Q1 2022 Walkme Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to the walk me first quarter earnings call Today's conference is being recorded.
At this time I'd like to turn the conference over to Mr. John Strep, a head of Investor Relations. Please go ahead.
Hello, and thank you for joining our first quarter 2022 earnings call I'm, John <unk> head of Investor Relations at Walker and today I'm joined by Dan <unk>, CEO and co founder Rafi swearing, President and co founder and Andrew Casey, Our Chief Financial Officer.
Certain statements we make today may constitute forward looking statements and information within the meaning of section 27, a of the Securities Act of 1933 section 21 E 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.
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 C. R.
Press release dated May 23rd 2022 for additional information.
In addition, certain metrics, we will discuss today are non-GAAP metrics. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to the information prepared and presented in accordance with GAAP.
We use these non-GAAP financial measures for financial and operational decision, making and as a means to evaluate period to period comparisons. We believe that these measures provide useful information about operating results enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect.
<unk> the 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 information on the non-GAAP financial measures and key performance indicators, including the reconciliation tables see our press release dated May 23 2022.
And with that I'd like to hand, it off to Dan.
Thank you John I, everyone and thank you for joining us today I'm pleased to share that in the first quarter of the year walk me grow subscription revenue, 34% year over year to over $51 million.
We continue to work with strategic deals with a leading organization utilizing our digital adoption platform to leverage data to take action and to simplify user experiences.
So strength in the growth of DAP customers, adding eight new DAP customers in the first quarter and the average IRR from that customer going to $650000.
Customers are those who have embraced data an outcome driven approach to their digital transformation.
While growing our revenue, but we're also able to show operating efficiency with a non-GAAP operating margin of 33% besting our initial guidance for the quarter. We are on a mission to fundamentally transform the productivity of humanity by unleashing the power of technology.
We pioneered the digital adoption platform to guarantee every user utilizes enterprise software to the foolish and that every organization maximizes the success of digital transformation, how do we do it through the three key components of our platform data.
Inexperience.
With our unique data capabilities walking provider organizations visibility into all of the digital touch points from existing workflows.
Alright, deep proprietary technology understand any user interface like humans.
And looking at every aspect of software and user interaction.
Using this data our customers know what needs to be fixing the digital journey and can utilize and no quota edits or to enhance workflows and build beautiful experiences for the end users delivering a best in class enterprise user experience through our web desktop mobile and a new unified interface.
<unk> workstation.
Workstation is a central hub for all employees digital needs. The successful from the end users to complete workflows has a direct impact on the business outcomes to drive the bottom line for enterprise such.
Such as workforce improvement risk reductions complying with productivity.
Biding and musty Roy this is the value achieved by walk news platform.
<unk> market category continues to receive greater market recognition with two recent reports from Gartner and Forrester I will discuss later.
Our ecosystem continues to grow this quarter, we had a record attendance at our user conference realized. In addition, we signed new partnerships, one with Hcl and a technology called partnership with so long as the tool to review later on.
The evolution of the Koreans macroeconomic and geopolitical environment has driven an accelerated mindset or efficiencies across the ipsec organizations are looking to drive more value from their existing application and empower users to make the most of these tools instead of putting incremental budget dollars.
Through these problems.
It means DAP is purpose built to help businesses extract more value from their existing software driving revenue and reducing cost our ongoing focus on global 2000 enterprise and commercial customers with over 500 employees continues to drive our growth and validates our platform value.
As we deepen our focus on the larger customer segment, we are seeing some variability in timing of these deals materializing in our IRR, which was the case at the end of Q1.
Since then we've seen great momentum that's been made and remain confident in our pipeline for the rest of the year.
We believe if we are at the tipping point for our category ecosystem and demand and see multiple leavers does can you give us the capability to grow more than 30% for the next three to five years as we continue to penetrate deeper into enterprise organization.
<unk> tends to drive that growth with prudent investments as we strive to balance growth with scalability as we push towards the rule of 40.
I would like to take this opportunity to invite everyone Tomorrow, our first ever Investor days in New York, where we will outline our company vision for the future ahead, our product roadmap detailed our go to market focus and how we believe we can build a scalable durable business, while delivering real ROI and value to our customers you can join us.
Virtually as well.
Now I'd like to dive deeper into our most important growth driver, which paved the path to scalable growth as highlighted in previous earning calls.
Do you believe that's where the tipping point for a category with greater recognition and rising demand for digital adoption platform.
Digital adoption is increasingly being highlight that is mission critical for driving employee productivity and adapting to changing work environment.
These are a crucial element of success.
It'll transformation change management and operational efficiency.
Inaccurate Gartner published their digital workplace innovation impact metrics.
Application leaders can use this tool to streamline decision, making according to business value visibility and organization an ambition.
Could you tell adoption solution ranked as the leading technology when classified by business value and she has the ability.
They do sell adoptions solution are listed as a core ambition digital workplace innovation strategy.
Furthermore, last week walking was recognized in the late stage vendor a maturity segment enforced or new Tech digital adoption from Q2 2020 to report, which is the first market landscape of the adult category.
According to the Forrester report global software and decision makers reported in more than 40% of their organization. So first spending in 2020, one went to new software licenses and new custom software solution.
<unk> are emerging as catalyst for managing digital transformation with purpose built features to enable users to do more with enterprise application. We are thrilled with the recognition by leading analyst firms of the category that we created and we expect more recognition to come over time as foreign stinking CIO as an organization focused on dry.
<unk> rois either software investment.
As the world becomes increasingly connected sogou business processes and workflows digital adoption platforms are the way to align organizational goals digital investment and improving and enhancing the employee experience.
Our customers are the foundation of our business and our top priority. We just concluded realize our annual user conference with record breaking attendance.
I'm excited to share that over 4000 professionals and global technology leaders registered to attend.
Forex from or less events in 2020.
During the event, we had a record number of customers and partners shared their journey to digital adoption.
We also shared key product updates on our roadmap for 2022, we highlighted walk me enterprise our approach to enterprise level digital adoption, where adopt is used an outcome driven platform through data action and experience.
Welcome to enterprise is designed as a solution and technology for digital adoption.
Business processes and digital transformation.
Viewing the installations, they must have a platform on which to be deployed measure any to rates on <unk>.
Welcome Your enterprise is that platform for our customers and we're excited to continue to advance our platform offerings for our customer.
We also introduced key enhancements that we're making throughout 2022 too often workstation workstation amplifies digital transformation through the employee user experience <unk>.
To enable this walk me customers to accelerate their digital adoption strategy by enhancing employee productivity.
Workstation is where employees can initiate workflows simplify and personalized information discovery communications and application usage data.
Think of it as a search across the enterprise digital experience. This is where you start your journey and potentially get the job done.
The new workstation and hence our existing offering to include capabilities, such as enterprise search new integration with enterprise software, which enables employees to initiate workflows and retrieve information without opening the underlying obligation.
Employees can also complete processes, where and that's where our language chat interface complete personalized onboarding and stay in the no show or a desktop anticipation with personalized and segment then announcement with workstation employees know exactly where to go to findings formation and starting point for whatever they need to.
Get their job done.
Lastly, we introduced digital transformation intelligent DPI V.
<unk> is designed for organizations to understand manage and measure their digital transformation initiatives.
Through integration with various data sources and using walk me cutting edge <unk> technology D. P. I unlock visibility into their organization Tech stack from Abbott discovery through deep usage insight across departments and users.
With enhanced visibility and data organization can plan a successful digital adoption strategy or directly take action with walk me to create experiences that drive users to success.
As a category in majority of our customers are early in their lifecycle journey to reach it wound up deployment, we believe that speed to value and value realization accretive we invested in our customer facing teams to support the build out of a world class Enterprise sales force to better silver customers and help them realize the value of walkways.
First.
I'd like to take a moment to highlight how we partner with a fortune 500 auto parts retailer achieving tangible business results in just 60 calendar days after the deal was signed.
In Q4, this customer was a new customer to walk me, we immediately understood. The vision the strategic importance of walkways and scientists adopt customer leaving.
They've invested millions in digital transformation and are now hyper focused on accelerating and delivering on their promise of digital transformation investments.
Including creating a dynamic employee experience, especially important in highly competitive retail labor market.
We work with their executive leadership team to identify use cases that are projected to have meaningful impact to revenue and margins.
During time, saving first mover advantage or upsell opportunities in.
In just 60 calendar days the customer deployed their first implementation, which focused on solving itself of mine challenge accelerating the time, it takes to build cost and field and new job listing.
Why does this matter in today's labor market speed is critical especially for frontline retail employees and even more so for these customer who had thousands of positions each year.
To enable managers to act quickly and meet the increased volume the customer decentralized hiring through the store labor.
With these shifts store managers needed to post and skill their own rules, which was something they never done before in other words, they needed to learn and entirely new complicated and time consuming process during a mission critical time.
We work hand in hand, with our newly established up team to launch walked me under HR system, and they've automated 60% of the steps create a new job listing and enabled managers to both tracks 85 per cent sector.
The benefits of their work the implementations are two folds.
Manager can now post raws and feel their hiring needs faster and focus on revenue generating activities.
Increasing customer experience.
And this is just the beginning for our partnership and they are expect to adopt journey. They are on track for the second release of their HR system within 45 days after or less deployment through next platform limitation will focus on driving in store off Soc, which are expected to generate additional higher margin revenue.
We believe that we partner on strategic level with our customers' outcome like this will continue to multiply as our customers advance in the lifecycle of digital adoption and realize value connecting data action and drive the employee experience, let's shift to our growth drivers fueling our go to market and revenues our journey.
Any to add more experienced market leaders to lead our organization to the next level is underway today I'm very excited to share as we have signed a new chief revenue officer will join US in July our new CRO is aligned with our focus on scaling and enterprise lifestyles force and will help drive sales execution and higher efficiency.
We strive to build deeper and more strategic relationship with our customers, who will continue to invest in our leadership team as we going forward.
As discussed in previous calls we're focused on international expansion of our business will continue to monitor and track the events unfolding in Ukraine as a company we support our fellow employees called Ukraine home during.
During the first quarter of 2022, we took swift action to help our co worker base and kids to evacuate the area if they wish to do so.
Previously we operated a small supports engineering team out of kit, we saw no interruption in our ability to service our customers and most importantly, all of our coworkers are safe.
We will continue to support them and their families. During this time.
We have not seen a material impact or slowdown on our business in the Europe region. We do not have nor do we plan to establish any relationship with organization based in Russia or any other regions under U S sanction.
In the EMEA region in the first quarter, we had new and expansion deals with 59 customers and our pipeline remains robust.
In our last earning call we highlight that it's we're investing in a global enterprise sales force and we continue to invest in building out the teams and capabilities to serve a global customer base in the first quarter My co founder Rafi swear we opened our office in Singapore to better serve our customer base in that region.
As a global company, we are excited about the opportunity to expand our presence internationally.
Another area of focus for us in 2022 is on the federal market, we invested in the teams and technology to be able to sell into the U S government.
It is a long process and requires some unique investment such a U S engineers in U S soil to serve as our technology as well as contained the rising our cloud based solution in the golf club.
In the first quarter, we made a great progress building out the team.
And we're on target with our plan to pursue federal starts a smoother rate in the second half of 2022.
We've been working diligently to sign new partnerships with key Influencers in the government recently, we were vetted for federal by decode deck accelerates, our connecting innovative tech companies and federal both dealers and buyers.
We believe that the federal market is vastly underserved and rice market opportunity for digital adoption.
Our approach to driving the employee and user experience is directly in line with president items executive orders on consumer experience and will during integration.
We are investing in the teams and technologies to be able to advance in this market and expect to share more throughout the coming quarters expanding on the recognition of the importance from the category by industry Research analyst firms are partners are increasingly coming to us for guidance on how to help drive digital transformation for their cup.
<unk> base and focused on driving employee digital experience change management and sulfur utilization that scale.
Another sign or a category maturing our partners, we invest in building their businesses and practices and their own digital adoption and welcoming as their platform.
In the last two quarters, we announced partnership with Accenture and Deloitte today I'm pleased to announce that we expanded our partnership with Hcl, a leading IP consulting firm to create more go to market opportunities. We've already had early traction with Hcl and we're looking forward growing our relationship further as they help there.
Your customers re imagine their businesses for the digital age.
Our partner program, while still very early and has already seen the pipelines from these channels continues to grow as we extend our combined go to market strategy. Our partnership with Accenture is already starting to bear fruit.
And now I am thrilled to announce an exciting innovative new partnership with so long as the leader in process mining and execution management, so long as strength in having deep log level data of users process combined with Walgreens the ability to use this data to drive action and ultimately the employee.
<unk> will help our mutual customers drive deeper engagement from our employees.
Customers that deploy walk in so long as together can identify and prioritize processes that are not being execute under full potential and either fix them automatically or if needed guide employees to take action at the precise moment their input as required.
Business processes can be automated either via walk me front and automation capabilities.
Our vas alone is backend API integration.
Together Walkman Solana's will help customers gain better understanding of how work moon across the enterprise. It flies those insights to accelerate digital innovation and take the right action to reach new levels of business performance in summary, our momentum continues to accelerate and I cannot be more proud of them.
Our amazing team of individuals around the world driving walking forward to the future of digital adoption into our customers partners DAP enthusiasm industry on the leased and community for being with US and supporting these ground journey. We the progress we've made in our growth drivers in the first quarter with continued positive momentum.
Our category and enterprise class sales force and growing diversification of Isps in GSI channels I am confident we have a capability to grow 30% plus over the next three to five years.
Now I'll hand, it over to Andrew Casey our CFO .
Do you ever while par listening.
Thanks, Dan and thanks to all our customers partners employees and industry analysts for their continued support of our vision for driving digital adoption for <unk>.
As Dan mentioned, we saw strength in our revenue and operating leverage throughout Q1 of 2020, we've seen early strength in April and May and have confidence that our full year 2020 to plan and we are reiterating our full year revenue guidance I want to take this opportunity to remind you there given our focus on the global two thousands enterprise and commercial customers with greater than five.
500 employees quarter to quarter, New ALR Tam shifts as we pursue larger deals.
Longer term as we gain scale, we expect these quarter to quarter movements will have a decreasing impact on our growth.
We continue to see strength in our enterprise segment, where AOR from customers greater than 500 employees is above 92% of our total IRR, whereas we continue to face short term headwinds for churn.
Less than 500 employee segment.
We expect those headwinds to abate in 2023 of you on as we continue to focus on revenue from customers with greater than 500 employees.
As we shift towards the greater than 500 employer segment, we expect to see better unit economics as the customers can change on their lifecycle journey from a single application deployment to adapt deployment.
We consider DAP customers as those were deployed on four or more applications or have an enterprise wide agreement.
Our DAP customers count grew by eight customers in the first quarter to 134 in total up from 88 in the first quarter of 2021 <unk>.
Average IRR from this customer cohort grew to 653000 in the first quarter of 2022 and total IRR from this cohort is up 56% since the first quarter of 2021.
We believe that this cover highlights the value that we can bring with organizations embrace an outcome driven approach through their digital transformation strategy and the opportunity that we see for all of our <unk> enterprise commercial customers.
We are also executing on our strategy to expand our sales channels by building out our existing partner program.
Thrilled with the progress that we've made partnering with Deloitte Accenture and Hcl we.
We believe that these expanded relationships will allow us to grow our footprint with the world's largest companies in some of the biggest digital transformations underway.
We continue to invest in the teens and structured to allow these relationships to scale today, they represent less than 10% of our full IRR, but we are beginning to see the early signs of the growth potential as Dan indicated earlier, we're very our pipeline from these partnerships. We believe these channels will also allow us to build leverage in our business model is the cost to serve.
Service these partner channels.
Less than it is for a direct sales model at scale, we believe the partner channels can contribute over 40% of our footwear where.
We are also executing on our strategy to expand our sales channels by building out our existing partner program mm three.
With the progress that we've made partnering with Deloitte accenture in HCI.
We believe these expanded relationships will allow us to grow our footprint with the world's largest companies and in some of the biggest digital transformations underway.
We continue to invest in the teams and structures to allow these relationships at scale today.
Today, they represent less than 10% of our total IRR, but we are beginning to see the early signs of a growth potential as Dan indicated earlier regarding our pipeline from these partnerships. We believe these channels will also allow us to build leverage in our business model is the cost to service. The partner channels is less than it is for our current sales model.
We believe these channels will also allow us to build leverage in our business model is the cost to service. These partner channels is less than it is for our direct sales model.
At scale, we believe these partner shuttles can contribute over 40% virtual.
Lastly, we are managing our business to be able to capture share in emerging growth of our category building a scalable model that can push to the rule of 40.
We believe that the investments, we're making today can show scale in 2022 and beyond as we show increasing operational efficiency as evidenced by our decreasing operating loss margin percentage throughout 2022.
We do this by managing our investments in the highest ROI areas last quarter, we outlined our investment plan should support extending our reach within the enterprise and large enterprise customers by investing in our international sales force are emerging federal practice and to support our partner channels as we focus on larger enterprise customers. We believe that our business model will become more seasoned.
All in nature with a larger percentage of our net new <unk> coming in the back half of the year.
With that in mind, we expect Q1 and Q2 to be the slowest in terms of growing thereof.
Now, let's review the numbers.
Total revenue for the quarter was $56 8 million, an increase of 33% year over year.
Subscription revenue in the first quarter grew 34% year over year to $51 4 million.
Remaining performance obligations or <unk> ended the quarter at $318 million, representing growth of 34% year over year and current Rps, which is contracted subscription revenue expected to be recognized over the next 12 months grew 30% year over year to $185 million.
Long term RVO, which is contracted subscription revenue expected to be recognized after the next 12 months grew 41% year over year to 134 million.
Annual recurring revenue at the end of Q1 was $230 million representing growth of 30% year over year compared to 29% growth in the first quarter last year.
The momentum in large enterprise continues AOR growth from customers with more than 500 employees continues to outpace the rest of our business growing 32% year over year.
Our dollar based net retention for customers over 500 employees was 121% for the trailing four quarters.
Before turning to gross margins expenses and profitability I would like to note that I'll be discussing non-GAAP results going forward.
Gross margin was 77, 6% in the first quarter of 242 basis points year over year in.
In the first quarter gross profit was $44 1 million up 38% year over year.
We continue to see improvement in gross margin due to a larger proportion of our revenue coming from subscription revenue, which carries a higher gross margin profile.
We expect our overall gross margins will increase over time as we continue to see a positive mix of subscription versus services revenue.
Optimization of our hosting operations and improve services engagement.
Leveraging partners wherever feasible, turning now to operating expenses, we remain focused on investing for growth to capture share as recognition of the category. We created continues to expand.
Sales and marketing for Q1 was $38 3 million compared to $24 3 million in Q1 last year. This represents 67% of total revenue in the first quarter compared to 57% in the first quarter of last year.
These increased sales and marketing expenses are a result of our investments in sales coverage across all geographies partner expansion and the burgeoning federal market.
As these resources increasingly become more productive we expect to show operational efficiencies.
R&D expense in Q1, 40, 42 was $13 9 million compared to $10 million in Q1 last year.
This represents 24% of total revenue versus 23% in the same period last year, we continue to make investments in our platform to drive innovation and plan to continue to invest in R&D as we extend our product and invest in our ecosystem in 2022 G&A expense was $10 5 billion for the first quarter of 2022 compared to $7 3 million in the first quarter last year.
G&A was 19% of revenue versus 17% in the first quarter last year, when we were still operating as a private entity.
We are investing in the infrastructure of our business to continue to drive long term scale in our business going forward. The primary areas of investment for us will be R&D and sales and marketing as we look to capture the growing market opportunity.
Operating loss in the first quarter of 2022 was $18 6 million compared to a loss of <unk> 5 billion last year.
Operating margin of negative, 33% compared to a negative 22% the same period last year and negative 35% in the fourth quarter of 'twenty 'twenty. One we expect to see continued improvement in our operating margin sequentially. Throughout 2022 is our investment scale. It will begin to see leverage in the coming quarters net loss per share in Q1 2020 to 22 sets.
84 million weighted average shares outstanding.
Free cash flow was a negative $23 million in Q1 compared to a negative $4 1 million in Q1 last year free.
Free cash flow margin was negative 36% down from a negative 10% in Q1 last year, a reflection of the tight expense policies, we implemented during the pandemic turning to the balance sheet. We ended the quarter with $326 8 million in cash cash equivalents and short term deposits, given our sizable cash balance and expectation of improving margin throughout 2022.
We are well capitalized to continue to support our growth goals, turning now to guidance first I want to remind you about the inherent seasonality of our business seasonality in our revenue reflects the classic enterprise SaaS model, where revenues increased sequentially throughout the year, a reflection of our customers demand patterns.
While our expense structure as a percentage of revenue is typically higher in the first half of the year and as we invest in head count early on with the expectation that those investments the increasingly productive throughout the year.
As we focus on large enterprises, we expect the seasonality to be more pronounced.
With that said for the second quarter of 2022 we expect revenue in the range of $59 million to $60 million representing growth of 26% to 28% year over year non.
non-GAAP operating loss in the range of 19 million to $20 million.
For the full year 2022, we are reiterating our topline revenue guidance and lowering our expected operating loss range.
We expect revenue in the range of $251 million to $255 million, representing growth of 30% to 32% year over year.
non-GAAP operating loss in the range of $78 million $274 million.
Reflecting a gradual improvement in operating leverage in the second half of FY 'twenty two as we see continued returns marine vessels.
With that Dan Ross, eight where I will take your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to let your signal to reach our equipment.
Again, Please press star one to ask a question, we'll pause just a moment to assemble the phone queue.
We will take our first question from Scott Berg with Needham. Please go ahead.
Hi, everyone. Thanks for taking my questions here.
I guess, a couple Dan let's start with your comments on larger deals taking longer to close.
I guess a couple of questions here first it sounds like you had some of your larger deals in the quarter slipping into the second quarter I guess first of all can you confirm that and then secondly have.
Have those deals that you expected to close in Q1 have they already closed here in either April or early may.
Hey, Scott Thanks for the question, so, yes, I confirm that.
As I said, we have a great day appealing.
Yeah, I would say few of the deals that pushed a majority of them already closed and we're looking forward to close all of the deals that pushed.
And it's why we're reiterating our guidance.
But yes, you are correct.
Got it helpful. And then from a follow up perspective, you all mentioned new CRO starting in July I know the organizations went through a lot of changes on the sales side over the last year, obviously, new Parker partner ecosystem seems to be doing well.
As part of that but what does this new C. R O bring maybe in a background or ore qualities qualification standpoint that we should look for that.
May make some changes to your sales organization.
So first Scott Andrew.
I would tell you we're very thrilled with our new CFO ROE I think he brings enterprise level focus and rigor to.
Our sales processes that as we transition to focus on.
Enterprise large enterprise clients.
It brings the capability and the Knowhow and frankly, the rigor and sales process that we really need as we scale and grow up so we're very thrilled about that.
We're looking forward to that.
Capability help bring to the executive team.
So all I have thank you for taking my questions.
We will take our next question from Michael <unk> with Wells Fargo Securities. Please go ahead.
Hey, great. Thanks for taking the questions.
Some impact from the timing of deals, but it did sound pretty clear not seeing any signs that the demand environment overall changing could you just spend some time on the data youre looking at that informs that perspective, and maybe also just if there is a view around walgreens approach to just getting better efficiency around software spend enough that it could at all help buffer.
Any macro headwinds in an environment, where we could see some degree of spend rationalization.
Sure.
So what we're seeing actually is going up market and we're selling digital adoption platform as a platform. Some of the deals are becoming larger and bigger.
It would be more complex.
We're all about a fair exchange of value between us and our customers and that sometimes that required some adaptation from our side.
Now with the new category, and we moved from selling point solutions to selling a wide platform that impacted your digital transformation strategy.
Yes, sometimes.
Those bigger deal again leap and move towards that.
A different quarter or different with the metrics that we're looking that it gave us the confidence is the pipeline. The pipeline is growing we're getting more GTK pipeline, we're getting bigger deals. The average deal size is growing so overall our pipeline for the rest of the year actually grew compared to what do we expect that.
Give us a lot of confidence in not just the pipeline is growing with the quality of the pipeline is growing and the deal and the people that we're talking with are meaningful conversations and meaningful deals that actually impact the bottom line.
Customers. So we should be very very excited about in addition, we're seeing huge momentum with our partners and obviously our partners to drive digital transformation with the largest companies in the wall when they're bringing walkman obviously.
Our customers are happy about that and obviously it needs to.
Very good deals and bigger deals and.
<unk>.
Software and Theyre that welcome your stable, yes, you're absolutely right I think in the economy like that.
The fear of recession.
Having got to deal with all the adoption of cloud key.
These are spending so much money on digital transformation and without real adoption or basically not not just getting the ROI, you're wasting money in which new resources.
No actually the companies are coming to us and asking us how we can help so we're actually seeing it as a great opportunity for us.
That's all really helpful color, Andrew we know you're pressed pause on some sales investments strict COVID-19 and saw some impacts both on the growth profile and just quicker profitability improvements are there any lessons learned from that exercise you can point us towards what's what's the current mindset from the team around investing in the things like sales capacity.
Currently.
Pet towards the back half of the year.
So a couple of things Michael Thanks for the question I think that first and foremost given the macroeconomic backdrop.
Laser focused as an executive team here at work to make sure that as we're investing our dollars where getting the right levels of loop return that we expect.
And we're taking the approach quarter an S curve approach if you will to the ways in which we're investing in that we're starting to see early returns from.
Small levels of investment were making and breath holding back if you will on the larger investments until we really see the efficiencies and the returns from that so that's the way we're approaching that as we go forward in 2022.
We've done a really good job in advance.
This year to really position our sellers in the right places with the right clients and that gives us confidence that we don't need to.
To do a whole lot of investment in the second half of it in fact, most of our investments are occurred during the first half of 2022 like any other major enterprise software company, who tries to make sure of their sellers.
Europe , a ramp capability this enterprise SaaS companies do and so that's the way we think about it as well Michael that we've done some major investments in our sales team, which started to support them with key resources around them like our partner managers, our sales engineers with a host of others, but the way I think about it right now.
We've got the capacity in place now.
It's upon us to execute and drive the efficiencies associated with those investments.
Thanks very much.
We will take our next question from Kevin Kumar with Goldman Sachs. Please go ahead.
Alright, Thanks for taking my question I wanted to ask about your DAP customers you added eight in the quarter and now DAP customers represent about 20% of your 100, K plus <unk> customer base, but my question is can all of your 100, K plus customers become GAAP customers over time, I guess said another way what needs to have.
And for customers, who are already spending six figures to go all in and become a DAP customer.
Great question. So we believe that every company about 500 employees can be a DAP customer so to your answer to your question. Yes. We believe that we can get most of our customers today to that level and that's what excites us the most.
Potential that we have with Jeff.
Existing installed base.
Now why do you think in order to get you to be at the customer one value.
Again, we're a new category, usually when companies coming to us they're coming to us.
One project for example.
Workday and deployment.
As far as employment Salesforce deployment, you name it and then from Derek you're seeing how much value what we can bring to the table so theyre starting to expand.
As I mentioned in the Cogs in Q4, we actually saw the customer lending at the top customer.
You've been expanding with us.
Obviously, there's a lot of market education that we need to do.
Going up for a market talking with obviously the CIO CTO.
Often organization and this is why the partner key key key component for us because they are.
These are the ones that drive the detailed transformation, we though.
Prizes and bringing work mean.
Faster to adopt.
I would say the number one for us.
You bring value to our customers what they think the value they're extending.
So yeah.
That's helpful.
And then last year.
You had some elevated churn I think coming from the SMB customer base.
Has that started to stabilize at all.
The overall churn of the business, where you'd like it to be at this point. Thank you.
Lastly, I would tell you that we see.
<unk> got 8% of our total annual recurring revenue there has been less.
Less than 500 employee category and as you indicated as we continued to focus our coverage and our our sales efforts around marketing to GTO Kase enterprises and commercial clients were greater than 500 employees that the amount just will drop.
I would become less and less and the fact of the matter remains that in that class, we do see a much higher churn rate.
The other targeted customer classes.
So I think we're going to continue to deal with at four three.
Throughout from 'twenty, two it's to a lesser degree, but as you move into 2023, IC that that percentage, becoming one but it's almost immaterial.
It comes from.
Okay.
Sure.
We continue to migrate those customers to adapt.
Oh, your proposition or we'll just move away from that right Laurie itself.
It will become a less and less drag.
Great. Thanks for taking my questions.
We'll take our next question from Michael <unk> with Keybanc. Please go ahead.
Hey, guys. Congrats on the adds on on DAP customers and on the solid growth.
Understandable.
As you move up market things get lumpy nature of the business, maybe you could drill down if you would.
What was behind some of the push outs was it <unk>.
<unk> sales cycle in general because the deals are getting larger was it anything to do with.
Macro in terms of tighter budgets.
Anything you can give us there would be helpful.
Sure.
When you how it works when we actually getting to the enterprise license agreement.
The top deals as well.
Call. It the organization basically move walk you meet with centralized budget right. So we've talked to the sales departmental Gd HR Department now when we're doing an enterprise license agreement there actually need to pay for it from a centralized budget.
Adopt is the new category. They don't have the line item budget. So this is usually where it's becoming a little bit more challenging for us because they want walkman. They already use walked me because usually the adopted.
Pension deal and.
And so what we're talking with a procurement cycle.
For Ya, which positives coming from and then Theyre going in allocating budget from the different departments in order to get to that bigger deal that usually takes us a little bit longer because we need to educate them they need to educate them and.
And exactly how to execute the deal because we're bringing tremendous value to those customers were not willing to proper pricing just to close the deal.
And because of that it will take.
Three five weeks longer to close the deal.
We will weigh that time because it.
And what's exciting is how we're building the category and science. This we're seeing that the category growing because in order for us to grow at that scale for the next five years and even more we need that to be a category, we need that to actually be something that is a line item budget for every CIO.
And that's what we're pushing and this is why we're very excited on this quarter.
Because of the partnerships that we made.
Logical partnership that we made and.
Obviously, new GSI that we're signing and but I would say Bob Jed.
Would it be lumpy like we can.
Ross.
I can add this is rob in some of the deals that were pushed we see early indicators for the conviction day in it.
It is a budgetary thing inside so for example, assigning the team that's going to work on the cross DAP collaborations. So those are things that are really encouraging for us.
Great. Thanks, that's helpful and then Andrew obviously it sounds like this is the peak of investments in the first half.
Obviously, you're not giving long term guidance at this point, but can you can you talk about something that would give us some sense of.
Beyond 'twenty, two in terms of whether or not.
You had a dollar reduction.
And losses, both EBIT and cash flow.
Yes, so let's talk about the Americas, Michael because and.
I certainly will encourage everybody who is listening to attend our analyst day Tomorrow, we're going to go through some of these things, but from a gross margin perspective, we talk about the increasing percentage of our subscription revenue, which has a much higher revenue per margin profile than the services revenue component and as that happens you'll see a natural progression.
They have a higher gross margin, we're also increasingly better managing our support and hosting costs that will drive higher subscription gross margin and then finally as we ship more and more of our refer this to our partners who are more efficient at delivering those services will be able to drive towards a much more optimized services profile.
The results in a lower drag on the overall gross margin. So that's what the gross margin line on the.
Do you expect the sales and marketing.
Efficiency is probably the low point for us as we continue to progress towards driving greater operational efficiencies and once again I will tell you as we invest and expand more with our partners will be able to drive a much more efficient go to market.
Model, which will result in a lower much.
Much higher cell efficiency, better LTV to CAC ratio, which I'll talk about in detail tomorrow.
Alright, thanks, everyone.
Oh I'm sorry.
So, let's just say that these are some of the examples of the <unk> portfolio.
We think that we have in our model that we can drive towards increasing operational efficiency.
Great. Thanks, everybody.
We will take our next question from Barnard with Barclays. Please go ahead.
Hi, Thanks for taking my question I wanted to touch on the U S government opportunity you brought up on the call.
The fed ramp certification moderate status can be coming in the second half of 2022 and in the past have talked about kind of having the right sales teams and partners in place can you maybe just talk about where you are with each of these factors first where you need to be to start driving more incremental revenue contributions and kind of when do you expect this to happen in each of the items.
As I mentioned.
Sure so on the federal moderate Scott, we're aiming to Q3 Q4 this year.
Obviously, it's a long and complex process.
But we're on track.
Dan.
And as you know that in order to do it.
With the government one of the things that we did an estimate.
In the previous earning call is that we already have the team in place. So we have a full team operate building opportunities working with the government agencies that the men and the government need for employee experience and digital transformation is exactly like the private market.
This is why.
Good originate those agencies are anxious to start working with.
Getting the demand from them.
So overall really really well I would say that we're already signing a deal with health authorities.
Date is not federal but obviously, we're seeing the same theme and the same demand. So obviously, you're probably going to be huge for us on that because we will start in Q3, but the pipeline is stacking up.
And we're really happy that we made those investments.
So this is where we are there yeah, maybe just to add to that that.
When you go through.
Advance of getting the certification itself. When you are starting to win when the agencies recognize that youre actually going through the process and that you're you've been approved into that process. It starts it starts to phase of where you're starting to get included.
The RFP discussions and I will tell you that.
The good positive momentum that were seeing in spaces, where we're getting the acknowledgment of the agencies. We're starting to get included into the Rfps and we did get recently.
A validation from our key partner within the federal space that were validated for federal business. So all of those things are just little milestones. It says there are investments and there are going to pay off and it's just about being.
Diligent and focused on our execution.
No. Thanks, that's helpful. And then I just also wanted to touch on Deloitte and Accenture and can you just talk about where they are in terms of building out their practices and.
How long does that take for them to kind of really build out full fledged practice is where you'll really start to see momentum and kind of move towards that longer term, 40% target.
Going from partners. Thank you.
So we're really happy with the progress alright, well tell you you'll have to ask them what they can do.
Okay.
Trained consultants or a dollar value, but we're very happy with the pipelines are starting to create and frankly some of the wins, we actually had a couple of quarters here.
Our key partnerships with each of them.
It provided us the reasons that customers chose walk me that they had confidence in the delivery capabilities and the vision that our partners at <unk>.
Boardwalk me in their environments. So that we're starting to see I think obviously I think it's one of the most important investments, we're making for our long term growth.
And frankly for our future sales efficiency. So it's look it's a it's one of those areas. When you are trying to do a major design win and change the way in which people are delivering their digital transformation services that you've got to do it in a very methodical and thought out way with the pipelines are growing the winds are accruing and we're increasingly.
Appealing to more and more GSI partners as evidenced by our agree.
Agreement with Hcl this quarter, so we're happy with the progress.
Great. Thank you.
We will take our next question from Pat Walsh.
With JMP Securities. Please go ahead.
Hi team. This is Joe emergency calling for part bringing for the question I Love more color on the strategic partnership with Colonus.
What was the Genesis for it and what do you think it provides Washington.
Seven months.
Thank you so much for the question I waited for you.
That's super exciting partnership.
Bart.
Net game changer.
The combined solution can do it for the digital transformation. So so let me explain what we do there so obviously.
And the Amazing company and they have the ability to get the contract.
<unk> data.
From logs and for.
On the transaction CRM, ERP, and so on and discovering efficiencies and processes, while they're lacking is the ability to actually create action. So you figure out that something is not working great. How you fix it.
Between us that once the lawn you identify the inefficient process. We can activate a welcomed reaction that will pop up on the employee computer and we show them exactly what you do even automated in real time and everything is happening without any configuration. So.
Theyre actually identifying the problem <unk>.
Waiting in API, and then walk me takes over and the action Pops up and show the user exactly what do you do that actually pushing real result.
With our joint customers and actually the way this partnership was born.
From a customer or customers were like Hey, why you are not collecting wire enough connecting and one of our customers introduced me and Alec and in a super fast fashion, we were able to create a very complex technology integration that is in production now and happy to have with me announce.
As we started to talk with more and more of them so far.
Every CIO, we presented the solution or blown away and said this is exactly what we need so we're looking forward to the partnership and see more and more for joint customers using that.
Thank you so much that's super helpful. And then on the on the hiring front I just wanted to clarify have you made any changes to your hiring plans for the year or any updates just with all the uncertainty going on.
What's there thank you guys.
The only thing I would say is there are hiring plasma inconsistent.
What we stated was that most of our hiring happens in the first half of the year now having said that I will tell you that.
We are we are watching every dollar we spend and we're making sure that we're achieving the rois that we expect from those investments that may cause us to look at individual hires and delay pause or reallocate based upon where we see investments through higher level versus the lower so I would.
Don't want you to takeaway that we are changing our expectations of where we're investing but I will tell you that the scrutiny with which were applied our expectations for return or at a heightened level.
Thank you both.
We will take our next question from Keith Bachman with Bank of Montreal. Please go ahead.
Yeah. Thank you I had a couple Andrew just to start with you on the come back to an earlier question.
And trying not to steal from the event tomorrow, but could you talk about when you think you would realize cash flow breakeven.
Is that going to be during a quarter and <unk> 23.
So we're not giving that long term guidance, Keith, but I think that what we will do is we'll show you the pattern through which add when we talk about growing.
To grow 30% over the next three to five years and the way, we're actually driving towards our long term operating.
Profitability that youll be able to come up with a model structure that.
Best facilitate that answer but right now we're not giving that long term guidance frankly, it's too at the situation of how will the second half of this year will you be profile out.
Although we certainly are mindful of the backdrop and the graco economic issues.
I want to reiterate something that Dan mentioned earlier than that.
We're not seeing any substantive change in our demand pattern and frankly, if we position walk me the right way, we could actually take advantage of some of those more record economic situations as well so no.
They take away a little uncertainty associated with that but the reality is that.
We're not giving that long term guidance, yet and we're going to try to map out a way for you to understand that in the key Beavers tomorrow.
Okay. When you did say that the operating income loss was at the low watermark. So can I assume that the free cash flow loss was also at a low watermark.
So the predominance of our of our free cash flow is generally from our operating loss, so youre not going to see big capital expenditures or other items negatively impact free cash flow from us. We're just not that type of business. So as op op income loss goes so does free cash flow profitability and it will add given that we bill annually in advance you'll see.
You'll see that happen there as a precursor to operating profitability. So.
The other thing you can take away, we're laser focused on driving operational efficiencies sequentially as we go forward.
Okay. My second question is I wanted to talk a little bit about the threat of competition on pricing.
And I was going to break it into a few pieces.
And when your.
Trying to procure new logos in particular is that still mostly sole source or the competitive bids.
When you're in those type of situations how is the pricing environment.
And then just more broadly you did mentioned that as you are trying to move up market.
You bet.
The unit economics get yet.
You get better and I just wanted to make sure I understood that correctly, because I assume the pricing is a bit more.
Shall we say scrutinize that the larger enterprise, but I just wanted to hear you flush out those kind of components on competition and pricing. Thank you.
Sure. So I would start so the way we're seeing it. So there is digital adoption platform. When we're selling the solution for organization that we're helping them drive their digital transformation and there is the point solution like when you buy guidance side or are you have a specific one.
Onboard in English.
This is this is usually where we'll see the competition and obviously they are coming in in the lower right, but that's not the promise of walked me and that's not what we're selling at the end of the day, we're helping companies realize the value of their digital initiative, and we're helping them with their bottom line and revenue so yes the REIT.
Competition, there will always be competition, but for us what we're doing we're focusing on the category and the value that we're creating to our customers.
So right now we.
We believe that we are by far the most advanced platform and so this is this is on that regarding the scrutiny on the pricing I wouldn't say there was just quickly on the pricing I think it's more understanding of how the budget thing. It. So at the end of the day, we think we're still leaving some money on the table, we don't think that.
Walk me is expensive at all and I don't think our customers think death as well I do think that as the lender budget and now they need to pay for it as an enterprise life, then they need to figure out how youre about <unk> and how they're allocating and and that's what's slowing us down I don't think it's.
Oh, the pricing is too high I hope you've answered the question, maybe just maybe just add to that a little.
When you refer to pricing I'm, assuming you mean deal sizes the value the issue that we often see is that we're rationalizing the value of the platform across to a whole new set of stakeholders at a whole new level and that.
Is is where.
We are showing the capabilities.
That our clients can really gain from investment.
Platform so.
It's one way or damage referring to earlier as we go into some of these larger deals we want our fair value exchange, if we're generating $1 billion and business savings that we expect that we can have a lower multiple on that as part of our fair value exchange and in some cases, that's an education process and that in some cases.
If you're dealing with procurement they'll push back as much as you can but if we're not willing to go there because we think we create greater value.
That's the route.
I, often I often talk to our sellers about the differences between attacking a rideshare service no one will compare to each other because the rideshare search gives you a much higher value gives you information to provide you a destination. So walk me is no taxi, we offer greater value to our clients and we should expect to be paid for it.
I think that also if you look in.
And the most recent comparisons game coming out of the Everest peak you see that there are 18 vendors walk me is more than 45% of the market. So we're definitely seeing that we maintain this leadership and from our perspective, the more smaller more competitors coming in which is b benefit us.
And then the last one Keith real quick and I'm happy to get into this in more detail tomorrow on the LTV to CAC ratios to think that in terms of we're paying the same price for a direct sales model for our customer with that is less than 500 employees, which is the much higher churn rate at a lower LTV than the enterprise clients, who sign longer term contracts have a much higher renewal rate.
So that's the major difference in when we add partners into that mix, we changed sales sales expense into.
Our sales expense line item into.
Our partner discount line item.
And ladies and gentlemen, this will conclude today's question and answer session. At this time I'd like to turn the conference back to Dan.
Any additional or closing remarks.
Thank you everyone for joining the call and I. Appreciate the question. There is that just a reminder.
At our analyst and Investor Day Tomorrow, and will go deeper into our product vision and go to market, though we will be thrilled to see you there.
Thank you so much for the time.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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