Weave Communications, Inc. (NYSE:WEAV) Q3 2023 Earnings Call Transcript

Weave Communications, Inc. (NYSE:WEAV) Q3 2023 Earnings Call Transcript November 1, 2023

Weave Communications, Inc. misses on earnings expectations. Reported EPS is $-0.10475 EPS, expectations were $-0.06.

Operator: Greetings and welcome to Weave Communications Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark McReynolds, Head of Investor Relations. Thank you. You may begin.

Mark McReynolds: Thank you, Rob. Good afternoon and thank you for joining us for Weave’s third quarter 2023 earnings conference call. Joining the call today are Brett White, CEO; and Alan Taylor, CFO. Brett will open the call with an overview of Weave’s performance and Alan will discuss our financial results in more detail. After the prepared remarks, we will take questions. Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Please refer to the cautionary language in the earnings release and in Weave’s filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause these results to differ materially from the forward-looking statements.

We will also discuss financial measures that do not conform with Generally Accepted Accounting Principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. Information maybe calculated differently than similar non-GAAP data presented by other companies. A reconciliation between these non-GAAP and GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at investors.getweave.com. And with that, I will turn the call over to Brett.

Brett White: Thank you, Mark and thank you to everyone for joining us on this call today. Before diving into our Q3 performance, I’d like to provide a brief overview of Weave for those of you who are new to our story. Weave provides small and medium-sized healthcare businesses with a vertically tailored customer experience and payment software platforms, helping practitioners to modernize and personalize every interaction with their patients. Our customers typically do not have dedicated technology staff, so they need software solutions that are easy to implement and manage. Weave unifies a patchwork of point solutions into a single platform that helps attract, engage and retain patients. SMBs make up the vast majority of businesses in the U.S. and we have spent almost 15 years building a platform specific to the needs of SMB healthcare practitioners.

These businesses are well-capitalized, well-managed and have demonstrated their resilience, even through economic challenges of recent years. Moving on to our Q3 2023 results. Weave had an excellent quarter, and I am very pleased with the team’s execution, delivering another quarter of both year-over-year and sequential quarterly improvements in revenue growth rate, gross and operating margin, adjusted EBITDA and free cash flow. Revenue for Q3 was $43.5 million, representing 20.2% year-over-year growth. We exceeded the top end of our revenue guidance for the seventh quarter in a row, and we vested our third quarter in a row of accelerating year-over-year revenue growth. This growth was driven by continued strong demand for our platform and our expanding customer base.

During Q3, we saw increased demand from both digital channels and in-person events, and we continue to add capacity to our sales team. In addition to our core vertical of dental, optometry and veterinary, we saw increased demands from additional specialty medical providers and continue to expand our platform to support them. In Q3, we continued to make positive progress in our – in the efficiency of our business. Our gross margin improved for the seventh consecutive quarter to 69.3%, a 470-basis-point improvement increase from last year. Additionally, we cut our operating loss margin from last quarter by more than half to 4.2% of revenue. Lastly, we produced $2.1 million in free cash flow, bringing us to $3.6 million in free cash flow generated year-to-date.

These results reflect that our vertically-tailored software payments platform continues to gain traction, and the Weave team is executing with intense focus on the needs of the customers and the verticals that we serve. On the product front, the team has been hard at work developing our next-generation platform, which features an enhanced user interface to improve workflows, overall usability and is optimized for multi-location customers. Customers with more than one location can perform key tasks for multiple practices for a single screen. This week, we will open up early access to this improved experience, and we are excited to receive customer feedback on this highly requested functionality. Additionally, this week, we signed an agreement that deepens our existing partnership with Henry Schein One, a leading provider of software for dentists with over 100,000 customers.

In November, we will launch an integration with the Dentrix Ascend platform, Henry Schein One’s premier cloud-based practice management software with advanced features for group practices and DSOs. This new integration will open up a more robust set of Weave features to Dentrix Ascend customers. On the payments front, our offering enables our customers to expedite billing and collect payments with minimal effort and administrative hassle. Payments are increasingly digital and our aim is to provide customers with multiple options to collect payments as quickly and efficiently as possible. Our customer experience software platform powers frictionless and flexible payment options, which helps create a positive patient experience, build trust and encourage repeat business for our customers.

In September, we announced a new partnership with a firm. Integrated directly into our platform, a firm allows patients to commit to treatment now and pay over time, making it easier to access and afford the care they need. This collaboration not only benefits patients, but also enhances the speed of revenue collection for our practitioners. Our customers’ experience is the keystone to retention, and Weave continues to receive positive recognition and validation that our platform delivers best-in-class results. Since 2017, Weave has been recognized every quarter as a leader in G2. In G2’s fall 2023 report, we ranked first in 34 different categories. These independent reports are grounded in authentic reviews, customer satisfaction metrics and market presence.

This recognition underscores our commitment to deliver technology tailored to suit the unique needs and challenges of our customers. In Q3, we also crossed a significant milestone, growing our customer base to over 30,000 active locations. This is a testament to both customer acquisition and retention as customers adopt Weave as their preferred customer experience platform. In our past several earnings calls, we have discussed the concept of Boomerang customers, offices that leave Weave for a competitive solution only to come back a short time later after being dissatisfied with the competitive offering. This trend continued in Q3, and we have had approximately 350 Boomerang customers year-to-date. This trend provides another data point and underscores the scope and value provided by our platform.

Finally, before I hand it over to Alan, I’d like to take a moment to share our recent personnel change. Our Chief Revenue Officer, Matt Hyde, will be leaving Weave later this month to pursue a new opportunity, and we wish him luck with his future endeavors. During Matt’s 2.5 year tenure at Weave, he was instrumental in transforming our sales function into a tightly run organization that will enable us to scale for many years to come. Included in this transformation has been the development of an outstanding sales management team led by our VP of Sales, Jake Kuresa. Jake will assume the role of interim CRO immediately effective, while we conduct a search both internally and externally. I have complete confidence in Jake and the entire sales organization continuing to produce the solid and improving results that we have experienced over the last several quarters.

In conclusion, we are very pleased with the strong results and sustained momentum in Q3. Revenue growth continues to accelerate, and our execution and efficiency continues to improve. Thank you to our customers, our team members and our shareholders for your support of Weave. We’re excited about the path ahead and are intently focused on finishing an excellent year on a strong note. With that, I’ll turn it over to Alan to go through the financial results in more detail, and then we’ll take questions. Alan?

Alan Taylor: Thanks, Brett, and good afternoon, everyone. As Brett mentioned, we delivered strong performance in the third quarter on both the top and bottom line. We delivered third quarter revenue of $43.5 million, reflecting 20.2% growth year-over-year. This represents a $1.3 million or a 3% beat over the midpoint of the range we provided last quarter. Our net revenue retention rate was 95% in Q3. As a reminder, the NRR calculation is based on the last 12 months of data and therefore, is burdened by the impact of the previously discussed transition from a third-party digital forms product to an in-house developed digital forms product. When we look at NRR on a monthly basis, both September and Q3 were the highest of the year primarily due to positive adoption of payments and software up-sell.

Gross revenue retention rate remained at 92% for Q3, among the best-in-class for SMB retention, and logo retention has been consistent for over 2 years. Moving on to operating results. As a reminder, I’ll be referring to non-GAAP results, unless otherwise stated. Our Q3 results showed significant improvement across the board. Gross margin was 69.3%. This represents a 470 basis point increase year-over-year and a 140 basis point increase sequentially. As we approach the second anniversary of our IPO, we wanted to highlight the progress that we have made since our first earnings call. Gross margins have improved by over 1,000 basis points. The improvement is due to higher average revenue per location and leveraging our cost structure. Here are some examples of the leverage.

We reduced hardware costs by over 300 basis points as a percentage of revenue in the past 2 years, connectivity and cloud infrastructure costs by over 200 basis points and cost of service by over 450 basis points. We have engineering and operating teams who are focused on providing an exceptional customer experience and doing so while remaining efficient and expanding our margins. These teams have accomplished this despite the macro inflationary pressures that we have seen across the economy. And we’re very pleased with the progress the team has made over the last 2 years. In Q3, operating expenses were $32 million, a $2.1 million increase from last year compared to a $7.3 million increase in revenue for the same period. Our operating loss was $1.8 million, an improvement of $4.7 million or 72% compared to last year, and $1.7 million better than the high end of the guidance that we gave in August.

The corresponding operating loss margin of 4.2% is a significant improvement from the operating loss margin of 18% last year and also a 530-basis-point improvement sequentially. Looking back 2 years, that is over 2,800 basis points of improvement in operating loss margin. We have seen leverage in each area of the business as sales and marketing has decreased to 38% of revenue from 51% in Q3 of 2021, R&D has decreased to 16% from 19% and G&A has decreased to 19% from 22%, all while accelerating our revenue growth each quarter of this year. Our net loss was $1 million or $0.01 per share in the third quarter based on 68.2 million weighted average shares outstanding. This is compared to a net loss of $6.5 million or $0.10 per share last year. This represents a $5.5 million improvement due to revenue acceleration and operating efficiencies.

Adjusted EBITDA loss was $900,000, a $4.7 million improvement year-over-year. Adjusted EBITDA loss margin of 2.1% is a significant improvement compared to the 15.5% loss margin reported a year ago and a 520-basis-point improvement sequentially. Turning to the balance sheet and cash flow. We ended the quarter with $118.4 million in cash and short-term investments. We ended last quarter with $110.9 million. This increase in cash is primarily related to cash received as a result of stock options being exercised during the quarter. Operating cash flow in the third quarter was $3.3 million, a $7.4 million improvement year-over-year. Free cash flow was $2.1 million and free cash flow margin was 4.8%. This compares to free cash flow of negative $4.6 million and a free cash flow margin of negative 12.8% in the third quarter of 2022.

We’re pleased with the progress. Our initial goal was to achieve positive free cash flow by Q4 of this year, and we have been positive in free cash flow each quarter year-to-date and plan to have positive free cash flow for the full year of 2023. Turning to our outlook for the fourth quarter and full year 2023. For the fourth quarter of 2023, we expect total revenue in the range of $43.5 million to $44.5 million and a non-GAAP operating loss in the range of $3 million to $2 million. For the full year 2023, we expect total revenue to be in the range of $168.3 million to $169.3 million. We expect our full year 2023 non-GAAP operating loss to be in the range of $12.8 million to $11.8 million. We expect to have a weighted average share count of approximately 67.7 million shares for the full year.

Let me wrap up by saying that we remain excited about where Weave is heading. Our focus is on giving our customers the best possible experience, while delivering top line momentum and positive progress towards profitability. And with that, we will open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Alex Sklar with Raymond James. Please proceed with your question.

Alex Sklar: Thank you. Brett, starting with you. On some of the newer bundle changes, I think you’ve got a higher tiered bundle now in market north of $700 a month. Can you just talk about what you’re seeing from customers in terms of initial purchasing patterns between your three bundled peers? Are you still landing with your largest bundle in kind of – of the three, despite it being a larger dollar total? Thanks.

Alan Taylor: Hey, Alex, this is Alan. I’ll take that one. We are landing there. The bulk of the sales that we do – the majority of the sales we do are on that highest bundle, which is called Weave Elite. And so we’re pleased with that. That’s helped us to maintain our ARPU, our average revenue per location. And we’re seeing that trending up at the highest level we’ve had in Q3.

Alex Sklar: Okay. That’s great to hear. And then maybe as a follow-up. Brett, in terms of overall demand gen, I know the live events have kind of been a tailwind this year. Can you just talk about kind of the success in the maturity of some of the other digital demand gen motions? Are there any KPIs you can kind of share that – relative to kind of this time last year in terms of if that’s improved?

Brett White: Yes. So we – good point, Alex. We’ve talked a lot about events. Have those have been picking up? They have been picking up for the last several quarters. We’re still not back to pre-pandemic levels. I don’t know if we will ever get back there, but they have performed well this year. And then on the other demand gen front. Digital demand, we’ve seen pretty meaningful improvements there across the board. I don’t have any metrics I can share with you, but I can share with you that lead gen and the performance of those channels exceeds our revenue growth rate on a kind of a year-over-year growth basis. So I think events were picking up throughout the year, and then kind of the digital demand efforts have picked up as well, especially, I think, in the second and third quarter.

Alex Sklar: Okay, that’s great color. Thank you, both.

Operator: Our next question is from Mark Schappel with Loop Capital Markets. Please proceed with your question.

Mark Schappel: Hi, thank you for taking my question. Nice job on the quarter. Brett, starting with you. With respect to the 4Q revenue guide, it appears that growth is ticking down a few points. Should we just chalk this up to just standard conservatism? Or do you see some headwinds out there that may cause concerns? And maybe you could just kind of roll that into a broader commentary on what you’re seeing macro-wise.

Brett White: Sure. So our guide for this Q4 is using the same methodology we’ve used for the last seven quarters, which is to put up a guide that we have a high level of conviction in. So there is nothing seasonal or ominous about our outlook for Q4. So that would be the first answer. And the second answer is we saw, again, strong performance in Q3. Our digital demand sales were up pretty meaningfully year-over-year. As I mentioned in my previous answer, ASPs were up. We announced our customer passing the 30,000 customer threshold. So customer acquisition was up. So pretty good results. Pretty good results on the demand side in Q3. And then going into Q4, knock on wood, we hope that trend continues. We’re not trying to imply anything with our Q4 guide at all. That’s the same methodology we just always use.

Mark Schappel: Great, thank you. That’s helpful. And then, Alan, bringing you into the mix here. Given that the company has now lapped the digital forms transition, when should we expect NRR to stabilize or maybe even turn back up? I realized it’s a trailing 12-month metric.

Alan Taylor: Yes. So Mark, the trailing 12-month metric will mean that, into Q4, we will see some of the same thing just because of that. But as we mentioned in Q3 and in the recent months, with that trend has already begun just to go back up. So it will be sometime next year where we will really start seeing that in that 12-month trailing metric.