Weave Communications, Inc.

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 WEAP'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.gateway.com. And with that, I'll turn the call over to Brent.

Thank you, Mark, and thank you all for joining us today. Q2 was another strong quarter of continuing momentum for Weave, and I am 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. Weave provides 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, email marketing, insurance verification, physical and soft phones, and more. Weave's payments platform enables offices to offer flexible payment options, including via text, email, 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 the 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 any 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 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, we've 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's 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 multi-year agreement to extend and deepen our partnership with Stripe to expand our payments 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 convenient for them. 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 payments 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 assistance which helps save time using AI to draft responses to customer reviews with one click. Leveraging the same technology, yesterday we announced an AI-powered email assistant that drafts emails based on basic customer prompts. Customers have the ability to edit and personalize emails before sending, saving time as they manage their email outreach and marketing. We will continue to develop and deploy AI-driven solutions for our customers. In Q2, we launched soft phones 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. Soft phones also provide business owners with increased flexibility to expand their employee talent pool and facilitate remote office management. 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 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 continues to improve. We are running a tight unit 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'll take questions.

Alan? Thanks, Brad, and good afternoon, everyone. As mentioned, we delivered 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 5 cents 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 16 cents 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 RSU's 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 it 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 positive free cash flow of $900,000. This compares to 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 towards 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 will continue to invest responsibly to maximize our long-term value. Now, Brett and I will take your questions.

Thank you. If you have a question at this time, please press star, then the number 1 on your telephone keypad. Once again, to ask a question at this time, please press star, than the number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from Alex Sklar with Raymond James. Your line is open.

Great. Thank you. Uh, Brett, I've got a two part question on the, on the sales team, uh, to start off here. So first on, on the 19% growth that you mentioned, is that a direct quota carrying rep figures that across all the sales and marketing positions? And then the second part, I just wanted to ask you, you, you've talked about higher ASPs you're seeing with new customers. I know you flagged that last customer's 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 initial sale basis. So that's really what's driving the ASPs.

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

Yeah, Alex, thanks. We, we just continue to provide guidance that we feel high conviction around.

and uh that's so it's it's kind of a normal course all right great thank you both for the color thank you your next question comes from mark chapeau of loop capital markets your line is open hi thank you for taking my questions um 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 coming back to your platform.

Sure. So, you know, if we start at, you know, 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 we've done 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.

Appreciate that. And then, you know, over the last year or so, you know, the company has done a lot of work on the product development front with respect to making your platform more attractive for multi-locations. And I was wondering if the – new products that you talked about, the AI-powered email assistant and the soft phones, were part of that initiative or were those initiatives pretty much for all customers?

So you're right. Thanks for recognizing all the work we've done on multi. That's been a really big part of our roadmap, 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 organizations. So I kind of want to say the best is yet to come on the multi-product. But in fact, it's already started revving up. This quarter was our best quarter for landing multi-location deals, I think, ever. And it was up pretty meaningfully from Q1. You know, even the releases that we've done so far on the multi-site 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 it's very, very focused on delivering what the customers want both on a single location, on a multi-location. And to answer the other part of your question, the AI-enabled tools, the soft phones, that's available for everyone. It's included in the bundles. And that's available for single and multi-location.

Great, thanks. That's all for me. Your next question comes from Tyler Radke with Citigroup. Your line is open.

Hi, this is Kylie Tobin on for Tyler. Thanks for taking the question and congrats on the quarter. I wanted to ask a little bit about the guidance raised. 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.

Yeah, 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, you know, 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 have those ASPs trended when they return?

Thanks. Honestly, I can't answer that question. I don't actually know. You 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 the past two quarters and then how we might expect that to trend over the next 12 to 18 months.

Thanks. Sure. So, you know, our core business sales and install base is still distributed along, I would 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 are our go-to-market activities. We've got, on our development roadmap, additional integrations outside of those three verticals. So I think that over time, over the next 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 dove TAM. So long answer to this quarter, it was pretty consistent with our install 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?

Yeah, thanks, Tyler. 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 be efficient across our communication bandwidth 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 them this past year, but on a long-term basis, we think that getting into the 75% margin range is very doable, you know, over the long term. And I'll add... Really helpful.

Yeah, I'll add, you know, 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 book 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 is open.

Good question. 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 Are you seeing existing customers expand more? Where are their puts and takes in that dynamic?

Sure. So I think you're really talking about the revenue contribution. Correct. Yep. Yep. 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 primary contributor to revenue growth. 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 install base, the existing customers, most of that growth comes from payment. And so as they get on board the platform, they adopt payments and that grows. And then also as their business grows, we share in that success on growth from existing customers. So those would be the two big pieces.

Awesome. Thank you so much. That was really helpful, Culler. And then another question would be kind of piggybacking off of 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?

Yeah, so definitely we're going through our 2024 planning right now, and one of our major initiatives is product adoption. So we want to be sure that we're delivering to our customers products that they really value and And we have a constant kind of drumbeat of those products rolling out 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 You know attach value to it in the pricing models whether it be in bundles or all the cards or upgrades and and And we'll work through that. But the real 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, you know, for now, the AI products that we've delivered, the soft phones, those are included in the bundles. And, you know, that may change, but really we're just focused on delivering a ton of value.

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

Once again, to ask a question, please press star 1 on your telephone keypad. That's star, then the number 1 on your telephone keypad. Our next question comes from Brent Braceland with Piper Sandler. Your line is open.

Hi, guys. This is Hannah Rudolph 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,

payments into the base and how quickly you think customers could adopt online bill pay and tap to pay yeah so I can about all I can give you there is we know payments revenue is less than 10% because we don't we don't report it separately the the I'll tell you that the attaches is more than that but it's we still have a lot of room to go in attaching payments to our installed customer base.

Okay, makes sense.

And then did SoftBund's adoption have any... I would say we're significantly under-penetrated in our installed base.

Okay, makes sense. And then did SoftBund's adoption have any impact on the gross margin uptick in the quarter?

Not really, not at this point. The soft phone's adoption is a convenience factor for many of our customers where they just do not have to take any hardware home, and they can operate as though they're working out of the office from wherever they are.

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

It's continuing to improve. You know, 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 improving. 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 improve close rates, which make 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.

At this time, there are no further questions. That does conclude today's WEAVE earnings release. Thank you everyone for attending and have a wonderful rest of your day.