2023-05-22 14:35:26 ET
Summary
- Weave Communications recently reported its Q1 2023 financial results.
- The firm provides a suite of customer communications and payments software to small healthcare-centric businesses.
- WEAV's top-line revenue growth is slowing and it is still generating operating losses.
- While its focus on the healthcare segment may make the stock more resilient during an economic downturn, I'm Neutral [Hold] on WEAV in the near term.
A Quick Take On Weave Communications
Weave Communications ( WEAV ) went public in November 2021, raising approximately $120 million in gross proceeds from an IPO priced at $24.00 per share.
The firm provides customer communications software and payments solutions to healthcare-centric businesses.
The stock has recently moved upward in the wake of its Q1 2023 earnings release and guidance.
I’m Neutral [Hold] on Weave Communications for the near term.
Weave Overview
Lehi, Utah-based Weave was founded to develop a SaaS software platform aimed at helping small businesses better communicate with and engage customers and prospects.
The company's current industry focus includes various healthcare and home service providers, and it has also begun to provide payment and related services.
Management is headed by Chief Executive Officer Brett White, who has been with the firm since July 2020 after joining the Board of Directors and was previously CFO and COO at Mindbody, CFO at Meru Networks, and VP Finance at Oracle.
The company’s primary offerings include:
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Messaging
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Email
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Reviews
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Analytics
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Payments
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Scheduling
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Team Communications
The firm uses a combination of direct sales, industry events, channel partnerships, and digital marketing efforts to reach small and medium size businesses.
Weave’s Market & Competition
Based on type, the global customer communications market is segmented into customer communication management ((CCM)), interactive customer relationship management (ICRM), and customer experience management ((CEM)).
According to a 2021 market research report by MarketsAndMarkets, the global customer communications market will be an estimated $1.3 billion in 2021 and is forecast to reach $2.2 billion by 2026.
This represents a forecast CAGR of 11.2% from 2022 to 2026.
The main drivers for this expected growth are the growing adoption of digital customer communication solutions tailored for various industry verticals, with the North American region expected to retain the largest market share through 2026. Still, APAC is expected to grow at the fastest rate of growth.
Also, the COVID-19 pandemic likely has pulled demand forward for digital customer communication solutions, and businesses of all sizes sought to retain and enhance customer relationships despite the pandemic's dislocations.
Management estimates the addressable market for all of its offerings in the U.S. to be $11.1 billion.
Major competitive or other industry participants include:
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Zendesk
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OpenText
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CEDAR CX Technologies
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Messagepoint
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Doxim
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Topdown
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Napersoft
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Ecrion
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Hyland
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Braze
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HelpCrunch
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Front
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Podium
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Others
Weave’s Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
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Gross profit margin by quarter has trended higher in recent quarters:
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Selling, G&A expenses as a percentage of total revenue by quarter have dropped in recent quarters, indicating the company is getting more efficient at producing incremental revenue:
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Operating income by quarter has remained materially negative in recent quarters:
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Operating leverage by quarter has been positive in the three most recent quarters:
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Earnings per share (Diluted), while still negative, have made some progress towards breakeven:
(All data in the above charts is GAAP)
In the past 12 months, WEAV’s stock price has risen 43.09% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) growth of 15.24%, as the chart indicates below:
For the balance sheet, the firm ended the quarter with $112.6 million in cash, equivalents and short-term investments and $10.0 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash used was $9.1 million, of which capital expenditures accounted for only $2.0 million. The company paid $19.8 million in stock-based compensation in the last four quarters, the highest figure in more than two years.
Valuation And Other Metrics For Weave
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.9 |
Enterprise Value / EBITDA | NM |
Price / Sales | 3.2 |
Revenue Growth Rate | 20.2% |
Net Income Margin | -29.5% |
EBITDA % | -21.6% |
Market Capitalization | $476,390,000 |
Enterprise Value | $436,450,000 |
Operating Cash Flow | -$7,050,000 |
Earnings Per Share (Fully Diluted) | -$0.67 |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
WEAV’s most recent Rule of 40 calculation was negative (1.4%) as of Q1 2023’s results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 20.2% |
EBITDA % | -21.6% |
Total | -1.4% |
(Source - Seeking Alpha)
Commentary On Weave
In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted that the quarter represented the first year-over-year revenue growth that increased sequentially since 2019 (before the pandemic).
The firm delivered its first quarter of positive free cash flow as a result of ‘revenue overachievements and continued operational improvements.’
Management expects to continue to invest in its in-person sales opportunities, such as industry events, as they have been an important source of new customer acquisition.
WEAV is also further enhancing its AI-enabled Response Assistant to improve patient communication.
The company’s net retention rate was 97%, indicating less than ideal product/market fit and sales & marketing efficiency.
Total revenue for Q1 2023 rose 18.9% and gross profit margin increased by 8.4 percentage points.
Selling, G&A expenses as a percentage of revenue dropped by 8.3 percentage points year-over-year, indicating increasing efficiency in generating incremental revenue and operating losses dropped 37%.
Looking ahead, for full-year 2023, management guided revenue to $162 million at the midpoint of the range, or growth of 14%, which would be materially lower than 2022’s growth over 2021 (22.6%).
The company's financial position is strong with plenty of liquidity, almost no debt and minimal free cash use giving WEAV plenty of runway.
Regarding valuation, the market is valuing WEAV at an EV/Sales multiple of around 3.2x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, WEAV is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
Risks to the company’s outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I’m most interested in the frequency of potentially negative terms, so management cited ‘Macro’ once in response to an analyst question about the macroeconomic environment, and CEO White indicated ‘no major changes in the macro or the buying environment.’
In the past twelve months, the firm's EV/Sales valuation multiple has increased 33%, with all of that net increase showing up in the past few weeks, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include a pause in the rise of the cost of capital, resulting in reduced negative valuation pressure on its stock.
The stock has risen sharply recently, essentially since its most recent earnings report.
Does WEAV have further to go? Its revenue growth rate appears to be decelerating but gross margin has risen and operating losses have reduced somewhat, indicating a greater focus on profitability rather than growth at all costs.
This may be a shift in focus that investors in the current market are taking notice of.
A case could be made that WEAV presents a growth at a reasonable price play that is making progress towards breakeven.
But its net retention figures are not impressive, its operating losses are the same as they were two years ago and the company is subject to the same macro headwinds as other technology firms as the economy slows down.
I’m Neutral [Hold] on the stock in the near term.
For further details see:
Weave Communications Guides To Lower Growth In 2023