Weave Communications, Inc.

Greetings and welcome to Weaver Communications' third quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

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'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 WEAV'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. 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 platform, 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, we've 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 posted 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 continued to add capacity to our sales team. In addition to our core verticals of dental, optometry, and veterinary, we saw increased demands from additional specialty medical providers and continued to expand our platform to support them. In Q3, we continued to make positive progress 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 platforms. 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 from 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 1, 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 1'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 affirm integrated directly into our platform affirm 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, Weave 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. 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 delivered by our platform. Finally, before I hand it over to Alan, I'd like to take a moment to share a 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 two-and-a-half-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 Caressa. 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 in 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 WEED. 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?

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 percent for Q3, among the best in class for SMB retention, and LOGO retention has been consistent for over two 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 leverage in 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 two 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 macroinflationary pressures that we have seen across the economy, and we're very pleased with the progress the team has made over the last two 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 two 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 one cent 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 10 cents 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 very 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.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove yourself from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Alex Skla with Raymond James. Please proceed with your question.

Thank you. Brett, I'm 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 tiers? Are you still landing with your largest bundle of the three, despite it being a larger dollar total? Thanks.

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 ARPL, our average revenue per location, and we've seen that trending up to the highest level we've had in Q3.

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 and 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?

Yeah, so good point, Alex. You know, we've talked a lot about events, how 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, you know, exceeds our revenue growth rate on a kind of year-over-year growth basis. So, you know, I think events were picking up throughout the year, and then, you know, kind of the digital demand efforts have picked up as well, especially, I think, in the second and third quarter.

Okay. That's great, Culler. Thank you both.

Our next question is from Mark Chappelle with Loop Capital Markets. Please proceed with your question.

Hi, thank you for taking my question and a nice job on the quarter. Brett, starting with you, with respect to the 4Q Revenue Guide, it appears that growth is taking 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 it. broader commentary on what you're seeing macro-wise.

Sure. So, you know, our guide for this Q4 is using the same methodology we've used for the last seven quarters, which is, you know, to put up a guide that we have a high level of conviction in. So there's nothing, you know, seasonal or ominous about our outlook for a Q4. So that would be the first answer. And the second answer is You know, 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. You know, we announced our customer passing the 30,000 customer threshold, so customer acquisition was up. So, you know, pretty good. 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.

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 realize it's a trailing 12-month metric.

Yeah, 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 Q4, In the recent months, that trend has already begun to go back up. So it'll be sometime next year where we'll really start seeing that in that 12-month trailing metric. Great. Thank you. That's all for me.

Our next question is from Parker Lane with Stiefel. Please proceed with your question.

Yeah. Hi guys. Thanks for taking the question and congrats on the strong results here. Um, Brett, you know, 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 could talk a little bit about go to market there and how that differs from, you know, the single location or traditional approach that you've had.

Sure. So, um, we have a different team, uh, a totally separate 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 expected 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 side. And also I mentioned that we had just signed an agreement to integrate quite deeply with the Venture to Send platform. That's their cloud version of their practice management 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 in speed on building the product and then developing the pipeline for our multi-location business And, you know, I think we're in good place there.

Got it. And one for you, Alan. You know, you've accelerated three 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, you know, margin expansion, the achievement of, you know, breakeven on a sustainable basis? Is that something that we should expect next year?

We will continue to see margin expansion. We've said in the past, Parker, that we'll, you know, longer term, we've just 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.

Understood. Appreciate the color here. Thanks.

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

Thanks for the questions tonight. So appreciate the comment you made on increased demand for in-person and digital events. I also know you put a lot of effort into the Salesforce revamp. So any additional color on Salesforce productivity, you know, how the newer salespeople have ramped up and how that's contributing to growth decisions?

Sure. So this is Brett. You know, 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 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 more 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, you know, new reps that are not yet ramped, you know, 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? 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.

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

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

Understood. Thank you so much for your time.

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

Understood. Thank you so much for the time.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from Brent Briceland with Piper Sandler. Please proceed with your question.

Hi, guys. This is Hannah Rudolph on for Brent today. Thank you for taking my questions. 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?

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 of signing up payments customers. And we're doing a better job now and really working to penetrate into our existing customer base by giving them more and more on-ramps using digital means to take customer payments.

Sorry, go ahead. I was going to say there was a second part of the question.

I was just asking about incentivizing that 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.

Yeah, 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 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, you know, 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.

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 Booker by MindBody and I was wondering if this signals a more concerted effort to expand into that beauty and wellness vertical.

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

Okay. Thank you.

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.

Yeah, 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.

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