This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Good day and welcome to the WalkMe third quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Strepper. Please go ahead, sir.
spk01: Hello, and thank you for joining our second quarter 2022 earnings call. I'm John Strepper, head of investor relations at WalkMe, and today I'm joined by Dan Adhika, CEO and co-founder, Rafi Swiri, president and co-founder, Scott Little, Chief Revenue Officer, and Andrew Casey, our Chief Financial Officer. Certain statements we make today may constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. These forward-looking statements are subject to risks, uncertainties, and assumptions, some of which are beyond our control. Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including those set forth in the section titled Risk Factors in our annual report on Form 20F filed with the Securities and Exchange Commission on March 24, 2022, and other documents filed with or furnished to the SEC. See our press release dated August 11, 2022 for additional information. In addition, certain metrics we will discuss today are non-GAAP metrics. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. Further, throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. For more information on the nine GAAP financial measures and key performance indicators, including the reconciliation tables, See our press release dated August 11th, 2022. And with that, I'd like to hand it off to Dan.
spk05: Thank you, John, and good morning, everyone. I'm proud to be here in our Tel Aviv office with all the global management team today. We're excited to share our second quarter results. We're executing against our strategy, delivering our full digital adoption platform to leading global enterprises. Our ARR from that customer is growing 60% year over year by driving expansion, use cases, and adding product lines like the newly launched workstation, our centralized digital employee hub. I'm thrilled with the progress we've made over the last two years, from selling single application use cases to now having 142 customers deploying WalkMe across four or more applications or with an ELA, now accounting for over 100 million of our ARR. This progress is what is driving us to move faster in our transition, focusing on larger enterprise with complex workflows. Overall, ARR has seen 29% growth year over year and surpassed 245 million. Our enterprise and large enterprise customers are seeing the value of DAP in this complex business environment and seeing growth expanding these accounts focusing on achieving digital transformation success with a focus on digital employee experience. I'm happy to share with you that in this quarter, we've closed our biggest deal in the company history and we've seen Three of our $1 million ARR accounts expand by a million dollars or more. This is a huge testament to the growing demand of digital adoption and value realization by our customers. Our biggest customers are getting bigger. These customers are the innovators that are driving digital strategies forward and focusing on new ways of work. As we continue to deliver value and expand within these accounts, We're also prioritizing our strategy, focusing on the right segment and the right product offering to lead our business to improve operational efficiency. We are driving our business to improve our efficiency and pushing to improve our margin and free cash flow from quarter to quarter. We improve our non-gap operating loss from Q1 by nearly $2 million, showing the underlying leverage in our operating model. We have moved fast in better prioritizing our strategic priorities, leading to this leverage and expect to see continued improvement in our margin going forward. We are growing the DAP market category and the transition of our customers to our complete digital adoption platform. We are better aligning our offering, including our products and data action and experience, with increased focus on our go-to market engine of enterprise and large enterprise customers. With our large customers, we are also moving our conversation to higher levels within the organization, driving more strategic discussions with CIOs. But in the near term, macro headwinds and budget consideration are lengthening the sales cycle. Longer-term strategic discussion with CIOs and business leaders is a positive for our business as we become more essential in our customer digital transformation effort. We are encouraged to see our pipelines continue to show robust growth. namely expansions with our enterprise and large enterprise customers and our partner ecosystems, which we believe will be more durable. On the operational side, we are prioritizing our investment spend with an intense focus on our strategic growth drivers of expanding our market category, driving growth in our partner ecosystem, and investing in areas of competitive advantage, such as our federal business. As a leadership team, we were pleased with the improvements we saw in the operating margins and free cash flow, and we'll continue to focus on profitability as we drive towards the rule of 40 that we laid out in our investor day in May. We believe that our technology and the ROI that we deliver position us well in a value-focused software spend environment. Our ability to deliver greater value has been driven by the flexibility of our digital adoption platform, which can be deployed across an entire organization to add employees in completing their unique workflows. As we work toward general availability for WorkStation, our newest product designed to be a central hub for employees to start their workflows, we are thrilled to see some of our largest customers deployed to their entire workforce. It's our first major product that complements our platform but also provides an additional revenue stream. A great example of deploying WorkStation at scale is with one of the largest U.S.-based property and casualty insurance providers. A Fortune 50 company with over 55,000 employees, will we have a strong expansion without this core? They've seen huge success using Working Workstation to drive a mission-critical change management initiative, streamlining processes, and ensuring team members completed specific regulatory requirements on a tight timeline, resulting in significant hard cost basings. They partner closely with WalkMe to establish a center of excellence that enables each business unit to develop solutions and design efficient user experiences across the enterprise's application ecosystem, from HR to sales. This customer digital adoption program has ushered in a new way to distribute information across the enterprise, changing how employees learn and work, and will continue to partner with them as they deploy on more systems. Proving value is important to us and to our customers. We invested in our pre-sales team to improve the efforts and demonstrate this value to our customers. But nothing can beat the live A-B testing by our customers. Metcash is Australia's leading wholesaler and distributor, supplying and supporting more than 100,000 businesses across a network of independent retailers and businesses in the food, liquor, and hardware industries. Medcash developed a self-service product management system for its supplier and internal team. Walk-in was deployed for its supplier-facing portal, compared to traditional change management and enablement approaches were used for its internal team. Medcash seamlessly migrated over 5,000 suppliers to the new system in less than 25% of the time it took to migrate their far smaller internal team of 140 users. With WalkMe guidance for the self-service portal, suppliers can add new products and update offering quickly. This enabled Medcash's network of independent grocers, liquor stores, and hardware stores to purchase goods and get them on their shelves and into customers' hands. As a result of this real-world A-B test experiment, Medcash introduced WalkMe to their internal users on the system. Medcash is now rolling out WalkMe enterprise-wide for their employee-facing application, as well as their customer and supplier-facing portals and websites. Another great example is WL Goran Associates, a global materials company which uses WalkMe to enable its global sales force of over 2,200 people, with cohesive, just-in-time training relevant to each user's role. Providing the right information and the right time with the proper context of each person's function has led to an 83% reduction in training time with faster feature adoption, resulting in sales leaders and sellers saving hundreds of hours a year. We continue to invest in our products. In our July product release, we released new functionalities and enhancements related to data, governance, multi-language, integration, security, and more. Notably, we introduced our newest version of Workstation to our customers. Workstation changes how employees interact with software through a desktop-based hub that brings workflow, automation, and enterprise search to the employees and simplifies employee interaction with software. In addition to Workstation, we introduced Digital Transformation Intelligence, DTI for short, to a select group of beta customers. DTI is our observability platform for digital transformation. allowing CIOs and executives to gain full insight into their software stack, including discovery and analytics. Not just on the usage level, but into the business processes and end-to-end workflows to truly measure how software is being used and how business processes are being completed. CIOs will be able to use DTI to focus their digital transformation efforts, and combined with our action and experience products, they will be able to target and deliver experiences that allow the employees to be more efficient, accurate, and happy. Now, transitioning to our category. Yesterday, WalkMe revealed the findings of a second annual State of Digital Adoption report in which we surveyed nearly 1,500 senior business leaders from enterprises across 10 countries. The research helps us take the pulse of organizations' digital transformation challenges and where the gaps still lie when it comes to digital adoptions. Some of the most compelling findings include 60% of decision makers are concerned about the effect of poor employee technology adoption on expected software ROI. This past year, on average, enterprises have only met 41% of their digital project KPI. 60% of enterprises say change management programs are no longer fit for purpose. 63% of enterprises say the one-size-fits-all approach to technology supports and training isn't applicable. So this is clearly a gap, and WalkMe can help these organizations solve these issues. According to the survey, the top five consequences of failed digital adoptions include increased security risk, operational inefficiencies and waste resources, poor employee retention, failing to adapt to industry changes, and losing a competitive edge. The survey shows that organizations increasingly realize that. Without effective digital adoption strategy, business processes improvements will fail. Another facet we'll include in the report was the growing community of WalkMeDAB professionals. The number of LinkedIn profiles that saved WalkMeAdmin grew by nearly 40% from 21 to 22, to more than 4,600. To honor the DAB profession, WalkMe recently registered the last Thursday of July as International DAB Professional Day. celebrating individuals who are advancing the use of digital technologies within the organization. In recognition of this day, we took the opportunity to officially announce the date of Telezake, our annual DAP professional event, which is taking place on October 25th to 27th, both virtually and in person. And just as DAP community continues to grow, we've also seen growth in the DAP category itself in terms of expanded application of technology, In the recent Gartner report titled Innovation Insights for Digitally Enabled Diversity, Equity, and Inclusion, DAP is cited as a DEI technology for the X equity use case, mentioning WalkMe as a sample provider. We believe this is more evidence of how DAP really levels the playing field for employees from all different backgrounds, generations, and experiences. Another example of category growth WalkMe was included in a recent Forrester report titled, Adopt Anywhere Work Strategy to Compete in the Future Tech Labor Market. The report mentioned WalkMe as an example for technology that can complement the current workforce to increase the productivity of the overall labor strategy. Our category continues to expand from our end users to that professional, and we've been working to scale our partner ecosystem to continue to drive this forward. In the past, we recognize our increased partnership with Deloitte, Accenture, HCL, and others. In this quarter, we continue to expand our relationship with these partners in geographies and executing against our combined go-to-market plan. As our efforts around the partner ecosystem continue to expand, we're seeing more significant deals being impacted by our partners. Our partner ecosystem contribution in the first half of 2022 has already eclipsed all of 2021. We saw numerous deals make a meaningful contribution to our net new ARR in Q2, including two global 2,000 customers with six-figure net new ARR deals, one a new customer and one an extension. Part of developing our partner ecosystem is delighting them as customers, and our partners are investing in their own talent to deliver WalkMe to their internal employees as well as your customers. Our partners already have hundreds of their employees certified of WalkMe or in the process. and we expect that the trend to continue to grow. As we outlined in our investor day, our partner ecosystem enabled us to expand the reach of our platform to some of the largest organizations undergoing digital transformation. We expect this focus to continue to contribute meaningfully in 2022 and scale further in 2023, as we laid out previously. Lastly, our work on FedRAMP certification continues to progress. We've invested in building out a team, capabilities, and technological infrastructure to support the public sector business. Last week, Georgia Secretary of State announced significant enhancement to Georgia's My Voter page, including the addition of WalkMe as part of a comprehensive plan to ensure voter access in the upcoming November election. In addition, we're in the process of pursuing FedRAMP and StateRAMP status and are pleased with the progress we've made so far. While undergoing the certification, we continue to gain new public sector customers, including the city of Chandler, Arizona, and large transportation customers. Our investment in our federal practice isn't just in our go-to-market strategy, but has helped us overall our entire technical infrastructure of our solution. This investment, driven by our goal of being able to serve the large federal segment, will drive greater efficiencies across our entire business, and a more nimble approach to the structure and deployment of our product going forward. Last quarter, we noted that we had assigned our new Chief Revenue Officer, and I'm pleased to be joined today by Scott Little, who started a few weeks ago. Additionally, earlier this week, we announced that we had hired Adriel Sanchez as Chief Marketing Officer. We're thrilled to reunite Scott and Adriel and have them join us to help drive greater focus on our strategic priorities and alignments. by driving increased focus on strong execution. I'd like to invite Scott to say a few words.
spk16: Scott? Thank you, Dan. I am thrilled to be here today. I joined WalkMe because I saw firsthand some of the largest digital transformations in the global 2000, as well as the money being invested in process discovery and optimization to support those transformations. Software solutions are a key ingredient to the success of these kinds of projects. whether that is an overhaul of existing deployments or new fit for purpose applications. An often underappreciated aspect of these digital transformations is the change management element related to the adoption of new systems and processes. WalkMe brings a nimble, cost-effective way to drive adoption of both new and existing applications, as well as a flexible platform to deliver lightweight process changes that can drive material outcomes. And in the end, Customers want good outcomes from their investments. These large digital transformation and process optimization projects are never implemented completely in-house by our clients. Partners play a huge role in their success, whether that is a software partner like Solonis or SAP, or a GSI partner like Accenture or Deloitte. These partners understand that the most valuable business processes live in multiple organizations and cross multiple applications. Our largest clients with the most complex workflow environments realize the greatest return on their software portfolio investment when they deploy the WalkMe platform across their Tier 1 applications. Our partners are a critical part of our ability to deliver good outcomes in these large clients. Successful projects and happy clients turn into repeat business. Since joining in July, I've taken the time to meet with employees from across the world, and I'm very excited to work with these smart, talented and driven people. The people that have joined recently have come from some of the best software companies in the world. As I look at my organization today, we've grown fast, and we're not immune to the problems that come with rapid growth. But I plan to provide the structure and processes that can help this organization continue to scale and grow in a repeatable and effective way. Thanks again, and now I'll hand it back to Dan.
spk05: Thank you, Scott. I'm really pleased with our progress this quarter. Thank you to all our partners, investors, employees, and customers. We are continuing our journey to fulfill the DAP vision that we kicked off four years ago. Since, DAP offering has grown to over $100 million in ARR. We have an expanding ecosystem with over 4,600 DAP professionals. Top tier analyst firms are recognizing the category, and our customers are expanding with us by realizing true value and signing multi-million dollar contracts with us. With that, I will hand it over to Andrew.
spk03: Thank you, Dan. Our second quarter was driven by strong expansions with our global 2,000 customers who continue to invest and expand their relationships with us. As Dan highlighted, we saw the biggest deal in company history, but we also saw broad expansions from some of our largest customers as evidenced by the increase in ARR of our DAP customers, which grew 60% year-over-year, and our average contact duration for the quarter was nearly 24 months, highlighting the strategic nature of these agreements. We also focused on our organization on improving our operating efficiencies. by utilizing WalkMe internally, driving greater savings in our software costs, improving our core processes, and in aligning our people with our long-term strategic vision that we laid out in our investor day. I'm pleased with the operating margin improvements we saw in the second quarter compared to the first, and it's a direct reflection of our customer focus and many of the initiatives we outlined to drive scale in our operations. The benefits from these initiatives will enable us to achieve greater operational efficiencies in the coming quarters. Improvements in our sales efficiency is one of these initiatives, and that's why we're excited to welcome Scott as our Chief Revenue Officer and Adriel as our first Chief Marketing Officer. Adding both of them to our executive team will drive greater alignment and the focus execution we need to take our business to the next level. Our biggest customers continue to invest and deploy WalkMe across our organizations. Impressively, in the quarter, we had 30 expansions that were greater than 100,000 from customers who already pay us over $100,000 in ARR. Nearly one-third of our $1 million customers expanded within the quarter, and we had three expansions of more than $1 million in that new ARR. All of this is validation of our shift in our go-to-market to focus on enterprise and large enterprise customers. We now have 490 customers who are paying us over $100,000 in ARR and 31 customers paying us over $1 million in ARR. In both cases, the average ARR per customer increased year-over-year, 12% and 24% respectively. Our ARR grew to $245.7 million, up 29% year-over-year, with expansions being the largest driver in the quarter. Total revenue for the quarter was $59.9 million, up 28% year-over-year, while subscription revenue was $54.2 million, up 28% year-over-year. Remaining performance obligations, or RPO, End of the quarter at $346 million, representing a growth of 33% year-over-year. And current RPO, which is the contracted subscription revenue expected to be recognized over the next 12 months, grew 28% year-over-year to $193 million. Long-term RPO, which is contracted subscription revenue expected to be recognized after the next 12 months, grew 39% year-over-year to $153 million. The momentum in large enterprise continues. ARR growth from customers with more than 500 employees continues to outpace the rest of our business, growing 31% year-over-year after accounting for the customer maintenance undergone in the fourth quarter of 2021. Our dollar-based net retention for customers over 500 employees was 120% for the trailing four quarters compared to 117% in the second quarter last year. While I'm pleased with the progress of our investments in our partner ecosystem and public sector, we've also taken steps to improve our operational efficiencies, which will enable us to continue improvement on both the margin and dollar loss basis sequentially throughout 2022, making the first quarter a high watermark for our loss. As a result of the improved non-GAAP operating margins, we now expect to achieve positive free cash flow during 2023. Before turning to gross margins, expenses, and profitability, I would like to note that I will be discussing non-GAAP results going forward. In the second quarter of 2022, gross margin was 78%, up 0.8% from the first quarter. Gross profit was $47 million, up 31% year-over-year. We've seen improvements in our gross margin due to a revenue mix shift towards subscription and improved hosting capabilities as we move to a multi-cloud strategy. We expect our overall gross margin will continue to improve due to the positive mix of subscription versus services revenue, an optimization of our hosting operations, and an improved services engagement model leveraging partners where feasible. Turning now to operating expenses, we are increasingly focused on our strategic growth drivers of category expansion, growth in our partner ecosystem, and prioritizing our go-to-market strategy to enterprise and large enterprise across the globe. Sales and marketing expenses in the second quarter of 2022 was $38.5 million compared to $28.1 million in the second quarter of last year. This represents 64% of total revenue in the second quarter compared to 67% last quarter and 60% in the second quarter of last year. R&D expense in the second quarter of 2022 was $14 million compared to $10.7 million in the second quarter of last year. This represents 23% of total revenue versus 23% in the same period last year. We continue to make investments in our platform to drive innovation and increase our flexibility for deployment. We will continue to invest in R&D as we extend our product and invest in our ecosystem in 2022. G&A expense was $11.1 million for the second quarter of 2022, compared to $8.8 million in the second quarter last year. G&A was 19% of revenue in the second quarter versus 19% in the second quarter of last year. We are investing in the infrastructure of our business and continue to drive long-term scale in our business. Going forward, the primary areas of investment for us will be R&D, sales, and marketing, as we look to continue to capture the growing market opportunity for our products. We've made progress in the second quarter, driving greater efficiencies in our operating model, which drove our operating loss lower than our initial plan for the quarter. We are very focused on driving towards cash flow break-even and operating profitability, showing increasing leverage in our business model. Operating loss in the second quarter of 2022 was $16.7 million compared to a loss of $18.6 million last quarter and $11.7 million last year. Operating margin of negative 28% compared to negative 33% last quarter and in the same period last year of negative 25%. Net loss per share in the second quarter of 2022 was 19 cents, using 84.7 million weighted average shares outstanding. Pre-cash flow was negative 12.2 million in the second quarter of 2022 compared to negative 20.3 million last quarter and negative 7.4 million in the second quarter of last year. Free cash flow margin in the second quarter of 2022 was negative 20%, down from negative 36% last quarter and 16% for the second quarter of last year, which is a reflection of our improved operational efficiencies. Turning the balance sheet, we ended the quarter with $317.9 million in cash, cash equivalents and short-term deposits. Given our sizable cash balance and the expectation of improving operating margins throughout 2022 and 2023, we are well capitalized to continue to support our growth goals. Turning now to guidance. While we were pleased with our performance in the second quarter, we are taking a more conservative approach the remainder of the year. In addition to the more uncertain macroeconomic environment, we are doubling down our focus of greater than 500 employee customers and expect increasing churn from our small customers, which currently represent around 7% of our total ARR. With that in mind, the macroeconomic and SMB impacts are factored into our revenue guidance. Combined, we expect this to be a $4 to $5 million headwind for the revenue and our total ARR for the second half of 2022. We are driving more efficiencies with our operating model while aligning our strategic priorities. As a result, we expect to see improved operating margins sequentially in the third and fourth quarter on a non-GAAP basis, and we are improving our operating loss guidance despite the revenue headwinds mentioned previously. With that said, for the third quarter of 2022, we expect revenue in the range of $62.5 to $63.5 million, representing growth of 24% to 25% year-over-year. Non-GAAP operating loss in the range of $15.5 million to $16.5 million. For the full year of 2022, we are lowering our top-line revenue guidance and lowering our expected operating loss range. We expect revenue in the range of 246 to 249 million, representing growth of 27 to 29% year over year. Non-GAAP operating loss in the range of 68 to 65 million, reflecting a gradual improvement in operating leverage in the second half of 2022 as we continue to see returns from our investments.
spk04: With that, Dan, Rafi, Scott, and I will take your questions.
spk06: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Michael from KeyBank. Your line is open. Please go ahead.
spk09: Hey, guys. Congrats on the good numbers and expansion rate for those large customers. Good to see that enterprise focus. Can you talk a little bit more about the Fed opportunity and how close you're getting there? And then also talk a bit about the move to free cash flow break-even next year. I assume that's just on a one-quarter basis. How sustainable is that, and when do you think we can actually get to that free cash flow break-even on a full-year basis?
spk03: Hey, Michael. It's Andrew. I'll take the first two, and then Dan can back me up on the Fed if you have more specific questions. But I tell you, we're making progress in line with our expectations on the certification. The teams are very focused, and I expect that we'll be showcasing our progress on that front with greater detail in the coming weeks. So we're very pleased with the progress there. On a free cash flow basis, I would tell you there's a couple. Whenever you drive big operational improvements, there's many factors which contribute to improving. Most importantly for us is we're very proud of the fact we're using our own product internally in our Walk Me for Walk Me program. We're driving process efficiencies, improvements in how we operate, and that's showing up in a real way in our operating expenses. So very proud of the progress the team has made there and and the areas we focus, which is really every major operational unit. The other thing that I'd tell you is, you know, when you get the teams really focused on executing on a singular goal, and that singular goal highlights inefficiencies in other areas, we all work together towards making sure that we're optimizing every dollar we spend. And I will tell you that when we talked about that at our analyst day, The response from our employees was tremendous, and everybody was giving us new ways in which we could drive efficiencies in our model. And it's not about major, major improvements, although our sales and marketing area is where we have to drive some big efficiencies. It's all these little things that come together when you work as a cohesive unit that makes the improvements palatable. And so you're right that we're talking about in terms of hitting – free cash flow positive position in 2023. And I do think that given the strength of our model and our framework and our unit economics, that we'll continue to do that on a sustainable basis.
spk04: Thanks, Andrew. And I think we're going to discuss the Fed, right?
spk09: Was that the one?
spk03: Well, so I'd say the Fed progress has been going great for us. We're well on pace for meeting our objectives. and I expect it will be showcasing our progress on the certification in the coming weeks.
spk11: Okay, thanks. Yep.
spk06: We will take our next question from Scott Burke from Needham. Your line is open. Please go ahead.
spk14: Hi, everyone. Congrats on the sales in the quarter. Thanks for taking my questions. I guess I got a couple things here. First of all, I wanted to start with the new Chief Revenue Officer. Welcome to the call that's in. I wanted to try to maybe get some commentary, understand what new process efficiencies or changes in the sales organization we can maybe expect over the next, I don't know, 12 to 18 months.
spk16: Thank you. Thank you, and I'm glad to be aboard. I don't expect significant organizational changes per se. I think they're in pretty good shape. from that perspective. But there are some discipline and efficiencies I think we can drive in the way in which we manage pipeline, in the way in which we manage aging maturity, just things that you would expect for the company to mature itself that you would see in the sales organization. So there's no magic here, just good sales discipline and approach. Got it. Helpful.
spk14: And then, Andrew, on your guidance here for the second half, we can obviously back into the fourth quarter guidance And your guidance assumes a little acceleration in revenue growth rate from Q3 to Q4. I wanted to try to understand where the confidence in that guidance comes from. And, you know, is there something in, I don't know, sales cycles or deals that move from Q2 into Q3 that's helping that? But any call there would be great. Thank you.
spk03: So certainly, Scott, you remember that when we talked about the Q2 earnings, we did talk about it. a few opportunities that we had slipped from the quarter and had moved into Q3. And I'd certainly tell you that we did a great job in closing almost all of those that had slipped in one of our major areas. So we were pretty pleased with the linearity that we saw in the quarter, especially with respect to those deals that slipped. When you look at our history on our revenue profile, a Q4 is always our strongest period throughout the year. And it's a reflection of the fact that how we actually go through our selling processes. and frankly how our BS revenues line up to on a quarterly basis as well. So it's really more linearity than anything else, but the thing that despite the macroeconomic headwinds that we're all talking about and they're well documented, I will tell you that I'm really pleased with how well our pipelines are lining up to align to our G2Ks and our enterprise large enterprise. We made that as a focus and the teams reacted and the pipeline is really shifting in a material way towards the right customers. And I talk about that in our onsite. It's really about focus on the right customers that can expand with us and have the problems with which we can solve. The other thing I would tell you is that the pipelines are exhibiting more and more expansion opportunities. And it is a reflection of the sales efforts and the sales motions we're driving. And you don't have to go sign up a new client with a new contract and go through all the DPA and the security reviews. It makes the sales cycles easier. And so that weighs a little bit in our optimism with respect to how we would operate in Q4. So I want to be prudent about how we're actually setting guidance with respect to the broader macro environment. But for us, the levers we've pulled and the ones we highlighted are starting to show up in a mature way. And it feels like we're just positioning the company very well for a long-term growth.
spk04: Great. Super helpful. Thank you for taking the questions.
spk06: We will take our first question from Kevin Kumar from Goldman Sachs. Your line is open. Please go ahead.
spk08: Hi. Thanks for taking my question. One on the updated guide, just given the increased profitability expectation, how much of that is improvements to maybe sales rep productivity, and are there any changes in terms of sales capacity investments in the back half of the year? Thanks.
spk03: So I'll take that one. I'll let Scott maybe comment if he wants to on sales capacity. I would tell you that you may recall that we hire most of our sales capacity at the beginning of the year. And so we made those investments with the expectation that they'd get more and more productive as we go throughout the year. And certainly in certain markets, in certain segments, we're seeing that productivity as we expected. And that's certainly given us a lot of confidence that the investments we made, we can continue to drive that focused sales efficiency. And I also told you at the analyst day that we are focusing our efforts on specific market segments and specific opportunities And in other areas where we're de-emphasizing, we're not spending as much time and effort and investment on, and that's allowing us to drive greater efficiencies overall. You know, it's amazing when you start focusing on the types of customers that are giving you the greatest profit, how much you can then focus the teams on doing the right activities. And so that's really kind of all of it built up, Kevin, and it's ones that I think we can continue to execute and grow our business with the sales teams that we have in place. I don't think we have to have materially greater hires in order to reach our growth goals. What we need to do is drive greater efficiencies in the investments we've made.
spk16: And I guess this is Scott. I would add to that that it's not just a combination of greater efficiency in the sales organization and the right deployment of rep resources. It's also greater efficiency and better communication with the marketing side of the house, right? So I think we're going to get a lift out of both of those going forward. with an expectation that I don't see a significant increase in sales and marketing expenditure to achieve the growth that we need.
spk08: Super helpful. Thank you. And then one on the Solonis partnership. I think it's been a couple of months since that was announced, and I'm curious if you're starting to see customers leverage the combination of Solonis and WalkMe, and is that accelerating, say, the identification of technology gaps and time to value for customers? Thank you.
spk05: Hey, this is Dan. So we are seeing the pipeline growing and there is a lot of interest, especially with the larger enterprise. We have a lot of CIOs asking about it. We're joining a lot of calls. That was our first, obviously, integration with them. So we are looking in the next quarter to have at least one or two big customers to try it out. So we're pleased with that. But the interest is just to keep growing and growing. And obviously, we're working on phase two with them to deepen their technology partnership.
spk11: Great. Thank you.
spk06: We will take our next question from Vinod Srinivas from Barclays. Your line is open. Please go ahead.
spk07: Hi. Thanks for taking my question. Just wanted to talk a little bit about your kind of revenue growth versus free cash flow profitability philosophy given that, you know, you've moved up the – cash flow go by that one, two years. Can you just talk about the formula for reaching the rule of 40 now? And do you still expect to get there by 2024?
spk03: So the short answer there is yes, we do. And I think that we still fancy ourselves a company that can still drive three plus percent revenue growth year over year, given the market opportunity we see in front of us. Now, having said that, The guidance we're giving is the guidance, and it's based upon what we see in front of us and some of the macroeconomic headwinds we're all experiencing. But I do believe that over the short term, and certainly what we're thinking about increasingly is the second half of this year and into 2023, there's not a lot more incremental investments we need to make in order to really drive the revenue growth that we seek. So that's really the basic formula. You know, we've got a lot of little different initiatives on every major line to go drive improvements in our operational leverage. And the actions we've taken, and some of them date back, you know, a year or two, we're starting to see the benefits from those actions now in our operating mall. So, you know, it's not magic. It's just hard work. And, you know, we heard the market and the feedback from when we rolled out our initial investments at the beginning of the year, and we doubled down on our focus on operational efficiencies and targeting the right customers And that really helps get the whole company aligned on the outcome of driving towards free cash flow positive positions.
spk07: Got it. No, that's helpful. And then can you just talk a little bit about kind of the cadence of demand through the quarter, given that you do report a little bit later than some other on-cycle companies and kind of the trends from, you know, later in June continue through July into early August. And then I guess a quick follow-up on that. You know, you talked about how E2K customers – you know, make up, you know, maybe about six, I think there are about 60 of them that are DAP customers. Can you talk about how some of those customers specifically performed versus the overall base? Thank you.
spk03: So I'll take the second part first. I think that one of the reasons why we're very optimistic that the things that we're doing are the right things is that the DAP customers we added during the quarter were G2K customers in a couple of cases. And of those cases, even the G2K customers that were already DAP were the ones that were expanding with us. So we're showcasing our technology to the largest companies in the world, and they're seeing the benefits associated with broad adoption. And when they do, they are able to improve their business processes in a meaningful way. And that's really booing our optimism that we've done the right things is focusing our organization. No major change in that focus. I think we're now just seeing the benefits of it. You'll see it in our DAAP customer number, I think, on a go-forward basis. We're going to continue to see that progression. And you may remember, I talked about G2Ks and the progressions there. I told everybody at that point in time, we had over 380 G2K customers But of those G2K customers, we only had 59 that were DAP. And that's the real opportunity. It's taking those G2K customers and showcasing our technology capability and making them DAP. And so the more DAP customers we can drive, the better off we'll be at really driving our growth. And if you do the basic math that I shared before, it's a $200 million plus opportunity for us just focusing on our existing customers by making them into a DAP customer.
spk13: Regarding the unit economy of ADAPT specific average deal, it grew to $725 for $540. So the deals themselves are also growing. The average real size. And that's helpful.
spk07: Thank you. And just on the demand part of the question.
spk03: Yeah, so I would say that... I wouldn't say that the demand profile has substantially changed for us. I think we're like every other major enterprise software company that has a back-end loaded quarter from a linearity perspective. But certainly our thought processes when every other company is talking about demand headwinds and lengthening sales cycles caused us to really reflect on what the right position was for us on guidance. And as we shift up market and talk to larger and larger clients, You know, invariably what happens is you get into longer than prior sales cycles. And we want to be prudent about how we approach that and make sure we're being clear with our teams and with our investors that as we do that, there may be some short-term impacts. Longer term, it's absolutely the right strategy. It's absolutely the right focus, and we're seeing it in our core metrics.
spk13: Another great thing we see in our domain metrics is an increase from departments. more demand-driven by partners, and that's another significant thing. And the partner deals that are coming are larger in their ASP.
spk04: All right, thank you. Appreciate that, caller.
spk06: We will take our next question from Michael Turin from Wells Fargo Securities. Your line is open. Please go ahead.
spk10: Hey, thanks. Good morning. I appreciate you taking the question. I think maybe just taking a step back could be helpful if you could just spend some time on what you're learning around selling into the DAP space in the current environment. You mentioned landing the largest deal ever during the quarter. Also sounds clear there's a more measured stance in framing targets for the back half of the year. So just how much of the shift in outlook comes from the continued de-emphasis of smaller customers and impacts you're expecting there and then on the larger customer side? Are there ROI or efficiency gains you're finding yourself able to lean into in the current environment to help offset some of that elongation or just constrained environment that we're hearing more broadly across software?
spk05: I will start. As I mentioned just now on the call, in the quarter we signed our largest deal ever in our history, and that was an expansion. What we're seeing is that our larger customers continue to increase the spend with us because they're seeing the gains and the ROI from deploying a digital adoption platform. It's clear to them that they need to go enterprise-wide or to start deploying WalkMe on more and more and more applications. So we're seeing it across all our customers. This is why the average per customer went up to 725. As they're deploying it, we absolutely think that in today's economic, WalkMe and Dapp in general will help them a lot. One, saving money on software, increased productivity, and just gain more ROI from their current investments. So we are suited to be this solution to help organizations utilize their spend on software. So we're happy to see it, and we're seeing more and more and more of our customers expanding with us. And as I mentioned on the call, three of our customers that are paying us over 1 million ARR increased by more than 1 million ARR. So that was a big sign for us that we're doing the right thing.
spk10: That's all helpful. Maybe just as a quick follow-on, Andrew, in terms of what's assumed in the outlook for the rest of the year, is it just big picture what you're seeing currently holds throughout the rest of the year? Are you allowing for additional impacts for those to surface or not? How do you approach framing targets, given a bit more uncertainty here, and just how much visibility do you have into targets between now and end of year? Thank you.
spk03: So I think we've got good visibility on our pipeline. As Scott said, he's doing more and more to drive discipline in how we frame those pipelines and how we mature them. So that part's really positive. I will tell you that we were very intentional with our guidance with respect to the less than 500 employee accounts. That's where we've shifted away our focus. And I do expect that when you shift away your focus away from roughly 7% of our ARR, there's going to be some headwinds there that may accelerate. And that factored definitely into softening of our revenue guidance. It's a little bit nuanced. Now, we're doing some shifts away from the less than 500, but there's also the larger impact from macroeconomic on small, medium-sized business clients. When we entered into We had the slowdowns associated with COVID back in 2020. The biggest customer segment impact we had was on our small, medium-sized business clients. So as we look out and see and expect that there's going to be some headwinds, that's the market segment for us that would be hit naturally by a slowdown. So it's a little bit nuanced on trying to split hairs between what is more macroeconomic versus intentional on our part to shift away from less than 500. But it does weigh heavily on our thought process and what the second half guidance is going to be.
spk11: Thank you.
spk06: We will take our next question from Tyler Rack from Citi. Your line is open. Please go ahead.
spk02: Hi, thank you. Good morning. I appreciate the question. I wanted to ask you just about the million dollar customers. It looks like you haven't added a new million-dollar customer in Q1 or Q2. You added about seven in the first half of last year. Yet you are talking about some pretty good expansions within those million-dollar customers. So could you just help us understand your outlook there? Were some of those new million-dollar customers part of the slip deals you referenced that closed in Q3? Or was there any churn from that existing cohort that just kind of makes that metric you know, look flat over the last couple quarters. Thank you.
spk05: Yeah, so I'll start with the end. We have absolutely zero churn in that million dollar cohort. Actually, they're just expanding. I would say as we're a new category and we're entering an organization, we need to prove our value. So to get a customer to the first million, that's the goal and that's harder. On the flip side, when we are getting to a million, we are seeing those customers increasing. So we didn't add new $1 million customers, but we added more than $1 million with those existing customers and signed our biggest deal in the company history, adding another over $3 million in ARR just in one account. So we are seeing that trend. So our goal is obviously to continue the DAP deployment, see more and more and more DAP customers, and in with time, it will get to more $1 million ARR customers. The good sign, as I said, as I mentioned, is the existing customers are continuing to expand.
spk03: So the other thing I'd add to that, Dan, is that we did see good increases in the number of customers greater than 100,000. And virtually all those customers that reached a rep on a million were expansions. They grew over a period of time. So as we're adding more and more customers, even in the greater 100K, they're expanding too. The average ARR for that cohort grew 38%. overall value, and in year over year it grew, the average ARR grew 12%. So as those customers continue to expand, they'll graduate into million-dollar customers. And we go back to where our focus is. If we've got a lot of opportunities to go drive expansions to the clients, you can bet that in the future we'll see more and more graduate.
spk02: That's helpful. And maybe a follow-up just on the ARR outlook for customers. excuse me, the full year, how are you just thinking about kind of your revisions to maybe your ARR forecast and then you took revenue down and anything we should keep in mind in terms of seasonality? I know Q3 is typically a bit softer for you guys because of, you know, summer and typical Q3 seasonality, but it did seem like maybe this year you do have the benefit of some slip deals. So maybe just frame for us how we should be thinking about ARR seasonality for Q3 and Q4. Thank you.
spk03: So thanks for that. I appreciate the question. I think you're absolutely right. And, you know, typically you see a little softness in the theater around this time. As well, I'd say, look, this is also the time when we're seeing some of the initial churn from the SMB client. So it's going to be something in the line with what we saw in Q2. But in Q4 is typically where we see our largest ARR contribution. So you're going to see that same type of seasonality. Obviously, there's a lot of things at play with respect to that. But I wouldn't expect huge growth in Q3. And I'd point you to those same types of linearity we saw last year to try and come up with your thought processes on how ARR were looking in the second half, where we did have some softness last year in Q3 on ARR. but we've more than made up for that in Q4.
spk04: Thank you.
spk06: We will take an expression from Josh Bayer from Marvin Stanley. The line is open. Please go ahead.
spk15: Great. Thanks for the question. Clearly, some great expansion trends that we're seeing and talked about strong pipelines. At the same time, we have this macro backdrop and I guess some commentary on slip deals. So just wanted to get a better sense for sales cycles and how your conversations with customers are going in light of this macro, maybe both from the perspective of existing large customers and then also for new potential customers.
spk03: Yeah, so I'd start with on Whenever you're moving your focus and segment up market, you're going to see that the overall average deal cycle time will extend a bit. I mean, just naturally, as we shift more and more of our focus on the large customers, you'd see that extension. The good thing is the focus and the pipelines we've got is weighted more towards expansion, so it's not trying to capture a lot of new clients. However, I also tell you, I don't want to over-rotate too much on just focusing on expansions. We're still focusing on going after new clients as well. We have objectives to go capture a lot of new G2Ks, and those are in our pipeline too.
spk05: Yeah, and I would add two things. One, as you know, when we started WalkMe 10 years ago, we were very much focused on a use case base. So we saw WalkMe to your product, WalkMe for Salesforce, WalkMe for Workday. Now, as we're expanding the DApp category and we're seeing massive demands for digital adoption platform, obviously those conversations are much more wider. So when we're talking with CIOs or COOs within companies, we're talking on a much bigger deployment. Just as I just said about Workstation, which is an employee app that sits on every employee desktop, this is a much different deployment with much greater value than just overlaying WalkMe on your Salesforce or CRM or HCM. So obviously, it takes a little bit more time because the value is bigger, the deployment is much, much deeper, but the value of the contract is way higher. So that's the focus. That's what we're seeing that's working. And obviously, that's our mission and our promise. We want to help companies with their digital transformation goals and KPIs. And this is not just a per-app deployment. This is a full enterprise deployment that we can touch every employee, every technology, every business process. I hope it answers the question.
spk11: Yes, thank you.
spk06: We will take our next question from Pat Warravens from JMP Securities. Your line is open. Please go ahead.
spk12: Oh, great. Thank you. And congrats on all the progress. So I guess maybe Dan and Andrew, I'm not sure, but I'd love your perspective. This is very big picture. I'd love your perspective on where WalkMe and digital adoption fits in strategically with what other players are doing. So you have a partnership with Solona. Solona started as process mining. Now their position themselves is execution management software and You integrate with ServiceNow, which is where Andrew worked before, and they have their creative workflows, and that includes low-code and RPA. I think it's really confusing for investors. How do all these pieces fit together, and where do you fit in?
spk05: Sure, so I would start. I would go to those specific examples that you just mentioned, Solonis and ServiceNow. So Solonis is doing... back-end business process mining, right? They're taking all your transactions from the database, from the logs, but they don't have anything on the front end, like what the users, how users are actually interacting with software. So that's one. On the service now, yes, they have great inspiration, obviously, to be the work OS or something like that, but reality is that companies are deploying a lot of software. Just in sales, They're using 8 to 12 different applications, not mentioning HR, benefits, payroll, and so on. So reality is that employees are not using one vendor. They're not using one application. They're using multiple. We're talking about 20, 30, and in some cases, much, much more. Think about organizations, big organizations that are making acquisitions. They have four or five different CRMs from different vendors. It can be Oracle, Salesforce, Microsoft, you name it. At the end of the day, the employee needs to be productive. They need to complete the process. And this is exactly where we fit. We're sitting on every employee front end or on the application or on the desktop, and we're helping them execute business processes, being more efficient, data validation, ensuring that they're doing their job correctly, onboarding, search, a lot of features. But at the end of the day, we are the last mile from the employees. Integrations that we have to ServiceNow or to Salonis, just making our customer getting most out of what WalkMe can do. So for example, our integration with Salonis, we're allowing Salonis to activate automation and action on the user desktop based on their data, right? So they have this amazing data, but what now? How we can actually make the user take an action. So Salonis trigger WalkMe via API and then WalkMe pops on the screens. If you have ServiceNow, think about how many different processes you need to do, and not all of them is on ServiceNow. Sometimes you need to go to your HCM, update details, then go to ServiceNow, then go to Salesforce, then go to another application. You don't want it to be break or you don't want the employee to be confused just because they need to go to one other solution or one other piece of software, and obviously WalkMe is orchestrating all of it. So I hope it answers the question. I would be happy to do a follow-up if you have.
spk04: That's great. Thank you.
spk06: It appears there are no further questions at this time. Mr. John Strepper, I'd like to turn the conference back to you for any additional or closing remarks.
spk05: I want to thank everyone, our team, our customers, our investors, analysts, everyone on the call. Thank you for being with us today.
Disclaimer