Weave Communications, Inc. Q3 FY2022 earnings

Weave Communications reported third quarter fiscal 2022 revenue of $36.2 million, up 19.6% year over year. Gross profit rose 33.1% to $23.2 million, and gross margin was 64.1%, up 6.5 percentage points. The operating loss narrowed to $11.9 million. The net loss narrowed to $11.8 million. Diluted EPS improved to negative $0.18. Operating cash flow was negative $4.0 million, down 22.9%. Capital expenditures were $0.27 million, down 88.2%. Deferred revenue was $32.7 million, up 15.1%. Management said the revenue increase came mostly from new customers acquired after September 30, 2021. Gross margin benefited from a favorable customer mix as more customers had fully depreciated phone hardware and from lower third-party costs for platform features and data usage.

Non-GAAP results showed better profitability than GAAP. Non-GAAP loss from operations was $6.5 million, compared with $9.9 million a year earlier. Non-GAAP net loss was $6.5 million, or $0.10 per share, compared with $10.3 million, or $0.72 per share. Adjusted EBITDA was negative $5.2 million, compared with negative $9.1 million. Free cash flow, a non-GAAP measure, was negative $4.6 million, compared with negative $6.4 million. That is separate from operating cash flow, which was negative $4.0 million for the quarter. The company ended the quarter with a larger deferred revenue balance, a sign that billings continued to run ahead of recognized revenue.

On a year-to-date basis, revenue was $104.4 million, up 24.3%. Gross profit was $63.9 million, up 32.2%. Operating loss widened to $40.0 million. Net loss widened to $40.5 million. Diluted EPS improved to negative $0.62. Operating cash flow was negative $9.9 million, up 3.8% from the prior year period. Capital expenditures were $1.19 million, down 79.2%. The year-to-date operating margin was negative 38.3%, up 5.5 percentage points. The year-to-date figures still show losses, even as the third quarter loss narrowed.

Key metrics were mixed. Dollar-based net retention rate was 101% as of September 30, 2022, down from 104% at September 30, 2021. Dollar-based gross retention rate was 94%, up from 93%. Management said the NRR decline reflected an anticipated normalization after the Weave Payments rollout and upsell efforts in the first half of 2021. Operational highlights included the appointment of Brett White as chief executive officer and Brooke Shreeve as chief people officer, new online scheduling features, phone reporting analytics for multi-location practices, a Great Place to Work designation for the fourth year, and a virtual conference for more than 130,000 users.

Guidance points to steady growth but continued losses. For the fourth quarter, total revenue is expected to be $36.0 million to $37.0 million. For the full year 2022, revenue is expected to be $140.5 million to $141.5 million. Fourth quarter non-GAAP loss from operations is guided to $(7.5) million to $(6.5) million. Full year non-GAAP loss from operations is guided to $(34.0) million to $(33.0) million. Weighted average share count is guided to 65.6 million for the fourth quarter and 65.1 million for the full year. Risks include the lingering impact of COVID-19 on SMBs, trade shows and conferences that have not returned to pre-pandemic attendance levels, competition, customer acquisition costs, and the ability to attract and retain talent. Leadership changes brought severance costs tied to the former CEO's departure. Management also noted an option repricing charge of about $1.1 million to be recognized over 2.5 years, which will add to stock-based compensation expense. The company expects sales and marketing expenses to slightly decrease as a percentage of revenue in 2022 compared with 2021.

The expense base continued to grow. Management described higher personnel costs across the business, including merit increases, sales commission adjustments, and executive stock-based compensation. General and administrative costs also rose on higher director and officer insurance premiums, professional fees, and severance tied to the former CEO's departure. Research and development spending increased as the company invested in platform infrastructure and new products. Those investments are part of the plan to scale, but they keep the company unprofitable on a GAAP basis. Weave also has a full valuation allowance against domestic net deferred tax assets, and it expects to maintain that allowance for the foreseeable future. The company believes its current cash and available credit facility will be sufficient for at least the next 12 months.