Weave Communications, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Weave provides a cloud-based communications and customer-engagement platform, primarily to small and medium-sized businesses. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $34.9 | $28.1 | $68.2 | $53.7 |
| Gross profit / margin | $21.2 / 61% | $16.0 / 57% | $40.7 / 60% | $30.9 / 58% |
| Operating loss | $(14.6) | $(14.1) | $(28.1) | $(22.8) |
| Net loss | $(14.8) | $(14.4) | $(28.7) | $(23.4) |
| Adjusted EBITDA (non-GAAP) | $(9.0) | $(8.3) | $(18.1) | $(14.5) |
| Free cash flow (non-GAAP) | $(2.4) | $(4.0) | $(7.5) | $(11.6) |
- Growth and margins: Revenue rose 24% in Q2 and 27% in the first half. Management attributed most of the increase to newly acquired customer locations. Subscription and payment-processing gross margin was 73% in both comparable periods. Overall gross margin improved, in part as costs from the prior in-office installation program declined.
- Expenses and profitability: Q2 operating expenses increased 19% to $35.8 million; general and administrative costs rose 53%, including higher legal, personnel and directors-and-officers insurance costs. First-half operating expenses rose 28% to $68.8 million. Despite revenue growth and better gross margin, net losses widened year over year.
- Cash flow and liquidity: First-half operating cash use was $5.9 million, versus $7.0 million a year earlier; investing cash use was $1.6 million and financing cash use was $4.2 million. Cash and cash equivalents were $124.3 million at June 30, down from $136.0 million at year-end 2021. Deferred revenue was $32.3 million.
- Debt and leases: The company had $10.0 million drawn on its $50.0 million revolving credit facility, leaving $40.0 million available; the balance is due August 2023. It reported $13.9 million of finance lease obligations and $51.8 million of operating lease obligations. Stockholders’ equity was $92.0 million.
- Operating indicators: Dollar-based net retention was 102%, down from 104% a year earlier; gross retention was 94%, up from 92%. Subscription and payment-processing revenue was $33.5 million in Q2, while onboarding revenue fell to $0.3 million from $1.0 million.
Material changes and unusual items
- Revenue growth outpaced total cost-of-revenue growth in Q2, lifting overall gross margin by four percentage points. General and administrative expense rose substantially, contributing to the continuing operating loss.
- Weave adopted ASC 842 lease accounting on January 1, 2022. The company recognized operating lease assets and liabilities; prior-period figures were not adjusted, so some balance-sheet comparisons are not on the same accounting basis.
- Stock-based compensation was $4.5 million in Q2 and $7.9 million in the first half. The filing reports no secondary-transaction-related stock compensation in 2022, compared with $3.4 million in the first half of 2021.
- After quarter-end, the company announced that CEO Roy Banks would step down effective August 15, 2022, with Brett White serving as interim CEO pending appointment of a successor.
Outlook, risks and contingencies
- No numeric revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expects losses and negative operating cash flows may continue as it invests in growth, while stating that cash, available credit and expected operating cash flows should cover requirements for at least 12 months from issuance of the financial statements.
- Management expected sales and marketing expense to increase in dollars but decline modestly as a percentage of revenue in 2022; it also expected research and development and general and administrative expenses to increase in dollars and decline as a percentage of revenue over time.
- Key risks include customer acquisition and retention among SMBs, competition, economic and COVID-19-related disruption, customer-support capacity, dependence on third-party providers and cloud infrastructure, cybersecurity and data-protection obligations, and communications and messaging regulation. Most subscriptions are month-to-month, increasing potential exposure to cancellations.
- Disclosure controls were deemed ineffective at June 30, 2022 because previously identified material weaknesses in financial reporting controls remained unremediated. The company was hiring accounting staff, using external advisers and providing training; remediation could continue through fiscal 2022 and entail significant costs.
- The company reported no legal proceedings expected to have a significant impact on its financial condition, results or liquidity. Its credit facility is secured by substantially all assets and includes liquidity and adjusted-EBITDA covenant requirements; Weave reported compliance at quarter-end.
Important facts for investors to verify
- Whether customer-location growth and retention stabilize, including the trend in net retention after its decline to 102%.
- Whether revenue growth translates into improving operating losses and cash generation, given the widening first-half net loss and ongoing investment needs.
- Whether Weave remediates its material weaknesses and improves the effectiveness of financial reporting controls.
- The status of CEO succession and any resulting changes to strategy, spending or execution.
- Credit-facility covenant headroom and the company’s ability to manage its debt, finance leases and long-term operating lease commitments.
- The effect of ASC 842 adoption and the company’s reliance on non-GAAP measures, which exclude certain costs and should be assessed alongside GAAP results.