WEAV - NYSE

Good day, ladies and gentlemen, and welcome to the Weave Second Quarter 2023 Earnings Conference Call. Our host for today’s call is Mark McReynolds, Head of Investor Relations. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Mr. McReynolds. You may begin.

Thank you, Morgan. Good afternoon, and thanks for joining us for our second 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 forward-looking statements. Please refer to the cautionary language in the earnings release and in these 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 actual 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 GAAP and non-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.

Thank you, Mark. And thank you all for joining us today. Q2 was another strong quarter of continuing momentum for Weave, and I’m very pleased with our team’s continued strong execution. Before providing a detailed review of our Q2 performance, I wanted to give a brief overview of our platform for listeners who are newer to the Weave story. We provide small- and medium-sized healthcare businesses with a single, vertically tailored customer experience and payment software platform, helping them unify, modernize and personalize every interaction with their patients. Our customers are experts in their field of care. We’ve helped them run their businesses more effectively by unifying a patchwork of point solutions into a single platform that helps them attract, engage and retain their patients. Our subscription platform includes texting, reminders, reviews, online scheduling, digital forms, e-mail marketing, insurance verification, physical and Softphones, and more. Weave’s payments platform enables offices to offer flexible payment options, including text, e-mail, online bill pay, terminals, and mobile tap-to-pay. SMBs make up the vast majority of businesses in the U.S. We have spent almost 15 years building a platform specific to the needs of SMB healthcare practitioners. We understand the unique challenges they face and have tailored our platform to address these challenges. SMB Healthcare businesses are well capitalized, well managed, and have proven able to withstand the economic uncertainty of the last few years. For example, dental practices are our largest and most tenured vertical and have among the lowest business failure rates of SMB. SMBs typically do not have dedicated technology staff, so they need software solutions that are easy to implement and manage. They also want to manage as few technology platforms as possible. When SMBs land on a solution that improves their businesses, they tend to stick with it, which is validated by our historically high retention rates. The majority of our customers are in the dental, optometry, and veterinarian verticals. They range from single practitioners with one location to multi-office businesses with dozens of locations. We are expanding our integrations to support several additional specialized medical practices, including family and general net practice, medical aesthetics, plastic surgery, to name a few. Weave’s platform adds even more value to healthcare SMBs through over 75 integrations with practice management software. These integrations power personalized communications and online scheduling in addition to automating appointments and recall reminders. Moving on to our Q2 2023 results, Weave delivered another strong quarter, exceeding the top end of our revenue guidance for the sixth quarter in a row and posting our second quarter in a row of accelerating year-over-year revenue growth. Total revenue for Q2 was $41.7 million, representing 19.3% growth year-over-year. As a reminder, Q1 2023 revenue growth rate was 18.9%, and it was the first quarter that our year-over-year revenue growth accelerated since 2019. Our revenue growth is driven by continued strong demand for our platform and our growing customer base. In Q2, we also continued to improve the efficiency of our business and make progress on our path to profitability. Our gross margin for the quarter was 67.9%, up 680 basis points from 61.1% in Q2 a year ago and a sequential increase of 30 basis points from Q1. Additionally, we reduced our operating loss to 9.5% of revenue from a loss of 28.9% of revenue a year ago and a loss of 10.1% in Q1. These margin improvements were primarily driven by top-line growth and continued efficiency improvements. In Q1, for the first time in the company’s history, we became free cash flow positive. In Q2, our free cash flow increased to $900,000 from $600,000 in Q1. These results reflect that our vertically tailored software and payments platform is continuing to gain traction as the Weave team is executing with intense customer focus. New customer growth is an area of strength, and our average sales price continued to expand this quarter. In the last couple of earnings calls, we’ve discussed the concept of a boomerang customer, one who leaves Weave for a competitive solution only to come back a short time later after being dissatisfied with the competitive offering. We are seeing that trend continue and counted over 200 boomerang customers in the first half of 2023. This trend provides another data point and validates the scope and value delivered by our platform. The improving sales momentum that we highlighted in the last few earnings calls continued to accelerate into Q2. In response to growing demand, we have continued to invest in our sales team and have increased the number of sales reps by approximately 19% year-over-year. Our confidence in our sales team is high, and we expect to continue to add sales capacity throughout the remainder of the year. In-person events are one of our most important sources of new business growth. In Q2, in-person event sales increased by over 50% when compared to the prior year. We attend larger shows in Q2 and are encouraged by the increased demand coming out of these events. In addition, we continue to ramp our digital demand creation efforts, expanding our reach with new advertising partners. In Q2, sales from digital demand creation increased by over 40% when compared to the second quarter of last year. Turning to payments, our payments offering enables customers to collect their fees faster with less effort and administrative burden, and we are encouraged by the trends that we are seeing in the payments data. For example, payments volume per location in Q2 was up 12% year-over-year, which speaks to the strength and resilience of the industries we serve. Last quarter, we announced a multiyear agreement to extend and deepen our partnership with Stripe to expand our payment offerings. We also announced several enhancements to our payments platform, including online bill pay and mobile tap-to-pay, providing customers with additional options to reduce friction for their patients in the payments process. Online bill pay gives our customers the ability to create, send and embed a link for their customers to pay their bills online whenever it’s most come for that. Mobile tap-to-pay allows patients and clients to make contactless payments by simply tapping their smartphone or payment card on the provider’s mobile device without the need for dedicated payment processing hardware. Additionally, we made several enhancements to our customer experience platform during Q2. I’ll highlight a few that we’re really excited about. In our last earnings call, we discussed our response system, which helps save time using AI to drive responses to customer reviews with one click. Leveraging the same technology, yesterday, we announced an AI-powered e-mail assistant that drafts e-mails based on basic customer prompts. Customers have the ability to edit and personalize e-mails before sending, saving time as they manage their e-mail outreach and marketing. We will continue to develop and deploy AI-driven solutions for our customers. In Q2, we launched Softphones to help small businesses better serve patients when their staff is not in the office. Now teams can answer calls and communicate with patients without dedicated telecom hardware. Softphones also provide business owners with increased flexibility to expand our employee talent pool and facilitate remote office management. Our customers’ experience is the keystone to retention, and Weave continued 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 by G2. These independent reports are based on customer reviews, customer satisfaction, and market presence, recognizing Weave’s continuous delivery, the best technology tailored to suit our customers’ unique business needs and address the challenges that they face. In conclusion, we are very pleased with the strong results and continued momentum in Q2. Revenue growth accelerated, and our execution and efficiency continue to improve. We are running a tight economics-based business, and we are getting better at it. I’d like to thank the Weave team for their passion and dedication in serving our customers and thank our customers and shareholders for their continued support. With that, I’ll turn it over to Alan to go through our financial results in more detail, and then we will take questions. Alan?

Thanks, Brett. And good afternoon, everyone. As mentioned, we delivered a strong performance in the second quarter on both the top line and the bottom line. We delivered second-quarter revenue of $41.7 million, reflecting a 19.3% growth year-over-year. This represents a $1.7 million or 4% over the midpoint of the range we provided last quarter. Our net revenue retention rate was 96% in Q2. As we’ve discussed in previous quarters, our NRR is negatively impacted by the ongoing effect of the discontinuation of our partnership with our former third-party forms provider. We launched our internally developed forms product and have seen positive adoption by our customers. Excluding the impact of the third-party forms provider, NRR remains at 100%. Gross revenue retention rate was 92% in Q2. It remains within a very tight band of historical performance among the best-in-class for SMB retention, and logo retention has been consistent for the last 12 quarters. Moving on to operating results. As a reminder, I’ll be referring to non-GAAP results unless otherwise stated. Our Q2 results showed significant improvement across the board. Gross margin was 67.9%. This represents a 680 basis point increase year-over-year and a 30 basis point increase sequentially. Operating expenses were $32.2 million, an $800,000 increase from last year compared to a $6.7 million increase in revenue for the same period. We had a sequential increase in operating expenses of $1.1 million, with a large portion of that increase flowing through G&A. The sequential increase in G&A was primarily related to seasonal professional fees associated with our proxy statement and audit, and increased headcount-related expenses. Our operating loss was $4 million, an improvement of $6.2 million or 61% compared to last year and at the high end of the guidance that we gave in May. The corresponding operating loss margin of 9.5% is a significant improvement from the operating loss margin of 28.9% last year and also a 60 basis point improvement sequentially. Our net loss was $3.1 million or $0.05 per share in the first quarter based on 66.8 million weighted average shares outstanding. This is compared to a net loss of $10.3 million or $0.16 per share last year. This represents a $7.2 million improvement due to revenue acceleration and operating efficiencies, coupled with a $1.1 million increase in interest income related to our treasury activities. Adjusted EBITDA loss was $3 million, a $6.1 million improvement year-over-year. Adjusted EBITDA loss margin of 7.3% is a significant improvement compared to the 26.2% loss margin reported a year ago and a 60 basis point improvement sequentially. Turning to the balance sheet and cash flow, we ended the second quarter with $110.9 million in cash and short-term investments. As you may recall, we ended last quarter with $112.6 million, which means we used $1.7 million of cash in Q2. We spent $1.9 million in cash to pay taxes on RSUs vesting in the quarter using the net settlement method, thereby reducing dilution. Operating cash flow in the second quarter was $1.6 million, a $3.3 million improvement year-over-year, and is inclusive of the 2022 annual bonus payout in Q2. We mentioned in the last call that free cash flow will fluctuate from period to period in 2023, and we forecast being slightly negative in Q2 due to our annual bonus payout. However, due to seasonally higher collections of customers with annual upfront payments in Q2, we ended with a positive free cash flow of $900,000. This compares to a negative free cash flow of $2.4 million in the second quarter of 2022. We continue to reiterate our plan to achieve positive free cash flow as we exit the year. Turning to our outlook for the third quarter and full year 2023, for the third quarter of 2023, we expect total revenue in the range of $41.7 million to $42.7 million and non-GAAP operating loss in the range of $4.5 million to $3.5 million. For the full year 2023, we expect total revenue to be in the range of $164.7 million to $166.7 million. We expect our full-year 2023 non-GAAP operating loss to be in the range of $16.9 million to $14.9 million, which assumes continued progress on our path toward profitability. We expect to have a weighted average share count of approximately 67.6 million shares for the full year. To summarize, we’ve delivered strong second-quarter results. Our performance demonstrates the growing demand for our platform, and we remain very excited about the opportunity ahead, and we’ll continue to invest responsibly to maximize our long-term value. Now Brett and I will take your questions.

Thank you. [Operator Instructions] Thank you. Your first question comes from Alex Sklar with Raymond James. Your line is open.

Great, thank you. Brett, I’ve got a two-part question on the sales team to start off here. So first, on the 19% growth that you mentioned, is that a direct quota-carrying rep figure or is that across all the sales and marketing positions? And then the second part, I just wanted to ask you, you’ve talked about higher ASPs you’re seeing with new customers. I know you flagged that last customer last quarter as well. Has anything changed in terms of what you’re including in that premier offering that’s driving the higher ASP growth? Thanks.

Sure. Thanks for the question, Alex. So the 19% increase is straight quota-carrying sales reps. So, no overhead, no sales ops, anything like that, and no management. And the higher ASPs, so we’ve been adding quite a bit of product into the bundles, and really that’s enabled us to sell more of the higher-end bundles on a kind of an initial sale basis. So, that’s really what’s driving the ASP.

Okay, great. Thanks for that. And then, Alan, just one on the implied kind of fourth-quarter growth outlook. It looks like it’s kind of flattish with the third quarter. And I just wanted to ask if there’s anything onetime either may be tied about that last quarter of forms transition or seasonal that might be driving that? Or is that just kind of normal conservatism? Thanks.

Yes, Alex thanks. We just continue to provide guidance that we feel high conviction around. And that’s – so it’s kind of a normal course.

Alright, great. Thank you both for the color.

Thank you.

Your next question comes from Mark Schappel of Loop Capital Markets. Your line is open.

Hi, thank you for taking my questions. Nice job on the quarter. Brett, starting with the boomerang customers, I was wondering if you could just talk a little bit more about maybe if there’s one, two, or three drivers in particular that are kind of the result of customers going back to your platform?

Sure. So, if we start at why do they leave, they often get a pitch from a competitor, whether it be another communications and engagement solution provider or even their practice management software provider that says oh well, we could do what Weave does for a lot less money. That sounds attractive. They go and onboard onto that platform and just find it’s functionally deficient. It doesn’t actually deliver the value that they need. And so then they come straight back. So, that’s kind of the life cycle there.

I appreciate that. And then over the last year or so, the company has done a lot of work on the product development front with respect to making our platform more attractive for multi locations. And I was wondering if the new products that you talked about, the AI-powered e-mail system, and the Softphones, were part of that initiative? Or were those initiatives pretty much for all customers?

So you are right. Thanks for recognizing all the work we’ve done on multi. That’s been a really big part of our road map. And you’re going to see, over the second half of the year, some pretty significant product releases that really enables our core products to work effectively across multi-location offices, multi-location organization. So, I kind of want to say the best is yet to come on the multiproduct. But in fact, it’s already started ramping up. This quarter was our best quarter for landing multi-location deals, I think ever, and it was up pretty meaningfully from Q1. So, even the releases that we’ve done so far on the multi-side are starting to get traction, but we’ve got a lot more to come there. That’s very, very exciting. The product and engineering organization is really firing on all cylinders and is very, very focused on delivering what the customers want, both on a single location on a multi-location. And the answer to the other part of your question, the AI-enabled tools, the Softphones, that’s available for everyone. It’s included in the bundles, and that’s available for a single and multi-location.

Great thanks. That’s all from me.

Your next question comes from Tyler Radke with Citigroup. Your line is open.

Hi, this is Kylie Towbin on for Tyler. Thanks for taking the questions and congrats on the quarter. I wanted to ask a little bit about the guidance raise. You raised by a bit more than you beat. Was this driven by uptake in new offerings? You talked about selling higher-end bundles or better pipeline visibility in the second half. Thanks.

Yes, thanks Kylie. It is driven by the better uptake, it’s driven by what we see in our bookings rate, it’s driven by what we see coming into the rest of the year with respect to September is the biggest events month of the year for us. All of those things play into our optimism regarding the balance of the year.

Got it. Thank you. And maybe one more on the boomerang customers. Are they growing their contracts when they return? Or are those 200 customers that you’ve seen in 1H? How has those ASPs trended when you return? Thanks.

Honestly, I can’t answer that question. I don’t actually know. We’re just thrilled when they come back, but I can’t answer that. I don’t know the answer.

Thank you.

Your next question comes from Michael Funk with Bank of America. Your line is open.

Hi this is Matt Bullock on for Mike Funk. Thanks for taking the questions. I was hoping you might be able to break down some of the main contributors by vertical to the growth acceleration in the past two quarters and then how we might expect that to trend over the next 12 to 18 months. Thanks.

Sure. So our core business, sales, and installed base is still distributed along say, our three top verticals. What we call the dental, optometry, vet. Dental is by far the largest and that’s been pretty consistent with our sales and bookings. One area where we’re starting to see an uptick is specialty medical. So I mentioned three of them in my prepared remarks, but one of the areas that we’re increasing our go-to-market activities. We’ve got on our development road map, additional integrations outside of those three verticals. So, I think that over time, over the next four to – or say, two to four quarters, we’ll start seeing greater bookings in specialty medical. And certainly, we’re seeing interest inbound organic interest from those additional verticals. There’s like 25 additional verticals in specialty medical. And actually, the TAM is bigger than our current DOVTAM. So long answer. To this quarter, it was pretty consistent with our installed base, but I expect that to pick up in specialty medical over the next two to four quarters.

Excellent, really helpful. And then just one quick follow-up. It’s been great to see the progress on gross margin. Can you break down some of the puts and takes and what we can expect longer term in terms of mature gross margin?

Yes. Thanks, Matt. So, as we get into the direct costs of delivery for our customers, we’ve got an engineering team that has a very concentrated focus on what it costs to deliver as well as the efficiency across our communication and with charges in the Google Cloud, where we host most of our operations. And then we also have a people team who are just extraordinary in responding to our customers, but also working to be as efficient as they can. So, those are the things that are driving these efficiencies. We will continue to see them, not necessarily at the rate year-over-year that we’ve seen in this last year. But on a long-term basis, we think that getting into the 75% margin range is very doable over the long term.

Really helpful.

And I’ll add. Payments is still a relatively small part of our business. It’s been growing. It’s growing much faster than our software business. And payments is very – since we look at net, it’s very, very high margin. So as that business grows, it will have an outsized impact on our gross margins.

Excellent, thanks.

Your next question comes from Jacob Staffel with Goldman Sachs. Your line open.

Thanks for taking the question. A good quarter and good to see the stock performance since the last quarter. One thing I wanted to ask on is when it comes to the dynamic between new and existing customers, can you talk about how that’s trending? Are you seeing more new customers land? Are you seeing existing customers expand more? Where are the puts and takes in that dynamic?

Sure. So, I think you’re really talking about the revenue contribution of the existing...

Correct.

Yes. So new customers, we had a strong new customer quarter definitely a highlight for the quarter. And that is the primary contributor to revenue growth. Well, I’ll say, a primary contributor to subscription revenue growth. We land pretty heavy, in other words, we sell – you can see in the growth of the ASP we sell a large portion of our product offering at the initial sale, which is great, but it also limits our ability to upsell and grow NRR. But the majority of the increase in software growth comes from new customers. From the installed base, and the existing customers, most of that growth comes from payments. And so as they get onboarded to the platform, they adopt payments and that grows. And then also as their business grows, we share that success on growth from existing customers. So, those would be the two big pieces.

Awesome. Thank you so much. That was really helpful color. And then another question would be kind of piggybacking up on what you said around how there’s maybe a limited ability to upsell and grow NRR. Does the introduction of maybe these new AI-centric products give that potential to increase selling prices? And if so, when do you think we’ll see that hit the top line?

Yes. So, definitely, we’re going through our 2024 planning right now. And one of our major initiatives is product adoption. And so we want to be sure that we’re delivering to our customers products that they really value, and we have a constant kind of drumbeat of those products rolling out over the next, say, six quarters. So, that’s a major focus of ours. Then the next piece of that equation is to figure out how to attach value to it in the pricing models, whether it be in bundles or à la cartes or upgrades, and we’ll work through that. But the really important piece is to make sure that we’ve got a good, constant, steady stream of products that our customers value, and then we can figure out the right monetization methodology over time. But for now, the AI products that we’ve delivered, the Softphones, those are included in the bundles, and that may change. But really, we’re just focused on delivering a ton of value.

Awesome. Thank you so much guys. Great quarter again.

[Operator Instructions] Our next question comes from Brent Bracelin with Piper Sandler. Your line is open.

Hi guys. This is Hannah Rudoff on for Brent today. Thanks for taking my questions. Just first off, I know you said payments is a small part of the business, but could you talk about where you are in terms of penetration of payments into the base? And how quickly you think customers could adopt online bill pay and tap to pay.

Yes. So I can – about all I can give you there is, we know payments revenue is less than 10% because we don’t report it separately. I’ll tell you that the attaches is more than that, but we still have a lot of room to go in attaching payments to our installed customer base.

Okay makes sense. And then…

I would say we’re significantly underpenetrated in our installed base.

All right, makes sense. And then did Softphones adoption have any impact on the gross margin uptick in the quarter?

Not really. Not at this point. This is a – the Softphones adoption is a mean factor for many of our customers where they just do not have to take any hardware, and they can operate as though they are working out of the office from wherever they are.

Okay, makes sense. And then the last question for me. Just how is rep productivity trending over the entire sales force?

It’s continuing to improve. We didn’t want to start adding reps until we’ve got that engine running really efficiently. And I think we’re there now. We’re adding reps now, and we plan to add more reps throughout the end of the year. Efficiency is definitely improving. The marketing engine is doing really well. We’re adding more spend to our marketing channels that are proving to be more effective, and that just kind of has a knock-on effect to producing higher-value leads, which improved close rates, which makes sales reps more effective. And when sales reps get more effective, they tend to stick around longer, and it’s kind of a wonderful phenomenon that happens.

Great, thank you very much.