Weave Communications’ Client Base Appears Recession-Resistant (NYSE:WEAV)

A Quick Take On Weave Communications

Weave Communications, Inc. (NYSE:WEAV) reported its Q2 2023 financial results on August 2, 2023, beating both revenue and EPS consensus estimates.

The firm provides a suite of communications software and related payment solutions to healthcare organizations.

I previously wrote about Weave with a Hold outlook on a lower forward growth outlook from management.

The stock has plateaued from its recent jump and may have reached the extent of its rise in the near term.

I remain Neutral [Hold] on Weave Communications, Inc. stock until we begin to see a further catalyst from increased revenue growth or operating loss reduction.

Weave Communications Overview And Market

Utah-based Weave was founded to develop a SaaS system to provide small and medium-sized businesses with better communication options with customers and to effectively engage with prospects.

The firm is focused on healthcare and home service providers and, more recently, has begun to offer payment and related services.

Leadership is headed by Chief Executive Officer Brett White, who has been with the firm since July 2020 and was formerly Chief Financial Officer and Chief Operating Officer of Mindbody, and Vice President of Finance at Oracle.

The company’s primary offerings include:

• Messaging

• Email

• Reviews

• Analytics

• Payments

• Scheduling

• Team Communications

The firm uses a combination of direct sales, industry events, channel partnerships, and digital marketing efforts to reach small and medium-sized businesses.

The worldwide business communications industry is segmented into customer communication management [CCM], interactive customer relationship management [ICRM], and customer experience management [CEM].

According to a 2022 market research report by Future Market Insights, the global customer communications market was forecasted to be an estimated $1.5 billion in 2023 and is expected to reach $4.1 billion by 2033.

This represents a forecast CAGR of 10.2% from 2024 to 2033.

The main drivers for this expected growth are an increasing demand from companies for tailored customer communication solutions that can grow with the company.

The APAC region is expected to grow at the fastest rate of all regions worldwide.

The COVID-19 pandemic brought demand to a higher level more quickly as businesses of all sizes worked to communicate with customers and partners remotely.

Company leadership believes the total addressable market for its offerings in the United States to be approximately $11 billion.

Major competitive or other industry participants include:

• Zendesk

• Open Text

• CEDAR CX Technologies

• Messagepoint

• Doxim

• Napersoft

• Ecrion

• Hyland

• Braze

• Front

• Podium

• Others

Weave Communications’ Recent Financial Trends

• Total revenue by quarter has risen per the following chart; Operating income by quarter has remained materially negative but has improved in recent quarters.

• Gross profit margin by quarter has trended higher in recent reporting periods; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower more recently.

• Earnings per share (Diluted) have remained negative but have uneven progress toward breakeven in recent quarters.

(All data in the above charts is GAAP.)

In the past 12 months, WEAV’s stock price has risen 65.06% vs. that of the iShares Expanded Technology-Software ETF’s (IGV) growth of 28.49%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $110.9 million in cash, equivalents and short-term investments and $10.0 million in total debt, of which none was classified as current.

Over the trailing twelve months, free cash flow was a minimal $1.9 million, during which capital expenditures were $1.8 million. The firm paid $21.2 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Weave Communications

Below is a table of relevant capitalization and valuation figures for the company:

Click to enlarge

(Source – Seeking Alpha.)

WEAV’s most recent unadjusted Rule of 40 calculation was 1.2% as of Q2 2023’s results, so the firm needs significant improvement in this regard:

Click to enlarge

(Source – Seeking Alpha.)

Sentiment Analysis

From the most recent earnings call by management, I prepared a word count chart of major word categories:

The chart shows some concern over the economic uncertainties of the past few years. It also refers to “challenges” that the firm’s customers have encountered.

Analysts questioned company leadership about the growth in average selling price [ASP]. Management said it has been bundling more products that has enabled the firm “to sell more of the higher-end bundles on a kind of an initial sale basis.”

However, the chart below shows a drop in web traffic to the company’s website in recent months, by one-third from a high in December 2022:

Commentary On Weave Communications

In its last earnings call (Source – Seeking Alpha), covering Q2 2023’s results, management highlighted the recession-resilient nature of its customer base, focused on SMB (small and medium-sized) healthcare businesses.

The firm exceeded the top end of its previous guidance range for revenue while improving the efficiency of its business.

WEAV also became free cash flow positive for the first time in its history in Q1, and improved on that result in Q2.

However, the company’s net revenue retention rate was only 96%, with management indicating the reason for the low figure was due to ‘the ongoing effect of the discontinuation of our partnership with our former third-party forms provider.’

Total revenue for Q2 2023 rose by 19.5% year-over-year, and gross profit margin grew by 6.4%.

Selling and G&A expenses as a percentage of revenue fell 10.8% year-over-year, indicating increasing efficiency and operating losses dropped by 32.9%, ending up at $9.8 million for the quarter.

The company’s financial position is excellent, with plenty of cash and equivalents and little debt. Free cash flow was minimal but positive.

WEAV’s Rule of 40 performance turned positive in Q2, but is far from where it needs to be.

Looking ahead, consensus revenue estimates for 2023 suggest a growth rate of 16.6% over 2022.

If the firm achieved this, it would represent a material drop in revenue growth rate versus 2022’s growth rate of 22.6% over 2021.

Regarding valuation, in the past twelve months, the firm’s EV/Sales valuation multiple has risen by more than double from its bottom, suggesting a re-rating of the stock by the market as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include further improvement in reducing operating losses while retaining above 15% YoY revenue growth.

However, it appears the ‘re-rating’ of the stock is already priced in.

If so, management will likely need higher growth and better operating results to justify a further catalyst for the stock.

Until we begin to see better results, I’m Neutral [Hold] on Weave Communications, Inc.