Description

Long WEAV

Weave Communications (NYSE: WEAV) is a cloud-based, SaaS platform that streamlines the mission-critical office work required for dental/optometry/veterinary practices. It trades at 1.2X NTM Sales (93%+ of sales are recurring), has ~33% of its market cap in net cash and can realistically grow topline at a mid-teens CAGR through the medium-term. As a cherry on top, WEAV also has an asset disclosed only in its footnotes. This is my preferred “<$500mm market cap name” going into 2023. That said, ADV is ~$1mm and this resembles a turnaround situation, so size your risk accordingly.

WEAV was founded as Recall Solutions in 2008 and its legacy focus was calling patients of dentists and getting them scheduled. It was the first Utah-based startup to be accepted into Y Combinator. Since then, it has grown to include ~90 different integrations and most recently hit ~$140mm in topline.

WEAV’s offering is essentially an all-in-one platform for practice management (answering phones, scheduling appointments, text reminders). Recently they have expanded into payments processing and insurance verification, among several others. When a patient of record calls, the front desk can see key details (i.e. name, next appointment, balance owed). Staff can communicate with each other and patients in a closed-loop system. The system then facilitates the required next steps such as optimal scheduling, insurance verification, and payment processing (including text-to-pay). By essentially owning the customer process from start to finish, the platform yields time and cost savings: their main “competitor” is the patchwork of point solutions that most small practices employ as a makeshift alternative. This is a hassle to coordinate and is more expensive vs. WEAV’s bundled “operating system”.

WEAV grew topline 77% in 2020 and 50% in 2021. It peak-timed its IPO in late FY21 at ~8X NTM Sales and raised ~$108mm in cash. The macro proceeded to fall apart -> topline growth decelerated to a low 20s clip, WEAV’s operating margins remain blood red and it looks like retention metrics peaked around its IPO. A lot of investors were burned, the stock entered small-cap land and now WEAV is an orphaned security – the state I found it in.

Several things excite me about WEAV going forward. First, WEAV appointed Brett White as the new CEO in October 2022. Brett is day and night vs. the prior one, who we do not think was qualified to run a public company. WEAV needs to find religion in its expenses, grow the payments add-on, and candidly be open to running a sales process as the metrics bottom/show signs of inflection. Brett’s resume has several promising experiences, but he most importantly served as CFO for Mindbody (a SaaS management platform for wellness companies) from private -> IPO -> take-private. During this period, a payments add-on was successfully introduced and Mindbody’s take-private valuation of ~7X Sales was >200% higher than the IPO price. After talking to Brett, I believe the playbook he is executing at WEAV is heavily inspired by his experiences at Mindbody.     

WEAV is pushing upstream as they allocate more resources towards landing multilocation clients. For example, Dental Service Organizations manage the overhead for their dental practices so that dentists can focus on attending to patients. DSOs are well capitalized (often by PE shops) and aim to employ best practices as to improve profitability at scale. In February 2022, WEAV landed its largest multi-location customer ever in the form of Dental Care Alliance, which has over 370 practice locations across the US. WEAV is improving its win rate in this field by actively catering towards what multilocation clients ask for (e.g. Call Queues, Phone Tree Updates, Analytics).

Multilocation clients provide several key benefits over smaller practices: each win is substantial in the # of practices represented; these Enterprise-type clients utilize more add-on integrations (higher net retention); WEAV rides a free wave of growth going forward as the DSOs roll-up more practices and implement WEAV’s platform as best practice. This means WEAV doesn’t have to spend the CAC that traditionally comes with landing each incremental practice.

The Payments Processing add-on comes at close to a ~100% contribution margin and a ~25% attach rate. It has grown from 1% to 5% of total Sales since FY21 and WEAV hit $2bn in payment processing volume through 2022. More importantly, this payments add-on drives retention upward, evidenced by gross retention expanding from 89% to 94% between FY18 and FY21 prior to the current macro. Adding a payments solution is one of the most powerful integrations a SaaS offering can layer on and improves WEAV’s value proposition.

Following the onset of COVID, WEAV lost its most important growth engine, which is in-person events (i.e. trade shows/conventions where their reps can showcase WEAV’s superior product). Management explicitly stated that in-person events yield the highest win rate. Then a meaningful portion of their sales reps quit during 2021 (“the Great Resignation”) which further crippled the flywheel for new customer adds. WEAV consequently had fewer ramped sales reps in H1FY22 than in Q4FY21.

Under new management, WEAV restructured its go-to market motion. The number of ramped sales reps has since increased by nearly 60% and management is aiming to add more reps each quarter in response to the growing pipeline. Former star sales reps (“President’s Club Award winners”) are even asking to rejoin WEAV after catching wind of the ongoing turnaround. The amount of TAM coming onto market is accelerating following two years of quarantine, so it makes sense that growth should re-accelerate as WEAV’s average deal size, # of ramped sales reps and win rate all inflect upwards.

Valuation:

We think WEAV can grow the topline at a mid-teens CAGR through 2026 and see continued gross margin uplift, all while zeroing in on excess OpEx spend. As evidence of the new CEO’s cost discipline: operating margins have improved by 2200bps YoY; OpEx is projected to grow by no more than 5% in FY23; WEAV is aiming to reach positive FCF by EOY23. Why was OpEx so egregious in the past? The largest shareholder from its pre-IPO days is Tiger Global: we were told that under the prior CEO, WEAV was explicitly encouraged to “throw cash and grow as fast as possible”. Brett’s tenure marks a change in focus to profitable growth. The market is also perhaps concerned with how retention numbers have trended downwards since IPO. These are not your typical SMBs; these are your educated dentist/veterinarian types that have a steady stream of customers and generally make prudent business decisions. Note how Gross Revenue Retention has remained stable at 94% even in the most recent quarter. We are betting that as the macro inevitably improves and as the mix shift skews increasingly towards enterprise-type clients, retention numbers will trend upwards.

As the operating margin inflects from 2024 onwards, we believe WEAV can reach ~20% Adj. EBITDA margins by 2026. In the meantime, WEAV has more than enough cash to weather the storm – assuming they do not blow it on a stupid acquisition. With proper execution, the market should acknowledge WEAV’s ability to grow topline profitably, their proven focus on cost discipline, and the quality of their end customer base. We get to ~$245mm in Sales and ~$50mm in Adj. EBITDA (nothing excessive modeled for SBC) by 2026. We think a 15X EBITDA multiple is conservative for a SaaS name growing topline at a teens CAGR, profitably. That gets us to ~200% in upside.

Another very plausible scenario is that this gets taken private by NetSuite (or a similar player) as they build out their SMB focus (and scoop up some very valuable end clients). They could easily strip out the excess OpEx much earlier than 2026; after accounting for cost synergies, a strategic acquirer would be getting a recurring revenue stream with inherent 30% EBITDA margins at 1X Sales. There is a clear floor on downside here. Brett has made it clear that he is willing to pursue this path if it is in shareholders’ best interest down the road. At ~1X Sales, we do not need much for this to work; we think the risk/reward is highly skewed in the investor’s favor.

Finally, WEAV has ~$64mm of DTAs not disclosed on the balance sheet as they have recorded a full valuation allowance given the company’s history of operating losses. If you believe WEAV achieves profitability as per their turnaround, then it should result in real cash savings. Our view is that DTAs are a low-quality form of cash, but the truth is you do not need these DTAs for the thesis to work. We discount this balance by 50% to be conservative, which means WEAV has ~$32mm in additional “cash”. In that case, it trades at 1.0X NTM Sales and the upside math is juiced a bit higher. We would also note that a strategic acquirer could utilize these DTAs, so long as the court doesn’t rule tax avoidance as the “principal purpose” of acquiring WEAV (unlikely for a NetSuite type name).

Catalyst

Earnings