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spk05: Thank you all for joining the WalkMe second quarter 2023 earnings call. Kindly be informed that you will have the opportunity to ask questions after the opening remarks. This can be done by pressing star 1 on your telephone keypad to register your question. I will now pass it to John Strepper, Head of Investor Relations for WalkMe. Thank you.
spk04: Thank you for joining our second quarter 2023 earnings call. I'm John Strepa, head of investor relations at WalkMe, and today I'm joined by Anadika, CEO and co-founder, Scott Little, our chief revenue officer, and Hagit Yanan, 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 expectation 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 20-F filed with the Securities and Exchange Commission on March 14, 2023. and other documents filed with or furnished to the SEC. See our press release dated August 10, 2023 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 gap 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 and 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 non-GAAP financial measures and key performance indicators, including the reconciliation tables, see our press release dated August 10, 2023. And with that, I'll hand it off to Dan.
spk03: Thank you for joining us today as we review our 2023 second quarter results. We had an amazing quarter, and I'm super excited to share all the progress with you today. When the trending macro headwinds began a few quarters back, we set a strategic company goal to be free cash flow positive and a profitable growth organization. The outstanding work of our finance and go-to-market teams to develop a sustainable growth model focused on operational excellence has paid off. I'm beyond thrilled to share that WalkMe has officially ended Q2 of 23 as a free cash flow positive company, two quarters ahead of our expectations. Our unit economics are excellent as we continue to advance our path to profitability with our non-GAAP operating margins of negative 3.5% and getting to nearly break even in our non-GAAP net income. Despite lingering global headwinds, we are seeing positive trends all across the business. Revenue was $66 million, just above the high end of our guidance range. In our most strategic enterprise accounts, we saw positive expansion outcomes, growing our million-dollar-plus accounts to a total of 38. It makes me extremely proud today to share these achievements. Our path to profitability is clearer and closer than ever. With over $300 million cash in the bank, strong unit economics, improve internal execution, and advancement in AI and product innovation, WalkMe is well positioned to increase market share and make the right investment as we shift our focus towards profitable growth. Turning now to our strategic growth drivers and customer value. WalkMe is all about the digital adoption of technology. Now, as enterprises are flocking to adopt new AI-powered technologies, the demand for change management and employee productivity are on the rise. In the public sector segment, we saw a great success in Q2. I'm super proud of the team as we've expanded our deal with the U.S. Army to over $8 million in TCV, and we're seeing an increase in deal flow pipeline from other agencies. Our partner ecosystem strategy is working, and we're laying down the foundations to distribute DAP globally, both directly and to our partners for years to come. We're seeing positive territory expansion and further investments in DAP, This quarter, we expanded our global agreement with Deloitte to now include New Zealand and India. Deloitte is a great example of global organization that started utilizing WalkMe in 2019 as a customer and then as a strategic alliance. Today, Deloitte is a thriving WalkMe center of excellence and has deployed WalkMe to nearly 100 applications internally that touch all areas of its U.S.-based businesses. Realizing the value to their own employees, Deloitte formed a strategic alliance with WalkMe in 2021 to deliver digital adoption solutions to their clients, and the partnerships continue to grow globally since then. Our Chief Customer Officer, Sonil Nagdez, and our Chief Revenue Officer, Scott Little, have been working hand-in-hand to increase value to our customer base. Our customer success organization is going through an important transformation with one thing in mind. the success of our clients, and we're already seeing the impact. I want to share another great example of how DAP is impacting large enterprises. One of the largest retailers in the U.S. with both a physical and digital footprint deployed WalkMe to ensure their call center agents consistently and accurately applying pricing, discounting, and return credits to customers. Their objectives were to increase policy compliance by prompting agents within the flow of work to follow procedures, provide consistent service, and increase speed to resolution. The customer expected to save $1 million in cost from their initial project. I'm glad to share they've surpassed their goals only in eight months into their deployment by 2.5x. with an estimated $2.5 million in savings only in one use case alone. Being able to show value in the DAP journey is essential for our path to expansion as we continue to execute with the top enterprises. Turning to AI and product innovation. The hype and increased awareness of recent AI advancement have created an emerging tailwind from our enterprise customer base. They are accelerating their focus on employee productivity and organizational efficiency. Enterprises are seeking to understand software usage patterns, take immediate action, and deploy smart experiences to their employees in the flow of work. As they rush to implement new AI solutions, like in the past with digital transformation phase one, they must rely on adoption of their employees and staff to reap the benefits and ROI from their investments. Compliance and observability of AI are top of mind. Our upcoming Shadow AI feature set, embedded in WalkMe Discovery, will provide organizations with visibility into which AI tools are consumed internally and empower them to take immediate action right on top of these applications in the flow of work. Human error is the number one cause of data and security incidents. The WalkMe for Security and AI database offer organization tools to take immediate measures and build guardrails, notifications, and alerts embedded right inside their enterprise employee journeys. They can now ensure no sensitive data is being misused, company policies and compliance are met, and avoid potential phishing attacks as they scale the use of the technologies. You need a strong data strategy before having an AI strategy. Data hygiene is the key for success. Without clean data while training the internal AI models or AI applications, the results will be bad predictions, bad suggestions, bad calculations, and bad outcomes. We offer a wide array of data validation and hygiene in-app capabilities to ensure that every single employee engaging with our daily software workflows is on track entering the right information. Expect more AI innovation in data validation and hygiene from us very soon. WalkMe is distributed and visible via web, desktop, and mobile to all of our customers' employees. We are scaling these assets to offer AI knowledge access. We are releasing our next version of Enterprise Search powered by large language models. We launched Enterprise Search on Workstation last year and already have millions of employees engaging with it to find organizational knowledge and get the job done faster. By embedding LLMs, employees will be able to extract any information in the flow of work. We are also adding AI-powered features to our own product to enhance the WalkMe build experience, including the launch of our new action editor coming in Q3, currently named XBuilder, that will make the build experience more innovative, faster, and simpler. More on this in our next earnings call and product releases. We've been heavily developing our proprietary core AI DPUI technology for the past five years to understand every employee interactions with every enterprise application. Just last year in 2022, we captured over 6.5 billion employee interactions from leading enterprise applications. Our AI DPUI technology is second to none. The power that WalkMe has from being distributed to tens of millions of employees and understanding how they interact with enterprise software, give us a unique offering in the AI landscape as we continue to leverage this technology for all our largest product innovations, including our enterprise data products. I'm extremely excited to share that our new data AI offerings of WalkMe Discovery and User Interface Intelligence, UII, have seen growth of over 100% quarter over quarter in Q2. This is one of our fastest-growing product lines. We launched the AI-powered WalkMe Discovery product to GA last quarter after closed beta to help drive efficiency by unlocking usage data and visibility of all enterprise applications and highlighting areas for potential improvement. I'm a big believer in integrating AI to drive operational excellence and employee productivity. We've been using WalkMe Discovery internally to track progress of our KPI of becoming an AI-integrated organization, and I'm glad to share that 35% of our employees are already using AI tools on a weekly basis to do their job. I look forward to seeing deeper AI adoption in the coming quarters. UII, user interface intelligence, part of the AI data product line, leverages our AI deep UI technology to automatically identify all the critical enterprise processes within an application, specifically data entry, and highlight frictions, errors, and wrong data entries. One of our valued G2K customers has a robust center of excellence that's committed to improve employee experience and reducing technology friction. They are currently live walk me on over 80 applications that span all areas of the business. This G2K customer is extremely data-driven and has enabled UI intelligence for success factors, an application used by 270,000 employees globally. They are keen to understand employee trends and friction points to provide actionable advice to internal business owners about what they can improve, how they can maximize the value of their solution, and remove barriers of completing common tasks. Last but not least, We continue to train our AI DPUI technology to develop the next generation of our AI offerings, what we call text-to-action automation. The potential to magically automate any action on top of all enterprise applications will have a profound effect leveraging generative AI in the future of work. We are evolving our current conversational automation offering, such as our ActionBot smart walkthroughs and attendant automation, into one new unique offering. I'm absolutely confident the text-to-action will drive organization towards hyper-automation faster. More on this as we gradually start rolling out use cases soon. It's been an exciting quarter to say the least, and I look forward for the upcoming months as we continue to scale towards a profitable growth company. As our journey upmarket continues, our teams demonstrated their ability to execute on the company strategy. We delivered a great quarter advancing our commitment to being cashflow positive by two quarters, which encourages me on our continued journey up market. We're in the middle of this journey and there are a lot more things to achieve. We're focusing on enterprise and large enterprises with an emphasis on our delivery partners and customer success. While our subscription revenue is on par with plans, we're going to see that service revenue going to stay flat as we transform the way we deliver success to our customers. Hagith will elaborate in her section. Finally, I'm thrilled to welcome our entire ecosystem to join us on October 25th for Realize, our annual event. We're excited to gather our customers, partners, and our professionals to share and explore the future of digital adoption and how our customers are harnessing the power of data, action, and experience to make their organizations more effective. We'll be highlighting the future of DAP and how we think AI and our unique take of tech to action will drive our industry to the next level of value realization. With that, I'll hand it over to Scott, our CRO, to share more details about our go-to-market efforts. Scott, over to you.
spk08: Thank you, Dan. We had a strong quarter in all three of our focus areas for 2023. public sector, the global partner ecosystem, and the expansion motion in key named account segment all performed well this quarter. I was especially pleased with sales execution in our largest opportunities. We brought in a number of deals that were both large in scale, but more importantly, strategic in nature and aligned to business outcomes for our customers. Overall, we're making progress on our execution despite lingering economic headwinds during the last few quarters and throughout required adjustments from our personnel changes in April following the rift. Our Parnu ecosystem continues its remarkable momentum as it impacts more and more of our deals globally. Our systems integrator partners, as well as our ISV partners, continue to grow their impact on our business both sequentially and year on year. We're seeing a greater contribution from recently announced partners as that group is activated and attributing business for WalkMe. In addition to the major global partnerships, which often seem to garner the most headlines, our regional partners across the globe are also standing tall in several key regions. Charlton House, for example, helped drive a very large expansion win with a top 10 global pharma customer in the UK, where their expertise and intimate knowledge of the client was a true differentiator for the customer and helped to secure the deal on schedule. On the ISV front, we achieved SAP certified integration with the SAP SuccessFactors. This integration embeds WalkMe's functionality directly into their application, which will ease deployment for our joint customers and speed up our sales motion. The certification demonstrates that WalkMe's digital adoption platform was able to pass SAP's stringent functional and performance benchmarks. Enterprise-grade protection and governance are table stakes for large enterprise organizations. Their security and privacy posture requires them to carefully vet the tools and applications used across their tech stack. Our ISV partners recognize our world-class capability in this area, and we've seen growing momentum as they bring WalkMe into deals that demand this kind of rigor and confidence. Our public sector continues to ramp into the back half of the year. And as Dan mentioned, I'm thrilled we were able to expand our deal with the US Army so quickly on the heels of our first win in 2022. We remain optimistic for additional contribution from this team in H2. Their plan continues to expand every month, and we expect to see them as an anchor for our growth in the medium term. In the key named enterprise segment, we had expansion deals with Desjardins, Cisco, and Caterpillar. These expansions show the strength of our enterprise solution to drive value for some of the largest organizations across the globe touching technology manufacturing and financial services. Based on our feedback from customers and insightful recommendations from our partners and industry analysts over the last 12 months we undertook a rigorous process to examine our buyer journey. I'm proud to share that we've launched a new and optimized packaging and pricing model to make it easier for customers to get started with us, providing multiple ways to land at a more flexible entry price. It is also designed to make it easier for our customers to ramp their uptake of our capabilities as they go through their unique journey. Customers are now able to purchase our core platform capabilities through WalkMeCore. which is designed for the enterprise and powered by our technological advancements, harnessing our AI technology, DeepUI. It includes everything that a client needs to start their DAPP journey, including our data and analytics, content creation, and the complete employee experience, all with enterprise class admin and security controls. For customers requiring more advanced capabilities, we're offering advanced modules, which are easy to add options that allow customers to expand and customize their DAP journey. These include deeper analytics, more advanced security, and additional collaboration and customization tools. Lastly, we've introduced WalkMe Essentials, which is a lean version of our WalkMe platform that's meant to tackle the most popular and most critical workflows on specific target applications. WalkMe Essentials pricing includes the services required to tailor pre-built WalkMe content to match any individual customer's needs. Our experience has been that when we solve a critical problem for a customer really well, they are eager to expand with us. WalkMe Essentials is designed to provide an easy initial land and short time to value. This new packaging and pricing methodology will make us more competitive on the initial land, help us accelerate our customer's time to value, and broaden our expansion ability through apps, users, and modules as customers go through their DAP journey. Finally, with the addition of Sunil Nagdev as our Chief Customer Officer, the Customer Success Org is going through a process of transformation to drive deeper value for our customers and to align our support strategy to our customers' critical business outcomes. We are examining and optimizing our delivery methodologies to enhance the overall customer experience. This includes a move to outcome-based PS delivery, which will drive our peer organization to deliver significant customer ROI in 2024, to support our updated land and expand motions with faster time to value for our clients, and to strengthen our relationship with our partner ecosystem, making them the experts in DAP. And with that, I'll pass it to Higuit.
spk00: Thank you, Scott. I'm proud to share that we have achieved our goals of becoming free cash flow positive crossing the mark two quarters ahead of plan. We generated $5.2 million in free cash flow in the second quarter compared to a burn of $12.2 million in the same quarter last year. This is an important milestone for WalkMe. We have seen improved cash collection results exceeding our plan. We have adjusted our cost structure to improve efficiencies all across the business, and we have been prudent with our cash management. seen an improvement of our operating margin on both dollar and percentage basis for six consecutive quarters with a non-GAAP operating loss of $2.3 million or 3.5% compared to a loss of 27.8% last year. Our financial backbone is stronger than ever, and we are near break-even on our non-GAAP net income and our non-GAAP EPS. The improvement we are seeing in our operating leverage is organization-wide, with an emphasis on our sales and marketing organizations. WalkMe is now well positioned to continue driving positive free cash flow. We are also committed to further improving our operating margin and accelerating revenue growth in 2024. We anticipate being profitable on a non-GAAP basis for the fall of 2024. Before turning to Q2 numbers, when referring to gross margin, expenses, and profitability, please note that I will be discussing non-GAAP results. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. We grew subscription revenue by 13% year-over-year, while also growing our subscription gross margin to 90.2%. Our improvement in subscription gross margin over the last few quarters reflects our strong unit economics and our ability to grow subscription revenue while optimizing our cost structure. We saw a decline of 17% in service revenue year over year with a positive gross margin of 0.5% driven by better workforce utilization. We expect service revenue to remain at a similar dollar level throughout the second half of 2023. lower than 2022, and our plans for 2023. This is a direct result of the transformation of our customer organization, as mentioned by Scott, the decrease of service hours, and continued transition of services to our partner ecosystem. Our total gross margin was 84%, up from 78% in Q2 last year. Gross profit was $55.4 million, up 18% year over year. we believe we can maintain the gross margin for the rest of the year. Our total operating expenses decreased by $5.7 million compared to the first quarter of 2023. We optimized our plan, which brought us closer to operating break-even. Savings were mainly driven by labor expenses related to the reef, ongoing headcount related, and a more efficient cost structure. We continue to invest in our R&D and maintain our expense level from Q1 with $12 million representing 18% of revenue and enhance our strategic data and AI capabilities. Our sales and marketing expenses were $35 million or 52% of revenue, an improvement from 60% last quarter and 64% in Q2 last year. We believe that our current sales capacity is sufficient to support an accelerated growth in 2024. The improvement from last quarter was driven by headcount reduction and other sales activity that occurred in the first quarter. G&A expenses were $12 million, or 18% of revenue, similar to the last quarter and below the 19% in Q2 last year. Operating loss was $2.3 million or 3.5% compared to 13.4% last quarter and 27.8% in Q2 last year. This is a leap in our path to profitability, and I'm very proud of the WalkMe teams for their devotion and commitment to our company goals and success. Net loss for the quarter attributed to WalkMe was $0.3 million compared to $16.5 million in Q2 last year. Net loss per share for the quarter was near 0 cents using 88.6 million weighted average shares outstanding compared to a loss of 19 cents in Q2 last year. We generated a 5.2 million positive free cash flow for the first time and improved our free cash flow margin to a positive 8% compared to a negative 20% in Q2 last year. On free cash flow, we expect to maintain a positive level, but it will fluctuate given seasonality in our cash management cycle. We ended the quarter with $304.6 million in cash, cash equivalent, short-term deposit, and marketable securities. Given our sizable cash balance and generating free cash flow, we are well capitalized to continue supporting our growth goals and explore strategic investment opportunities. Turning now to guidance. It's been a good quarter overall. We saw positive trends in our business metrics and financial results, becoming free cash flow positive with a clear path to profitability. Our revenue growth was 10% year-over-year, driven by subscription revenue of 13%, while our service revenue declined by 17%. We foresee a similar level of service revenues in the next two quarters, which is below our plan, mainly due to the continued transformation and delivery methods of our customer organization and the continued transition of ours to our partner ecosystem. We are adjusting our guidance for the full year accordingly, and we are improving our operating loss guidance. With that said, for the third quarter of 2023, we expect revenue in a range of 66 million to 68 million and a non-GAAP operating loss in a range of 3 to 2 million. For the full year of 2023, we are adjusting our revenue guidance and improving our expected operating loss range. we expect revenue in a range of $266 million to $270 million, and a non-GAAP operating loss in the range of $16 million to $14 million, reflecting the continued improvement in operating leverage in the second half of 2023. Looking at 2024, we expect that the net new business will accelerate from 2023 levels, and we anticipate to see the positive impacts of the transformation of our customer organization. We reiterate our plan to be profitable and free cash flow positive for the full year of 2024 on a non-GAAP basis. Thank you, and we will now take your questions.
spk05: Thank you. Ladies and gentlemen, if you would like to ask a question on today's call, please press star 1 on your telephone keypad. Thank you. We'll now take our first question from Skordberg at Needham. Your line is open. Please go ahead.
spk09: Hi, everyone. Thanks for taking my questions and congrats on the nice results here. I guess we have a couple of things. Let's start with something for either Dan or Scott. You seem very, I guess, much more confident in your sales execution in the quarter, at least relative to your commentary last quarter. I know you're making a lot of changes in the go-to-market strategy. How far through those changes do you think you are? And I know Hageet's comments said you expect execution and demand to be better even next year, but how far are we kind of through that, and do these changes kind of linger into next year? Thank you.
spk08: Hey, yeah, thanks for the question. I am more confident than I was last quarter. Last quarter was tougher. This quarter was better. From a timing perspective, on the sales side of the house, we're farther down the path than the guys on the customer success side of the house. I mean, Sunil's been in the job about 90 days. So the changes that he's making obviously will affect me because happy customers are the ones that want to expand. So for us, I'm farther down the path than he is. He's got some work to do. He feels like we'll be in a good position as we come into 24, but the second half is where he's going to be working hard.
spk09: got it helpful and then Dan you and I had a chance to connect this summer and we had we were talking about you know shadow AI and some of the other opportunities within the AI kind of ecosystem there I guess two questions on shadow AI is one do you price and package that separately from the core you know walk me platform today or is that functionality just kind of embedded in what customers already get today but then two as you think about some of these applications for AI more globally, can you continue to develop similar use cases like what Shadow does? Because I imagine every corporate environment is concerned about what their employees are doing with just generative AI solutions, and that could be obviously a very big value add.
spk03: Sure. So if you remember last quarter when we announced Discovery, we were very bullish because we understand, obviously, the value it can give to our customers just by you know, unlocking visibility into their tech stack. Obviously, the world is very dynamic, and now we're seeing the opportunity with Shadow AI, and we think that it's even bigger than what we had with Discovery. So our teams were able to release those features very, very quick, and we're going to officially launch it within this quarter. So this is something that we think is tremendous because what we're seeing today is that employees are the weakest link in your security and compliance strategy. And they are being offered to use so many cool tools that will make their productivity much, much better. And what happens is that CISOs, CIOs, obviously, and compliance officers completely losing that grip. And by using WalkMe, We're doing the same play we did with digital transformation. We're giving them visibility. We're showing them who's using what and how they're using that. And we're allowing them to take action in order to prevent it. So, yes, we're obviously going to continue to invest. Our R&D teams are one of the strongest teams I ever had the chance to work with. And we're going to continue and innovate. And we think it's a huge opportunity for us. And we said in the, in the PR that we saw a hundred percent increase a quarter over quarter in end users in our product. And we're just released discovery in May. So super excited of the opportunities that that will bring to us.
spk09: Great. That's all I have. Thank you for taking my questions. Thanks Scott.
spk05: Thank you. And we'll now move on to our next question from Austin Cole at JMP Securities. Your line is open. Please go ahead.
spk10: Great. Thanks for taking the question. So, Dan, you mentioned the deal with the U.S. Army reaching over $8 million in TCV and increased deal flow from other agencies. Is there any sense you can give us for the momentum behind that and how that pipeline has developed since May? Thanks.
spk03: Sure, I will start and Scott will continue. So that was additional to already the deals that we made earlier this year. So the 8 million TCV that's on top of what we did, that's not just the expansion. So we are super excited about it. And, yes, we're seeing Federal growing pretty fast. We're the only vendor there, and the opportunity is great, but I would like Scott to expand on that.
spk08: Yeah, as you know, we're coming into the end of the U.S. fiscal year. So there's two pots of money that happen in the second half. There's flush money, as they say, money that is sitting in the budget that clients need to spend as they exit the fiscal year. And for the ones that have spent their money, they get new money in October. So typically the second half of the year is good for Fed. And the general sense from my team and as I ask around to our partners and, of course, everything in Fed goes to our partners, is that they expect a really good second half. So we're very optimistic that it's going to help us and give us some tailwind in the second half of the year.
spk10: Great. Thanks so much.
spk05: Thank you. We'll now move on to our next question from a note at Barclays. Your line is open. Please go ahead.
spk01: Hi. Just a couple for me. You know, your second half guide obviously does imply a little bit more pressure in the second half. And I just kind of want to break it down a little bit. I guess first, can you give us a sense of, you know, growing 60% in the second half, you know, is that, what's the split between kind of new logo contribution versus expansion from existing customers? And then I also want to kind of reconcile, you know, you saw your, some of your customer metrics, like a hundred K and a million dollar customers kind of tick, but yeah, you know, at the same time, enterprise DAP ads were a little bit lower. Can you just kind of talk about that dynamic really quick? Thanks.
spk03: Sure. So first I will touch the point on the guidance. As Chagit mentioned in her script, one of the main reasons was on the PS revenue, professional services revenue, actually subscription revenue is in line. And that's part of some of the transformational stuff that we're doing in the customer success organization and the services organization, like offloading ours to partners and obviously changing some of the packaging and so on. So we're actually pleased because obviously we're focusing on the subscription revenue. Regarding obviously the $1 million account, we're happy because one, we're seeing it growing. And we're not just adding more $1 million accounts. The $1 million accounts are growing. Obviously, we're not sharing that metric because the metric is just how many are over 1 million. But like U.S. Army, they were already over 1 million, and now we added another 1.5 million. So that's something that we're seeing as well, same with the 100K. Regarding the DAP growth, obviously, that's different because we started selling DAP or at least recognizing the DAP product just in 2019. So obviously the first few years you will see massive acceleration, and now it's basically normalizing. But it's still what's pushing the company up, and that's the growth driver for the company. So in all metrics that we're seeing in Q2, they were better in Q1, and we're seeing that acceleration, so we're happy with that. Chagit, I don't know if you want to comment the second part.
spk00: Overall, what we have shared with respect to the PSAs, I think overall we can say that although we have seen a decline this quarter of 17%, and we will see the same level on dollar-wise in Q3 and Q4, we did keep our gross margin break-even this quarter, and I do believe that we will continue to execute in line with our plan.
spk01: Okay, and just a quick follow-up. Are you saying the reduced guidance is basically completely due to the lower PS, um, that you're bending due to kind of the transition more to partners or is there, you know, a little bit of pressure, you know, or I guess a little bit of conservatism in the guide just due to macro. I'm just trying to understand that a little more.
spk03: Yeah. So as we said, obviously we're still seeing headwinds, but I would say that mainly it's because of the services component. And as I said, Q2 was much better in Q1 in every parameter. So, There is some conservatism, obviously, but the main thing was a gap that we saw in the services revenue, and some of it is just due to how we're recognizing it and how we're selling it. So this is why we're pleased with the results. Got it. Thank you.
spk05: Thank you. We'll now take our next question from Michael Berg at Wells Fargo. Your line is open. Please go ahead.
spk07: Hi there. Thanks for taking my question. I have some quick follow-up on the comment of fiscal 24 net new business accelerating. Are you suggesting that as we exit the year and go into 24 that subscription revenue growth simply can reaccelerate from here? And as a part of that, how can we think about how you're thinking about the net retention rate progressing from here? Thank you.
spk03: So the comment that Hagith made about 2024 was related to ARR, which is obviously an indicator. So obviously revenue will follow up that. So we believe that 2024 will be a better year than 2023 in terms of gross new ARR and net new ARR due to many facts. One, as Scott mentioned, we're seeing great headwinds from Fed and partners and obviously our direct motion that increasing And as we said, we're putting a lot of effort in our summer organization, so we do think that we'll see churn goes down. So the combination of two will give us an acceleration in our ARR in 2024. Revenue will probably be a lagging indicator. Obviously, we're not commenting on that yet, but that will follow through after ARR will accelerate. So that was the comment. Helpful.
spk07: Thank you.
spk05: Thank you. We'll now take our next question from Tyler Ratcliffe at Citi. Your line is open. Please go ahead.
spk02: Yes, thank you for taking the question. I wanted to just understand kind of where you are in terms of the renewal cycle with some of your large contracts. Obviously, there's been some pressure both on a seat-based perspective as well as pricing, but do you feel like Most of those are already in the rear view or some of your larger contracts you're worried about in terms of down sales in Q3, Q4. And do you think those are largely behind you as you head into 2024, which could set up that acceleration? Thank you.
spk03: Yeah, great question. So, yeah, we do feel that most of it is in the rear view. Having said that, the way we're looking at it is Q1 and Q4 of last year were, I would say, uncertain times for a lot of companies. Therefore, their budgets and the way they're planning the year was a little bit unclear. Once we're seeing things are settled and are basically much more predictable and companies know how much they spend, they find where to put WalkMe. And obviously, we're coming in and helping them with so many different ways. So for us, the uncertainty that we saw in the past, I would say, few quarters in the economy, it's what created, obviously, the pressure of how much of the walk-me portion they would renew. Q2 was way better than Q1, not just on, obviously, new business, but on renewals as well, because companies already have their plan for the next two to three years. And so we're actually very, very confident that we know exactly how to continue on improving it. The second piece, we have a new chief customer officer that comes, obviously, I need a big change in terms of how many of our customers we're covering, what's the cover method and so on. So obviously we're gonna see incremental improvement quarter over quarter, and we're gonna go back and we're hoping to do it early and to go back to the levels of net retention and gross retention that we used to have in 2021 and 2022.
spk02: Great. And follow-up question just on the professional services. So, you know, I understand your commentary around perhaps a further shift in, you know, what you're outsourcing to partners driving that reduction in the full year number, I guess. If I look at professional services this quarter, it was down year over year. And I think there was already some initiatives to, you know, to outsource more to partners. So can you talk specifically what's different this time and then maybe any way to kind of quantify for Q3, Q4, the breakout of subscription revenue relative to services and, you know, what maybe like the steady state services mix you're expecting for this business.
spk03: So I will start and Chagit will continue. So as Chagit mentioned in her script, we're going to keep the same level of professional services revenue throughout Q3 and Q4. So around the $4,700,000, $4,800,000 that we had this quarter. So that's one. The second piece is that it's not just that we're offloading hours. It's the way we're packaging it and the way we're selling it. For example, managed service and so on. And that's, we're just recognizing him a little bit in place. So there's many, I would say, different variables regarding that.
spk00: I'll add to Dan, when Dan refers to different packaging, we'll see more services that we're selling in the recurring model versus time and material. And there is a difference in revenue recognition on the recurring model. And also, I think one of the outcomes of the our new CCO that is leading the organization through a major transformation, that the focus of our organization is on outcome-driven model versus what we've seen in the past or just delivering hours. And I do believe that we are probably paying the price for that in the PS revenue right now, but we will see the benefit coming in 2024. Thank you. Thank you.
spk05: And I'll take our next question from Matt Saltzman at Morgan Stanley. Your line is open. Please go ahead.
spk11: Great. Good morning. So I just wanted to go back to the DAP customer growth, just kind of looking at the slowdown there over the last several quarters. And I recognize, you know, some of that can be macro impacted. Some of that is just, you know, as you, you know, as you get to, you know, further out on the maturity curve, you know, customer growth slows. But I'm curious if there are any drivers of this kind of beyond macro. Because on one hand, it makes sense that in a budget-constrained environment, customers add fewer new tools or consolidate the existing tool set. But I would think that DAP actually helps from that standpoint around license optimization and application analytics. So I'm curious if there's kind of anything that you guys can give us incremental there that might be driving some of that slowdown in customer growth.
spk08: Well, this is Scott. I'm happy to give you my perspective, and I'll let Dan follow up. We had a change in our approach to positioning DAP as well, and that took place at the end of 22 coming into 23. There were, at least in 21 and 22, the desire in some cases to try to land at clients with a multi-app first deployment. And while that's possible to do, it's more risky for us and it's more risky for the client to land that way. So one of the changes we made was to go back a little bit back to the future and go back more straightforward, more targeted land environments, one to two applications instead of multiple applications at one time, in order to get the client up and running and receiving value faster, and then going back to a more traditional expand motion, which is land the first couple of clients, get them happy, and then first couple of projects, and then get them happy and move on to additional projects and additional personas within the accounts. So part of it is a function of macro. Part of it is also a function in the style in which we're trying to land with clients today. We are very rarely landing as a DAP installation, a multi-app installation. Does that make sense?
spk11: Yeah, no, that makes a lot of sense. Thank you.
spk05: And we'll now take our next question from Michael Turretz at KeyBank. Your line is open. Please go ahead.
spk06: Hi, this is Michael Vidovic on from Michael Tertz. Thanks for taking my question. Just want to quickly follow up on the NRR comments. I guess from here, where would you expect the metric to kind of drop? And then when should we really expect improvement as you expect revenue to reaccelerate next year?
spk03: Talking about the net retention, the trading four quarters. So once it's trading four quarters, so obviously we'll see some lag as we're getting improved. And obviously we were having some quarters in the only thing that cohort. We are focusing on growth retention, and once we will do that, what we will see, we'll see the net retention starting to go up. It will take a few quarters, but that's the trend that we're pushing for.
spk06: Okay, great. And then just a quick follow-up on the Walkme Essentials. Is that something you'd expect a materially large portion of your potential customers to use on initial deployments, or is that kind of more relevant only towards the lower end or down market focused? Thanks.
spk03: So WalkMe Essentials is basically aimed for new customers, blend new customers, that then will grow to our platform. So it's less relevant to existing customers. It's more relevant for landing motion. We launched it in July, so we'll have more data to share with you probably in the upcoming quarters. But the idea is to allow companies that want to have digital adoption platform do a crawl, walk, run, And that's the goal, so they can start fast with pre-built content in Essential and then just grow with us to what we call DAP deployment. So that's the idea and the purpose.
spk08: And I would add this to Scott, that my sellers are pretty excited about it. So, again, we dropped it within the last 30 days. We'll see how it goes, but – We didn't highlight that in my comments, but it's also for specific target applications. So it's not a product designed to land in every target application. It's a very specific target application. So that does limit the applicability of it a little bit, but we've been smart about it. It's the biggest applications in our portfolio, and my team's excited about it. Michael, any other questions?
spk06: No, that's great. Thanks, guys. You got it.
spk05: Thank you. That's all the time we have for Q&A. I will pass it back to Dan Edica for closing remarks.
spk03: Thanks. First, I want to thank everyone for joining the call. I want to thank our customers, partners, and most importantly, the WalkMe team, the WalkMe employees that helped us drive such an amazing quarter. I know that it wasn't easy at the beginning of the year, but we had a goal to be cash flow positive, and we did it together, and I'm super proud of you all. Thank you.
spk05: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining today's call. Stay safe. You may now disconnect.
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