Weave Communications, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Weave sells subscription access to an integrated communications and customer-engagement platform for small and medium-sized businesses, including VoIP phone service, software, and payments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $36.2 | $30.3 | $104.4 | $84.0 |
| Gross profit / margin | $23.2 / 64% | $17.4 / 58% | $63.9 / 61% | $48.3 / 58% |
| Operating loss | $(11.9) | $(13.9) | $(40.0) | $(36.7) |
| Net loss | $(11.8) | $(14.2) | $(40.5) | $(37.6) |
| Adjusted EBITDA (non-GAAP) | $(5.2) | $(9.1) | $(23.3) | $(23.6) |
| Free cash flow (non-GAAP) | $(4.6) | $(6.4) | $(12.1) | $(18.0) |
Q3 revenue increased 20% year over year; nine-month revenue increased 24%. Recurring revenue represented 95% of Q3 revenue and 96% of nine-month revenue. Subscription and payment-processing gross margin was 76% for Q3 and 74% for the nine-month period. GAAP diluted loss per share was $0.18 for Q3 and $0.62 for nine months; prior-year figures were $1.03 and $2.97, respectively. Per-share comparisons are affected by the substantially larger post-IPO share base in 2022.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $118.4 million at September 30, 2022, versus $136.0 million at December 31, 2021. Nine-month operating cash use was $9.9 million; investing cash use was $2.2 million; financing cash use was $5.5 million.
- Current assets were $136.3 million and current liabilities were $74.8 million. Deferred revenue was $32.7 million.
- Debt under the revolving credit facility was $10.0 million, due August 2023, with $40.0 million in stated available borrowing. The facility is secured by substantially all assets and includes liquidity and adjusted-EBITDA covenants; the company reported compliance at quarter-end.
- Operating lease liabilities totaled approximately $51.1 million and finance lease liabilities approximately $13.0 million at September 30, 2022. These balances reflect adoption of lease accounting guidance in 2022; prior-year balance-sheet figures were not restated.
- In October 2022, Weave transferred $75.0 million into an investment portfolio of available-for-sale securities with maturities of up to 12 months. Management stated that available liquidity and expected cash flows should cover requirements for at least 12 months from issuance of the statements.
Material changes and management commentary
- Q3 revenue growth was largely driven by new customers: management attributed approximately $5.7 million of the $5.9 million increase to customers acquired after Q3 2021. For the nine-month increase, approximately 71% was attributed to new customer locations.
- Gross margin improved year over year, attributed to a more favorable mix of customers with fully depreciated phone hardware and lower third-party/platform usage costs. Onboarding and phone hardware remained loss-making revenue categories.
- Operating expenses increased year over year for the nine-month period, particularly general and administrative expense, including higher personnel, public-company professional-fee, and insurance costs. Stock-based compensation was $13.2 million for nine months.
- Dollar-based net retention declined to 101% from 104%; gross retention increased to 94% from 93%. Management linked the net-retention decline partly to less benefit from the earlier Weave Payments rollout and upsell activity.
- Management expects losses and negative operating cash flows may continue as it invests in growth. It expects sales and marketing and research and development spending to rise in dollars, while anticipating those expenses to decline as a share of revenue over time. The filing does not provide specific financial guidance for future revenue, earnings, or cash flow.
- Leadership changed during the period: Brett White became CEO effective September 30, 2022, following Roy Banks’s departure. A November 2022 option repricing is expected to add approximately $1.1 million of stock-based compensation over a weighted-average 2.5-year vesting period.
Risks, contingencies and unusual items
- Management concluded disclosure controls were ineffective at September 30, 2022 because previously identified material weaknesses in internal control over financial reporting remained unremediated. The weaknesses involved accounting resources and controls over complex transactions, including contract-cost capitalization and stock-option valuation. Remediation is ongoing and may require significant time and expense.
- The company has incurred recurring losses since inception and reported an accumulated deficit of $222.4 million. It depends on customer growth and retention while serving SMBs that may be especially vulnerable to economic downturns. COVID-19-related sales and installation disruption, inflation, higher interest rates, and reduced in-person events may affect growth.
- Other significant disclosed exposures include competition; cybersecurity and service interruptions; reliance on Google Cloud Platform, Stripe, phone and network suppliers, and integration partners; telecommunications, messaging, privacy and healthcare regulation; and potential customer churn. Most customer subscriptions are month to month.
- No legal proceedings were identified as expected to significantly affect financial condition, results, or liquidity. The company disclosed ordinary-course indemnification obligations, including intellectual-property and data-related provisions; potential payments are not determinable.
- Weave adopted ASC 842 lease accounting on January 1, 2022, recognizing substantial operating right-of-use assets and liabilities. The change affects balance-sheet comparability with 2021.
Important facts for investors to verify
- Whether customer acquisition and retention trends improve, particularly the 101% net retention rate and continued dependence on new customers for growth.
- Whether gross-margin gains persist as customer usage, infrastructure costs, messaging fees, and hardware economics change.
- Cash consumption, the planned investment portfolio’s liquidity and performance, and the company’s ability to satisfy the credit facility’s covenants and refinance or repay the $10.0 million due in August 2023.
- Progress in remediating material weaknesses and whether management’s controls can be tested and found effective.
- The effect of leadership changes, option repricing, stock-based compensation, and potential share dilution on expenses and shareholders.
- Whether the company can manage SMB-related churn and macroeconomic, platform availability, supplier, cybersecurity, privacy, and regulatory risks without material disruption.