Fathom Holdings Inc. (NASDAQ:FTHM) is a national, technology-driven real estate services platform that has weathered the challenges of the current market environment with resilience and strategic adaptability. The company's diverse business model, encompassing residential brokerage, mortgage, title, insurance, and SaaS offerings, has enabled it to navigate the shifting real estate landscape and position itself for long-term success.

Financials

In the fiscal year 2023, Fathom Holdings reported annual revenue of $345.2 million, a testament to the strength and diversification of its operations. However, the company faced headwinds, recording a net loss of $23.9 million and negative operating cash flow of $10.6 million, as well as negative free cash flow of $12.4 million. These financial challenges were largely driven by the broader macroeconomic conditions, including rising interest rates and their impact on the residential real estate market.

Despite these obstacles, Fathom Holdings has demonstrated its resilience and adaptability. In the first quarter of 2024, the company reported a 9% year-over-year decline in total revenue to $70.5 million, primarily due to a 9.7% decrease in real estate transaction volume. This decline was largely attributable to the continuation of high interest rates, especially in the last few weeks of the quarter. However, the company's strategic initiatives and operational improvements have begun to bear fruit, as evidenced by a meaningful increase in gross profit margin, rising approximately 160 basis points to 10.3% in the first quarter of 2024 from 8.7% in the same period of the prior year.

Strategic Initiatives

One of the key drivers of this margin improvement was the company's implementation of a new fee structure, which included a "High-Value Property Fee" and an increase in the annual agent fee from $600 to $700. These changes, along with the continued growth of Fathom's ancillary businesses, which generally have higher gross profit margins, have positioned the company for improved profitability going forward.

Business Overview

Fathom's mortgage business, Encompass Lending Group (ELG), has been a particular bright spot, with revenue surging by 55% in the first quarter of 2024 to $2.3 million, compared to $1.5 million in the same period of the prior year. This growth was driven by a strategic increase in the company's loan officer base, which now comprises 55% of the total, up from 34% in the previous year. Additionally, ELG's file start loan volume increased by 114% in the first quarter of 2024 compared to the same period in 2023, signaling strong momentum and the potential for the mortgage business to achieve positive EBITDA in the second quarter of 2024.

The company's title business, Verus Title, also demonstrated improved performance, with revenue increasing by 9.5% to $652,000 in the first quarter of 2024, up from $595,000 in the same period of the prior year. Fathom's strategic initiative to establish a joint venture, Verus Title Elite, has exceeded expectations and is expected to contribute positively to the title business's EBITDA in the second quarter of 2024.

Fathom's real estate brokerage segment, Fathom Realty, remains the core of the company's operations, accounting for the majority of its revenue. While this segment experienced a 10.7% decline in revenue to $65.4 million in the first quarter of 2024, the company's focus on attracting high-performing agents and implementing strategic initiatives, such as the reintroduction of the Producer Perks program, have positioned Fathom Realty for a return to growth in the second half of 2024.

The company's technology segment, which includes its proprietary SaaS platform intelliAgent and the LiveBy business, has also shown promising developments, with revenue increasing to $1.1 million in the first quarter of 2024, inclusive of approximately $300,000 in internal charges to Fathom Realty for transaction management and CRM services.

Fathom Holdings' geographic footprint spans the South, Atlantic, Southwest, and Western regions of the United States, with a focus on expanding its presence nationwide. The company's agent-centric business model, which offers industry-leading commission splits and a compelling value proposition, has been a key driver of its growth, with the agent base expanding by 13% year-over-year as of the first quarter of 2024.

Outlook

Looking ahead, Fathom Holdings has provided guidance for the second quarter of 2024, expecting total revenue in the range of $86 million to $89 million and adjusted EBITDA in the range of $0.2 million to $0.5 million. This guidance reflects the company's confidence in its ability to navigate the current market conditions and capitalize on the anticipated seasonal uptick in real estate activity.

Risks and Challenges

One of the key risks facing Fathom Holdings is the ongoing industry-wide litigation related to real estate commissions. While numerous companies have reached settlements since the start of the year, Fathom is currently engaged in active discussions and unable to disclose any specifics at this time. However, the company remains committed to resolving this matter swiftly to alleviate investor concerns and focus on its long-term growth strategy.

Liquidity

Fathom Holdings' liquidity position has been bolstered by the recent sale of its Dagley Insurance Agency subsidiary for $15 million, with $8 million received upfront and an additional $7 million to be received over the next 24 months. This strategic move has enhanced the company's financial flexibility and positioned it to execute on its growth initiatives, including the pursuit of accretive acquisitions and the continued expansion of its ancillary businesses.

Conclusion

Fathom Holdings Inc. has demonstrated its resilience and adaptability in the face of a challenging real estate market. The company's diversified business model, strategic initiatives, and focus on high-performing agents have positioned it for improved profitability and long-term success. As Fathom navigates the shifting industry landscape, investors will be closely watching the company's ability to capitalize on the anticipated market recovery and deliver sustainable growth in the quarters and years ahead.