2023-09-09 01:46:20 ET
Summary
- WM Technology reported Q2 2023 financial results, beating revenue and EPS estimates.
- The company sells software to cannabis retailers and brands for online selling and regulatory compliance.
- WM faces challenges in revenue growth and has reduced operating costs.
- My outlook on MAPS remains Neutral [Hold] for the near term.
A Quick Take On WM Technology
WM Technology (MAPS) reported its Q2 2023 financial results on August 8, 2023, beating both revenue and EPS consensus estimates.
The company sells its software to cannabis retailers and brands for their online selling and regulatory compliance requirements.
I previously wrote about the company with a Hold rating.
MAPS has reduced operating costs but continues to face a revenue growth problem.
I remain Neutral [Hold] on the stock for the near term.
WM Technology Overview
Irvine, California-based WM Technology has created a platform and marketplace for ecommerce functions related to enabling consumers to order cannabis products online.
The firm is headed by Executive Chair of the Board Doug Francis, who has a long history of investment in the company and has held various 'management positions in each of Legacy WMH's current subsidiaries.'
The company's primary offerings include:
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Weedmaps online marketplace
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WM Business Suite
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Sprout CRM system
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Cannveya delivery and logistics
The firm acquires via its direct sales and marketing efforts to businesses and through online and word-of-mouth referrals.
WM Technology's Market & Competition
According to a 2023 market research report by Grand View Research, the global market for cannabis technology, of which the software industry is one segment, was an estimated $3.9 billion in 2022 and is expected to reach $23.5 billion by 2030.
This represents a forecast CAGR of 25.3% from 2021 to 2030, which is a very strong growth rate, if achieved.
The main drivers for this expected growth are legalization in various states, regions and countries, which will require greater regulatory compliance.
Cannabis companies also need to continue to create operational efficiencies due to high competition and sometimes onerous reporting and operational restrictions.
The chart below shows the expected growth trajectory of the U.S. cannabis technology market through 2030:
U.S. Cannabis Technology Market (Grand View Research)
Major competitive or other industry participants include:
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Ample Organics
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Canix
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Distru
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Flourish Software
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Flowhub
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Greenbits
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Helix BioTrack
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MJ Freeway
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Retail Innovation Labs LLC (Cova Software)
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SYSPRO
WM's Recent Financial Trends
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Total revenue by quarter has dropped in recent quarters due to reduced client demand; Operating income by quarter has recently risen to above breakeven due to successful cost reductions.
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has fallen slightly in the recent reporting period; Selling and G&A expenses as a percentage of total revenue by quarter have dropped precipitously due to previous cost-cutting efforts.
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have been highly volatile due to operating expense changes.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, WM's stock price has fallen 35.66% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) rise of 32.61%:
For balance sheet results, the firm ended the quarter with $24.6 million in cash and equivalents and no debt.
Over the trailing twelve months, free cash used was ($17.0 million), during which capital expenditures were $13.3 million. The company paid $16.0 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For WM Technology
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 1.3 |
Enterprise Value / EBITDA | NM |
Price / Sales | 0.7 |
Revenue Growth Rate | -10.0% |
Net Income Margin | -57.9% |
EBITDA % | -9.8% |
Market Capitalization | $252,390,000 |
Enterprise Value | $255,560,000 |
Operating Cash Flow | $1,900,000 |
Earnings Per Share (Fully Diluted) | -$1.27 |
(Source - Seeking Alpha)
MAPS' most recent unadjusted Rule of 40 calculation was negative (19.8%) as of Q2 2023's results, so the firm's previously poor results have since worsened markedly into negative territory, per the table below:
Rule of 40 Performance (Unadjusted) | Q4 2022 | Q2 2023 |
Revenue Growth % | 20.3% | -10.0% |
EBITDA % | -18.7% | -9.8% |
Total | 1.6% | -19.8% |
(Source - Seeking Alpha)
Sentiment Analysis
The following chart shows the frequency of various keywords in management's most recent conference call:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
The chart shows negative terms such as 'Challeng[e][es][ing] , Headwind, Macro and Drop' appearing several times indicating the firm is facing negative market conditions.
Analysts questioned the company about trends on spend per client, retention, accounts receivables, advertising budgets and the recent Mastercard announcement on stopping the processing of cannabis transactions.
Management responded by saying that spend per paying client was up in Q2 compared to previous quarters due to certain larger clients growing their transaction volume, but it will likely drop down in Q3/Q4 to be more in line with Q4 2022 and Q1 2023 levels.
Net revenue retention on listings revenue was 99.5% but spending levels in emerging markets are still below the overall average due to newer clients usually starting out with smaller activity volumes, but Weedmaps is seeing good retention growth there.
The company's days receivables have improved with more stringent collection policies. Allowance for bad debt is coming down, although risks remain elevated.
Management noted that client advertising budgets have been feeling increased downward pressure due to the macro environment, but some players are consolidating and increasing spend. It's a state-by-state story.
The Mastercard announcement to stop cannabis transactions will create more headwinds and challenges for clients, but leadership believes the industry is dynamic and that clients will adapt over time.
Organic visitor traffic to the firm's Weedmaps.com website has decreased markedly since late 2022, as the SEMRush chart shows below:
Commentary On WM Technology
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023's results, management highlighted that its adjusted operating expenses were 32% lower year-over-year.
However, the company will be 'strategic with marketing investments that may put pressure on EBITDA in the near term…'
Also, management conceded that the industry 'is struggling with growth.'
Total revenue for Q2 2023 fell by 12.7% YoY, and gross profit margin increased by 0.2%.
Selling and G&A expenses as a percentage of revenue dropped 14.9%, indicating improving efficiency in generating incremental revenue while operating turned positive ($3.5 million) for the first time since Q3 2021.
The company's financial position is of some concern, with a hefty trailing twelve-month cash outgo against only moderate liquidity.
MAPS' Rule of 40 performance has been poor and is getting worse.
Looking ahead, consensus revenue growth estimates for 2023 are a decline of 9.9% versus 2022's results.
If achieved, this would represent a reversal in revenue growth rate versus 2022's growth rate of 11.6% over 2021.
In the past twelve months, the firm's EV/Sales valuation multiple has risen only slightly net from where it started the period, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include improving operating results as a result of cost cuts.
However, as management has stated, growth is a struggle and the industry doesn't appear to be getting any help from regulators in certain states.
Add to that additional headaches, like the Mastercard payment ban, and the outlook is not rosy.
Given the likelihood of continued revenue growth challenges ahead, my outlook on MAPS remains Neutral [Hold] for the near term.
For further details see:
WM Technology Cuts Costs But Continues To Have A 'Growth Problem'