Weave Communications Inc

NYSE:WEAV

Earnings Call Analysis

Weave's Q3: Strong Growth, Margin Improvement

In Q3, Weave reported solid performance with a revenue of $43.5 million, a year-over-year increase of 20.2%. Gross margin climbed to 69.3%, and operating loss margin narrowed significantly to 4.2%. Weave projected stronger customer engagement, with a net retention rate of 95% and a deepened partnership integrating with Henry Schein One's Dentrix Ascend platform. The company forecasts Q4 revenue between $43.5 million to $44.5 million and full-year 2023 revenue between $168.3 million to $169.3 million, with a non-GAAP operating loss of $12.8 million to $11.8 million.

Solid Revenue Growth and Surpassing Expectations

Weave Communications has delivered a robust performance in the third quarter of 2023, with revenues reaching $43.5 million, indicating a 20.2% growth compared to the same period last year. This marks the seventh consecutive quarter where the company's revenue has not only grown but also exceeded the top end of their guidance.

Expanding Customer Base and Strategic Partnerships

The company's customer base has expanded to over 30,000 active locations, reflecting strong customer acquisition and retention. This growth has been complemented by Weave's reinforced partnership with Henry Schein One and the introduction of an integration with the Dentrix Ascend platform, expected to boost demand for Weave's platform among dentists.

Improving Margins and Drastic Reduction in Losses

The third quarter has seen the gross margin reach 69.3%, improving by 470 basis points over the previous year. Weave has achieved this by increasing efficiency across its operations, which has also translated to a substantial decrease in net losses from $6.5 million to $1 million year-over-year.

Financial Discipline Leading to Positive Cash Flow and Reduced Operating Loss

Weave's careful management of finances is evident from the $2.1 million free cash flow generated in the third quarter, which is a significant turnaround from the negative free cash flow last year. The operating loss margin has also been considerably narrowed to 4.2% from 18% in the previous year.

Optimistic Outlook Based on a Proven Forecasting Method

The company has issued guidance for the fourth quarter of 2023 with expected total revenue in the range of $43.5 million to $44.5 million. For the full year of 2023, they forecast revenue between $168.3 million to $169.3 million, with an anticipated non-GAAP operating loss ranging from $12.8 million to $11.8 million. This guidance builds upon their consistent approach over the past seven quarters.

Effective Strategy with High-tier Bundles Leading Revenue Per Location

Weave's strategic sales focus on their highest offering, the Weave Elite bundle, has helped to maintain and increase the average revenue per location, contributing positively to the company's financial performance.

Expectation for an Uptrend in Net Revenue Retention

Having moved past the transition period from a third-party digital forms product to an in-house developed one, Weave anticipates an improvement in the Net Revenue Retention (NRR) rate, which should start reflecting positively in the upcoming year.

Leadership Transition amid Continued Growth

Matt Hyde's departure from Weave to pursue new opportunities introduces a leadership transition, even as the company continues to scale up. Jake Kuresa, the VP of Sales, will serve as the interim CRO during the internal and external search for Hyde's successor.

Diversified Demand and Positive Reception

The demand for Weave's services has surged not only through digital channels but also through live events. With the customer experience at their core, the business has continued to receive positive recognition, maintaining a leading position in various categories according to G2's fall 2023 report.

Earnings Call Transcript 2023-Q3

[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, executive]

Thank you, Ram. 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'll 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'll 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 may be 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'll turn the call over to Brett.

[Brett White, executive]

Thank you, Mark, and thank you to everyone for joining us on the 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 provide 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 unified 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'm 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've discussed the concept of Boomerang customers, [indiscernible] 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, executive]

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 upsell. 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'll open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Alex Sklar with Raymond James.

[Alexander Sklar, analyst]

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?

[Alan Taylor, executive]

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.

[Alexander Sklar, analyst]

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, executive]

Yes. So we -- good point, Alex. We've talked a lot about events. Have those have been picking up? They've been picking up for the last several quarters. We're still not back to pre-pandemic levels. I don't know if we'll 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.

[Operator]

Our next question is from Mark Schappel with Loop Capital Markets.

[Mark Schappel, analyst]

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, executive]

Sure. So our guide for this Q4 is using the same methodology we've used for the last 7 quarters, which is to put up a guide that we have a high level of conviction in. So there's 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, analyst]

Great. 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, executive]

Yes. So Mark, the trailing 12-month metric will mean that, into Q4, we'll 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'll really start seeing that in that 12-month trailing metric.

[Operator]

Our next question is from Parker Lane with Stifel.

[J. Lane, analyst]

Congrats on the strong results here. Brett, multi-location is an area you've talked about as an intriguing growth driver of this business. And I know you've discussed some innovation you're bringing there. But curious if you can talk a little bit about go-to-market there and how that differs from the single location or traditional approach that you've had?

[Brett White, executive]

Sure. So we have a different team, a totally support sales team that focuses exclusively on multi-location. Not surprisingly, multi-location is a longer sales cycle. And so really, the trick there is to make sure that you've got the product to support that market. And then once the product gets there, then going out and -- either developing or further nurturing the pipeline.

I think we've got, as I mentioned, our new kind of next-gen user experience. We're rolling that out to select customers this month, and we'll be getting feedback there. So kind of the first half of the year, I've been talking about how we've been working on multi-location product, and we expect that the second half to start dropping some releases that were meaningful.

And so that's starting to happen. And we're very excited about that. So as these products roll out, we get traction, we get good feedback from the customers. We make any tweaks we need to, then we can really lean into demand gen and the go-to-market activities on the multi side.

And also, I mentioned that we had just signed an agreement to integrate quite deeply with the Dentrix Ascend platform. That's their cloud version of their practice mission software, and it's particularly focused on multi-location. So that's very exciting for us as well.

So I think we're kind of steady course and speed on building the product and then developing the pipeline for our multi-location business. And I think we're in a good place there.

[J. Lane, analyst]

Got it. And one for you, Alan. You've accelerated 3 straight quarters now. At the same time, you're not far away from breakeven in terms of absolute dollars. I know you're not guiding to '24, but how should we think about that pace of margin expansion, the achievement of breakeven on a sustainable basis? Is that something that we should expect next year?

[Alan Taylor, executive]

We will continue to see margin expansion. We've said in the past, Parker, that will -- longer term, Weave is a 75% gross margin company. The trajectory that we're on, you can count on that continuing, although the rate may slow a little bit just because we're balancing our strong desire to grow with our absolute commitment as well to move towards profitability. And so we'll continue to balance that with a preference for growth, and that's the way that we're looking at 2024.

[Operator]

Our next question is from Michael Funk with Bank of America.

[Michael Funk, analyst]

So I appreciate the comment you made on increased demand from in-person and digital events. I also know you put a lot of effort into the sales force revamp. So any additional color on sales force productivity? How the newer salespeople have ramped up and how that's contributing to gross additions?

[Brett White, executive]

Sure. So this is Brett. We have made really significant progress. And this is, I think -- kudos to the sales leadership team and the model that they put in place. The time to -- for sale, the time to ramp for sales reps today, I think, is about half or maybe a little bit less than half than it was, say, a year ago, which is what gave us the confidence to start adding sales capacity starting at the end of last quarter and then throughout this quarter.

So in individual efficiency, the sales organization is getting more efficient. But when you add new reps that are not yet ramped, the aggregate efficiency kind of stays flattish. But -- they're really executing well. And pretty much all of the sales metrics individually, based on ramp reps, has improved pretty much every quarter. Alan, would you add anything there?

[Alan Taylor, executive]

No. Other than the model that has been put in place by the sales team is working. The machine is predictable now, and so the inputs are very easy to make when they're warranted.

[Michael Funk, analyst]

Great. And then one more, if I could. The November integration with the Dentrix cloud version, you mentioned opens a new opportunity for you, new market. Can you quantify that new market? I mean how many locations that might be? How large you think that is?

[Brett White, executive]

Well, so their entire location-based is around 100,000. And they, like most practice management software vendors, started with on-prem solutions and then adopted a cloud version. And I think eventually, over time, new customers will be onboarded on the cloud version, and then legacy customers would be upgraded to the cloud conversion.

So I think the important part is the opportunity for that platform long term versus how many customers they have today. And so that's what we're really excited about. Our product is incredibly valuable and sticky when it's integrated with the practice management software. So being able to provide this integrated solution to the Dentrix Ascend platform is exciting, frankly, for both of us.

[Alan Taylor, executive]

I would just add. Sorry, Michael. I would just add that the -- some of the near-term prospects associated with that Dentrix Ascend integration are the multi-office ones. And so that is an element that we're excited about.

[Operator]

[Operator Instructions] Our next question comes from Brent Bracelin with Piper Sandler.

[Hannah Rudoff, analyst]

This is Hannah Rudoff on for Brent today. Nice to see the continued momentum in the business. Just one for you, Brett. I guess how often are you signing payments in the initial deals? And then how are you incentivizing that adoption of the payment products earlier in the motion rather than later?

[Brett White, executive]

So Hannah, I'll take that one. At the point of sale, I think we're still between about 20% and 25% at the point of sale signing up payments customers. And we're doing a better job now and really working to to penetrate into our existing customer base by giving them more and more on-ramps using digital means to take customer payments.

[Hannah Rudoff, analyst]

All right, helpful. And then a few...

[Brett White, executive]

There was -- sorry, go ahead. I was going to say that was the second part of the question?

[Hannah Rudoff, analyst]

I was just asking about incentive looking at adoption sooner rather than later, but it sounds like you're trying to build it into the existing motion more than the initial land motion?

[Brett White, executive]

Yes, there's -- we're approaching it from both vectors. One is that new customer land. And we've experimented where in the actual new customer journey is the most effective way or most effective place to make -- to close a payments deal.

And I think we've got that one figured out. And then the next really activity would be turbocharging the upsell activity. And so that's definitely very much in the works as well. Part of our adding capacity to the sales force in the third quarter was adding -- ensuring that we had adequate and appropriate resources for the upsell motion because I think we've got a lot of opportunity to upsell the software as well as payments.

[Hannah Rudoff, analyst]

Okay. That makes a lot of sense and good to hear. And then just my follow-up is that, a few weeks ago, I saw you released an integration with [indiscernible] Mindbody. And I was wondering if this signals a more concerted effort to expand into the beauty and wellness vertical?

[Brett White, executive]

It's actually Med spa. So Booker is -- know a little bit about the business. Booker is very strong in med spa. So we've talked about our next batch of specialty medical verticals. It's med spa, it's plastic, it's general practitioner and it's physical therapy. So we actually did two integrations we press released on the med spa space.

[Operator]

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Brett White for closing comments.

[Brett White, executive]

Yes. Thank you. Thank you all for joining us today and an additional special thank you to the Weave team for just delivering another terrific quarter. And we look forward to our next call in February. So thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.