Weave Communications, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is the three months ended March 31, 2022. Weave sells subscription access to an integrated communications and engagement platform, including VoIP phone services, software and payment processing, primarily to small and medium-sized businesses.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $39.6 million | $33.3 million |
| Gross profit / margin | $26.5 million / 67% | $19.5 million / 59% |
| Operating loss | $(8.5) million | $(13.5) million |
| Net loss | $(7.9) million | $(13.8) million |
| Basic and diluted loss per share | $(0.12) | $(0.21) |
| Cash from operating activities | $1.5 million | $(4.2) million |
| Free cash flow (non-GAAP) | $0.6 million | $(5.1) million |
| Adjusted EBITDA (non-GAAP) | $(2.0) million | $(9.1) million |
Revenue grew 19% year over year; management attributed approximately $5.8 million of the $6.3 million increase to customers acquired after March 31, 2022, and $0.5 million to existing customers. Subscription and payment-processing revenue was $37.7 million; onboarding revenue was $0.8 million and embedded phone-hardware lease revenue was $1.1 million. Recurring revenue represented 92% of total revenue, compared with 95% a year earlier.
Cash and cash equivalents were $56.1 million and short-term investments were $56.5 million at March 31, 2023. The company reported $10.0 million outstanding on its revolving credit facility, with $40.0 million of borrowing capacity available. Finance lease liabilities totaled $13.0 million; operating lease liabilities totaled $49.7 million. Deferred revenue was $34.6 million. The accumulated deficit was $239.5 million.
Changes versus the prior comparable period
- Gross margin increased to 67% from 59%. Management cited lower cloud, hardware and telecommunications costs, a larger share of customers with fully depreciated phones, and support and onboarding efficiencies.
- Operating loss narrowed by $5.0 million, while net loss narrowed by $6.0 million. Other income was $1.2 million versus near zero in Q1 2022, mainly reflecting earnings on cash and short-term investments; interest expense increased to $0.5 million from $0.3 million.
- Operating cash flow improved by $5.7 million to positive $1.5 million. Free cash flow improved to positive $0.6 million, after $0.6 million of property and equipment purchases and $0.3 million of capitalized software costs.
- Dollar-based net retention declined to 97% from 103%; dollar-based gross retention declined to 93% from 94%.
- Stock-based compensation rose to $4.5 million from $3.4 million. Sales and marketing, research and development, and general and administrative expenses all increased in dollars, although each declined as a percentage of revenue.
Outlook, liquidity, risks and unusual items
- Liquidity outlook: Management stated that cash, cash equivalents, short-term investments, available credit and expected operating cash flows should cover operating and capital needs for at least 12 months from issuance of the financial statements. The company also noted it may incur losses and negative operating cash flow in the future.
- Credit facility: In April 2023, the company amended its revolving facility, extending maturity from August 2023 to August 2025 and setting EBITDA covenants for fiscal 2023. It reported compliance with covenants at March 31, 2023. The facility is secured by substantially all assets and includes liquidity and financial covenant requirements.
- Operating outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management expected sales and marketing expense to increase in dollars but decline as a percentage of revenue in 2023; research and development expense was expected to rise with investment, while general and administrative expense was expected to increase in dollars and decline as a percentage of revenue.
- Business risks: The filing emphasizes continued losses and uncertain profitability; customer churn and weaker retention; reliance on acquiring new customers and increasing product adoption; exposure of SMB customers to economic weakness; competition; and dependence on third parties, including Google Cloud Platform, Stripe, phone suppliers and network providers. It also details cybersecurity, privacy, HIPAA, communications-regulation and service-continuity risks.
- Subsequent events: A sublease beginning in April 2023 is expected to generate approximately $0.7 million of income in 2023. The company also granted 2.1 million RSUs in April, with a stated grant-date fair value of $10.2 million.
- Contingencies and controls: The company reported no legal proceedings expected to significantly affect its financial condition, results or liquidity, and no material change in internal control over financial reporting. Standard indemnification obligations remain, with potential future exposure not quantifiable.
Important facts for investors to verify
- Whether revenue growth can continue to rely on new customer additions while net retention remains below 100% and has declined year over year.
- Whether the improvement in gross margin and operating cash flow is sustainable, and how non-GAAP free cash flow and adjusted EBITDA reconcile to GAAP results.
- The terms and ongoing covenant compliance of the amended credit facility, including the EBITDA covenants and the $20 million minimum-liquidity requirement when applicable.
- The effects of stock-based compensation and potential dilution: 11.6 million potential common shares were excluded from diluted loss-per-share calculations as antidilutive; 66.7 million common shares were outstanding as of May 8, 2023.
- Whether the company can manage customer churn, SMB economic exposure, third-party service dependencies and regulatory or cybersecurity risks without materially impairing growth or margins.