Walkme Ltd (WKME) 2022 Q4 法說會逐字稿

Thank you for joining our fourth quarter and full year 2022 earnings call. I'm John Streppa, Head of Investor Relations at WalkMe. And today, I'm joined by Dan Adika, CEO and Co-Founder; Scott Little, our Chief Revenue Officer; and Hagit Ynon, 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 and 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 20-F 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 February 15, 2023, for additional information.

And 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 our 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 non-GAAP financial measures and key performance indicators, including the reconciliation tables, see our press release dated February 15, 2023. And with that, I'd like to hand it off to Dan.

Thank you, John, and good morning, everyone. I'm pleased to share our fourth quarter and 2022 results with you today and touch on our plans ahead for 2023. As we aligned to be a sustainable growth company, targeting cash flow positive within 2023, we fine-tuned our strategy to focus on enterprise and large enterprise customers. I'm happy to share that we grew our enterprise footprint and now count 39 customers paying over $1 million in ARR, showing a 26% year-over-year growth and finished the year with 173 customers with ELA or departmental wide deployments on 4 more applications, which we call our DAP customers.

We are focused on our DAP customers as we're seeing the most room for expansion growth, account ARR and, most importantly, value realized from the utilization of our platform. ARR from DAP customer is up 63% year-over-year. And in Q4, we've seen 18 new DAP deals, showing steady growth above 60% for the last 3 quarters in a row accounting now for 50% of our total ARR.

While focusing on our key segments and DAP offering, we've also prioritized our investment in the highest growth area while rationalizing our spend to drive towards positive free cash flow. I'm pleased with the continued sequential progress we made throughout the year, reducing our OpEx run rate and improving our operating margin.

Through prudent expense management, we have reduced our non-GAAP operating loss from 35% in Q4 2021 to 16% this quarter. With that, I'm positive that we will hit our cash flow positive milestone by Q4 2023. We've seen tremendous progress from our partner ecosystem, driving the highest growth within WalkMe in 2022. We now count the Deloitte, Accenture, SAP, HCL and others as our partners. These partners have deep relationship with the largest organizations and are tackling the larger change management challenges in the world.

We'll continue to invest in tools, training and people to enable our partners to scale their businesses and drive even greater contribution in 2023.

We're also excited about the opportunity in the U.S. federal market. In the fourth quarter, we signed 2 large deals in the federal space to our existing partnership prior to FedRAMP's approval. This is amazing progress as we work towards secure FedRAMP-ready status. This is a testament to the pent-up demand in the U.S. federal government. We expect more meaningful contribution to come through the second half of 2023.

We are the pioneers of the digital adoption platform, accredited market category, and I'm going let to share that 2022 was a tipping point year for the category with unprecedented number of analyst mentions major market guide reports from Gartner, Forrester, IDC and Everest Group and also the first-ever forester new way for DAP, where WalkMe was named as a leader in the market.

One of the investments we made in 2022 was to strengthen our executive leadership team with the addition of Scott Little, our Chief Revenue Officer; Chelsea Pyrzenski, our Chief People Officer; and Adriel Sanchez, our CMO. I'm so proud of the way this group has come together and defined a clear path forward to deliver the best experience for our customers.

It is with great pride that I announce the promotion of Hagit Ynon to the role of Chief Financial Officer. Hagit has been a valuable member of our [AL] team in the past 3 years, having served as EVP Finance and Operations and Interim CFO for the past 6 months. Hagit has been a leader in building our finance organization and was an integral part in our IPO process.

Prior to joining WalkMe, Hagit spend close to 2 decades honing her skills and expertise at NICE, where she held a variety of financial leadership roles and she's a certified CPA. Her past and present experience has well positioned WalkMe on the path to profitability. Myself and the company leadership have been incredibly impressed by her ability to step into the role with a clear purpose and commitment, and we have the utmost confidence in her leading WalkMe finance and operations going forward.

Hagit, I want to congratulate you and thank you for all of your achievements. I'm looking forward to working with you side-by-side as we continue to shape the future of our company and our category.

It's been a busy and productive year in 2022, and I'm very proud of the progress we've made as a team and company through a challenging macro backdrop. We're not immune to economic headwinds facing corporation across the globe and we've prioritized our strategic investment while anticipating slower growth in 2023. In January, we made a difficult decision to ensure our people resources were properly aligned with our strategic focus, which led a reduction of around 3% of our global workforce.

We will continue to hire in '23 to support the growth of our initiatives aligned with our upmarket enterprise selling motion. With that, I look forward to working with our customers to navigate the markets and economic downturns that may linger throughout 2023. WalkMe enterprise digital adoption platform inside the need to drive ROI from the second largest investment software. Corporation across the globe are wrestling with the initial promise of digital transformation to increase revenue and margins, reduce risk and provide greater clarity into the underlying workflow, which allowed our businesses to succeed.

The accelerated path to technology has led to Textron with the average company of over 2,000 employees running 185 applications. (inaudible) has been decentralized and owned by the department. Diffusing the visibility from decision makers and creating a disjointed user experience for the employee.

In today's world, simply put, employees expect a frictionless digital experience. Organizations have found themselves in the paradox with more technology than ever and more powerful system than ever, adoption is an all-time low, resulting in 70% of digital transformation efforts still saving.

Today's worker is using on average 27 applications a week and the average company running over 1,900 workflows. This leads to a duplication of costs, wasted employee time, context switching to understand the process of our application and decreasing time spend on innovation and driving the ultimate business outcome. Bottom line, in today's economy, organization are focused on efficiency and time to value. WalkMe has been working closely with global leaders, achieved these results by focusing on streamlining the digital employee experience and automation for key workflows.

I'd like to share a few recent developments to our enterprise DAP offering. Being able to understand software utilization and the impact it carries on the key company business outcome is mission-critical. To achieve big debt, we've launched our discovery tool and cost optimization model as part of the Digital Transformation Intelligence, DTI, currently in beta and GA by end of Q.

Using the discovery tool, enterprises can unlock data about software consumption and utilization across the org by department and users. At the end of Q1, we will be introducing a new module for license tracking and optimization. With this new dashboard leveraging our proprietary DPI AI technology that uses machine learning to understand end user interface and end user journey across all enterprise applications, enterprises will be able to get a clear view of how many licenses are used and the type of usage. For example, licenses that can be converted to read only. Or licenses, which can be eliminated due to lack of usage.

Alternatively, organization can use this data to pinpoint where to use WalkMe to drive user adoption. Our ability to understand exactly how users use the application allow us to generate quality data sets that provide clear actionable insights to our customers. Using DPI discovery at WalkMe in Q4 resulted in immediate savings of 15% of our software spend, spending over various underutilized SaaS application.

We expect the product to be generally available to WalkMe customer at the end of Q1 and heavily adopted by our customer base. In the past 4 years, we've been developing the workflow blueprint of enterprise organization in which system task drive them. I'm excited to announce that we are launching DAP kid, a second generation to our solution accelerators that text prebuilt content for almost every enterprise workflow and task, leveraging all best practices and years of accumulated knowledge from all the major enterprise SaaS application.

With new DAP kid, customer will be able to go live much faster and our teams will be able to shorten the sale cycle and improve our professional services margin. Our customers will be able to pick and choose the solution for their problems and almost instantly deploy it and get real live data on their business processes and improve their user workflow.

Since its founding, WalkMe has been committed to being a technological leader in their areas that empower employees and customers to interact with software. Our DPI AI technology has 8 unique patents that automatically understand end user interface and end user journey and all its elements allowing us to deliver the best experience for both building content and automation focus on end user journey.

This technology has always been the foundation of our innovations and ensure that we are on the forefront of the DAP category and the future of work. For the past 12 years, we have been developing modules and data centers that understand human interactions with technology. WalkMe has unique intelligence on billions of interactions with enterprise software.

Using our deep user interface intelligence technologies, we have accumulated a vast understanding of every UI element in our notes being used by employees in leading organizations every single day and every single moment. I'm excited to share that this data is the foundation of new [ISV] developments currently in the works that will unlock huge value for enterprises.

We are leveraging our technology, data sets and know-how, connected with the power of natural language modules available through open AI to bring a completely new digital employee experience. Aside from our native II offering, I'm also thrilled to announce that WalkMe and Jasper AI integrated to bring generative AI content capabilities in the flow of work to millions of global employees.

Together, we aim to enhance the employee experience through our omnichannel workstation product on mobile, web and desktop. Employees will have access to Jasper AI content functionalities contractually in the flow forward when they need it, where they need it. We are integrating AI content creation into input fields to streamline user workflow. This will help organizations stay ahead as the future of work is rapidly unfolding.

I'm truly excited about the road ahead and will take a personal role in this unique area of technological advancement for WalkMe, for DAP and for the future of work. I want to thank all of our customers, partners and most importantly, our employees for a great 2022, and I'm looking forward to all of the investment and achievements we'll make together in 2023. With that, I'll pass it over to Scott Little, our Chief Revenue Officer, to share more about our go-to-market plans. Scott?

Thank you, Dan. Our go-to-market engine executed well in the fourth quarter, driving upsell to some of our largest customers, signing some of the biggest deals in company history across the globe and focusing on selling to our most important market segment, the enterprise.

We're optimizing our go-to-market motion, focusing on the best and most impactful use cases to deliver value to our newly landed customers right out of the gate. We're also improving our packaging and pricing to give our customers a clear and structured path to grow on our platform.

Our data product offerings will play a strong role in '23 as organizations look to identify redundancies in their software stack, identify mission-critical processes that are inefficient, employing meaningful improvements to their workflows fast. Our ability to deliver an omnichannel digital experience on web, mobile and desktop with our workstation product line will also play a key role in 2023 as organizations will need to extract high engagement from their employees in order to drive results.

We like to say work flows with WalkMe. I strongly believe that every enterprise can benefit from our digital adoption platform as they face software paralysis in their growing organizations and unwieldy (inaudible). 2022 was a transformational year internally at WalkMe, and I'm thrilled to help drive this transformation forward with clear purpose and plans in place to deliver the best-in-class workflow management platform to our customers.

I've partnered closely with Adriel Sanchez, our CMO; and Wayne McCulloch, our Chief Customer Officer, to shape a customer-first value-oriented organization that is hyper-focused on growing our customer base and value. While we ended the year short of expectations, I'm still very pleased. We executed across regions, further advanced our strong relationship with our ecosystem and continue to accelerate our strategic priorities, all the while maintaining strong growth in DAP customer ARR at over 60% year-over-year.

And in Q4, we saw many long-time customers continue to expand and invest in their WalkMe deployments, including one of the largest railway networks. As they shifted from mainframe-based legacy systems to new, modern and purpose-built mobile applications and equipped their 30,000-plus field employees with tablets, they selected WalkMe as their digital adoption platform of choice. After deploying WalkMe on a handful of applications and seeing successful results, they're now rolling walk me out on over 20 applications while developing road map of over 100.

They've established a WalkMe center of excellence to ensure all of the new applications are DAP enabled and are simple and intuitive for workers to use, whether they're a conductor or in the rail yard. Most notably, they're going to use mobile workstation as the gateway to all of the apps railway employees need to complete their work. Employees will simply launch workstation from their tablet and based on their role, will automatically see their role-specific apps.

It's customers like these that are seeing the ROI that we can deliver and utilizing us to drive workflow improvements and business impact that touch all areas of their organization. We have customers across every industry from highly regulated financial institutions to retail and transportation customers that are transforming the way all of their employees interact with technology to create value.

In the fourth quarter, we started new relationships with Ingersoll Rand, American Electric Power and On Process Technology. We expanded our relationships with CNH Industrial, Standard Chartered Bank and Income Insurance Limited, among others.

Before I focus on what's in store in '23, I want to look back at some of the successes we had in 2022. One of the big investments that we made in '21 and '22 was in our ecosystem. Which started out in the third quarter of '21, it's grown over 100% in '22 and is the fastest-growing area within WalkMe. We've signed great partnerships with Accenture, Deloitte, HCL and SAP Concur, Celonis, among others, and now are seeing those partnerships turn into tangible business.

Partners helped us deliver 37% of our new ARR in 2022. We doubled the overall ARR sourced by partners in 2022, and we're asking our team to double it again in 2023. The alliances and channels organization sourced over $12 million in new ARR in 2022 and influenced an additional $14 million. In Q4, our most established and largest (inaudible) partners, the Americas grew sourced ARR over 185% year-over-year.

We're continuing to invest in our partnership ecosystem to accelerate this important area and enable our partners to work with us easier. Our partners also helped us generate demand in markets that we wouldn't be able to access otherwise. A great example of this is in the U.S. federal space. As Dan mentioned, we traded over $2 million in new ARR in Q4 from the U.S. federal market with the Veterans Administration and the U.S. Army, which we could not have secured without strong partner relationships. We also excelled within state and international governments.

In the EMEA region, for example, we closed a large 7-figure deal with our partner, SAP Concur, and one of their largest public sector clients. All 3 of these transactions would not have happened without strong sales support from our partners and the ability to use their contract vehicles for entry into the market. The [pull vector] market is right for an enterprise-ready solution to drive ease and workflows across both citizen-facing applications as well as those used by government employees.

In the U.S. federal market, we've been able to capture market share through our existing partnerships. And when we secure FedRAMP-ready status, we will be primed to take advantage of budgets that have already been allocated to major digital transformation contracts in both civilian agencies and the Department of Defense. This is important to establish ourselves as the only digital adoption provider in the U.S. federal space and generate the demand needed for a brand-new category of technology for the government.

Our pipeline is already building and is nearly 5x what we saw in 2022. We are looking to the second half of 2023 for this opportunity to help us accelerate our position and establish ourselves as the digital adoption provider for the U.S. federal government. In 2023, our go-to-market motion is focused exclusively on the market segment that is ripe for a digital adoption platform.

Over the last 6 months, we have reduced our (inaudible) focused on smaller customers and shifted some of those resources up market. Our marketing activities are aligned to the enterprise buyer and we're shifting our sales process to adapt to the new market normal of longer deal links and more levels approval.

Our fourth quarter results were impacted by several headwinds, including continued elongation of deal cycles for both new business and renewals. We've also been impacted by headwinds to seat counts, which limited some opportunities for expansion even with desire within the organization. We anticipate that these headwinds will continue for 2023 and have built our plan with that expectation.

Given these headwinds, our dollar-based net retention fell in the fourth quarter, and we expect this to continue into 2023. Despite these headwinds, I'm pleased with the progress that we're making to shift our strategy up market. And believe we are well positioned to reap the benefits of our investment during the last 2 years in our partner ecosystem and public sector.

Before I pass it off to Hagit to review the numbers, I want to thank all of our amazing customers, partners and most importantly, our employees for a great 2022. I'm looking forward to building value with our entire ecosystem in 2023. Now to Hagit to review our numbers.

Thank you, Scott, and good morning, everyone. Before we jump into the quarter, I want to thank Dan Adika, our CEO; and our Board of Directors for trusting me to execute as the CFO of WalkMe. There are many opportunities and challenges ahead as we continue to navigate the macro headwinds. WalkMe is well positioned to accelerate as the leader of the DAP market, helping organization really dig deep into their digital strategies and cost to extract value where it matters.

We will continue to focus on building a sustainable growth business that balances investment with our growth opportunities, focusing on executing our long-term asset strategy to be free cash flow positive in Q4, while driving our path to profitability with alignment to the base principle of The Rule of 40. I'm committed to the success of WalkMe and highly value this opportunity.

Our fourth quarter results were highlighted by the continued progress against our strategic objective of continuing to grow our DAP customer base, grow our partner ecosystem and improve our operating margin and cash flow. I'm pleased to see our non-GAAP operating loss declined to 16% loss compared to 35% in the fourth quarter last year.

We have also continued to decrease our free cash flow to only $10 million negative in the fourth quarter compared to $16 million in the fourth quarter last year. We are committed to balancing our growth investment with a path to reach cash flow positive in the fourth quarter. DAP customers, which we define as customers with an ELA or have a departmental deployment of 4 more applications grew to 173 customers.

ARR from DAP customers now represents 50% of our total ARR. I also want to highlight our G2K customer growth throughout 2022. We ended the year with 403 G2K customers. The average ARR of G2K customers is nearly doubled then the non-G2K customer.

Furthermore, we count 83 G2K customer as DAP customers with an average account ARR of over 1 million in the fourth quarter. This is great progress against our strategy to focus on the market segment with the best product market fit that shows the potential growth opportunities of this segment. While we have made a direct progress on our strategic initiatives, we are not immune to the macro headwinds.

Sales cycles continue to be extended, and we have faced some pressure from declining fee to some of our customers. This resulted in our dollar-based net retention falling below our expectations for the quarter. Our guidance is built on the assumption that these headwinds will continue to depress our growth in the near term, and we have been conservative with our revenue growth expectation.

With that in mind, we have also built our model to reflect this expectation and still believe that we can get the free cash flow positive in the fourth quarter even with the lower revenue growth than we previously anticipated. We ended the year with $262 million in ARR, up 19% year-over-year. Going forward, we are going to focus our disclosure on those metrics that we think best align with our strategy.

We are focused on driving enterprise adoption, increasing contract size and driving platform adoption. With that in mind, we will continue to disclose metrics related to our DAP customers. $1 million and $100,000 customers on a quarterly basis. We will update our total ARR and RPO on an annual basis as they can be highly dependent on timing of deal signing and could be volatile with changes in our underlying model as we drive greater penetration in the enterprise segment.

Our total revenue for the quarter was $64.9 million, up 22% year-over-year at the high end of the guidance. Our subscription revenue grew 21% year-over-year to $58.7 million. Remaining performance obligation, or RPO, ended the quarter at $374 million, representing growth of 18% year-over-year.

Current RPO, which is contracted subscription revenue expected to be recognized over the next 12 months, grew 21% year-over-year to $206 million. Long-term RPO grew 15% year-over-year to $159 million. We can continue to strengthen our position with our larger customer cohort of employees greater than 500, which now represent 94% of our total ARR.

Before turning to gross margin expenses and profitability, I would like to note that I will be discussing non-GAAP results going forward. As Dan highlighted, we are very proud of our focus on efficiencies and expense management, which drove an improvement in our non-GAAP operating loss for the fourth consecutive quarter.

In the fourth quarter of 2022, gross margin was 82%, up 2 percentage points from last quarter. Gross profit was $53.5 million, up 30% year-over-year. We have seen improvement in our gross margin due to our continued optimization of our cloud hosting operation and better utilization with our professional services organization. We believe we will continue to improve our gross margin over time.

Turning now to operating expenses. We are prioritizing our resources internally behind the highest growth area versus areas that are no longer fit our strategic direction such as SMB customer. We made a difficult decision to reduce our workforce by 3% at the beginning of 2023 to better align our resources with our go-to-market strategy. We will continue to hire as appropriate in line with our strategic priorities. We are better aligning our sales and marketing organization to drive efficiencies that we expect will be yield margin improvement in 2023 and into 2024.

Sales and marketing expenses in the fourth quarter were $40.1 million compared to $37.4 million in the fourth quarter of last year. This represents 62% of total revenue in the fourth quarter, an improvement from 64% last quarter, and 70% in the fourth quarter of last year. R&D expense in the fourth quarter was $12.1 million compared to $12.9 million in Q4 last year. This represents 90% of our total revenue versus [24%] in the fourth quarter last year.

We continue to make investment in our platform to drive innovation and increase our flexibility for deployment, as you heard from Dan. G&A expense was $11.8 million for the fourth quarter compared to $9.8 million in the fourth quarter last year. G&A was 18% of revenue, similar to the fourth quarter last year.

We have made progress during the past 4 quarters, improving efficiencies in our operating model, which drove our operating loss lower than initial plan for the year. We are very focused on driving towards positive free cash flow, showing increase in leverage in our business model. Operating loss in the fourth quarter was $10.5 million compared to a loss of $12.5 million last quarter and $18.9 million in Q4 last year. Operating loss margin of 16% compared to 20% last quarter and 35% in Q4 last year.

Net loss per share in the fourth quarter of 2022 was $0.10 using 86.2 million weighted average shares outstanding compared to $0.14 last quarter and $0.23 in the Q4 of last year. We improved our free cash flow margin to 16% compared to 31% in Q4 last year. Free cash flow was negative $10.2 million in the fourth quarter of compared to negative $11.2 million last quarter and a negative of $16.4 million in the fourth quarter of last year.

Turning to the balance sheet. We ended the quarter with $304.9 million in cash, cash equivalents, short-term deposits and marketable securities. Given our sizable cash balance and improvement in our free cash flow, we are well capitalized to continue to support our growth goals.

Turning now to guidance. While we were pleased with our financial results, we have created our guidance to be in line with the economic headwinds, which we expect to linger throughout 2023. We have built our operating plan to account for a lower revenue growth in 2023, and we will continue to show operating income improvement throughout the year.

With margin improvement, we expect to be cash flow positive in the fourth quarter and for the full year of 2024. With that said, for the first quarter of 2023, we expect revenue in a range of $64.6 million to $65.6 million represent growth of 14% to 15% year-over-year and a non-GAAP operating loss in a range of $11 million to $10 million and an operating margin loss of 17% to 15%.

For the full year of 2023, we expect revenue in the range of $269 million to $276 million, representing growth of 10% to 13% year-over-year and a non-GAAP operating loss in the range of $29 million to $26 million and operating margin loss of 11% to 9%.

With that, Dan, Scott and I will take your questions.

(Operator Instructions) We'll now take our first question from Scott Berg at Needham.

This is Michael Rackers on for Scott. Just first off, wondering if you've seen any uptick or change in churn over the past few quarters, maybe overall versus companies with under 500 employees. And then has this been something that you've kind of baked into your initial FY '23 guidance or just seeing it all as an additional headwind? .

Michael, this is Scott. I'll take that question. So I'll answer the second half first. We've absolutely baked into our guidance for '23. But we have seen an uptick in churn we saw it in Q4 of downsell pressure on the number of seats. I think as you see clients in general, reducing their overall employee counts that puts pressure on us as a provider that manages our software with user accounts. So we have seen pressure, and we do believe that pressure will continue into '23.

Great. And then we've also found that these digital adoption technologies like WalkMe are often selected by customers when they purchase and implement a large software upgrade like an ERP, a CRM or a new HCM platform. Is the macro kind of changing how or when customers like to purchase WalkMe? Or are you seeing kind of consistent customer behavior?

We haven't seen any drop-off in overall demand. But since as you point out, digital adoption platforms are also often connected to the deployment of a new large system record. We do see elongation of sales cycles related to clients pushing out their go-live dates for some of these large systems. So we do see that, that is a function of what we see in the overall macro headwind, and we have planned for that in our '23 guidance. .

We will now take our next question from Tyler Radke at Citi.

You talked about just some of the momentum you had with partners in the year and your expectations for that to double again. I'm just wondering if you could expand on that a little bit. Are you expecting to sign kind of new partners with some of the SIs? And what is kind of the approach with them? Is this, again, kind of going back to the earlier question, involvement with the implementation of ERPs? Or just if you could expand on maybe what you're doing differently on the partnership side.

Yes. Great question. Again, this is Scott. I'll take that question for you. The plan is to continue the current momentum that we have in place. We've got most of the important G4 and larger players as existing partners when we announce additional member firms almost every quarter. But in general, that's going to be our focus. Will we pick up additional regional players to help us with deployment and delivery and in some cases, advisory work? For sure. But our focus is going to be on that large player, the G4, the IBMs, the SAP Concurs because they're the ones that frankly have the most influence on whether a client considers digital adoption in conjunction with their new deployment or new projects around organizational change management or digital transformation. So for us, it's a state of course. We performed well in 2022, and we're going to keep doing what we did well in 2023.

Great. Congrats on the promotion. I'm just curious, as you think about overall head count and the expense base that you have today, how are you just thinking about the opportunities for efficiencies. And you talked about some of the restructuring over the past quarter. But do you feel like future restructuring is -- needs to be done given what you're seeing in the macro environment? Or is this kind of the right level of headcount that you need for the next year? .

I can tell you that what we have done up until now, and we've actually demonstrated a very good expense management was not restructuring. We have -- we didn't do a restructuring, I can tell you, restructuring is totally different story. What we have done is actually we are shifting more resources from low-growth area to areas that we believe that our focus, like Federal, like DAP customer, like a partner within our partner ecosystem. So it's a matter of focusing. And yes, we do believe that from a headcount perspective, we have enough people on the ground. We are building the right sales capacity within the sales organization. So we are not expecting to see any additional major headcount changes in the near future. And we feel very comfortable with what we have done up until now. In January, we have done a very slight, slim, let's say layoff of a 3% from around 40 people mainly redundancy position that we felt. So at this point, we are not expecting to take any major measures.

We'll now take our next question from Josh Baer at Morgan Stanley.

Congrats, Hagit. I wanted to dig in on churn. In the prior question, I guess the answer is more focused on downsells contraction related to seats and customers' headcount reduction. I guess I just wanted to ask about any change in the quarter around logo churn.

This is Dan. So actually, we're seeing the churn on logo actually stays the same, even getting better. The big change we're seeing is really on the downsell and not logo churn. So companies see the value in WalkMe and keep using WalkMe. They're just adjusting to order new headcount or focusing on the projects that are more important to them. And so actually, on the logo churn, we're seeing actually good results, and it's mainly on what we call negative expansions.

Okay. And then so from a logo perspective, like if I look at the customers with over $100,000 in ARR that moved up [3%] quarter-over-quarter. So churn is getting better than it was more of the elongating sales cycles that were impacting the gross adds in the quarter?

Yes. So what you're actually seeing is that we have expansions with those $100,000 logos and with the $1 million logos with the addition of a new $1 million logo and we had less new logos over $100,000 as we're seeing those long sale cycle.

Okay. Got it. And then on the prepared remarks, I think it was mentioned around some changes around packaging and pricing, I believe, with the focus on large customers. Could you expand on some of those changes there?

Sure. So obviously, we're doing a lot of work to understand how we can better serve our customers. So what we're going to introduce is new packaging model, 1 for new logos, so what we call a starter package. We want people that want to try WalkMe to be able to go and try fast and easy. And what we did until now, you could buy WalkMe and you get everything included. Now we're going to offer a starter package for people that have a very precise use case and they want to get up and running fast. The second piece, we're moving to a platform plus module structure. Again, so we can better suit our packaging to our customers and we call it, the crawl walk run, as you remember in the previous call, most of our customers actually expanding with us, starting with 1, 2, 3 apps and then go into what we call DAP license. So we just better align our packaging. So it will be easier for them to grow with us.

We'll now take our next question from Michael Turits of KeyBanc.

Good work, obviously, on where we're going from a profitability perspective. I just wanted to ask a little bit about Fed. This is something we've been targeting for a while, especially on FedRAMP. What are some of the costs that are involved in that, both FedRAMP itself as well as adding capabilities around federal sales and partnerships. And I'd say what inning do you think you're in, in terms of being really ready to attack that market?

Just to clarify the question. The first question was about the costs associated with it?

Well, in other words, so maybe we can push that to Hagit afterwards. But I think just where are we in terms of progress towards FedRAMP itself, towards the needed Fed partnerships and towards the needed expertise around Fed dedicated sales?

Yes. So I would start with just the technicality and Scott will take it on the sales because we did see a great momentum in Q4. So we already have WalkMe running on GolfCloud. Everything is ready and we're waiting for final approval to be FedRAMP ready and then FedRAMP moderates. So we did all the heavy lifting actually in 2022. So 2023 is basically what we call go time and actually starting to sell. We already have deals coming in, in Q4 and Scott will expand on that.

Yes. So the expectation, just to make a fine point on it is all the heavy lifting all the work is done as part of the FedRAMP process, we have to provide documentation for the government to confirm. So we're finalizing our documentation with them that is typically a couple of rounds of answering their questions. We're going through that now and we believe we're very close to finalizing that. But we were very pleased -- a little bit surprised, but pleased as well that we're able to bring in some clients who've been circling with us in our pipeline, interested in what we could bring, but obviously, we needed to have the support and the certifications in order to provide it. And it worked out that we had really good support with from IBM. IBM is a debt client of ours. In addition to be a great partner. And they were able to, along with us, use their FedRAMP certifications in order to make the U.S. Army, in particular, in the Veterans Administration, happy that we have the right certification, security and support so that those clients could get started ahead of our normal FedRAMP process certification because they had business needs today right now that we needed to service for them. So that was a business that we delivered in the quarter that we were very pleased about, very smooth, and we expect only more of that. So it was, if not a surprise, a nice upside for us.

Okay. Good. And then I think we got some sense of where you are. It sounds like from Scott, in terms of the spending ramp up a bit. So I just want to maybe reask the question a little bit regarding cost cuts. What have you done or cost optimization. What have you done, say, in the last quarter that's changed? Obviously, the prioritization of enterprise versus SMB has been going on for a long time. So as things have gotten worse more recently in macro, beside the 3% headcount cut. Anything else you can tell us about cost optimizations that you've been through and maybe that you saw to go this year in order to hit those targets for profitability?

I'll start and Hagit can continue. Yes, the main thing we did is basically mobilizing our team to go up market. So whether focusing on upmarket, we need less resources than handling with a large volume of SMB accounts. And we saw it across. It's not just in sales and marketing, it's in support services, customer success, (inaudible) so we were able to show really good savings in operating leverage through the entire 2022, and we'll see it continuing in 2023 because we're focusing on the rising to get [set], if it's federal partners, if it's enterprise and large enterprises. So that was the main focus. In addition, we had more savings. If you saw our gross margins were becoming better. We're always working to improve and be more efficient. Hagit, if you want to add more.

Yes, I will add with the gross margin part that we have demonstrated rate saving around our multi-cloud hosting, and we also have been able to balance the same of the gross -- to balance of the gross margin over our PS organization. We have been more strategic on hiring and backfilling. I think it's important we are really shifting resources to a growth area. And another point that needs to be taken into account that we have a very strong infrastructure. So we are starting to see the outcome of the scaling up of the organization. Maybe another point with respect of the SMB is the fact that we are actually moving out of the SMB. The SMB customers are more expensive to service. So we are able also in (inaudible) efficiency there as well.

We'll now take our next question from Michael Turrin at Wells Fargo Securities.

This is Michael Berg on for Michael Turrin here. I just want to get some clarity diving into the mix between large and small customers, in particular, the headwinds on less than $100,000 customers. That grew negative 7% year-over-year and the quarterly dollar-based net retention dropped pretty significantly from 120% to 111%. Maybe just walk us through what we can expect for headwinds expected in '23 across those 2 metrics from smaller customers and maybe when we can expect those to abate as your focus on enterprise plays out.

Yes, I would take it. So yes, we're seeing 2 things. As Scott mentioned, one, we're seeing negative expansion, which is a majority part of our overall churn and not necessarily in logo churn. On the smaller customers, SMBs, but not only SMB, which is a small customer below $50,000 and so on. We are seeing more pressure and budgetary pressure on those companies. So obviously, we're seeing higher churn there.

On the flip side, on the big accounts and what we call the enterprise accounts or the DAP deal, we're actually seeing a steady over 60% growth quarter-over-quarter. So where it matters like where the vision is going, where our platform is going. We're actually seeing a healthy increase and unfortunately, due to the macro headwinds, we are seeing pressure, obviously, on seats, but not only. So we're feeling it more on the lower side, but we took everything into account when we provide guidance for 2023. So as Hagit said, we used a conservative method coming into 2023, assuming we continue to see the macro headwinds. But obviously, we hope that the market will rebound and we'll see an upside as we continue.

Make sense. And going back to the margin front, anything in particular changing to the seasonality of free cash flow generation that would lead to fourth quarter free cash flow positive versus the rest of the year? Or is it just a general improvement of the operating margin profile throughout the year?

Yes. So yes, the answer for that is that we are actually continuing to show and demonstrated improvement in the cash flow in the past couple of quarters in line with the improvement in our gross margin and in our gross operating margin. So the expectation is that 2023, we're going to leverage the operating margin furthermore. And Q4 will be cash positive, and it's not an issue of seasonality. .

We'll now take our next question from Keith Bachman of BMO.

If I think about the last number of quarters, WalkMe has typically been sort of in line with the demand-related metrics. And I'm just wondering on the construct of how you've approached guidance for '23. In other words, have you been more conservative on how you approached guidance in CY '23 versus the past really few years since you've gone public to kind of tilt towards having a little more opportunity given the economy to be in line or a little bit better. But I just want to try to hear about the construct of conservatism as you've approached guidance versus what's different over the past number of quarters.

Yes. Great question. So yes, obviously, 2023 is much more conservative than the previous year, obviously, following the IPO. There is a lot of unknown, so we wanted to be conservative and bake it into our plan. Hagit, I don't know if you...

Yes. I think, overall, the fact that we are in a very tough environment, along with what we see, with what we have actually experienced in Q4. We are planning with a more conservative approach as we are taking also into account that this -- the current environment will be -- will not change in the near future. So we do take the guidance into account, and we are also taking into account the continued lengthen of the sale cycle also -- in line also with our strategy to -- with that, we also see that we are expecting to see changes that will drive our investment in the DAP and in the FedRAMP and in the partner ecosystem.

The result there will be -- if those drivers will not result immediately. So we expect to see them yield in the long-term area. So taking into account all of that, we are doing the right -- we are taking the right approach and setting the right guidance from our perspective on our revenue book. On the other hand, we do anticipate to continue to demonstrate a strong cost management and efficiency. So we expect also to see an improvement also in our operating margin coming into 2024.

Okay. And then on a broader basis, again, if you take a step back, WalkMe has been public for a short period of time, I think most investors would submit that there's been a reasonable amount of turnover for such a relatively young company. Do you feel like the team is in place now to navigate a challenging '23?

Yes, absolutely. Obviously, as you said, we are a young company and we did a lot of changes going upmarket, setting out our priorities and focus. And as we did that, we hired a new executive team that's focusing in that strategy and upmarket. We feel strongly about our team. We just came back from our go-to-market sales kickoff in Orlando, lots of excitement. Everybody is ready. As I said, we're calling it go time. We feel that we have everything ready to go and with the right strategy, products, all the innovations we baked in. So we worked a lot in 2022 to set the infrastructure for a great 2023 and 2024.

Okay. I'm going to sneak in one more. Just -- sorry. In the prepared remarks, you talked about and I didn't catch the name, a new offering that was focused on AI and discovery, in particular, and how users were taking advantage of software implementations, giving more data more -- is that additive to the model? And how do you charge for that?

Yes. Thank you for asking because this is actually a game changer, and this is huge, especially in this current environment. So the new offering basically allowing companies to one, discover other digital assets without any heavy lifting, what we completely understand which applications are being used and more importantly, how they're being used. So it's not just, hey, we understand the usage and logins. We can actually understand the adoption, the processes that you're actually completing within those applications. So we can give you full visibility on, obviously, how can you improve adoption. But in this environment, how you can save money on licenses, how you can improve your operating budget and so on.

So today, and I'm talking with a lot of CIOs, they are being tasked to save money if it's software cost, if it's IT costs. And to do it, if you can just get, we need to eliminate the guesswork. So with our new module, what we call digital transformation intelligence, we added license optimization and the discovery model. We can actually allow those companies to gain those savings very, very fast and show adjusted ROI. And obviously, we're listening to our customers, and this is something that we're seeing as demand.

Now regarding to the pricing, yes, we are selling it as an addition. Obviously, if you're a DAP customer and you're expanding with us, it's including in the package, but we are going to allow customers to 1 buy only that module and the way we charge is per users, mainly employees, how many employees we're monitoring. And we believe that, that offering would be very compelling to every CIO or every system architect. And as we said in our earnings, we used it ourselves just in Q4, and we were able to save 15% on our software license without hurting our operations DAP actually improving our operation because we can be laser-focused on what's working.

We'll now take our next question from Vinod at Barclays.

You've mentioned down selling pressure and longer sales cycle. So I just wanted to get a sense of, what does -- guidance assume that your quarterly NRR stays in that 110% to 115% range. And does this embed similar or slightly greater contribution for partners in the federal vertical? Or do you think that -- should we view much greater contribution from these sources as kind of upside to your guidance?

Yes. This is Scott. I'll take that one. Yes, we do assume that our NRR guidance stays in that range, the range coming out of Q4. And we are absolutely baking in the greater contribution from our partners in Fed. Now remember, the Fed year is skewed to the back end of our calendar year. So most of our models assume that we'll see the bump in Fed overall performance in the second half of '23. But that's what we got to do right now. We're building a pipeline, and we're being prepared for when we get that FedRAMP moderate status. And then for us, it's run hard. So that's exactly what we baked into our model. And we're excited about it. I mean we didn't really expect to see some of these deals that came in for us in Q4 until the first half of this year. And they came in with our partner's contribution in Q4. So it's a little scary and exciting in a good way.

We will now take our next question from Kevin Kumar at Goldman Sachs.

Dan, we're hearing cases of companies reducing their overall software spend to control expenses. I guess how do you think this and walk me in kind of the value proposition you're trying to showcase to prospective customers.

Yes. So this is actually a great opportunity for us. And we're hearing from more and more customers that they actually see more value in WalkMe when they actually have pressure on those things because what happened is when you are pressured to save. You have more pressure to provide more value from your current investments. And this is exactly what we're doing. We're increasing the ROI from your current investment.

In addition, because we saw that there is a lot of pressure on CIOs to save money, we are releasing the license optimization and the digital transformation intelligence in order for them to be able to focus, eliminate the guesswork and basically show better bottom line for their company. So we are actually seeing it as a massive opportunity. Obviously, in the short term, yes, sales cycles are being longer, there is pressure on the budget, but that actually makes digital adoption much more relevant, and we're happy for that. And one testament of it is that we're not seeing a logo churn and we're just seeing the pressure on seats. On the other hand, we are ready for -- with new products and new offerings to actually help those companies navigate this macro challenging environment.

And then just another question on the feet downsell commentary in the quarter. Are you seeing that across enterprise customers, including DAP customers? Or was that concentrated in a certain cohort of customers?

So basically, I'd say, every (inaudible) given reduction of course and laying off employees and their WalkMe customers basically needs less seats. So we're seeing it basically across companies that increasing their hiring and hire more, we won't see it. So we can pinpoint it to a certain segment. But obviously, the pressure is usually in the lower end and not the offering.

We'll now take our last question from Pat Walravens at JMP Securities.

It's Joey Marincek on for Pat. Dan, you did mention investing in the highest growth areas. So I'd love to get your thoughts on where you see the most opportunity flocking in the near term. And then second, on the partner ecosystem. Can you just give us an update on the Celonis partnership? How is that trending relative to expectations? .

Can you repeat the first question, please?

Yes, you mentioned investing in the highest growth area. So I just wanted to get your thoughts on where you see the most near-term opportunity for WalkMe.

So obviously, One is the federal. We're seeing massive opportunity in the federal and the contribution that WalkMe have is just mind blowing. Obviously, partners, we invested a lot in partners and what we call our DAP platform and DAP customers where we're seeing over 60% growth year-over-year. So when we're looking at our recent developments, we mentioned in AI, I can talk about it as well. But we're actually seeing massive ROI coming from our platform to those customers, and we're putting most of our resources on enterprise, large enterprise, and obviously, working with our partners and obviously penetrate to new markets as well.

I think the second question you had was around an update on our Celonis partnership. Is that right?

Yes, that's correct.

I'm happy to take that. The Celonis partnership, as you know, we kicked off last year. And from our perspective, it's going really well. There were a number of clients that purchased with us in Q4 because of that Celonis relationship, and we added at least 1 new a greater than $1 million ARR client because of that relationship. So the technology that we've built with Celonis, that stuff is GA, it's ready to go. The way in which we deliver the support with the Celonis folks. And in fact, Celonis participated at our sales kickoff a couple of weeks ago, did a fantastic job. So we're really excited about what we can bring to bear just based on these first initial wins we've had with them. And we're looking at what the joint pipeline would be in the first half and progressing into the second half as being a positive upside for us. .

Thank you. I will now hand you back to Dan Adika, to conclude today's conference. Thank you.

Thank you, everybody. I want to obviously thank our employees, our partners, investors for a great 2022. The relapse coming in 2023, and we're super confident in our category in our growth and in our customer base. And so we're looking forward to execute against our 2023 plan. And really sincerely want to congratulate Hagit for the new role. And thank you all, and thank you for listening.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.