Q4 2022 Walkme Ltd Earnings Call
Okay.
[music].
Thank you for joining our fourth quarter and full year 2022 earnings call.
I'm, John <unk> head of Investor Relations at Walkman today, I'm joined by Dan <unk>, CEO and cofounder, Scott Little our Chief revenue Officer, and I get you're not 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 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 that section titled risk factors in our annual report on form 20-F filed with the Securities and Exchange Commission on March 24th 2022 and.
And other documents filed with or furnished to the SEC C.
See our press release dated February 15th 2023, and all information.
In addition, certain metrics, we will discuss today are non-GAAP metrics. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP we.
We use these non-GAAP financial measures for financial and operational decision, making and as a means to evaluate period to period comparison, what do you believe that these measures provide useful information about our operating results enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key.
Tricks used by management in its financial and operational decision, making.
Further throughout this call we provided 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 a reconciliation tables see our press release dated February 15th 2023, and with that I'd like to hand, it off to Dan.
Thank you John and good morning, everyone I am pleased to share our fourth quarter and 2022 results with you today and touch on our plans to head for 2020 three.
As we align to be a sustainable growth company targeting cash flow positive within 2023, we fine tuned our strategy to focus on enterprise and large enterprise customers.
I'm happy to share that we grew our enterprise footprint and now counts 39 customers paying over $1 million and they are showing a 26% year over year growth and finished the year with 173 customers with DLA or departmental wide deployments on for more application, which we call adapt.
Customers, we are focused on our DAP customers as we're seeing the most room for expansion growth account. They are our most important the value realized from the utilization of our platform.
Our our from that customer is up 63% year over year and in Q4, we've seen 18, new DAP deals showing steady growth above 60% for the last three quarters in a row accounting now for 50% of our total IRR.
While focusing on our key segment and DAP offering we've also prioritized our investments in the highest growth area wide rationalizing our spend to drive towards positive free cash flow.
I'm pleased with the continued sequential progress we made throughout the year, reducing our opex run rate and improving our operating margin.
Through prudent expense management, we've reduced our non-GAAP operating loss from 35% in Q4, 2021% to 16% this quarter with that progress and positive that we will hit our cash flow positive milestone by Q4 2023.
We've seen tremendous progress from a partner ecosystem driving the highest growth within walk me in 2022, we now count Deloitte Accenture and SAP Hcl and others as our partners. These partners have deep relationship with the largest organizations and are tackling the largest change management challenges in the world will continue to invest in.
Tools training and people to enable our partners to scale their businesses and drive even greater contribution in 2023.
We're also excited about the opportunity in the U S federal market in the fourth quarter, we signed two large deals in the federal space. So our existing partnership prior to federal approval.
This is amazing progress as we work towards secure federal I'm ready status.
This is a testament to the pent up demand in the U S. Federal government, we expect more meaningful contribution to come through the second half of 2023.
We are the pioneers of DAP digital adoption platform accredited market category and I'm glad to share that 2022 where the tipping point here for the category with unprecedented number of analyst mentioned major market Guide reports from Gartner Forrester IDC and Everest group and also the first ever Forrester and <unk>.
New way for DAP, we're walking was named as a leader in the market one of the investment we made in 2022 was to strengthen our executive leadership team with the additions of Scopoletin, Our Chief revenue Officer, Chelsea Brzezinski, our chief people officer, and the drilled Sanchez, our CMO and so proud of the way. This group has come together and define the clear path.
Forward to deliver the best experience for our customers.
It is with great pride that I announced the promotion of getting on to the role of Chief Financial Officer I get there has been a valuable member for LTE in the past three years, having served as EVP finance and operation and interim CFO for the past six months.
It has been a leader in building, our finance organization and was an integral part in our IPO process.
Prior to joining walk me I get to spend close to two decades, honing our skills and expertise at nice where she held a variety of financial leadership roles and she's a certified CPA.
Her past and present experience is well positioned walk me on the path to profitability myself and the company leadership have been incredibly impressed by our ability to step into the role with a clear purpose and commitment and we have the utmost confidence in her leading walk with finance and operations going forward.
Again, I want to congratulate you and thank you for all of your achievements I am looking forward to working with us side by side as we continue to shape the future of our company in our category.
It's been a busy and productive year in 2022, and I'm very proud of the progress we've made as a team and company through a challenging macro backdrop.
Not immune to the economic headwinds facing corporation across the globe and we prioritize our strategic investments while anticipating slower growth in 2023 in January we made the difficult decision to ensure our people resources are appropriately aligned with our strategic focus which led to a reduction of around 3% of our global workforce.
We will continue to hiring 23 to support the growth of our initiatives aligned with our upmarket enterprise selling motion.
With that I look forward to working with our customers to navigate the markets and the economic downturn that may linger throughout 2023.
Welcome to the enterprise digital adoption platform emphasized the need to drive ROI from the second largest investment software.
Corporation across the Globe are wrestling with initial promise of digital transformation to increase revenue and margins reduced risk and provide greater clarity into the underlying workflows, which allowed our businesses to succeed.
The accelerated path to technology has led to tax problems with the average company of over 2000 employees running 185 applications.
Buying has been decentralized and owned by the departments diffusing the visibility from decision makers and creating a disjointed user experience for the employee into.
In today's world simply put employees expect frictionless digital experience organizations. They found themselves in the paradox with more technology than ever and more powerful system than ever adoption is an all time low resulting in 70% of digital transformation efforts still failing.
Today's work areas using whenever it's 27 applications are weak and the average company running over 1900 workflows. This leads to a duplication of costs wasted employee time context switching to understand the process or application and decreasing time spend on innovation and driving the ultimate <unk>.
The south.
Bottom line in today's economy, our organization, our focus on efficiency and time to value. Welcome. He has been working closely with global leaders achieved these results by focusing on streamline the digital employee experience and automation for key workflows.
I'd like to share a few recent developments to our enterprise DAP offering.
Being able to understand software utilization and the impact it carries on the key company business outcomes is mission critical.
To achieve that we've launched our discovery tool and cost optimization model as part of the digital transformation intelligence DPI currently in bed that MGA by end of Q1.
Using the discovery tool enterprises can unlock data about software consumption and utilization across the org by department and users.
At the end of Q1, we will be introducing a new module for license racking and optimization.
With this new dashboard, leveraging our proprietary deep UI AI technology that uses machine learning to understand and user interface and end user journey across all enterprise applications enterprises will be able to get a clear view of how many licenses are used and the type of usage for example license says it again.
Be converted to read only.
<unk> says, which can be eliminated your leg of usage.
Certainly organization can use this data to pinpoint where to use walk me to drive user adoption, our ability to understand exactly how user use the application allow us to generate quality datasets that provide clear actionable insights to our customers.
Using DTI discovery walk me in Q4 resulted in immediate savings were 15% of our software spend spending over various under utilized US application. We expect the product to be generally available to walk me customer at the end of Q1 and heavily adopted by our customer base.
In the past four years, we've been developing the workflow blueprint of enterprise organization, and which system task drive them I'm excited to announce that we're launching that kids are second.
<unk> to our solution accelerators that pecs prebuilt content for almost every enterprise workflow and test leveraging all best practices and ears of accumulated knowledge from all the major enterprise SAS application.
These new DAP kids customer would it be able to go lives much faster and our teams will be able to shorten the sales cycle and improve our professional services margin.
Our customers will be able to pick and choose the solution for their problems and almost instantly deploy it and get real live data on their business processes and improved our user workflow.
Since its founding Woken me has been committed to being a technologically leader in their areas that empower employees and customers to interact with software.
Our <unk> AI technology has eight unique patents it automatically understand and user interface and end user journey and all its elements, allowing us to deliver the best experience for both building content and automation focus on end user journey.
This technology has always been the foundation of our innovations and ensure that we are on the forefront of the DAP category and the future of work.
For the past 12 years, we've been developing modules and data centers that understand human interactions with technology Walk me has unique intelligence on billions of interactions with enterprise software using our deep user interface intelligence technologies, we have accumulated a vast understanding of every UI elements.
And now it's being used by employees in leading organizations every single day and every single moment I'm excited to share that this data is the foundation of new I base developments currently in the works that will unlock huge value for enterprises, we are leveraging our technology datasets and knowhow connected with it.
Europe's natural language modules available through open AI to bring a completely new digital employee experience aside from our native AI offering I'm also thrilled to announce that walk me in Jasper AI integrated to bring generate these AI content capabilities in the flow of work to millions of global employees.
Together, we aim to enhance the employee experience through our Omnichannel workstation product on mobile web and desktop.
Employees will have access to Jesper I content functionality contextually in the flow for them when they need it where they need it we are integrating AI content creation into inputs built to streamline user workflow. This will help organizations stay ahead is the future of work is rapidly unfolding and <unk>.
Truly excited about the road ahead, and we will take personal role in this unique area of technological advancement for walk me four adopt and for the future of four I want to thank all of our customers partner and most importantly, our employees for a great 2022, and I'm looking forward to all of the investment and achievements will make together.
2023 with that I'll pass it over to Scott <unk>, our chief revenue officer to share more about our go to market plans Scott.
Thank you Dan.
Our go to market engine executed well in the fourth quarter driving upsell. So some of our largest customers.
Signing some of the biggest deals in company history across the globe and focusing on selling to our most important market segments. The enterprise.
We're optimizing our go to market motion focusing on the best and most impactful use cases to deliver value to our newly landed customers right out of the gate.
We're also improving our packaging and pricing to give our customers a clear and structured path to grow on our platform.
Our data product offerings will play a strong role in 'twenty three as organizations look to identify redundancies and their software staff identify mission critical processes that are inefficient and deploy meaningful improvements to their workflows.
Yes.
Our ability to deliver an omni channel digital experience on web mobile and desktop with our workstation product line will also play a key role in 2023 as organizations will need to extract high engagement from their employees in order to drive results, we like to say workflows with Walker.
<unk>.
I strongly believe that every enterprise can benefit from our digital adoption platform as they say software paralysis and theyre growing organizations.
And unwieldy Tech stacks two.
2022 was a transformational year internally and walk me and I'm thrilled to help drive this transformation forward with clear purpose and plans in place to deliver the best in class workflow management platform to our customers.
Partnered closely with Adrian Sanchez, our CMO and Wayne Mccullough, our chief customer officer to shape, a customer first value oriented organization that is hyper focused on growing our customer base and value.
While we ended the year short of expectations I'm still very pleased we executed across regions further advanced our strong relationship with our ecosystem and continue to accelerate our strategic priorities all the while maintaining strong growth in DAP customer <unk> at over 60% year.
Over a year.
In Q4, we saw many longtime customers continue to expand and invest in their walk me deployments, including one of the largest railway networks.
As they shifted from mainframe base legacy systems to new modern and purpose built mobile applications and equipment. There are 30000, plus field employees with tablets. They selected walk me as their digital adoption platform of choice.
After deploying walk me on a handful of applications and seeing successful results. They're now rolling walked me out on over 20 applications, while developing a roadmap of over 100 days.
They've established a walk me center of excellence to ensure all of the new applications, our DAP enabled and our simple and intuitive for workers to use whether they're a conductor or in the rail yard.
Notably they are going to use mobile workstation as the gateway to all of the apps railway employees need to complete their work.
Employees will simply launch workstation from their tablet and based on their role automatically see their role specific apps.
It's customers like these that are seeing the ROI that we can deliver and utilizing us to drive workflow improvements and business impact that touch all areas of their organizations we.
We have customers across every industry from highly regulated financial institutions to retail and transportation customers that are transforming the way all of their employees interact with technology to create value in.
In the fourth quarter, we started new relationships with Ingersoll Rand American electric power and on process technology.
We expanded our relationships with C N H industrial standard chartered bank and income insurance limited among others.
Before I focus on what's in store in 'twenty, three I want to look back at some of the successes we had in 2022.
One of the big investments that we made in 'twenty, one and 'twenty two was in our partner ecosystem with <unk>.
<unk> out in the third quarter of 21 has grown over 100% in 'twenty two and is the fastest growing area within walk me.
We signed great partnerships with Accenture, Deloitte H C L.
Concur slowness among others and now are seeing those partnerships turn into tangible business.
Partners helped us deliver 37% of our new <unk> in 2022.
We doubled the overall air are sourced by partners in 2022, and we're asking our team to double it again in 2023.
The alliances and channels organization sourced over $12 million in new <unk> in 2022, and influenced an additional $14 million.
In Q4, our most established and largest geo for partners. The Americas grew sourced or are over 185% year over year.
We're continuing to invest in our partnership ecosystem to accelerate this important area and enable our partners to work with us easier.
Our partners also helped us generate demand in markets that we wouldn't be able to access otherwise a.
A great example of this is in the U S federal space.
Dan mentioned, we generated over 2 million in new <unk> in Q4 from the U S federal market with the Veterans administration and the U S Army, which we could not have secured without strong partner relationships.
We also excelled within state and international governments.
In the EMEA region. For example, we closed a large seven figure deal with our partner SAP concur and one of their largest public sector clients.
All three of these transactions would not have happened without strong sales support from our partners and the ability to use their contract vehicles for entry into the market.
The public sector market is right for an enterprise ready solution to drive ease and workflows across both citizen facing applications as well as those used by government employees.
In the U S federal market, we've been able to capture market share through our existing partnerships and when we secure fed ramp ready status, we will be primed to take advantage of budgets that have already been allocated to major digital transformation contracts in both civilian agencies and the department of defense.
This is important to establish ourselves as the only digital adoption provider in the U S federal space and generate the demand needed for a brand new category of technology for the government.
Our pipeline is already building and is nearly five X. What we saw in 2022, we are looking to the second half of 2023 for this opportunity to help us accelerate our position.
And establish ourselves as the digital adoption provider for the U S Federal government.
In 2023, our go to market motion is focused exclusively on the market segment that is ripe for digital adoption platform.
Over the last six months, we have reduced our head count focused on smaller customers and shifted some of those resources up market.
Our marketing activities are aligned to the enterprise buyer and we're shifting our sales process to adapt to the new market normal longer deal links and more levels of approval.
Our fourth quarter results were impacted by several headwinds, including continued elongation of deal cycles for both new business and renewals.
We have also been impacted by headwinds to seat counts, which limited some opportunities for expansion even with desire within the organization.
We anticipate that these headwinds will continue for 2023 and have built our plan with that expectation.
Given these headwinds our dollar based net retention fell in the fourth quarter and we expect this to continue into 2023.
Despite these headwinds I'm pleased with the progress that we're making to shift our strategy up market and believe we are well positioned to reap the benefits of our investments during the last two years and our partner ecosystem and public sector.
Before I pass it off as a gate to review the numbers I want to thank all of our amazing customers partners and most importantly, our employees for a great 2022, and I'm looking forward to building value with our entire ecosystem in 2023.
Now to <unk> to review our numbers.
Thank you Scott and good morning, everyone.
Before we jump into the fault them I want to thank <unk> and our board of directors for trusting me to execute as the CFO of Walker.
There are many opportunities and challenges ahead as we continue to navigate the macro headwinds walk me is well positioned to accelerate as the leader of the DAP market, helping organization really dig deep into the digital strategies in close to extract value with lantus.
We will continue to focus on building a sustainable growth business that balances investments with our growth opportunities focusing on executing our long term financial strategy to be free cash flow positive in Q4, while driving our path to profitability with alignment to the basic principle of the rule of 40.
Make it to the success of walk me and highly valued this opportunity.
Our fourth quarter results were highlighted by the continued progress against our strategic objective of continuing to grow our DAP customer base.
Our partner ecosystem and improve our operating margin and cash flow.
I'm pleased to see our non-GAAP operating loss declined to 16% loss compared to 35% in the fourth quarter last year. We have also continued to decrease our free cash flow to only $10 million.
<unk> in the fourth quarter compared to $16 million in the fourth quarter last year.
We are committed to balancing our growth investment we the path to reach cash flow positive in the fourth quarter.
<unk> customers, which we define as customers within Ely or Havent departmental deployment, a formal application grew to 173 customers.
Oh from DAP customers now represent 50% of all still today at all.
I also wanted to highlight our <unk> customer growth throughout 2022, we ended the year with 422 key customers.
I would say all of <unk> customers is nearly double the knowledge to pay customer.
Furthermore, we count <unk> customer is that customers within Atlantic County over $1 billion in the fourth quarter.
This is great progress against our strategy to focus on the market segment with the best product market fit that shows the potential growth opportunities of the settlement.
While we have made great August on our strategic initiatives, we are looking to move to the macro headwinds. So cycles continue to be extended and we have faced some pressure from declining CTO cellphone estimate.
This resulted in our dollar based at the attention falling below expectations for the quarter.
Our guidance is built on the assumption that these headwinds will continue to depress our growth in the near term and we have been conservative with our revenue growth expectation we.
We did in mind, we have also built our model to reflect this expectation is still believes that we can get a free cash flow positive in the fourth quarter, even with the lower ways. When you close than we previously anticipated. We ended the year with 262 million and a L. L. A 19% EBITDA Vivian.
Going forward, we are going to focus our disclosure on those metrics that we think best aligned with our strategy.
We are focused on driving enterprise adoption, increasing contact side and driving platform adoption.
That in mind, we will continue to disclose metrics related to our DAP customers $1 million and 100 paid customers on a quarterly basis.
We will update that we're totally on an <unk> appeal on an annual basis as they can be highly dependent on timing of deal signing and could be volatile with changes in our underlying model as we drive greater penetration in the enterprise segment.
Our total revenue for the quarter was $64 9 million up 22%.
High end of the guidance, our subscription revenue grew 21% year over year to $58 7 million.
He made a performance obligation or <unk> ended the quarter at 374 million.
<unk> growth of 18% year over year.
How is the appeal, which is contracted subscription revenue expected to be recognized over the next 12 months grew 21% year over year to $216 million.
Nokia mobile grew 15% EBITDA to 159 million.
Continue to strength, our position with our largest customer cohort of employees greater than 500, which now represents 94% of all totally out.
Before turning to gross margin expenses and profitability I would like to know that I will be discussing non-GAAP results going forward.
As Dan highlighted well those proud of our focus on efficiencies and expense management, which drove an improvement in our non-GAAP operating loss for the fourth consecutive quarter.
In the fourth quarter of 2022 gross margin was 82% up 2% from last quarters call.
Well, if it was $53 5 million up 30% year over year, we have seen improvement in our gross margin due to our continued optimization of our cloud hosting operation and better utilization without professional services organization. We believe we will continue to improve our gross margin over time.
Turning now to operating expenses, we are prioritizing our resources internally behind the highest growth area. This area that are no longer fit our strategic direction, such as SMB customers.
We made a difficult decision to reduce our work force by 3% at the beginning of 2020 speech to better align our resources with our go to market strategy, we will continue to hire as appropriate in line with our strategic priorities.
We are better aligning our sales and marketing organization to drive efficiencies that we expect will be yield margin improvement in 2020 speak and into 2024.
Sales and marketing expenses in the fourth quarter with $41 million compared to $37 4 million in the fourth quarter of last year. This represents 62% of total revenue in the fourth quarter, an improvement from 64% last quarter and 70% in the fourth quarter of last year.
R&D expense in the fourth quarter was $12 1 million compared to $12 9 million in Q4 last year. This represent 90% of our total revenue versus 24% in the fourth quarter last year.
We continue to make investment in our platform to drive innovation and increase our flexibility for deployment as you heard from them.
G&A expense was 11 8 million for the fourth quarter compared to $9 8 million in the fourth quarter last year G&A was 18% of revenues similar to the fourth quarter last year.
We have made progress during the first full quarter of improving efficiencies in our operating model, which drove our operating loss lower than initial plan for the year. We are very focused on driving towards positive free cash flow showing increasing leverage in our business model.
Operating loss in the fourth quarter was $10 5 million compared to a loss of $12 5 million last quarter and $18 9 million in Q4 last year.
Operating loss margin of 16% compared to 20% last quarter and 75% in Q4 last year.
Net loss per share in the fourth quarter of 2022 was.
Using $86 2 million weighted average shares outstanding compared to <unk> 14.
Hotel in 'twenty three.
Q4 of last year.
Turning to the balance sheet.
We ended the quarter with $304 9 million in cash cash equivalents short term deposits and marketable securities.
Given our sizable cash balance and improvement in our free cash flow, we are well capitalized to continue to support our growth goals.
Turning now to guidance.
We were pleased with our financial results, we have created our guidance to be in line with the economic headwinds, which we expect to linger throughout 2023.
We have built our operating plan to account for lower revenue growth in 2023, and we will continue to show operating income improvement throughout the year with margin improvement, we expect to be cash flow positive in the fourth quarter and for the full year of 2024.
Sales for the first quarter of 2023, we expect revenue in a range of $64 6 million to $65 6 million representing growth of 14% to 15% year over year.
non-GAAP operating loss in the range of 11 million to $10 million and an operating margin loss of 17% to 15%.
So the <unk> 'twenty to 'twenty three we expect revenue in the range of 269 million to $276 million representing growth of 10% to 13% year over year and non-GAAP operating loss in the range of 29 million to $26 million and an operating margin loss of 11% to 9%.
With that Dan scored a nine ridiculous question.
Thank you, ladies and gentlemen, if you would like to ask a question on todays call. Please press star one on your telephone keypad.
We'll now take our first question from.
Scott back at Needham. Your line is open. Please go ahead.
Hi, everyone. This is Michael <unk> on for Scott, Thanks for taking my questions today.
Just first off wondering if you've seen any uptick or change in churn over the past few quarters now maybe overall versus companies just under 500 employees and then has this been something.
You've kind of baked into your initial FY2023 guidance or just seen at all is an additional headwind. Thank you.
Hey, Michael This is Scott I'll take my questions. So I'll answer the second effort, yes, we've absolutely baked into our guidance for 'twenty three but we have seen an uptick in churn we saw it in Q4 of downside pressure on the number of seats I think as you see clients in general reducing their overall employee counts that's pushed.
That puts pressure on us as a provider that manages our software with user counts. So we have seen pressure and we do believe that pressure will continue into 'twenty.
Great. Thank you.
We've also found that these digital adoption technologies like walk me are often selected by customers when they purchase and implement a large software upgrade like an ERP CRM or our new HCM platform is the macro kind of changing how we're one customers like you purchased walkman or are you seeing kind of consistent.
No customer behavior.
Well, we haven't seen any drop off in overall demand, but since as you point out.
Digital adoption platforms are also often connected to the deployment of a new large system of record, we do see elongation of sales cycles related to clients pushing out their go live dates for some of these large systems. So we do see that that is a function of what we see in the overall macro headwind and we have planned for that in our 'twenty three.
Guidance.
Awesome. Thank you.
Thank you we'll take our next question is from Tyler what K at Citi. Your line is open. Please go ahead.
You talked about just some of the momentum you had with partners in the year and your expectations for that I think to double again.
Just wondering if you could.
Spanned on that a little bit.
Expecting to sign kind of new new.
<unk> with some of the size and.
What is kind of the the approach with them. It is again kind of going back to the.
Earlier question.
<unk> with the.
The implementation of ERP or just if you could expand on maybe what you're doing differently on the partnership side. Thank you.
Yeah. Great question again this is Scott I'll take that take that question for you. The plan is to continue the current momentum that we have in place. We've got most of the important <unk> and larger players as existing partners. When we announced additional member firms almost every quarter, but in general that's going to be our focus where we pick up additional.
Regional players to help us with.
Deployment and delivery and in some cases advisory work for sure, but our focus is going to be on that large player. The GE for the IBM SAP concur, because they're the ones that frankly have the most influence on whether a client considers digital adoption in conjunction with their new deployment or new <unk>.
Projects around organizational change management or digital transformation. So for us. It's a stay the course, we performed well in 2022, and we're going to keep doing what we did well in 2023.
Great.
For the question and congrats on the promotion.
Just curious as you think about.
Overall head count in the expense base that you have today.
How are you just thinking about the.
The opportunities for efficiencies and <unk>.
You talked about some of the restructuring over the past quarter.
But do you feel like.
Future restructuring is.
It needs to be done given what youre seeing in the macro environment or is this kind of.
The right level of head count.
That you need for the next year. Thank you.
Yes.
Thanks, Doug.
I can tell you this.
What we have done up until now and we've actually demonstrated it.
Expense management was nobody stopped.
We didn't do a restructuring that continually factor is certainly consistent with what you've done is actually we are shifting more resources.
Local areas to areas that we believed it.
We will focus that said that aflac, a DAP customer that K E filing.
Okay.
Each of mental focus in India, we do believe that from head count perspective, we have enough people.
On the ground, we are building the right data capacity team leading this does organization. So we are not expecting to see any additional main shuttle a head count changes in the new CTO.
And we feel very comfortable with what we have done up until now in January we have done is really a nice day.
Slim this a lay off a 3% 40 people made mainly redundant positions that we felt so at this point, we're not expecting to take any major all the.
Hey, Julien mentioned.
Thank you.
Thank you and we'll now take our next question from Josh Beck.
Stanley. Your line is open. Please go ahead.
Alright, congrats ticket.
I wanted to dig in on on churn and <unk>.
Your question I guess the answer is more focused on down sales contraction related to two.
Two seats and customers head count.
Reduction I guess just wanted to ask about any change in the quarter around logo churn.
82, then so semi we're seeing the churn on logo.
David the same even getting better.
The Big change, we're seeing is actually on the down sell and not logo churn to accompany and sees the value and welcoming and keep using walk me theyre, just adjusting to our new head count or focusing on the projects that are more important to them.
So actually on logo churn, we're seeing actually good result, and it mainly on the what we call the negative expenses.
Okay, and then so from a logo perspective like if I look at the customers with over 100, K, an IRR that moved up.
Three quarter over quarter so of churn.
It's getting better than it was more of the elongated sales cycles that were impacting the gross adds in the quarter.
Yes.
What you're actually seeing is that we have expansions with those 100, K logos and we know $1 million of logos with the addition of a new $1 million level, and we had less new logos over 100, K as we're seeing those long sales cycle.
Okay got it and then on the prepared remarks.
I think it was mentioned around some changes around packaging and pricing I believe with a focus on on larger customers could you expand on some of those changes there. Thank you.
Sure. So obviously, we're doing a lot of work to understand how we can better serve our customers. So what we're going to introduce.
New packaging model won four new logos, so what we call a starter package. We want details just wanted to try and walk me to be able to go and try it fast and easy and what we did until now you could why walk me and you get everything included now we're going to offer a starter package where people that have a very precise use case and they want.
To get up and running.
The second piece, we're moving to a platform to module structure again, so we can better suit our packaging to our customers as we call. It a crawl walk run as you as you remember in the previous calls most of our customers actually extending without starting with one to three apps and then going to work.
We called up license so it will get better align on packaging. So it will be easier for them to grow with us.
Thank you.
Thank you, we'll now take our next question from Michael <unk>.
Keybanc. Your line is open please go the height.
Hey, guys. Thanks for taking the questions.
Good work, especially obviously on where we're going from a profitability perspective.
Just wanted to ask a little bit about that.
This is something we've been targeting for a while especially on fed ramp what are some of the costs that are involved in that both fed ramp itself as well.
Adding capabilities around federal sales and partnerships and I'd say what inning do you think you are in terms of being really ready to attack that market.
Yes, just to clarify the question. The first question was about the cost associated with it.
Well in other words there.
Maybe we can push that afterwards, but.
Okay.
Where are we in terms of progress towards fed ramp itself towards this needed fed partnerships and towards the needed expertise around third dedicated sales.
Yes, so I would start with just the technicality and Scott will take you on that.
Because we did see a great momentum in Q4. So we already have walk me running on Gov cloud everything is ready and we are waiting for final approval to be February Freddie and then federal moderates.
We did all the heavy lifting exiting 2022 2023 is basically what we call go time and actually starting to so we already have deals coming in in Q4 and this of course will extend on that yes. So the expectation just to make a fine point on it has all the heavy lifting all the work is done.
As part of the fed ramp process, we have to provide documentation for the government to confirm so we're finalizing our documents chasing with them that is typically a couple of rounds of answering their questions. We're going through that now and we believe we're very close to finalizing that but we were very pleased with a little bit surprised but pleased pleased as well that we're able to bring in some.
So we've been circling with us on the pipeline of.
Interested in what we can bring but obviously we needed to have the support and.
Certifications in order to provide it and it worked out that we had really good support from IBM IBM as a DAP client of ours. In addition to be a great partner and they were able to along with US use their fed ramp certification in order to make the U S. Army in particular in the Veterans administration happy that we have the right certifications six.
Charity and support so that those clients to get started ahead of our normal fed ramp process.
Suffocation, because they had business business needs today right now that we needed to service for them. So that was business that we delivered in the quarter that we were very pleased about very smooth and we expect only more of that so it was.
It's not a surprise a nice upside for us.
Got it and then the negative.
Thank you.
We got some sense of where you are it sounds like from Scott in terms of the spending ramp up yet. So I just wanted to maybe re ask the question a little bit regarding cost cuts.
What is that have you done.
Cost optimization, what have you done in the last quarter that's changed obviously.
Prioritization of enterprise versus SMB has been going on for <unk>.
Long time, so as things have gotten worse more recently macro besides the 3% head count got it anything else you can tell us about cost optimizations that you've been through.
Maybe that you would start to go this year.
Those targets for profitability.
And in the dark on significant continued to be the main thing we did is based.
We mobilized our team to go up market.
So it wasn't focusing enough market, we need less restrictive than handling with the large volume of SMB accounts and we saw it across not just in sales and marketing support services customer success with name. It. So we were able to show really good saving in operating leverage and through the entire 2022.
We see it continuing in 2023.
Because we are focusing on the right thing don't forget said, if you'd better audit partner.
Enterprise in large enterprises. So that was the main focus. In addition, we had more savings if you saw our gross margins will.
We are becoming better we always.
We're working to improve and be more efficient.
And then if you want to add more yes, I would add was the gross margin positive.
<unk> demonstrated data saving that Aldo.
Cloud hosting and we also have been able to balance the several fee growth.
To balance out the the.
Gross margin of $1 <unk>.
So renovation being.
In both the surgical hiring in vaccine I think it's important.
We are really shifting resources to a growth area.
Another point that needs to be taken into account.
So stop so we are starting to see the outcome of this came up maybe I'll steal innovation.
Maybe another point with respect of the SMB and the fact that we are.
Actually moving out of the SMB in the SMB customers are more expensive to Zalviso, we are able to open.
On the efficiency standards with.
Thanks, Scott and Pat Thank you very much.
You got.
Thank you we'll now take our next question from Michael <unk> at Wells Fargo Securities. Your line is open. Please go ahead.
Alright. Thank you. This is Michael Berg on for Michael turn here.
I just wanted to get some clarity diving into the mix between large and small customers in particular the headwinds from.
Less than a 100 K customers that grew 7% year over year and the quarterly D. G.
Dollar based net retention dropped pretty significantly from 120 to 111, maybe just walk us through what can what we can expect for headwinds expected in 'twenty three across those two metrics from smaller customers and maybe when we can expect those too.
How does your focus on enterprise play.
Plays out.
Yes, I'll take it so yes, we are seeing two things.
Just mentioned one we're seeing negative expansion, which is the majority part of our overall.
And not necessarily logo churn on the smaller customers smbs, but not all of the SMB, which is a small customers below 50, K and so on we are seeing more pressure and budgetary pressure on those companies and so obviously, we're seeing higher churn there.
On the flip side on the big accounts and what we call the enterprise account or the DAP deal, we're certainly seeing a steady over 60% growth quarter over quarter, So where it matters like worth division is going where our platform is growing we're actually seeing a healthy increase and unfortunately due to the macro headwinds we are seeing pressure.
Obviously on <unk>, but not only so we're feeling it's more on the lower side and but we took everything into account when we provide guidance for 2023. So as <unk> said, we use conservative methods coming into 2023, assuming we continue to see the macro headwinds, but obviously and we hope that.
The market will rebound and we will see an upside as we continue.
It makes it.
Thank you and going back to the margin front.
Anything in particular changing to the seasonality.
Free cash flow generation.
B to <unk>.
Fourth quarter free cash flow positive versus the rest of the year.
Or is it just general improvement of the operating margin profile throughout the year. Thank you.
Yes so.
The answer for that is that we are actually continuing to show and demonstrate an improvement in the cash flow in the past couple of quarters in line with the improvement in our gross margin and in our Booth say operating margin. So the expectation is that 2023, we're going to leverage the operating margin fell a bit more in Q4.
<unk> will be cash positive, even though it's not an issue of seasonality.
Thank you.
Thank you we'll now take our next question from Keith Bachman of BMO. Your line is open. Please go ahead.
Hi, Thank you if I think about the last.
Number of quarters.
Walk me has typically been sort of in line with the demand related metrics and I'm just wondering on the construct of how you've approached guidance for 'twenty three.
Other words have you been more conservative.
And how you approach guidance and see why 23 versus the Paas.
Really two years.
Since you've gone public.
To kind of tilt towards having a little more opportunity given the economy to be in line or a little bit better, but I just wanted to try to hear about the construct of conservatism as you've approached guidance versus what's different over the past.
A number of quarters.
Yeah, Great question. So obviously 2023 is much more conservative than the previous year is obviously following the IPO and there is a lot of unknown. So we wanted to be conservative and baked it into our plan.
Yes, I think on the law and the fact that we already had a very tough.
<unk> is also with what we see what we actually experienced in Q4, we are planning that we do with a more conservative approach as we are taking also into account.
Current environment.
<unk> will not change in the near future. So we do take the guidance into account that we are also taking into account the continued lengthening of the sales cycle.
Also in line also with all of the Apple.
The strategy too.
And with that we also see that we are expecting to see changes that will drive.
Our investment in the in the DAP and in the field and in the team.
Okay.
In India now.
In the partner ecosystem, there is no doubt we will be.
These drivers will not result immediately so we expected to see them in the long term and also taking into account all of that we are doing.
Doing the right today, we're sticking to our approach in 2015.
The right guidance from our perspective with our revenue growth on the other end, we do anticipate to continue to demonstrate strong cost management and efficiency. So we expect also to see an improvement also in Italy.
The operating margin.
Going into <unk>.
Okay, and then on a broader basis again, if you take a step back welcome. He has been public for a short period of time I think most investors would.
Submit that there has been.
A reasonable amount of turnover.
Such a relatively young company do you feel like the teams in place now to navigate.
A challenging 23.
Yes, absolutely obviously.
We are a young company.
And we did a lot of changes going upmarket setting out our priorities and focus and as we did that and we hired a new executive team.
We are seeing in that strategy and upmarket.
We feel strongly about our team and we just came back from our go to market sales kickoff in Orlando Nashville excitement everybody is ready as I said, we're calling it would go down so we feel that we have everything ready to go and with the right strategy product all the innovations we baked in so we worked a lot in 2022.
You said the infrastructure for a great 2023 and 2024.
Okay, I'm going to sneak in one more just sorry.
The prepared remarks, you talked about and I didn't catch the name.
Our new offering that was really focused on AI and discovery in particular and how.
Users were.
Taking advantage of software implementations, giving more data more.
Is that.
Is that additive to the model and how do you charge for that.
Yeah. Thank you for asking because this is actually a game changer in Youtube views, especially many clients environment. So the new offering basically allowing companies to one discover other digital assets.
Without any heavy lifting market completely understands with applications are being used and more importantly, how they are being so.
So it's not just hey, we understand the usage and low games, we can actually understand the adoption the process that youre actually completing within those applications, though we can give you full visibility on obviously, how can you improve adoption, but in this environment. How you can save money on licenses how you can improve your operating.
And budgets and so on so today and I'm talking with a lot of CIO and theyre being tasked to save money and its software cost if its costs and to do it you can just get we need to eliminate the guesswork, so with our new module, what we call digital transformation intelligence. We ended the licensed <unk>.
Mutations in the discovery model, we can actually allow those companies to gain those savings very very fast and show.
And obviously, we're listening to our customers and this is something that we're seeing as demand now regarding to the pricing, yes, we arent selling easier than addition, obviously, if you adopt customer and you're expanding with us it is including in the package, but we are going to allow customers to one buy only depth module and the way we charge <unk> per user.
Mainly employees, how many employees were monitoring.
And we believe that that offering would be very compelling to every CIO every system architect and as we said in our earnings we use it ourselves.
In Q4, and we were able to save 15% on our software license without hurting our operations at all actually improving our operation because we can be laser focused on what's working.
Okay, great. Thank you.
Thank you we'll now take our next question from Ed at Barclays. Your line is open. Please go ahead.
Hi, Thanks for taking my question, you've mentioned down selling pressure and longer sales cycles. So I just wanted to.
You get a sense of what does guidance assume that your quarterly NR stays in that 110% to 115% range and dosage and dad.
Similar or slightly greater contribution from partners in the federal federal vertical or do you think that should we view much greater contribution from new stores do you guys kind of upside to your guidance. Thanks.
Yeah. This is Scott I'll take that one yes, we do assume that are in our guidance stays in that range.
The range coming out of Q4, and we are absolutely making in greater greater contribution from our partners and said now remember the fed year is skewed to the back end of our calendar year. So most of our models assume that we will see the bump in fed overall performance in the second half of 'twenty three but that's what we got to do right now we're <unk>.
<unk> pipeline and we're being prepared for when we get that fed ramp moderate status and then for US It's run heart.
So that's exactly what we baked into our model and we're excited about it I mean, we didn't really expect to see some of these deals that came in for us in Q4 until the first half of this year and they came in with our partners contribution in Q4. So it's it's a little scary and exciting in a good way.
Yeah.
No that's great. Thanks appreciate it.
Thank you well now take our next question from Kevin Kim at Goldman Sachs. Your line is open. Please go ahead.
Thanks for taking my question, Dan we're hearing cases of companies, reducing their overall software spend to control expenses I guess, how do you think this will impact walk me in kind of the value proposition, you're trying to showcase to prospective customers.
Yeah. So this is actually a great opportunity for us.
We are hearing from more and more customers that they actually see more value in walk needs. When they actually have pressure on those savings because what happens is when your pressure to say you have more pressure to provide more value from your current investment and this is exactly what we're doing we're increasing the ROI from your client investment in addition.
Because we saw that there was a lot of pressure on CIO to save money.
We are releasing the license optimization in the digital transformation intelligent in order for them to be able to focus eliminate the guesswork and basically show better bottom line for the company.
So we are actually seeing it as a massive opportunity obviously in the short term, yes sale cycles are being longer there is pressure on the budget, but that actually make digital adoption much more relevant and we're happy for that and once estimate of it is that we're not seeing a logo churn and we're just seeing the pressure on <unk>.
On the other hand, we are ready for it with new products and new offerings to actually help those companies navigate this macro challenging environment.
Thanks, and then just another question on the fee down sell commentary in the quarter are you seeing that across enterprise customers, including DAP customers or was that concentrated in a certain cohort.
Customers.
So basically.
Every.
Yes.
<unk> worked and laying off.
<unk> and her walking customers basically need less seats. So we're seeing it basically across companies increasing their hiring and hire more we want to see it. So we can pinpoint it to a certain segment, but obviously the pressure is unusual in the lower end and not another.
The offering.
Great. Thanks for taking my questions.
Thank you, we'll now take our last question Pat Paul Rubens at JMP Securities. Your line is open. Please go ahead.
Hey, Tim It's Joe I'm ready to take on for Pat. Thank you for the questions here.
And you did mentioned investing in the highest growth areas. So I'd love to get your thoughts on where you see the most opportunity for work in the near term and then second on the partner ecosystem can you just give us an update on the slowness partnership how is that trending relative to expectations. Thank you so much.
Repeat the first question.
Yes, you mentioned that you are investing in the highest growth areas. So just wanted to get your thoughts on where you see the most near term opportunity core walk me.
Sure. So obviously.
One is the federal.
Being massive opportunity in the federal and the contribution that <unk> can have.
Can you just mind blowing obviously partners, we invested a lot in partners and what we call our <unk> platform and DAP customers, where we're seeing over 60% growth year over year. So when we're looking at our recent developments.
We mentioned in the AI.
I can I can talk about it as well, but we're actually seeing massive ROI come from our platform to those customers and we're putting most of our resources on enterprise large enterprise and obviously working with our partner.
And obviously penetrate new markets as well.
I'll take the second question you had was around an update on US along this partnership.
Is that right.
Yes, sorry.
Sorry, that's correct. Thank you so much.
Happy to take that the slowest partnership as you know we kicked off last year and from our perspective, it's going really well there were a number of clients that purchased with us in Q4 because of that slowness relationship and we added at least one new for greater than $1 million of our client because of that relationship. So the technology that we've built with solar.
One is that stuff is GAA, it's ready to go.
Way in which we deliver the support with.
This alone is folks and in fact, so loan has participated at our sales kickoff a couple of weeks ago did a fantastic job. So we're really excited about what we can bring to bear just based on these first initial wins, we've had with them.
And we're looking at what the joint pipeline would be in the first half in and progressing into the second half as being a positive upside for us.
That's very helpful. Thank you guys.
Thank you I'll now hand, it back to Dan or Cathy conclude today's conference. Thank you.
Thank you everybody.
Obviously, thank our employees our partners and investors for a great 2022.
There is a lot coming in 2023 and <unk>.
Super confident in our category and our growth in our customer base.
And so we're looking forward to execute against our 2023 plan and really sincerely want to congratulate again for the new law and thank you all and thank you for listening.
Thank you ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect.
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