Greetings, and welcome to the Weave Communications Q1 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark McReynolds, Head of Investor Relations. Over to you, sir.

Thank you, [Danai] [ph]. Good afternoon, and thanks for joining us for our first quarter 2023 earnings conference call. Joining the call today are Brett White, CEO; and Alan Taylor, CFO. Brett will open the call with an overview of Weave's performance, and Alan will discuss our financial results in more detail. After the prepared remarks, we'll take questions. Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Please refer to the cautionary language in the earnings release and in Weave's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. We'll also discuss financial measures that do not conform with generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. Information may be calculated differently than similar non-GAAP data presented by other companies. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at investors.getweave.com. And with that, I'll turn the call over to Brett.

Thank you, Mark. Good afternoon, and thank you all for joining us today. I'll start my remarks by sharing the highlights from the quarter and then follow with a broader company update. I'm very pleased to share that we kicked off the year with strong results. Our total revenue for Q1 was $39.6 million, representing 19% year-over-year growth and above the high-end of our guidance for the quarter. Q1 was an important milestone for us as this was the first quarter in which the year-over-year revenue growth rate increased sequentially since 2019. This growth was driven by strong demand for our platform and our growing customer base. In Q1, we also continued to make significant progress toward our profitability goals. Our gross margin for the quarter was 67.6%, up 850 basis points from 59.1% in Q1 2022 and up 90 basis points from last quarter. Additionally, we reduced our operating loss to 10% of revenue from a loss of 30% of revenue one year ago. Our Q1 adjusted EBITDA loss was 5% of revenue, compared to 27% of revenue last year. Our operating loss for the quarter was 4 million, a 60% improvement over last year and 1 million above the midpoint of the guidance that we gave in February. In last quarter's earnings call, we shared that we built our plan for 2023 to accelerate our revenue growth and our path to profitability with the goal of being free cash flow positive by the end of 2023. We are pleased to report that through revenue overachievements and continued operational improvements, for the first time in the company's history, we delivered positive free cash flow in the amount of $587,000 in Q1. I'm proud of the Weave team's intense focus on serving our customers and delivering these excellent results. As…

Thanks, Brett. Good afternoon, everyone. We delivered first quarter revenue of $39.6 million, reflecting 19% growth year-over-year. This represents 4% or $1.6 million over the midpoint of the range we provided last quarter. Our net revenue retention rate was 97% in Q1. The primary cause of the decline from Q4 is the ongoing impact from our former third-party forms provider. We launched our internally developed product and have seen positive adoption by customers, but the transition will continue to negatively impact net revenue retention through the third quarter of 2023.Excluding the impact of the third-party forms provider, net revenue retention was 100%. Gross revenue retention rate was 93% in Q1, a slight decrease from last quarter and within the range we've seen for the last 7 quarters. Moving on to operating results, as a reminder, I'll be referring to non-GAAP results unless stated otherwise. Our Q1 results showed consistent improvement across the board. Gross margin was 67.6%. This represents an 850 basis point increase year-over-year. Operating expense was $30.8 million, approximately a $1 million increase from last year, compared to a $6.3 million increase in revenue for the same period. We have continued our progress in streamlining our operations while continuing to produce steady growth. Our operating loss was $4 million, an improvement of $6.1 million or 60%, compared to last year, representing $1 million over the midpoint of the guidance range we provided last quarter. The corresponding operating loss margin of 10% is a significant improvement from the operating loss margin of 30% last year. Our net loss was $3.3 million or $0.05 per share in the first quarter based on 66 million weighted average shares outstanding. This is compared to a net loss of $10.4 million or $0.16 per share last year. This represents a $7.1 million improvement…

Thank you, sir. [Operator Instructions] The first question that we have is from Alex Sklar from Raymond James. Please go ahead.

Great, thank you. Brett, I want to start off asking for just an update on the multilocation opportunity. Can you just give us an update where the product stands today in terms of ability to address the multi-location? And I know you've been making some significant go-to-market investments there as well. Have you started seeing that in the numbers at all driving the success this quarter? Thanks.

Sure. As the product suite as it currently stands can absolutely support multilocation offices. We have a significant number of multilocation offices on the platform using it successfully. I think our next step is, kind of a major push into the multilocation domain and going after larger DSOs. And there's a few things that we still want to do to the product just to make it a little bit easier to use from a centralized, kind of command-and-control perspective, and then some functionality around phone routing and things like that. Look for that to come in the second half, but Q1 was pretty consistent with prior quarters on number of multi accounts landed.

Okay. Great color. And then can you elaborate a little bit more, I don't know Alan or Brett, whoever wants to take this one. You referenced higher ASPs in the prepared remarks. I think you've always, kind of had a larger land model versus kind of land and expand. But did anything change this quarter in terms of just overall pricing or lack of discounting or initial attach rates from the add-on products? I'm curious in more behind that comment. Thanks.

Sure. I'll start, and I'll give my perspective. I think the biggest drivers are, one, we've moved to a bundled solution where we offer now three bundles that can be sold and purchased by our prospects. So, that has definitely helped the ASP. And then also, as our sales teams get more ramped, get more experienced, they're better qualified, better capable of meeting the customers' needs and helping them make the right choice. So, I think the combination of higher quality marketing, more targeted marketing, higher performing sales teams, and then just the bundle strategy, all those things together are moving the ASP up a bit.

The only thing I would add to that, sorry, I would just add to that the product confidence just on the sales team side, given the boomerangs that we're seeing, they're able to just hold the line on pricing just because of the quality of the experience our product offers versus competitors.

That's great color. Thank you both.

Thank you. The next question we have is from Matt Stotler from William Blair. Please go ahead.

Hi guys. This is Alex [indiscernible] on for Matt. Thanks for taking my questions. Just a couple of quick ones for me. So, maybe if we could start with the go-to-market transition, thanks for some of the color on that. Maybe if you could just touch on when you expect that to be fully ramped and any implications that might be – that we might see for future period growth?

Sure. On a weighted basis, I would not expect us to really ever be more than kind of 80% or maybe 90% ramped. Because now we're actually adding new reps just due to the demand we're seeing, and so we will always have a cohort of reps that are in the ramping phase. So, I think on percentage ramp, we'll probably get to 80%, 90% and then just continue to grow from there. We're adding new account executives, new sales reps now in Q1 and expect to continue to add them as long as demand continues to grow as we're seeing it. So, we're pretty excited about that. And we just measure it very, very carefully. We look at results daily and weekly, and we make our hiring decisions based that. Hopefully, if kind of growth and demand continues, we will always be adding go-to-market capacity.

Got it. Awesome. Thank you for that. And then just one more for me, maybe as a broader question. Can you talk about any of your updated observations you have on the current macroeconomic environment? And any updated observations regarding demand, spend behavior, usage patterns, etcetera?

Yes. The data that we're seeing, we shared one datapoint in our prepared remarks that average volume per location is up 10% year-over-year, so that is terrific to see. That says that our existing customer base, their business is growing, so that's terrific to see. As far as the demand environment, sales cycles, really no change there. They've been pretty consistent the last couple of quarters. The product is doing very well, especially competitively. We've got a lot of I think favorable progress, especially due to the improvements we've seen in our services offerings. We've seen a lot of improvements in our onboarding functions, and our support functions and those show up as, kind of positive sales tools for our teams to use. So, no major changes in the macro or the buying environment I think.

Got it. Understood. Thank you for that and I will pass it on.

Thank you. The next question we have is from Mike Funk from Bank of America. Please go ahead.

Yes, thank you very much and thank you for the questions tonight. First question, just thinking about free cash flow, first, a great job hitting that positive metric in 1Q ahead of target. Obviously, always looking for more, so any thoughts on incremental efficiencies you can drive out of the business? I understand you've already done a lot. And then how we should think about the free cash flow progression moving forward from here? And then I have one more follow-up.

So, we continue to hit both our COGS lines, as well as operating expenses. And we now have much more robust models to support staffing levels on the COGS side or support for onboarding. The efficiencies and the economies of scale that we get on our – the datacenter costs and the telecom costs associated with supporting our customers, we continue to drive costs out there. So, we're not done by any stretch. I do think that the pace may slow down a little bit, given the 850 basis points we've seen over basically the last year, but we'll continue to drive those out. And then on the operating expense side, we've got – I think that we're trending towards, kind of best-in-class benchmarks on several of those areas. And as Brett had mentioned, we're going to continue to invest in the go-to-market side as we can while still delivering and moving quickly towards profitability. So, there's additional room to drive the costs out and to deliver full cash flow and profitability.

Thank you for that. And then in our prepared remarks, you mentioned positive momentum carried over into first quarter I think in terms of both customer additions and pricing. On the customer additions, are there any geographic regions or customer verticals to call out that are driving that strength or is it relatively broad-based?

I would say it's relatively consistent. Our big geos, so we're vast majority, primarily all of our businesses in the U.S., our big geos are not surprising, California, New York, Texas, Florida. So, that's continued – that volume trajectory continues. And then by vertical, it kind of continues to be pretty weighted, pretty consistent with what we've seen over the last several quarters. So, dental being number one, optometry, veterinarian, and specialty medical.

Great. Thank you for the question.

Sure. And let me give a little bit more color to Alan's response. The operating model that we have developed internally on finding efficiency is kind of the deal we struck with the team is let's go find waste and inefficient spend. And every dollar that we find, we will take some of that and put it back into spend that we know works, that we can really calculate weekly, monthly, we know that spend works. So, we've got a pretty passionate team here pretty focused on running waste and inefficiency out of the business because they just know we'll immediately flip some of that back to growth investments.

And that's part of the question as well. You're seeing better demand trends, the kind of desire to focus on reinvesting back into the growth engine of the business as that improves. So, I think you answered that question. Thank you.

Thank you.

Thank you. The next question we have is from Tyler Radke from Citi Group. Please go ahead.

Hi. This is [Kylie Tobin] [ph] on for Tyler Radke. Nice quarter, and you had a really nice beat and raise on the quarter, guidance raised more than you beat. Is this driven by your new product releases and potential upsell within your Pro SKU or something else? And just on that note, have you disclosed what percent of your client base is on that Pro SKU? Thanks.

So, it does represent that and just the continued confidence that as we just continue that acceleration of execution across the board. It was only a year ago when we did the sales re-platforming. We now have got that dialed in. And as – even though we're fully ramped, we will still see some additional efficiencies as we continue forward. That's a pattern that we've seen in the past with some of our more seasoned reps, and so we'll see both the product enhancements that will be coming forward and the just performance of the sales team. And remind me the second part of your question?

Yes, sure. It was just if you've disclosed what percent of your client base is on that Pro SKU?

Yes. Just we haven't described the percentage. Suffice it to say that we landed heavy on the Weave Elite bundle is what we're calling it now, or in the past is Weave Plus with premium features. And the vast majority of our customers usually land on that package.

Okay. Great. Thank you. And just one more. Is your newly launched Response Assistant solution, is that leveraging generative AI LLM? And is this something that would just be available in that Pro SKU? And just on that note, I would love to hear more about the opportunities you feel like you have within the pricing and packaging as you continue to add these new features? Thanks.

Yes, I'll start, and then Brett can add in. But yes, the answer is yes, it is using the LLM generative AI. I think this introduction of Response Assistant on the reviews is just the beginning. There are so many things that can be done with respect to chat appointment and appointment scheduling and responses. The AI is all the rage, as you know, and this really represents something that can take a significant burden out of people, making them able to edit instead of create and personalize information. So, that gives them a much more efficient way of really personalizing and engaging directly with each customer.

Thank you. The next question we have is from Brent Bracelin from Piper Sandler. Please go ahead.

This is Mauro stepping on for Brent. Thanks for taking our questions. Just two from us. As you think about the investments you've made on the go-to-market front, how should we think about how that will affect your net retention metric as we, kind of go throughout the year? I'm just trying to figure out if 100% ex that third-party dynamic is kind of a starting point for the year? Or is there just not enough visibility on that front yet? And then on my second question, just wondering if there's any qualitative commentary you can provide on how customer conversations or in-person events trended in April?

So, why don't I take the NRR one and then maybe Brett can talk to the customer events and I'll join in. On the NRR, I think that we will see some further degradation there until we clear the full cycle of – because it's really in Q3 is when that customer forms issue will finally, we will have lapped it. So, we'll see a bit – I don't think – it'll probably go from the 97% to maybe 96% and then we should be able to start taking that back up. As a trailing 12-month average, it takes a while to turn that around and particularly given the forms issue that we've been talking about now for three quarters. So, that's where we see that going, but we do have plans in place to get that turned around.

Yes. And I'm hesitant to, kind of report on April. I don't really want to set that precedent, but we're pretty happy with how the year is shaping up.

Okay. Thank you very much.

Thank you. The next question we have is from Kash Rangan from Goldman Sachs. Please go ahead.

Hi guys. This is Jacob on for Kash. Appreciate taking the question. I apologize if this was addressed already, I just hopped from another call. But I know the original goal was I believe, and correct me if I'm wrong, was free cash flow breakeven by 4Q. And that was brought up by well three quarters into 1Q it looks like. So, can you just touch on the dynamics that really allowed you to post breakeven free cash flow this quarter and then how you expect that to trend going throughout the year?

Yes. Jacob, the execution of the team, the overperformance on the topline, those were the things that really drove us into the free cash flow positive position. We mentioned in the prepared remarks that we don't anticipate seeing that again in Q2. There are seasonal payroll factors that enter in associated with the way we manage our employees that will make it so that we won't achieve that necessarily in Q2, but we do intend fully on exiting the year in Q4 as cash flow positive as well. So, we're excited about that. It's the first time in company history, obviously, and it helps us to turn that corner and move rapidly towards both free cash flow positive, as well as GAAP profitability.

Awesome. No, I appreciate that color. Thank you so much guys.

Thank you. The next question we have is from Parker Lane from Stifel.

This is Matthew Kikkert on for Parker. Thanks a lot for taking my questions and congrats on the quarter. You mentioned digital forms. I'm curious, what's been the reception like for your new digital forms product? Has the success rate been about what you're anticipating? And is there any incremental interest in this solution over the previous partnership and their solution for maybe new customers that are new to a digital forms product?

Yes. Thanks, Matthew. First of all, we are pleased with the ramp of the digital forms. We're also pleased with the trajectory we're on with respect to retention of the digital forms. I think that the solution that we are offering and the deeper integration that we offer versus our prior third-party alternative is going to make us a more compelling solution as we move forward because we've got the write back capability into many of the practice management solutions that we are tied to. And so that makes it – so that when you go into your dentist or your doctor and you fill out the paperwork online in that digital form, there's an automatic write-back capability into the practice management solution. There's no transcription errors, there's no wasted time in reentering data. And all of those things are features that these customers are really enjoying and that make their offices run much more efficiently.

Okay, got it. And then secondly, after your announcement of continued relationship with Stripe for payment processing, do you envision payments becoming a larger part of the Weave growth story once again or is it more of an added feature for the clients? Could you talk about your payments vision there?

Sure, I'll start. So, yes, we expect payments to be a bigger part of the Weave story. Payments currently is growing significantly faster than subscription revenue. And we're quite, I'd say underpenetrated in our customer base with our payment solution. Getting greater breadth and greater depth into the Stripe platform with the Weave Stripe integrations offers our customers more functionality, which is terrific. And then also, we're just getting more focused internally on our payments business and driving our payments functionality into a larger percentage of our customer base. So, we definitely look forward to our payments business continuing to grow rapidly and grow as a percentage of revenue as well.

Terrific. Thank you very much.

Thank you. The last question we have is Mark Schappel from Loop Capital Markets. Please go ahead.

Hi. This is Tim Greaves on for Mark Schappel. Thank you for taking the question. I wanted to ask, with respect to like improving the gross margin and streamlining your infrastructure, has that been a priority? Particularly in optimizing the Google Cloud. Can you talk about or give us an update on where that initiative stands?

Yes. That initiative will always be ongoing. But we – there's been several very nice improvements, both in terms of the efficiency with which we use the Google Cloud, the efficiency in our telecom operations, with our bandwidth providers, and in our datacenters overall. The engineering team is focused on this. As Brett mentioned, the energy around the whole team really looking for opportunities to drive out the waste is really what we're after. So, everyone is really looking at this on the support side and onboarding side. We've got teams that are engaged, that are creative, that are really putting in the work to make sure that we're able to leverage the cost basis we're already at and provide the services to our customers, all while driving higher CSAT scores over the last 6 to 8 months. And so, all of those things are coming together and will continue to be a focus in driving the most efficient process we can for both attracting customers, getting them onboarded, and servicing them.

Okay, great. Thank you.

Thank you. Ladies and gentlemen, that concludes the question-and-answer session. Thank you for joining us today. You may now disconnect your lines.