Weave Communications, Inc. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to Weave's conference call regarding the financial results for the third quarter of 2024. All lines are currently muted, and we will open the floor for questions and comments after the presentation. Now, I am pleased to turn the call over to your host, Mark McReynolds, Head of Investor Relations. The floor is yours.

Thank you, Kat. Good afternoon and welcome to Weave's third quarter 2024 earnings call. With me on today's call are: Brett White, CEO; and Alan Taylor, CFO. During the course of this conference call, we will make forward-looking statements regarding the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations and entail certain assumptions made as of today's date and are subject to various risks and uncertainties described in our SEC filings. We've disclaimed any obligation to update or revise any forward-looking statements. Further, on today's call we will discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. Unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC before this call, as well as the Earnings Presentation on our Investor Relations website at investors.getweave.com. And with that, I will now turn the call over to Brett.

Thank you, Mark, and thanks to everyone for joining the call today. I'd like to start with a few financial highlights from Q3. We delivered another quarter of solid top line performance and significant improvements in gross and operating margins and free cash flow. We also achieved another major performance milestone reporting positive non-GAAP operating income for the first time in the company's history. Revenue for Q3 was $52.4 million, representing over 20% year-over-year growth and $1.2 million above the midpoint of the guidance range we provided in July. Gross margin reached 72.5%, an improvement from last quarter and over 300 basis points greater than Q3 of last year, marking our 11th consecutive quarter of gross margin improvement. Weave's mission is to enhance health care experiences for both patients and the practices that serve them. We deliver an all-in-one customer experience and payment software platform specifically designed for small and medium-sized health care practices. Our solution enables healthcare providers to focus on patient care, while we help optimize office operations, streamline billing and payment processing, and drive practice growth through improved patient communication and engagement. Our current focus is on dental, optometry, veterinary, and specialty medical verticals, which we estimate is an addressable market exceeding $7 billion in the U.S. alone. Specialty medical, which includes family practice, MedSpa, plastic surgery, and physical therapy, was our fastest-growing category again in Q3. Our origins are in helping practitioners grow their businesses by effectively attracting, engaging, and retaining patients. The integration of fintech solutions like payment processing, Buy Now Pay-over-time, and payment plans is a natural progression to help practitioners accelerate collections and increase acceptance rates of additional services. With Weave, billing and payment requests are seamlessly integrated into communication workflows, using the practice's trusted phone number and domain. This approach streamlines payment timelines, reduces accounts receivable and write-offs, and further supports practice growth and profitability. Healthcare providers, often without dedicated IT, business intelligence, finance or marketing teams rely on intuitive software like Weave to succeed. Our platform integrates seamlessly with practice management systems, enabling greater personalization, more automation, and improved data accuracy. Last week we announced the availability of the New Weave platform, which is the most significant product launch in our company's history. This is a culmination of a multi-year effort that holds great strategic importance for Weave and our customers. Now available across all customer locations, the New Weave platform strengthens our market position with a robust, scalable, and cutting-edge technology infrastructure that enables us to accelerate innovation. Weave has been at the forefront of administrative AI solutions for healthcare practices and an AI-powered Weave Assistant is integrated throughout the new platform. Our unique advantage is that we have more than a decade of patient interactions available to train large language models. This unique training dataset includes billions of records like phone calls, voicemails, and SMS messages. Our AI-powered features provide immediate customer value. McKinsey reports that AI tools could automate nearly 45% of administrative tasks in the healthcare sector, potentially saving $150 billion annually. Weave Assistant helps craft personalized responses to reviews, write professional branded emails, and automate tasks like message tagging and voicemail transcriptions. Our new call intelligence product leverages a custom AI model to extract actionable insights from call data. To keep their businesses running smoothly, our customers must manage communications and payments workflows simultaneously. The new Weave platform improves practice operations by consolidating tasks into a more unified system. It features a modern user interface that prioritizes versatility and ease of use, streamlining daily tasks with fewer steps and clicks. Pop-out texting and team chat allows users to text patients, chat with staff, accept a phone call and view the calendar all at the same time. Users can toggle between locations to access one or all locations and configure forms, messages, and other settings once for a single location or multiple locations with ease. The New Weave platform features an enhanced user interface which can now expand to full screen for a comprehensive view or shrink to fit seamlessly alongside the practice's system of record. A fully customizable dashboard places the most essential elements front and center, providing a helpful overview of the day. The New Weave platform is available via mobile app, desktop app, or any browser. Security and software updates are installed automatically, ensuring the platform stays up to date without any extra effort on the part of our customers. I invite you to watch a two-minute video on our website to see firsthand the exciting leap forward our new platform represents for our customers. Take a look at getweave.com/new. Last week we also launched an enhanced email marketing tool on the New Weave platform, enabling the easy creation of professional, on-brand emails with a drag-and-drop composer, pre-built templates, and free stock images. Emails can be sent from the trusted business domain to ensure professionalism and help avoid spam filters. Our AI-powered Weave Assistant helps craft content while advanced filters target the right audience. The New Weave platform also introduces a new specialized user interface for veterinary practices. These UI enhancements, built in collaboration with veterinary professionals, streamline daily operations and improve the experience for clinic staff and clients. By making pets the primary profile across the Weave platform, the update enables more personalized service and allows front desk staff to quickly access essential pet details. In addition to enhancements to our user experience and AI-powered features, the New Weave platform opens up valuable opportunities for seamless integration of payments functionality into communication workflows via the trusted practice phone number. By embedding billing and payment features throughout the entire patient journey from appointment scheduling to post-visit text-to-pay notifications, we simplify and enable customers to accelerate the billing and collection process. With Weave Payments, our customers can easily allow their patients to pay using their preferred methods. Practices can send payment requests via text-to-pay, accept payments through credit cards or ACH direct debit, and offer online and in-person payment options like online bill pay, scan to pay, and mobile tap to pay. Practices can also keep payment methods on file and provide flexible options such as Buy Now Pay-over-time and payment plans. This empowers practices to increase procedure acceptance rates, optimize billing operations, improve collections on past due accounts, and reduce write-offs. In Q3, we've also announced payment reminders. This new feature allows our customers to collect more outstanding balances with less effort, by turning each Weave payment invoice or text-to-pay request into an Automated Collection campaign. As we announced last quarter, the New Weave platform powers Weave Enterprise, our solution designed specifically for multi-location practices. Approximately one-third of our active locations are part of multi-location groups, and Weave Enterprise offers advanced capabilities like a unified inbox for appointments and forms, centralized management tools, region-specific reporting, and robust payment and collection features. We're very excited to share an early success story for the New Weave platform and our Enterprise product. Earlier today, we announced that Affordable Care, America's largest dental support organization for tooth replacement services has selected Weave as the platform of record for patient engagement and payments across its supported dental practices. Affordable Care chose Weave for our ability to integrate seamlessly with their databases, streamline and automate patient engagements and provide new digital payment options that fit naturally into patient communication workflows. Since implementing Weave, Affordable Care pilot locations have achieved measurable improvements in operational efficiency through online scheduling and digital forms, and have also seen a boost in patient acquisition and treatment acceptance rates. These practices report increased cash flow and revenue capture per location driven by flexible payment options that optimize revenue cycle management and enhance overall patient experience. To further drive growth in the multi-location space, we have recently added a seasoned leader with 20 years of industry experience to head our multi-location sales team. His experience, strategic vision, and strong market relationships will play a crucial role in Weave's presence particularly among Dental Service Organizations or DSOs. On the partnership front, we continue to make progress. Our authorized and supported integrations with leading practice management systems empower practices to automate and personalize their communications and play a critical role in driving growth across our target markets. This year, we have expanded our addressable market through new integrations with eClinicalWorks, athenahealth, NextGen, ezyVet, and other practice management systems. We've also deepened existing integrations with Dentrix Ascend, Eaglesoft, and Fuse to include reading and writing patient information, appointment details, confirmations, and ledger entries to streamline payments collections, helping practices further enhance efficiency and accelerate growth. Even more compelling, we have advanced our strategic approach by forming deeper commercial partnerships. In June, we announced a strategic agreement with Patterson Dental offering one of the most comprehensive integrations in the market and enabling co-marketing and co-selling initiatives. Since then, close collaboration between Weave and Patterson leadership has enhanced value for our shared customers resulting in improved conversion rates at every stage of the sales cycle and bookings growth. Finally, Weave continues to earn recognition for our dedication to delivering exceptional customer experiences and the outstanding performance of our platform and team. In G2's Fall 2024 Report, we've ranked first in 21 categories and was once again named the leader in the grid for patient relationship management and was listed among the top 50 software products for small businesses. Additionally, Weave was named an Inc. Power Partner, recognizing our impact in helping businesses start, run, and grow. We are committed to fostering an exceptional workplace and Weave is now Great Place to Work certified in the U.S. for the sixth consecutive year and for the first time in India. In closing, I'm incredibly proud of the Weave team's achievement in Q3 as we continue our momentum from the first half of the year. We drove strong top line growth, made solid progress in profitability, and brought to market some truly innovative new products. This success reflects our commitment to putting our customers first and constantly delivering solutions that meet their needs. I want to sincerely thank our customers, partners, team members, and shareholders for their ongoing support of Weave. With that, I'll hand the call over to Alan to dive deeper into the financial results and share our outlook.

Thanks, Brett, and good afternoon everyone. I'm excited to share some additional insights on our financial performance this quarter. In Q3, we continued to execute well, and we're pleased with our results. As Brett mentioned, we are excited about hitting $1.4 million in positive non-GAAP operating income. This operating income result represents a $2.1 million beat over the midpoint of the guidance range we provided last quarter. We delivered this significant milestone of non-GAAP operating income for the first time in the company's history, while achieving third quarter revenue of $52.4 million and maintaining a revenue growth rate of over 20%. Revenue growth this quarter was largely fueled by new customer acquisitions with continued momentum from our specialty medical vertical, which is growing at more than twice the rate of our overall revenue growth with notable success among MedSpas and general practitioners. Our net revenue retention rate improved to 98% in Q3, up from 97% last quarter. Our upsell products have continued to perform well. We've continued to increase the number of payments customers and we've also benefited from price adjustments, which are periodically made across customer cohorts and products as we continuously deliver additional value and functionality like the new Weave platform. Our gross revenue retention rate remained strong at 92%, placing us among the top performers for SMB retention. Weave's gross revenue retention rate has consistently ranged between 91% and 94% each quarter over the past four years. Transitioning to a deeper look at our operating results. As a reminder, I'll be referring to non-GAAP results unless stated otherwise. In Q3, we achieved solid improvements across the board. Our gross margin reached 72.5%, greater than a 300 basis point increase year-over-year. Cost of revenue rose by only 8% year-over-year while revenue grew by over 20%. Our total operating expenses as a percentage of revenue improved to 70% this quarter, down from 74% in Q3 of 2023, reflecting our continued focus on optimization. Sales and marketing expenses came in at $19.4 million or 37% of revenue, a slight decrease from 38% in the same period last year. Research and development expenses for the quarter totaled $8 million, representing 15% of revenue, down from 16% of revenue a year ago. Additionally, general and administrative expenses were $9.2 million or 17% of revenue compared to $8.3 million or 19% of revenue in the prior year period. These improvements highlight our focus on efficiency and productivity as we scale our operations. As previously mentioned, operating income for Q3 was $1.4 million, an improvement of $3.2 million compared to last year and $1.6 million higher than the top end of the guidance that we gave in July. The corresponding operating income margin of 2.7% is a significant improvement from the operating loss margin of 4.2% last year. Our net income was $2.1 million or $0.03 per share in the third quarter based on 72 million weighted average shares outstanding. This is compared to a net loss of $1 million or $0.01 per share last year. This represents a $3.1 million improvement due to revenue growth and operating efficiencies. Adjusted EBITDA was positive $2.2 million, a $3.2 million improvement year-over-year. Adjusted EBITDA margin of positive 4% was a significant improvement compared to the negative 2% margin reported a year ago. Shifting the focus to the balance sheet and cash flow. We ended the third quarter with $98.2 million in cash and short-term investments. Cash flow generated from operations was $4.5 million in the third quarter and $7.5 million year-to-date. Free cash flow was $3.5 million in the third quarter, representing year-over-year growth of 70% and $4.2 million year-to-date. Turning to our outlook. We are raising our guidance for the full year 2024 and we expect total revenue to be in the range of $202.7 million to $203.7 million. We also expect to produce positive non-GAAP operating income for the full year 2024. For the fourth quarter of 2024, we expect total revenue in the range of $52.6 million to $53.6 million and non-GAAP operating income in the range of $0.9 million to $1.9 million. We expect to have a weighted average share count of approximately 71.6 million shares for the full year. In summary, we've continued to execute well in Q3 and we're excited about the success we're having across all the verticals that we serve. We're optimistic about our future opportunities and are committed to strengthening our long-term value through sustained business growth. And with that, I'll turn the call back over to the operator for Q&A.

Thank you. The floor is now open for questions. Our first question comes from Brent Bracelin from Piper Sandler. Go ahead, Brent.

Thank you. Good afternoon. Great to see the profitability crossover this quarter. I had two questions if I could here: one, when could the new Patterson relationship here start to have a bigger impact on the pipeline top of funnel? And then two, I was hoping you could talk a little bit about specialty medical, what's driving the momentum there? And maybe more specifically could you frame how the new Weave Enterprise platform could expand your reach into hospitals. It looks like hospitals are now one of the areas you could go after with that new platform. Thanks.

Thank you, Brent. Let me break this down. Starting with Patterson, we expect it to start affecting the funnel now. We initially announced and built the integration, established the partnership, attended their sales conference, and trained around 700 of their representatives. We've visited and trained their sales teams a few times, and we're already seeing positive results. Our conversion rates throughout the funnel are improving, and bookings are increasing. Weave sales on the Patterson platform have certainly risen, and we anticipate that this momentum will continue.

Perfect. And then could you talk a little bit about the specialty medical, and maybe a little bit more about Weave Enterprise. I do see you're targeting hospitals now on the website. I'd love to understand that opportunity. I know historically you haven't addressed larger hospitals. I'd love to know what Enterprise opens up for you particularly given that proof point with Affordable Care in their 450 locations?

Specialty medical is quite fragmented, and our success in that area is primarily due to our efforts in building integrations. There is significant demand to transition from various point solutions to an integrated platform, which explains our positive momentum. As we continue to implement these integrations, complete the payment systems, and train our sales teams, I anticipate ongoing growth. In fact, specialty medical overall represents a larger market than dental, optometry, and veterinary sectors combined, so we are very optimistic about the trends we're seeing. Regarding hospitals, our focus is primarily on small and medium-sized practices. We view the multi-location opportunities as a consolidation of small- and medium-sized sites. For example, Affordable Care, which has 450 locations, is a substantial enterprise, and we see tremendous potential there. The new Weave enterprise platform is a great fit for their requirements, and our win with Affordable Care demonstrates this alignment. By combining a modern multi-location product with strong integrations, as seen with the Affordable Care solution and payments, we have created a compelling offering. Notably, Affordable Care chose us not just for the engagement solution, but also for managing their payments, which is a significant achievement. At this stage, we are not specifically targeting large hospitals, as we have ample opportunities within single-location and multi-location businesses.

Very clear. Helpful color. Thank you.

And our next question comes from Alex Sklar from Raymond James. Go ahead, Alex.

Great. Thank you. Alan or Brett, just starting off with the first question on the outlook for NRR. It's picked up nicely in the last couple of quarters. Can you just help frame where you see some of the biggest opportunities to get that figure even higher? I know you talked about payments being a big bucket. What is maybe some of the other lowest hanging fruit if you look at that metric in particular? Thanks.

Thank you, Alex. NRR payments are definitely one of the major drivers, and we have seen an increased take rate through partnerships like Patterson and across our sales team. Our payments segment is growing at a faster rate than our overall business revenue. This will be a critical factor for us. We are also launching some strong upsell products, including call intelligence, bulk messaging, and insurance verification, which are becoming significant contributors to our quarterly revenue and aiding in the growth of our NRR. We will keep focusing on these areas and make improvements to help reduce downgrade rates. These are the main priorities for enhancing our NRR.

As we develop more integrations, we see a greater chance to transition customers who are currently using Weave as a standalone service to an integrated platform. When this shift occurs, they gain access to additional functionalities, making the service more appealing and leading to upsell opportunities.

Great. That's great color. Maybe a follow-up for you Brett just on Specialty Medical broadly. So four core subverticals today. I think you talked about it going to 8. How is your sales coverage broadly for that opportunity? And then what do you need to see? It's already growing twice as fast as kind of the overall organization you said. What do you need to see to kind of take that formal go-to-market hiring from four to eight of the subverticals to something north of 10 or 20 over the next couple of years? Thanks.

Yes, integrations are extremely important for us. When we look to enter a new vertical, it's essential to integrate with the leading Practice Management Software in that area. We need to ensure we have strong product market fit. As you can see from our recent vertical rollouts, we are very strategic in our approach. We will continue to add new verticals, but not just for the sake of it; we want to ensure we have good product market fit, established integrations, and are providing increasing value. The market outside of our current verticals is quite fragmented, indicating that there is potential for us to introduce our solution effectively. We aim to do this thoughtfully and successfully, establishing a mutually beneficial relationship with our customers from the start.

I would just add, Alex, we are seeing inbound interest from customers for whom we do not have an integration. These folks are pretty starved for a solution like Weave to communicate with their patients. And so it represents a great opportunity for us to know where the biggest interest is and make sure that we got on our roadmap the integrations that will even better serve them in the future.

Great. And maybe just a quick follow-up on both of those about the inbound, are you seeing any increase in inbound interest from those fragmented practice management systems that are looking to build the integration? Are they being more proactive in asking if they can build the integration with you and speed up the process? Is that something you've noticed?

Yes, very much so.

When we attend events, whether they are trade shows or other on-site gatherings, and display a banner that says 'We now integrate with XYZ,' we attract a lot of interest. There is certainly a demand for this. Moreover, about a year and a half ago, many Practice Management Software providers viewed us as competitors and were not particularly keen on collaborating with us. It required a shift in our approach to demonstrate that we are interested in fostering win-win relationships with these vendors. Now, the situation has changed significantly; we have Practice Management Software vendors approaching us to request integrations. We are now focused on building a pipeline for writing these integrations and developing our go-to-market strategy. Therefore, we are quite optimistic about expanding into new verticals and enhancing both the volume and quality of our integrations.

Thank you both.

And our next question comes from Parker Lane from Stifel. Go ahead, Parker.

Hey, guys. Thanks for taking the question here. Alan, you alluded to some price adjustments that you periodically do. I'd love to get some more color on where those took place. And longer term, you bring a lot of functionality to the table here. How should we think about your ability to I guess extract more price for some of these more premium-type features that you're bringing to the table?

Yes, thank you, Parker. We adjust prices every quarter, typically based on when customers renew and also in response to product changes. We're continually testing different bundles. We've noticed that as long as we provide value, like with the New Weave platform, customers are generally receptive to price increases, especially as we move out of a high inflation period. So, we will keep managing prices to ensure we are offering the value that justifies them. In terms of maximizing our share of customers' spending, payments play a significant role. Integrating into our customers' workflows is essential, which includes better integration with payments to simplify record-keeping and reduce reconciliation tasks for office staff. This is where we excel, and customers recognize that we offer one of the best solutions available. As long as we continue to deliver, they are willing to pay for it, and that is our goal.

Parker, one thing I would add is the New Weave platform is a vastly superior product to the legacy app in kind of every possible way. And right now it's available to all of our customers, existing and all new customers, at no additional charge even though it's a significantly more valuable product. So I think we've got opportunity there in the future. But right now it's just an upgrade at no additional charge.

Brett, just a follow-up on that. Is there any timeline by which customers will sort of adopt that newer platform? Is there going to be a big changeover moment for everyone? Is it a case-by-case basis? Just coming from a change management standpoint how you're handling that?

Yes. So it's our desire to move customers over sooner rather than later just so they can get a lot of the benefits. I mean one of the great benefits is they get updates to the software as they're developed and pushed out as opposed to having to go in and update their app. So they kind of have to constantly have the best solution that's available to them. So it's to their benefit to move over quickly, but we understand that there will always be folks who are just comfortable with what they're using. And we don't have any plans at this time to kind of force people over. We just hope that they get the word through our marketing initiatives and our pop-ups that, 'Hey, give us a try and I think you'll like it.' And sooner is better for everyone.

Understood. Thanks, again.

And our next question comes from Mike Funk from Bank of America. Go ahead, Mike.

Great. Thanks. Hi. This is Matt on for Mike. Great to see the profitability this quarter and continued gross margin expansion. Maybe if you could just help us frame some of the drivers for potential future margin improvement as a whole. And then maybe help us think about where terminal gross margins can end up in a couple of years out? Thanks.

Thanks, Matt. Yes, the gross margin story has been impressive with 11 quarters of consistent growth. The main contributors to this growth are our payments product and its revenue impact. As we expand this product into our existing and new customer bases, it positively influences gross margin expansion. Additionally, the phone component of our market strategy comes off amortization after three years, providing a structural improvement as we retain customers over time. Moreover, we have a support organization dedicated to delivering top-notch service while controlling costs. They have implemented new tools and processes recently that enhance our customer service capabilities without increasing staff levels. Our Engineering organization is also focused on efficient delivery across our data centers and managing costs with bandwidth providers. Our scale enables us to achieve efficiencies in these areas. Looking ahead, we envision gross margins reaching between 75% and 80% as we continue to enhance payment success and maintain a close watch on all other costs.

Super helpful. Thank you.

And at this time, there are no more questions. I would now like to turn it back to management for any closing remarks.

Yes. I'd like to just kind of circle back on a question we got at the beginning of the call and it was a question around kind of how our relationship with Patterson was turning out. And one observation I'd like to share, which is very exciting for us is that the adoption of Weave payments at the time of sale of the Weave platform on Patterson is very high. It's higher than our core business. So that would be adoption of payments at sale of the software. And so that's a very encouraging sign as well. So with that said, I'd like to thank the entire Weave team. I'd like to thank everyone, all of our shareholders for your support. Thank you for joining the call. We here are really excited to continue to build on the progress that we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters. So, thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.