Q3 2022 Walkme Ltd Earnings Call

Hum.

Hum.

[music].

Hum.

Okay.

[music].

Okay.

Thank you all for joining the walk me, but quarter earnings call.

Kindly be informed that you will have the opportunity to ask questions. After the opening remarks.

This can be done by pressing star one on your telephone keypad to read your state your question.

I will now pass it to John Strep, I head up Investor Relations Boardwalk may thank you.

I'm, John <unk> head of.

After relations at walk me and today I'm joined by Dan <unk>, CEO and cofounder, Scott Little Chief revenue Officer, and AG and on our interim 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 second 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 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 November 15th 2022 for additional information.

In addition, certain metrics we discussed 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 financial information prepared and presented in accordance with GAAP. We.

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 and enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management.

And its financial and operational decision, making.

Further throughout this call we provide a number of key performance indicators used by our management and often used by competitors in our industry for more information on the non-GAAP financial measures and key performance indicators, including the reconciliation table see our press release dated November 15th 2022.

And with that I'd like to hand, it off to Dan.

Thank you John Good morning, everyone I'm happy to share the progress we've made in Q3 in light of the dynamic market environment. We continue to be bullish about our strategy to accelerate up market with our dop offerings, which fueled the war, leading enterprise companies, who are seeking to accelerate their digital strategy. We are very pleased to announce that.

Our growth of over 60% for the second quarter in a row.

Our DAP customers are embracing the platform approach to digital adoption by acquiring in L. A or deploying walking departmental wide on four or more application is this processes don't live in a single application and the progress we're seeing with DAP customers.

As confidence to continue to drive our strategy towards larger validation with complex workflows.

Now more than ever in this challenging financial times organizations are looking to extract more value and accelerate their technology investment.

Welcome is well positioned to expose usage visibility on the entire tech stocks, where our data solution, while empowering the organization with no go to automation and orchestration tools to deliver a seamless digital experience to their employees and customers.

Simply by connecting the user into the business workflow Rois achieved.

We continue to align our internal strategy of moving up market, we're seeing the results in our numbers.

Overall, our area our of customers over 500 employees grew 31% year over year compared to a total of 26% they are growth year over year in all customer segments, including F N b.

At the end of the third quarter, we had 390 <unk> customers up from 367 at the end of 2020. One we are seeing improvement in lending these customers and expanding our currency to K customer base.

At our Investor day in May this year, we know that the average IRR from day to day customer with 305 K as of the end of 2021 and today. The average IRR 42, K customers is 334, K up almost 10% year to date the opportunity of growth within energy to gain customer is tremendous.

In the quarter, we added four net new customers paying us over 1 million. They are are we now have 35 customers that are paying us over $1 million of IRR and 511 that are paying us over 100 K E. R. R.

We are taking active measures to reduce our exposure to the lower growth in higher cost customer segment of the smbs.

Near term it will be a headwind to our overall net revenue as we proactively reduced the segment sub.

Sub 500 employees customers now account only four 6% of those are they are and we expect this to decline further over the coming quarter, which allow us to focus on enterprise and DAP customers. While we're seeing positive signs in our strategy and ended up offering we are seeing headwinds from micro standpoint, we continue to see deals.

Take longer to get through the closing process, including additional layers of approval in larger deals.

On the expense side I'm thrilled to see that we held our non-GAAP operating expenses flat quarter over quarter. We also improve our gross margin by 2% from previous quarter to 84% driven by our investments in multi cloud approach, where our subscription gross margin was 89% and we're seeing better utilization with our professional services are going to.

Nations, we drove at above breakeven on a non-GAAP basis operating loss in the third quarter was $12 5 million compared to a loss of $16 7 million last quarter operating loss margin of 20% compared to a 28% last quarter.

We are committed to building a sustainable growth business and achieving cash flow positive within 2023 with the progress we made in Q3 I'm, even more confident in our ability to reach that goal. There is a growing sense of a tipping point in the market category. We pioneered adopt validation for digital adoption platform is at an all time high with them.

Increase in tier one analyst firms recognition.

I'm proud to share that Gartner for the first time publish a full market guide acknowledging the dog category that we've been creating and shaping for the past few years and Foerster have released their first D wave analysis of the top market naming walking is it either.

I'm willing to see the recognition and appreciation from our global thought leaders. It confirms even further that we'd been paving the right path for digital all ROI is the market's recognition continues to grow we're also seeing growth in the ecosystem around us in October we hosted the elevate the adapt industry events to empower that professional.

We have speakers joining us from AB inbev called the Lloyds WL Gore, among others, who shared their amazing joining us in digital adoption East was our largest gathering of dot professionals to date and I'm excited to see the continued growth and maturity of professionals driving the category forward beyond the walls of bachman.

Lastly, we see an increasing demand coming from our partner ecosystem as our customers are focused on how to do more with less in a complex spending environment, we're seeing significant growth in the volume of deals that come through our advisory partners.

And we're making great progress with our ISG partnerships Walgreens consistently being selected as the partner of choice for the leading providers of change management and digital transformation across the globe, we adopted a tipping point in our strategy in place. We expect an increased number of organizations, who turned to walk me to drive their digital efficiencies are.

'twenty three plan is focused on improving our efficiency and aligning our investments to our new go to market strategy and ensuring our product offering continue to lead the category with.

With that in mind I want to pass it off to Scott, Our Chief revenue officer to highlight some of the improvements and changes we made to our go to market approach and what he's seeing from ourselves neither as industry. Thank you after you Scott.

Thank you Dan.

I'm going to have a full quarter in the seat as the C. R. O I wanted to highlight my observations over the past quarter, and where I expect us to improve and our execution.

In the third quarter, we had mixed results from a sales execution standpoint.

<unk> net new <unk> number was below my expectations, but that number hide some of the advancements that we've made like growth and GTK customers improved adapt air are and the growth of greater than $1 million and are our customers.

Dan mentioned, we continued to make progress shifting away from the SMB customer cohort, which we've identified as not having a strategic fit with our go forward enterprise strategy.

In line with that strategy, we're actively shifting our go to market resources to enterprise and large enterprise customers, where we have the best opportunity over the next three to five years.

Secondly, I'm pleased with our land and expand motion and our larger customer cohorts, we've made solid progress expanding our footprint within our two to pay customers.

We've also worked hard to drive increased renewals and expansions within these larger customers as evidenced by our dollar based net retention for customers with over 500 employees staying above 120% in the third quarter.

We had customer lands with AE com and insurance limited and expanded our relationships with Hewlett Packard Enterprise Schneider electric and Thermo Fisher scientific.

Looking at how our go to market team is structured I want to highlight a few investments that show our shift towards a customer centric enterprise led sales organization.

The first is our value realization team, which began as an initial investment in 2021 and continues to build momentum in 2022.

This pre sales organization led by our CTO has invested in a mapping exercise with some of our best customers who have seen the greatest success would want me to.

<unk> then creates templates based on those mappings, which our sales teams used to talk about real ROI possibilities with our prospects when.

When we deploy these value realization resources to our enterprise opportunities, we've seen closing rates that are greater than when they are deployed in.

In 2023, we will continue to expand on this team's work to make artifacts like process Roadmaps, ROI calculators and deep value diets more accessible to all of our customers.

The second investment area to highlight is our partner ecosystem.

You've touched on this in the past, but I'm very excited about accelerating these partnerships globally with leading global system integrators and enterprise Isps.

Here is continue to emphasize joint customer wins announced new partnerships and expand capabilities within our existing partnerships.

Such.

Thrilled to announce continued global momentum in one of our key growth markets with Deloitte.

Building on our partnership in the U S and in Canada in Q3, we expanded our relationship to Deloitte, Australia, a vital member firm with the Deloitte Asia Pacific Group. This.

This is the latest Deloitte member firms, who adopt the walk me Alliance is provides even further validation and Deloitte largest Asia Pacific market. It also recognizes the accelerated value walk. These digital adoption platform combined with the Lloyds capabilities and provide to our mutual clients and prospects.

Our entire partner ecosystem is driving meaningful impact to our results and continues to be one of the fastest growing areas of our business.

In the third quarter, nearly a third of our global air or was impacted by our partner ecosystem.

In the U S, where our partner business has had the most focused investment this year to three partner sourced air or quadrupled over last year's totals.

This ecosystem is critical to expand the capabilities and delivery of digital adoption outside of the walls of walked me.

Our partners extend our reach and credibility with the largest organizations in the world undergoing some of the most complex change management.

We will continue to invest in the team supporting our partners to better enable their sales and implementation skills, allowing this ecosystem to scale even faster.

Our third key investment area is the public sector. Our U S. Federal business continues to progress in line with our plans and we're working towards FID Ram status by the end of the fourth quarter.

This is a massive opportunity, which will be a competitive advantage against our peers for the next two plus years. The U S. Federal government is ripe for digital transformation for both internal processes and citizen facing processes.

As you May remember, we're happy to already count a number of international governments as our customers, which include one of our largest expansion this quarter.

Our first government entity, having over 1 million and a R. R.

We're working hard to deepen our relationships with government agencies around the world as they invest in improving citizen's experiences and driving process efficiencies for.

For example, the government of Canada's Global Affairs Office recently deployed walked me on two of their citizen facing websites that manage import and export controls.

With walk me a global Affairs office is able to automatically guide individuals and businesses through the import export application processes.

<unk> data in real time, and enable them to export import goods and services at a faster rate, which accelerates time to market for approvals and subsequent revenue generation.

Looking forward to 2023, we're focused on improving the quality of our pipeline and shifting resources to better align with an account based go to market philosophy. This shift from a broad based go to market approach to a more targeted one.

Our sales and marketing teams focus on the enterprise customers and prospects, which are most likely to benefit from our solution at scale.

So that we can grow to enterprise DAP deployments.

It is just as important to be crystal clear about what we don't do as it is to be clear about what we do within that go to market organization.

In closing I'm pleased with the work done to date to make sure our sales and marketing resources are aligned to drive a world class Enterprise go to market organization.

I'm working hand in hand, with our new CMO and with our chief customer officer to deliver a best in class customer experience that has at its center those large enterprise customers with sophisticated application environments that best benefit from walk me.

With that I'll hand, it off to the gate and on our interim CFO to cover the numbers.

Thank you Scott and good morning, everyone. Our third quarter results were highlighted by continued progress with customer expanding their relationship with us.

75 customers paying us more than 1 million in El Dorado. We then average from those customer of $2 1 million, which grew 15% year over year.

That customer, which we define as customer we can easily port have a departmental deployment a formal application grew to 155 customer.

They are all from DAP customers now represent 45% of total lay out our total revenue for the quarter was $63 4 million up 25% year over year and the high end of our guidance range.

Subscription revenue grew 23% year over year to $56 7 million.

Meaning performance obligation or <unk> ended the quarter, its $358 million representing growth of 29% year over year, Colin Powell P. L, which is contracted subscription revenue expected to be recognized over the next 12 months grew 27% year over year to $199 for it.

No film OPO grew 32% year over year to $151 4 million, we continue to strengthen our position with our larger customer cohort of employees greater than 500, which now represent 94% of our total lay out before turning to gross margin expenses and profitability I would like to know that.

We'll be discussing non-GAAP results going forward.

As Dan highlighted we are extremely proud of our focus on efficiencies and expense management, which drove an improvement in our non-GAAP operating loss for the third consecutive quarter.

In the third quarter of 2022 gross margin was 18, 4% up 2% points from the second quarter.

Profit was $50 9 million up 29% year over year, we have seen improvement in our gross margin due to our continued optimization of our cloud or seen operation and better utilization with our professional services organization. We believe we will continue to improve on our gross margin over time as we continue to scale, our multi cloud strategy and <unk>.

Our professional services organization leveraging partners with indeed, Philly when feasible turning now to operating expenses, we are prioritizing our resources internally behind highest growth area. This area that no longer fit our strategic direction, such as SMB customer further we are better aligning our sales and marketing okay.

Nation to drive efficiencies that we expect will be yield margin improvement in 2023.

Sales and marketing expenses in the third quarter was $40 3 million compared to $29 6 million in the third quarter of last year.

This represents 64% of total revenue in the third quarter similar to last quarter's results and compared to 59% into third quarter of last year.

<unk> expenses in first quarter was $12 2 million compared to $10 7 million in Q3 last year.

Represent 90% of total revenue versus 21% in the third quarter last year, we continued to make investment in our platform to drive innovation and increase our flexibility for deployment, we will continue to invest in R&D as we extend our well adapt and invest.

Yeah.

G&A expense was 11 million for the third quarter compared to $9 3 million in the same quarter last year, G&A was 17% of placing a new versus 18% in the salesforce deals last year.

While we do not anticipate a large increase in our overall opex for the remainder of 2022 and 2020, we do expect some growth early in 2023 as we continued to align to our strategic growth plan. We have made progress during the third quarter improving efficiencies in our operating model, which drove our operating loss.

Lower than our initial plan for the quarter.

We are very focused on driving towards positive free cash flow showing increasing leverage in our business model.

Operating loss in the third quarter was $12 5 million compared to a loss of $16 7 million last quarter and $10 1 million in Q3 last year.

I think the loss margin was 20% compared to 28% last quarter and 20% last year net loss per share in the third quarter of 2022 was 14 sent using 85 5 million weighted average shares outstanding compared to 19% last quarter.

We know efficiency metrics expense control and focus on driving towards positive free cash flow, we wound down with free cash flow by $1 million quarter to quarter.

Free cash flow was negative $11 2 million in the third quarter of 2022 compared to a negative $12 2 million last quarter and a negative $12 9 million in the third quarter of last year.

Free cash flow margin in the second quarter of 2022 was negative 18% down from a negative 20% last quarter and a negative 26% for the third quarter of last year.

Turning to the balance sheet, we ended the quarter with $309 2 million in cash cash equivalent and short term deposits.

Given our sizable cash balance and expectation of improving operating margins throughout 2022, and 2020, we are well capitalized to continue to support our growth goals.

Turning on to guidance.

While we were pleased with our execution against our strategic priorities the lower than expected net new L. L. You slightly our total revenue expectation for the full year, we are anticipating the uncertainty surrounding the micro environment to continue as we focus only do you see no exposure and customers that are below 500 employees.

Today. These cohorts are at present in a 6% of a L M.

While we are slightly lowering our top line revenue estimate while improving on our expected non apple thinking of US. Likewise, we are reaffirming our goal to reach positive free cash flow in 2020.

With that said for the fourth quarter of 2022, we expect revenue in the range of $62 9 million to $64 9 million representing growth of 18% to 22% year over year.

non-GAAP operating loss in the range of $13 2 million to $11 2 million and in the open 18 margins of 21% to 17%.

For the full year of 2022, we expect revenue in a range of 243 million to 245 reps.

Representing growth of 26% to 27% year over year, and a non-GAAP operating loss in the range of 61 million to 59.

With that Dennis and I will take your questions.

Okay.

Yeah.

Thank you once again, ladies and gentlemen, as a reminder, if you would like to ask a question on todays call. Please press star one on your telephone keypad.

Then we will take our first question from Tyler Radke of Citi. Your line is open. Please go ahead.

Yes, good morning, and thank you for taking the question.

Wanted to.

Ask you just a little bit about the you your comments on the macro environment.

Specifically.

As it relates to some of your larger deals.

Was the elongation of sales cycles is that was that something you werent expecting this quarter and are you expecting it to get worse in the guide and then if you could also just comment on how you see the macro environment impacting your renewal rates and <unk>.

Expansion rates to the extent that you've seen any any pressure there. Thank you.

Hey, Suzanne I would take this question. So one overall, what we're seeing is that there is more I would say process within our customers to get our budget approved and deal side. So on the larger deal that it's more signatures.

Take place before we can actually execute easily that prolongs the deal a little bit further.

And to your question regarding renewals and expansion, we're showing tremendous value to our customers. So when walgreens deployed and when we have a wide the accompany deployment like that we're actually seeing that growing very fast.

The third consecutive quarter, one we're seeing acceleration in that growth.

63% year over year and were seeing overall in large enterprises growth with 35 customers over 1 million.

And so I don't know if you want to add anything.

Just add.

Next issue. Our next question, you'll probably being up is what are we seeing in terms of demand I think we haven't seen a falloff in demand we have seen longer sales cycle, but as Dan pointed out you know.

But I would also say that.

When we look forward to Q4.

Earnings results for Q4, we would expect roughly the same kind of impact on match any acceleration and impact on economic headwinds.

That's helpful.

Got it so pipeline is still strong just maybe an adjustment on that on the close rate.

Yes.

Got it and just on the.

Operating.

Income side.

How are you managing through the expense this year.

Talk about kind of the you know I guess, what you've learned with obviously seeing much higher partner contributions.

And then also reducing your focus on SMB.

Yes, just just help us understand how much of that cost savings is in the numbers that we're seeing today and.

And does this maybe accelerate your your pathway to breakeven just kind of doubling down on on the enterprise and you're seeing.

We're seeing that momentum partners. Thank you.

Sure I'll start then it looks like it will continue so obviously, our enterprise customers as the most profitable segment in SMB and one creating a lot of overhead support cost and so forth and so forth. So yes by reducing the exposure to SMB, we are able to save cost because.

We can be laser focused with our resources towards the large enterprise and adopt customer. So that's what we did and Thats our strategy and we focus all our energy towards that so with that it allows us one to improve our operating margin.

And improving our free cash flow and that will be our strategy moving forward into 2023.

I will answer that ice could be that would add to that is yes.

So much focus on our efficiency metrics of course organization.

Turning to SMB and R&D and the build.

Organizationally.

Ooh Ooh.

Are you, becoming the acreage within 2020.

Yeah, sorry, just to clarify you said cash flow positive in 2023.

Okay.

And then within 2023.

Okay.

So like in a given quarter not not the full year.

Yes, correct.

Okay.

<unk>.

Thank you, we'll now move on to the next question comes caught back of Needham. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking my questions here.

I got a couple I wanted to start with I think your comment Dan made.

Believe you had mentioned youre going to.

I think the word was accelerates some of the SMB customers moving I guess out of the.

Out of the business here, how should we think about that 6% IRR kind of trough out and no longer being a headwind to the business because most of that kind of go away here in Q4 or will some of that still continue to linger into next year.

Think about the model here and when.

When things may improve relative to the success, you're having in that market.

Sure. Thanks, Scott. So we are we are having active contracts with them. So basically what we will see is quarter over quarter, we will see more and more and more of those customers basically going away. So within I would say four to six quarters, maybe a little bit more.

That portion will be almost zero is already 6% and were anticipated to go down and down from quarter to quarter. So it's only going to be like one quarter in <unk>, it's more of a transitional play.

Play.

Great. Thank you and then.

Scott Thanks, Tom.

You had talked about moving.

Some of them yourselves resources, or I guess reallocating them from your smaller customers up market.

I think lots of us have seen sales reps from different businesses tend to be really good at selling to certain types of customer segments. How long should we take about that transition, though from your sales reps are used to selling smaller customers, who are selling to a bigger enterprise customer that might take time to build pipeline and close deals which is often different than some small.

Other companies out there.

Yes, you kind of said it yourself there Scott.

We expect that to take.

A few quarters for us to make that transition in some cases, we do believe we can retrain those reps that are calling on those smaller clients and help them move up market, but their nearby stores. So as part of that is on us and part of it will be the situation, where we hire additional good quality enterprise and large enterprise reps to help us pursue that markets will be a combination of both over the.

Next few quarters.

Okay.

Great Thats all the questions I have thanks, and congrats on the good quarter. Thank you.

Thank you we'll now take our next question from Kevin Kumar of Goldman Sachs. Your line is open. Please go ahead.

Yeah.

Alright, Thanks for taking my question.

I just wanted to ask about the some of the deals that were pushed out earlier in the year I believe some of them close in Q2, just maybe can you talk about the progress you've made with some of those elongated deal.

Closed the majority of them. Thanks.

Yeah.

Hey, Kevin Yes, so we closed most of the deal. So when we have those deals pushing from quarter to quarter, we're not losing those deals. We're just closing them in a different timing.

So, yes, im happy to say that the deals from Q1 that moved to Q2, we closed most of them and go into Q2.

So I.

I hope it answer the question.

Yes, so I'll jump in here too as broker I'll jump into Kevin.

Well the question I mean part of this is.

Also something I'm working on when I came into the organization I'm pretty happy with myself leadership team and what.

What I inherited when I joined but Theres some process rigor things that we could do to improve that too will help offset some of that economic headwind and will help offset some of the things that we see in terms of lengthening sales cycles. So there's things you can control and there's things you can on the things we can control, we're going to improve and I'm already starting to see just in the first six to eight weeks.

An improvement in our ability to shorten sales cycles on the areas that we can control.

Okay, Great I appreciate the color.

We will now move onto our next question from Michael <unk> of Keybanc. Your line is open. Please go ahead.

Hi, This is Michael Ludovic on for Michael Thanks.

Thanks for taking my question I was curious on discounting our trends up or down and if they're up how significant of a change or are you seeing in the current period.

Yes, so for US we haven't had a seen a significant change in discounting trends.

No discount discounts matter by volume and size and market segment, but no real major shifts and discounting trends right now.

I know that my peers in other industries have seen that pressure so far we have not.

Yeah.

Great and then just a quick follow up.

Go ahead market for.

Are you doing a different go to market approach to that or how you're building out the pipeline differently or is there a different partner ecosystem strategy driven contracting strategy I guess, how much of a pipeline are you seeing in front of me right now fed ramp and then what are you expecting to materialize. When you score in the <unk> you achieved fed ramp.

Yes, that's a bunch of questions at once all right I'll try to answer them in order.

In terms of what we in terms of what we expect on the go to market. The major change that our new CMO and I and his name is AGL Sanchez.

<unk> is a focus away from kind of a broad brushed approach with our marketing dollars and our prospecting span. So more account based approach when you move up market I gave you the numbers in the U S.

You can sell to approximately 10000 total net total entities in the U S. When you move up market, you're significantly reducing that down so I don't want to make sure that the money we spend in marketing and attention. We put from my my sales organization is going into the market and we don't care about so thats a shift from how the company has done in the past HOA are worth.

<unk> out now and as we come into 'twenty, three exactly which accounts, we want to target in the space that fits that enterprise and large enterprise customer base, and then youll see that reflected in the pipeline so larger larger transactions larger average sale expectation and hopefully the intention is a.

Broad industry presence, which will help us.

With closing in the second half of next year.

Oh, sorry.

So next question first so we expect to exit the Q4, so exit this year with what was called fed ramp ready steps okay.

We're very close to having that in place and then we would expect to go what is called set moderate status sometime in the first half of <unk>.

Of 2023 is that helpful.

Yes, Thanks, Rob Lorenzo.

It all from me thank you.

Thank you if you thought that your question has been answered you may remove yourself from the queue by pressing Star then I'll move on to our next question from Pat All Robbins of JMP Securities. Your line is open. Please go ahead.

Oh, great. Thank you.

So Scott not not that way.

Ideally you would start your first quarter right and I'm, just wondering when women women.

In the quarter did you start to realize the sales team wouldn't meet your expectations.

Well as you guys know I joined roughly middle of the quarter. So it took me a while to find the bathroom and in my desk that was probably the tail end of the quarter.

Last month, when I started to get a feel that are.

That we were not going to close at the rate that I expected.

Alright and.

I mean, you've talked about it but what would you attribute it to.

But what I attribute to some funds at some point.

Not come together not come together the way I thought it was going to why.

Why was it not coming together the way you hoped it would.

Yes.

We had some sales execution issues guys I'll just be straightforward, while I'm very happy with my sales leadership team and the quality of the quality of later, that's a process rigor issues things that that I would have addressed.

Earlier in the quarter.

They didn't do so now they're doing it my way.

Yeah good.

Okay. Good and then I caught your your you used the word quality. When you were talking about the pipeline for 2023. So can you can you explain a little more about what you'd like to see in that pipeline that maybe you don't see as much of them now.

Yes. Good question Great. Examples speaks back to our overall focus areas for the for 2023 and for the business as I put in my prepared remarks with some we closed at a much higher rate when we have a partner deal quality of pipeline that comes in especially from one of our advisory partners or a winter of ISP partners is just a better qualify.

Ideal and we close them at a higher rate. So one of the things that I'm pushing my team and are making investments on the channel side to improve pipeline quality has to improve improve deals in conjunction with those most important partnerships partners. The saps of the world. The Ibms of the World and certainly the Deloitte KPMG as et cetera that we have these.

Great relationships with so Thats first and foremost and again those guys aren't chasing the SMB there in the market that were in their enterprise and large enterprise and they're tackling those really difficult.

Business problems like digital transformation and organizational change management that we best service. So it's a combination of those two things that will help me with with quality and then for me if I've got an existing client in a relationship in place including contracts is just so much easier to do an expansion. So when I look at pipeline quality I would like to see.

An improvement in the number of expansion opportunities for our existing clients that are not depth today that we can take today.

And when I'm looking at land at all from a land perspective, I'm looking for clients that fit that large enterprises are enterprise and large enterprise clients that could then turn into that for me if not in 'twenty three than 'twenty four 'twenty five so that's what I at a qualitative level and we're looking for in terms of pipeline quality, if I can improve in those three areas.

Yes.

Katy bar the door, it's good stuff.

Alright, that's super helpful and then Dan one for you.

How are you and the board thinking about the 300 million plus in cash that you have sitting on your balance sheet.

Use it to buy back stock do you make an acquisition.

Not do anything with it.

Sure you're discussing it with what are what are the thoughts.

Sure. So obviously as you know we have a new leadership and we're really focusing on our strategic.

Strategic points, which is the large enterprise fed partners and so on so we're not in a rush to do anything we're actually want to make sure that we're fixing all that those execution continued to go up market and obviously see what happens in the economy now with over $300 million in cash that puts us in a really.

Positive position and we're going to just wait to see how the economy will evolve as we are entering 2023, so no concrete plan.

Okay. Good thank.

Thank you.

Thank you we'll move onto our next question from Michael <unk> of Wells Fargo. Your line is open. Please go ahead.

Hi, This is Michael Berg on for Michael Thanks for taking my question.

In terms of the revised guidance, there's a downtick of about $3 million to $4 million.

Any sort of quantification around the impacts from the shift to shift away from SNB.

On the macro.

How can we think about which one it was a greater impact to the revised downward guidance. Thank you.

Yeah, So I would take it. So obviously, we had a bigger churn because as we announced in the Q2 earnings we do $3 million to $4 million in SMB churn. So obviously is affecting the IRR and which is.

Indicators to what will happen to the revenue so we'd say that's a portion of it and the second portion is what Scott said regarding again not hitting the expectations. We had on the IRR from sales execution. So I wouldn't say that we're seeing big macro event that is slowing us down and I would say, it's a combination of SMB.

Us being better in execution and.

I would say that was coming up.

Got it and a quick follow up would you say that short from SMB was.

Much as you anticipated when you announced it in Q2, you made it sound like you just now but it was a greater churn than you initially anticipated.

No. It's in line with what we expected and you need to understand where we are pushing the customer to cancel we wont we don't want to prolong those contracts. So basically upon renewal. This is how much we have.

To churn and obviously, if we have.

Customers that I know went under or something like that even though they have active contracts and we have the opportunity to write it off we are writing it off as well.

But if it's an active calling them or debt using the product and is active contract that youre still going to be an IRR.

Got it thank you.

Thank you we'll move onto our next question from.

Of Barclays. Your line is now open. Please go ahead.

Hey, guys. Thanks for taking my question right.

So right now we're seeing a lot of layoffs and hiring freezes in the tech industry and beyond.

Beyond and I know one use case for walk me has been employee Onboarding and training I was just curious is this being our first or second use case, when a customer onboard to our expands with walk me with your Jcpenney customers and you know in this environment.

What are you seeing them kind of adopt and expand with now and can you talk about maybe some of the other use cases that may be more demand and interest.

Given this environment. Thank you.

Sure I'll start and Scott can continue but.

I talked about it in the call when actually now when we are seeing the headwinds from economy companies, one wants to spend better their it budgets and software they want to make sure that the investment that they already made yielding better ROI and are executing better against their strategy and this is where we are.

Actually in a really really good place one with our data products and where our ability to help them with adoption I would say.

And this is why we're focusing on DAP customers.

Rarely does we're selling walkman just for single use case and usually there is a lot of use cases. The companies are buying walk me, yes, onboarding. These one of them but.

<unk> is one of them too so let's say that you now have a restructuring of your business you have tons of change management, especially when youre letting people go. So I would say that when you have something like digital adoption platform, helping your workforce to be better. This is actually put us in a really really good spot and actually our customers.

Turning to us for more use cases and more solutions like that that you can add to that reskilling and upskilling right. It's not just off boarding.

May move out X number of employees, but the ones that are left may not be in the same job or have the same skill requirements. So we have an opportunity to help out there and remember when we talk about that cohort. It's most important to us which is that it's for more applications with not just the hrp's all the other efficiencies that we bring to the table around it.

SAP and concur and sales force those are all still in place.

Got it that's helpful. Thank you.

Thank you we'll move onto our next question from Keith Bachman of BMO. Your line is open. Please go ahead.

Keith Your line is open if you would like to on mute. Please.

Yes, thank you sorry.

Sorry about that.

I had a couple of questions if I could the first one is you're guiding Q4 revenues to about 20%.

Year over year growth rate and I'm, just trying to think about.

The various puts and takes of that and really the question is that the right sort of starting point as you look at C. Y 23, and the reason I ask is you have incremental macro headlines that are causing elongation of sales cycles happening to just about every software company at the same time it sounds like you have more.

Rigor around pipeline and partner leverage.

So I'm just trying to think about how that.

Those balance out if we look over the horizon beyond Q4.

So again, our approach is adding the local.

Especially when you get a little closer to the mic.

Yes.

So, yes, we are being more conservative, especially as all of the macro environment right now and the fact that we are looking into <unk> and.

2020, we can yes, we are more focused on efficiencies on one hand, and we are also looking into our potential growth within 2023, we are still too early for us yet to tell where we are but again I think for the rest of the 2022, what we gave you what we feel more comfortable with.

Right now <unk>.

I believe.

Probably too early to tell about the 2023.

Okay, Okay, well, let me ask a philosophical question.

As we look at 'twenty three.

You basically been your Opex has been about $63 million for the last three quarters.

Dan.

I'm trying to understand how you improve operating margins next year at the gate at the same time trying to do.

Stimulate growth.

So your Opex for the first three quarters has been growing faster than revenues and yet you have <unk> revenues understandable given the macro environment.

How do you balance.

The objective to two.

Sustained revenue growth at the same time improve margins in the face of these macro headwinds.

Keith I'm happy to offer my opinion, because good or bad I carry the biggest the biggest portion of that Opex and on the go to market side of the house. So for me one of the reasons that I was brought in was to not only help with some of the sales rigor and process thing, which I'm on top of now, but it's also having <unk>.

<unk> so.

The way we see.

Margin expansion next year, most portion of it must come from improved top line performance of course for another portion of it is going to come from efficiencies on the sales and marketing side of the house. So I'll give you a great example.

How we spend money on a broad market.

On a broad based marketing.

Program is very different than what Youre doing account base and so I think we can get some efficiencies there and theres other things that we're working on that we can talk about as we come into 'twenty three but you should think about it in terms of improvement around sales and marketing expense as an opportunity for margin for margin expansion and then.

Solid solid topline performance.

To add to that because then so as we enter 2022, if you remember we had a lot of investments.

In growth engines, which was our international market our partners and our federal so those are starting to bear fruit and they will bear more fruit in 2023. So that's one growth engine. In addition, we are laser focused on the enterprise and large enterprise and DAP customers, which allow us to reduce costs from the business because we need to.

Serve less customers, but much more profitable customers that actually expand with us.

And not just departmental wise, but company wide, which obviously, it's easier for us to serve the market and our category is continues to evolve we're seeing tremendous.

Improvement in what we're calling the customers who saw the 63% year over year, and we want to see more of those coming from our existing customers. So.

<unk> Cdos.

Finally understand that they need that digital adoption platform in order to manage and be successful with their digital transformation initiatives. So with everything that Scott plus all the investment that we've already made we feel strongly that one we can get to positive free cash flow within 2023, while.

Keeping that growth momentum.

Okay, Okay, Dan if I could just sneak one more in.

One of the questions, we typically get us.

In a recession budgets have to prioritize.

The DAP platforms may fall at the lower end of the prioritization, how do you how do you responsible.

So thats a great question, so conversation that I have with CIO when they have their portfolio of applications and digital assets and they are being asked to cut I would say that in order for them to cut they need data they need to know who is using what which applications are redundant.

For us it says are something that they can replace with other software and we're offering the exact solution for that so if you're renewing software or emerging applications and so on we're giving you like and.

Full breakup of their ability in order for you to make those decisions. So we think that we have a really strong offering, especially in that in that macro environment. So yeah, H, one b and again welcome you as a big platform not just the guidance piece or the automation fees, but we're actually seeing a good momentum with the data that show you the adopt.

<unk> per application and.

For department and so forth.

Okay.

Good morning.

See the floor.

Yeah.

Thank you we'll move onto our next question from Mike.

Mike Jeff Keybanc. Your line is open. Please go ahead.

Yeah.

Okay.

We will now take our next question from Josh <unk> of Morgan Stanley . Your line is open. Please go ahead.

Hi, This is Sophie Li.

On behalf of Josh Baer today.

I just had a question on the customer adds it looks like you had solid customer adds across cohorts and all.

Just wondering how much of the customer as our customers graduating to higher paying segments.

First is truly new customers.

And what kind of assumptions on new versus existing customer growth is implied in your Q4 guidance.

Also as we.

Think about your shift to like enterprise.

Okay sales.

Sales motion, how should we think about that looks like university of existing dynamics.

Yeah.

Okay. So when we're talking about the customer adds and higher paying segment. We are seeing that the majority of the expansion. So companies that started with walk me with one one use case to use case, there's maybe one or two apps actually extending to four and more application and becoming the DAP customers.

<unk> signing a fully aligned so I would say that the majority of our new IRR coming from from those expansion.

And the second question was regarding.

The guidance for Q4, new customer versus existing customer in Q4 guidance and it speaks.

It's basically the same.

Yes. This Q3 for Q4, yes, it will still be mainly on expansion.

Got it that's helpful and.

Are you seeing are you seeing any changes in competitive environment recently.

Now we're seeing the same competitive environment as we saw last quarter, but we arent seeing the category isn't a tipping point with Forrester, new wave and Gartner market guidance.

So we finally have it.

I would say, Inc. That adopted the real category and there is players in the category with you didn't see new players coming in.

So that stays the same from last quarter as well.

Got it thank you.

Yes.

Thank you.

Any other questions I will now hand, you back to your host John <unk> to conclude today's conference.

Hey, this is Don I want to thank everyone for joining our call and looking forward to see you in our next earnings.

Thank you everyone.

Thank you. This concludes today's call. Thank you for joining you may now disconnect.

[music].

Okay.

Hum.

Okay.

Okay.

Okay.

Yes.

Okay.

Okay.

Okay.

Okay.

[music].

Okay.