WalkMe - Q2 2023

Transcript

Operator (participant)

Thank you all for joining the WalkMe second quarter 2023 earnings call. Kindly be informed that you will have the opportunity to ask questions after the opening remarks. This can be done by pressing star one on your telephone keypad to register your question. I will now pass it to John Streppa, Head of Investor Relations for WalkMe. Thank you.

John Streppa (Head of Investor Relations)

Thank you for joining our second quarter 2023 earnings call. I'm John Streppa, Head of Investor Relations at WalkMe, and today I'm joined by Dan Adika, CEO and Co-founder; Scott Little, our Chief Revenue Officer; and Hagit Ynon, our Chief Financial Officer. Certain statements we make today may constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, that relate to our current expectation and views of future events. These forward-looking statements are subject to risks, uncertainties, and assumptions, some of which are beyond our control.

Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including those set forth in the section titled Risk Factors in our annual report on Form 20-F, filed with the Securities and Exchange Commission on March 14th, 2023, and other documents filed with or furnished to the SEC. See our press release dated August 10th, 2023, for additional information. In addition, certain metrics we will discuss today are non-GAAP metrics. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

We believe that these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. Further, throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. For more information on the non-GAAP financial measures and key performance indicators, including the reconciliation tables, see our press release dated August 10, 2023. With that, I'll hand it off to Dan.

Dan Adika (CEO and Co-Founder)

Thank you for joining us today as we review our 2023 second quarter results. We had an amazing quarter. I'm super excited to share all the progress with you today. When the trending macro headwinds began a few quarters back, we set a strategic company goal to be free cash flow positive and a profitable growth organization. The outstanding work of our finance and go-to-market teams to develop a sustainable growth model focused on operational excellence has paid off. I'm beyond thrilled to share WalkMe has officially ended Q2 of 2023 as a free cash flow positive company, two quarters ahead of our expectation. Our unit economics are excellent as we continue to advance our path to profitability with our non-GAAP operating margins of -3.5% and getting to nearly breakeven in our non-GAAP net income.

Despite lingering global headwinds, we're seeing positive trends all across the business. Revenue was $66 million, just above the high end of our guidance range. In our most strategic enterprise accounts, we saw positive expansion outcomes, growing our $1 million-plus accounts to a total of 38. It makes me extremely proud today to share these achievements. Our path to profitability is clear and closer than ever. With over $300 million cash in the bank, strong unit economics, improved internal execution, and advancement in AI and product innovation, WalkMe is well positioned to increase market share and make the right investment as we shift our focus towards profitable growth. Turning now to our strategic growth drivers and customer value. WalkMe is all about the digital adoption of technology. Now, as enterprises are flocking to adopt new AI-powered technologies, the demand for change management and employee productivities are on the rise.

In the public sector segment, we saw a great success in Q2. I'm super proud of the team as we've expanded our deal with the U.S. Army to over $8 million in TCV. We're seeing an increase in deal flow pipeline from other agencies. Our partner ecosystem strategy is working. We are laying down the foundations to distribute DAP globally, both directly and through our partners for years to come. We're seeing positive territory expansion and further investments in DAP. This quarter, we expanded our global agreement with Deloitte to now include New Zealand and India. Deloitte is a great example of global organization that started utilizing WalkMe in 2019 as a customer and then as a strategic alliance. Today, Deloitte has thriving WalkMe Center of Excellence and has deployed WalkMe to nearly 100 applications internally that touch all area of its U.S.-based businesses.

Realizing the value to their own employees, Deloitte formed a strategic alliance with WalkMe in 2021 to deliver digital adoption solutions to their clients. The partnerships continue to grow globally since then. Our Chief Customer Officer, Sunil Nagdev, and our Chief Revenue Officer, Scott Little, has been working hand in hand to increase value to our customer base. Our customer success organization is going through an important transformation with one thing in mind: the success of our clients. We're already seeing the impact. I want to share another great example of how DAP is impacting large enterprises. One of the largest retailers in the U.S., with both a physical and digital footprint, deployed WalkMe to ensure their call center agents consistently and accurately applying pricing, discounting, and return credits to customers.

Their objectives were to increase policy compliance by prompting agents within the flow of work to follow procedures, provide consistent service, and increase speed to resolution. The customer expected that to save $1 million in cost from their initial project. I'm glad to share they've surpassed their goals only in eight months into their deployment by 2.5x, with an estimated $2.5 million in savings only in one use case alone. Being able to show value in the DAP journey is essential for a path to expansion as we continue to execute with the top enterprises. Turning to AI and product innovation. The hype and increased awareness of recent AI investments have created an emerging tailwind from our enterprise customer base. They are accelerating their focus on employee productivity and organizational efficiency.

Enterprises are seeking to understand software usage patterns, take immediate action, and deploy smart experiences to their employees in the flow of work. As they rush to implement new AI solutions, like in the past with digital transformation phase I, they must rely on adoption of their employees and staff to reap the benefits and ROI from their investments. Compliance and observability of AI are top of mind. Our upcoming Shadow AI feature set, embedded in WalkMe Discovery, will provide organizations with visibility into which AI tools are consumed internally, and empower them to take immediate action right on top of these applications in the flow of work. Human error is the number one cause of data and security incidents. The WalkMe for Security and AI Apps offer organization tools to take immediate measures and build guardrails, notifications, and alerts embedded right inside their enterprise employee journeys.

They can now ensure no sensitive data is being misused, company policies and compliance are met, and avoid potential phishing attack as they scale the use of the technologies. You need a strong data strategy before having an AI strategy. Data hygiene is the key for success. Without clean data, while training the internal AI models for AI applications, the results will be bad predictions, bad suggestions, bad calculations, and bad outcomes. We offer a wide array of data validation and hygiene in-app capabilities to ensure that every single employee engaging with their daily software workflow is on track and entering the right information. Expect more AI innovation in data validation and hygiene from us very soon. WalkMe is distributed and visible via web, desktop, and mobile to all of our customers' employees. We are scaling these assets to offer AI knowledge access.

We are releasing our next version of Enterprise Search, powered by large language models. We launched Enterprise Search on Workstation last year and already have millions of employees engaging with it to find organizational knowledge and get the job done faster. By embedding LLMs, employees will be able to extract any information in the flow of work. We are also adding AI-powered features to our own product to enhance the WalkMe build experience, including the launch of our new action editor coming in Q3, currently named WalkMe X, that will make the build experience more innovative, faster, and simpler. More on this in our next earnings call and product releases. We've been heavily developing our proprietary CoreAI Deep UI technology for the past five years to understand every employee interactions with every enterprise applications.

Just last year, in 2022, we captured over 6.5 billion employee interactions from leading enterprise applications. Our AI Deep UI technology is second to none. The power that WalkMe has from being distributed to tens of millions of employees and understanding how they interact with enterprise software, give us a unique offering in the AI landscape as we continue to leverage this technology for all our largest product innovations, including our enterprise data products. I'm extremely excited to share that our new data AI offerings of WalkMe Discovery and User Interface Intelligence, UII, have seen growth of over 100% quarter-over-quarter in Q2. This is one of our fastest-growing product lines.

We launched the AI-powered WalkMe Discovery product to GA last quarter after a closed beta, to help drive efficiency by unlocking usage data and visibility of all enterprise applications, highlighting areas for potential improvement. I'm a big believer in integrating AI to drive operational excellence and employee productivity. We've been using WalkMe Discovery internally to track progress of our KPI of becoming an AI-integrated organization, I'm glad to share that 35% of our employees are already using AI tools on a weekly basis to do their job. I look forward to seeing deeper AI adoption in the coming quarters. UII, User Interface Intelligence, part of the AI data product line, leverages our Deep UI technology to automatically identify all the critical enterprise processes within an application, specifically data entry and highlight frictions, errors, and wrong data entries.

One of our valued G2K customers has a robust Center of Excellence that's committed to improve employee experience and reducing technology friction. They are currently live WalkMe on over 80 applications that span all areas of the business. This G2K customer is extremely data-driven and has enabled UI Intelligence for SuccessFactors, an application used by 270,000 employees globally. They are keen to understand employee trends and friction points to provide actionable advice to internal business owners about what they can improve, how they can maximize the value of their solution, and remove barriers of completing common tasks. Last but not least, we continue to train our AI DAP technology to develop the next generation of our AI offerings, what we call text-to-action automation.

The potential to magically automate any action on top of all enterprise applications will have a profound effect, leveraging generative AI in the future of work. We are evolving our current conversational automation offering, such as our ActionBot, Smart Walk-Thrus, and Attended Automation, into one new unique offering. I'm absolutely confident the text-to-action will drive organization towards hyper-automation faster. More on this as we gradually start rolling out use cases soon. It's been an exciting quarter, to say the least, and I look forward for the upcoming months as we continue to scale towards a profitable growth company. As our journey upmarket continues, our teams demonstrated their ability to execute on the company strategy. We delivered a great quarter, advancing our commitment to being cash flow positive by two quarters, which encourages me on our continued journey upmarket.

We're in the middle of this journey, and there are a lot more things to achieve. We're focusing on enterprise and large enterprises with an emphasis on our delivery partners and customer success. While our subscription revenue is on par with plans, we're going to see the service revenue going to stay flat as we transform the way we deliver success to our customers. Hagit will elaborate in her section. Finally, I'm thrilled to welcome our entire ecosystem to join us on October 25th for Realize, our annual event. We're excited to gather our customers, partners, and DAP professionals to share and explore the future of digital adoption and how our customers are harnessing the power of data, action, and experience to make their organizations more effective.

We'll be highlighting the future of DAP and how we think AI and our unique take of text-to-action will drive our industry to the next level of value realization. With that, I hand it over to Scott, our CRO, to share more details about our go-to-market efforts. Scott, over to you.

Scott Little (CRO)

Thank you, Dan. We had a strong quarter in all three of our focus areas for 2023. Public sector, the global partner ecosystem, and the expansion motion in key named account segment all performed well this quarter. I was especially pleased with sales execution in our largest opportunities. We brought in a number of deals that were both large in scale, more importantly, strategic in nature and aligned to business outcomes for our customers. Overall, we're making progress on our execution, despite lingering economic headwinds during the last few quarters and throughout required adjustments from our personnel changes in April following the RIF. Our partner ecosystem continues its remarkable momentum as it impacts more and more of our deals globally. Our systems integrator partners, as well as our ISV partners, continue to grow their impact on our business, both sequentially and year-on-year.

We're seeing a greater contribution from recently announced partners as that group is activated and attributing business for WalkMe. In addition to the major global partnerships, which often seem to garner the most headlines, our regional partners across the globe are also standing tall in several key regions. Charlton House, for example, helped drive a very large expansion win with a top 10 global pharma customer in the U.K., where their expertise and intimate knowledge of the client was a true differentiator for the customer and helped us secure the deal on schedule. On the ISV front, we achieved SAP-certified integration with the SAP SuccessFactors. This integration embeds WalkMe's functionality directly into their application, which will ease deployment for our joint customers and speed up our sales motion. The certification demonstrates that WalkMe's Digital Adoption Platform was able to pass SAP's stringent functional and performance benchmarks.

Enterprise-grade protection and governance are table stakes for large enterprise organizations. Their security and privacy posture requires them to carefully vet the tools and applications used across their tech stack. Our ISV partners recognize our world-class capability in this area, and we've seen growing momentum as they bring WalkMe into deals that demand this kind of rigor and confidence. Our public sector continues to ramp into the back half of the year, and as Dan mentioned, I'm thrilled we were able to expand our deal with the U.S. Army so quickly on the heels of our first win in 2022. We remain optimistic for additional contribution from this team in H2. Their plan continues to expand every month, and we expect to see them as an anchor for our growth in the medium term. In the key named enterprise segment, we had expansion deals with Desjardins, Cisco, and Caterpillar.

These expansions show the strength of our enterprise solution to drive value for some of the largest organizations across the globe, touching technology, manufacturing, and financial services. Based on our feedback from customers and insightful recommendations from our partners and industry analysts, over the last 12 months, we undertook a rigorous process to examine our buyer journey. I'm proud to share that we've launched a new and optimized packaging and pricing model to make it easier for customers to get started with us, providing multiple ways to land at a more flexible entry price. It is also designed to make it easier for our customers to ramp their uptake of our capabilities as go through their unique DAP journey. Customers are now able to purchase our core platform capabilities through WalkMe Core, which is designed for the enterprise and powered by our technological advancements, harnessing our AI technology, Deep UI.

It includes everything that a client needs to start their DAP journey, including our data and analytics, content creation, and the complete employee experience, all with enterprise-class admin and security controls. For customers requiring more advanced capabilities, we're offering advanced modules, which are easy-to-add options that allow customers to expand and customize their DAP journey. These include deeper analytics, more advanced security, and additional collaboration and customization tools. Lastly, we've introduced WalkMe Essentials, which is a lean version of our WalkMe platform that's meant to tackle the most popular and most critical workflows on specific target applications. WalkMe Essentials pricing includes the services required to tailor pre-built WalkMe content to match any individual customer's needs. Our experience has been that when we solve a critical problem for a customer really well, they are eager to expand with us.

WalkMe Essentials is designed to provide an easy initial land and short time to value. This new, new packaging and pricing methodology will make us more competitive on the initial land, help us accelerate our customers' time to value, and broaden our expansion ability through apps, users, and modules as customers go through their DAP journey. Finally, with the addition of Sunil Nagdev as our Chief Customer Officer, the customer success org is going through a process of transformation to drive deeper value for our customers and to align our support strategy to our customers' critical business outcomes. We are examining and optimizing our delivery methodologies to enhance the overall customer experience.

This includes a move to outcome-based PS delivery, which will drive our PS organization to deliver significant customer ROI in 2024, to support our updated land and expand motions with faster time to value for our clients, and to strengthen our relationship with our partner ecosystem, making them the experts in DAP. With that, I'll pass it to Hagit.

Hagit Ynon (CFO)

Thank you, Scott. I'm proud to share that we have achieved our goals of becoming free cash flow positive, crossing the mark two quarters ahead of plan. We generated $5.2 million in free cash flow in the second quarter, compared to a burn of $12.2 million in the same quarter last year. This is an important milestone for WalkMe. We have seen improved cash collection results exceeding our plan. We have adjusted our cost structure to improve efficiencies all across the business, and we have been prudent with our cash management. Seeing an improvement of our operating margin on both dollar and percentage basis for six consecutive quarters with a non-GAAP operating loss of $2.3 million, or 3.5%, compared to a loss of 27.8% last year.

Our financial backbone is stronger than ever, we are near breakeven on our non-GAAP net income and our non-GAAP EPS. The improvement we are seeing in our operating leverage is organization-wide, with an emphasis on our sales and marketing organizations. WalkMe is now well positioned to continue driving positive free cash flow. We are also committed to further improving our operating margin and accelerating revenue growth in 2024. We anticipate being profitable on a non-GAAP basis for the full year of 2024. Before turning to Q2 numbers, when referring to gross margin, expenses, and profitability, please note that I will be discussing non-GAAP results. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. We grew subscription revenue by 13% year-over-year, while also growing our subscription gross margin to 90.2%.

Our improvement in subscription gross margin over the last few quarters reflects our strong unit economics and our ability to grow subscription revenue while optimizing our cost structure. We saw a decline of 17% in service revenue year-over-year, with a positive gross margin of 0.5%, driven by better workforce utilization. We expect service revenue to remain at a similar dollar level throughout the second half of 2023, lower than 2022 and our plans for 2023. This is a direct result of the transformation of our customer organization, as mentioned by Scott, the decrease of service hours, and continued transition of services to our partner ecosystem. Our total gross margin was 84%, up from 78% in Q2 last year. Gross profit was $55.4 million, up 18% year-over-year.

We believe we can maintain the gross margin for the rest of the year. Our total operating expenses decreased by $5.7 million compared to the first quarter of 2023. We optimized our plan, which brought us closer to operating breakeven. Savings were mainly driven by labor expenses related to the RIF, ongoing headcount-related, and a more efficient cost structure. We continue to invest in our R&D and maintain our expense level from Q1, with a $12 million, representing 18% of revenue, enhance our strategic data and AI capabilities. Our sales and marketing expenses were $35 million or 52% of revenue, an improvement from 60% last quarter and 64% in Q2 last year. We believe that our current sales capacity is sufficient to support an accelerated growth in 2024.

The improvement from last quarter was driven by headcount reduction and other sales activity that occurred in the first quarter. G&A expenses were $12 million or 18% of revenue, similar to the last quarter and below the 19% in Q2 last year. Operating loss was $2.3 million or 3.5%, compared to 13.4% last quarter and 27.8% in Q2 last year. This is a leap in our path to profitability, and I'm very proud of the WalkMe teams for their devotion and commitment to our company goals and success. Net loss for the quarter attributed to WalkMe was $0.3 million, compared to $16.5 million in Q2 last year.

Net loss per share for the quarter was near $0.00, using 88.6 million weighted average shares outstanding, compared to a loss of $0.19 in Q2 last year. We generated a $5.2 million positive free cash flow for the first time and improved our free cash flow margin to a positive 8%, compared to a -20% in Q2 last year. On free cash flow, we expect to maintain a positive level, but it will fluctuate given seasonality in our cash management cycle. We ended the quarter with $304.6 million in cash, cash equivalent, short-term deposit, and marketable securities. Given our sizable cash balance and generating free cash flow, we are well capitalized to continue supporting our growth goals and explore strategic investment opportunities. Turning now to guidance. It's been a good quarter overall.

We saw positive trends in our business metrics and financial results, becoming free cash flow positive with a clear path to profitability. Our revenue growth was 10% year-over-year, driven by subscription revenue of 13%, while our service revenue declined by 17%. We foresee a similar level of service revenues in the next 2 quarter, which is below our plan, mainly due to the continued transformation and delivery methods of our customer organization and the continued transition of ours to our partner ecosystem. We are adjusting our guidance for the full year accordingly. We are improving our operating loss guidance. With that said, for the third quarter of 2023, we expect revenue in a range of $66 million-$68 million and a non-GAAP operating loss in a range of $3 million-$2 million.

For the full year of 2023, we are adjusting our revenue guidance and improving our expected operating loss range. We expect revenue in a range of $266 million-$270 million, and a non-GAAP operating loss in the range of $16 million-$14 million, reflecting the continued improvement in operating leverage in the second half of 2023. Looking at 2024, we expect that the net new business will accelerate from 2023 levels, and we anticipate to see the positive impacts of the transformation of our customer organization. We reiterate our plan to be profitable and free cash flow positive for the full year of 2024 on a non-GAAP basis. Thank you, and we will now take your questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question on today's call, please press star one on your telephone keypad. Thank you. We'll now take our first question from Scott Berg at Needham. Your line is open. Please go ahead.

Scott Berg (Managing Director and Senior Research Analyst)

Hi, everyone, thanks for taking my questions and congrats on the nice results here. I guess I got a couple things. Let's start with something for either, or Dan Adika or Scott Little. You seem very, I guess, much more confident in your sales execution, execution in the quarter, at least relative to your commentary last quarter. I know you're making a lot of changes in the go-to-market strategy. How far through those changes do you think you are? I know Hagit Ynon's comments said you expect execution and demand to be better even next year. How far are we kind of through that, and do these changes kind of linger into next year? Thank you.

Scott Little (CRO)

Hey, yeah, thanks for the, thanks for the question. I am more confident than I was last quarter. Last quarter was tougher. This quarter was better. From a timing perspective, on the sales side of the house, we're farther down the path than the guys on the customer success side of the house. I mean Sunil's been in the job about 90 days, the changes that he's making obviously will affect me because the happy customers are the ones that want to expand. For us, I'm farther down the path than he is. He's got some work to do. He feels like we'll be in a good position as we come into 2024, the second half is where he's gonna be working hard.

Scott Berg (Managing Director and Senior Research Analyst)

Got it. Helpful.

... Dan, you and I had a chance to connect this summer. We were talking about, you know, Shadow AI and some of the other opportunities within the AI kind of ecosystem there. I guess two questions on, on Shadow AI is, one, do you price and package that separately from the core, you know, WalkMe platform today? Is that functionality just kind of embedded in what customers already get today? As you think about some of these applications for AI more globally, can you continue to develop similar use cases like what Shadow does? Because I imagine every corporate environment is concerned about what their, you know, what their employees are doing with just generative AI solutions, and that could be obviously a very big value add.

Dan Adika (CEO and Co-Founder)

Sure. If you remember last quarter when we announced Discovery, we were very bullish because we understand obviously the value it can give to our customers just by, you know, unlocking visibility into their tech stack. Obviously, the world is very dynamic, and now we're seeing the opportunity with Shadow AI, and we think that it's even bigger than what we had with Discovery. Our teams were able to release those features, very, very quick, and we're gonna officially launch it within this quarter. This is something that we think is tremendous, because what we're seeing today is that employees are the weakest link in your security and compliance strategy. They are being offered to use so many cool tools that will make their productivity much, much better.

What happens is that CISOs, CIOs, obviously, and compliance officers completely losing that grip. By using WalkMe, we're doing the same play we did with digital transformation. We're giving them visibility, we're showing them who's using what and how they're using that, and we're allowing them to take action in order to prevent it. Yes, we're obviously gonna continue to invest. Our R&D teams are one of the strongest teams I ever had the chance to work with, and we're gonna continue and innovate, and we think it's a huge opportunity for us. We said in the PR that we saw a 100% increase quarter over quarter in end users in our product, and we just released Discovery in May. Super excited of the opportunities that that will bring to us.

Scott Berg (Managing Director and Senior Research Analyst)

Great. That's all I have. Thank you for taking my questions.

Scott Little (CRO)

Thanks, Scott.

Operator (participant)

Thank you. We'll now move on to our next question from Austin Cole at JMP Securities. Your line is open. Please go ahead.

Austin Cole (Equity Research Consultant)

Great. Thanks for taking the question. Dan, you mentioned the deal with the U.S. Army reaching over, you know, $8 million in TCV and increased deal flow from other agencies. Is there any sense you can give us for the momentum behind, behind that and how that pipeline has developed since May? Thanks.

Dan Adika (CEO and Co-Founder)

Sure, I will start, Scott will continue. That was additional to already the deals that we made earlier this year. The $1 million TCV, that's on top of what we did, that's not just the expansion. We are super excited about it. Yes, we're seeing federal growing pretty fast, we are the only vendor there, and the opportunities are great, but I will let Scott to expand on that.

Scott Little (CRO)

Yeah. As you know, we're coming into the end of the U.S. fiscal year. There's two pots of money that happen in the second half. There's flush money, as they say, money that, that is sitting in the budget that clients need to spend as they exit the fiscal year. For the ones that have spent their money, they get new money in October. Typically, the second half of the year is good for Fed. The general sense from my team, as I ask around to our partners, of course, everything in Fed goes through our partners, is that they expect a really good second half. We're very optimistic that it's going to help us and give us some tailwind in the second half of the year.

Austin Cole (Equity Research Consultant)

Great. Thanks so much.

Operator (participant)

Thank you. We'll now move on to our next question from Raimo Lenschow at Barclays. Your line is open. Please go ahead.

Raimo Lenschow (Managing Director)

Hi, just a couple for me. You know, your second half guide obviously does imply a little bit more pressure in the second half, I just kinda wanna break it down a little bit. I guess first, can you give us a sense of, you know, growing 6% in the second half, you know, is that-- What's the split between kind of new logo contribution versus expansion from existing customers? Then I also wanna kinda reconcile, you know, you saw your, some of your customer metrics, like 100,000 and $1 million customers, kinda tick, but, you know, at the same time, enterprise DAP adds were a little bit lower. Can you just kind of talk about that dynamic really quick? Thanks.

Dan Adika (CEO and Co-Founder)

Sure. First I will touch the point on the guidance. As Hagit mentioned in our script, one of the main reasons was on the PS revenue, professional services revenue, actually, subscription revenue is in line, and that's part of some of the transformational stuff that we're doing in the customer success organization, and the services organization, like offloading hours to partners and obviously changing some of the packaging and so on. We're actually pleased because obviously we're focusing on the subscription revenue. Regarding, obviously, the $1 million account, we're happy because, 1, we're seeing it growing, and we're not just adding more $1 million accounts. The $1 million accounts are growing, so obviously we're not sharing that, that metric because the metric is just how many are over $1 million.

Like U.S. Army, they were already over $1 million, and now we added another $1.5 million. That's something that we're seeing as well. Same with the $100K. Regarding the DAP growth, obviously that's different because. We started selling DAP, or at least recognizing the DAP product, just in 2019. Obviously, the first few years you will see massive acceleration, and now it's basically normalizing. It's still what's pushing the company up, and that's the growth driver for the company. In all metrics that we're seeing in Q2, they were better in Q1, and we're seeing that acceleration, so we're happy with that. Hagit, I don't know if you want to comment the second part.

Hagit Ynon (CFO)

Overall, what we have shared with respect of the PS is done. I think overall, we can say that although we have seen a decline this quarter of 17%, and we will see the same level on dollar-wise in Q3 and Q4, we did kept our gross margin breakeven this quarter, and I do believe that we will continue to execute in line with our plan.

Raimo Lenschow (Managing Director)

Okay, just a quick follow-up. Are you saying the reduced guidance is basically completely due to the lower PS that you're vending due to kind of the transition more to partners? Or is there, you know, a little bit of pressure, you know, or I guess a little bit of conservatism in the guide just due to macro? I'm just trying to understand that a little more.

Dan Adika (CEO and Co-Founder)

Yeah. As we said, obviously, we're still seeing headwinds, but I would say that mainly it's because of the services component. As I said, Q2 was much better in Q1 in every parameter. There is some conservatism, obviously, but the main thing was a gap that we saw in the services revenue, and some of it is just due to how we're recognizing it and how we're selling it. This is why we're pleased with the results.

Raimo Lenschow (Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. We'll now take our next question from Michael Turrin at Wells Fargo. Your line is open. Please go ahead.

Michael Turrin (Managing Director and Equity Research Analyst)

Hi there. Thanks for taking my question. I have some quick follow-up on the comment of fiscal 2024 net new business accelerating. Are you suggesting that as we exit the year and go into 2024, that subscription revenue growth simply can re-accelerate from here? As a part of that, how can we think about how you're thinking about the net retention rate progressing from here? Thank you.

Dan Adika (CEO and Co-Founder)

The comment that Hagit made about 2024 was related to ARR, which is obviously a indicator. Obviously, revenue will follow up that. We believe that 2024 will be a better year than 2023 in terms of gross new ARR and net new ARR due to many facts. One, as Scott mentioned, we're seeing great tailwinds from Fed and partners and obviously our direct motion that's increasing. As we said, we're putting a lot of effort in customer organization, so we do think that we'll see churn goes down. The combination of two will give us an acceleration in our ARR in 2024. Revenue will probably be a lagging indicator. Obviously, we're not commenting on that yet, but that will follow through after ARR will accelerate. That was the comment.

Michael Turrin (Managing Director and Equity Research Analyst)

Helpful. Thank you.

Operator (participant)

Thank you. We'll now take our next question from Tyler Radke at Citigroup. Your line is open. Please go ahead.

Tyler Radke (Director and Senior Equity Research Analyst)

Yes, thank you for taking the question. I wanted to just understand kind of where you are in terms of the renewal cycle, with, with some of your large contracts. Obviously, there's, there's been some pressure, both on a, a seat-based, perspective as, as, as well as pricing. Do you feel like most of those are already in the rear view, or, or are there, you know, some of your larger contracts you, you know, you're worried about in, in terms of downsells in Q3, Q4? You know, do you think those are, are largely in, behind you as you, as you head into 2024, which could, set up that, acceleration? Thank you.

Dan Adika (CEO and Co-Founder)

Yeah, great question. Yeah, we do feel that most of it is in the rear view. Having said that, the way we're looking at it is Q1 and Q4 of last year were, I would say, uncertain times for a lot of companies. Therefore, their budgets and the way they're planning the year was a little bit unclear. Once we're seeing things are settled and are basically much more predictable and companies know how much they spend, they find where to put WalkMe, and obviously, we're coming in and helping them with so many different ways. For us, the uncertainty that we saw in the past, I would say a few quarters in the economy, it's what created obviously, the pressure of how much of the WalkMe portion they would renew.

Q2 was way better than Q1, not just on obviously, new business, but on renewals as well, because companies already have their plan for the next two to three years. We're actually very, very confident that we know exactly how to continue on improving it. The second piece, we have a new Chief Customer Officer that comes obviously, and need a big change in terms of how many of our customers we're covering, what the cover method, and so on. Obviously, we're gonna see incremental improvement quarter over quarter, and we're gonna go back, and we're hoping to do it early, and to go back to the levels of net retention and growth retention that we used to have in 2021 and 2022.

Tyler Radke (Director and Senior Equity Research Analyst)

Great, follow-up question just on the professional services. You know, I understand your, your commentary around perhaps a further shift in, you know, what, what you're outsourcing to partners, driving that reduction in, in the full year number. I guess, if I look at professional services this quarter, it, it was down year-over-year, and I, and I think there was already some, some initiatives to, you know, to, to, to outsource more to partners. Can you talk specifically what, what's different this time? Maybe any way to kinda quantify for Q3, Q4, the, the breakout of subscription revenue relative to services and, you know, what, what maybe like the steady state services mix you're expecting for this business?

Dan Adika (CEO and Co-Founder)

Yeah. I will start, and Hagit will continue. As Hagit mentioned in her script, we're gonna keep the same level of professional services revenue throughout Q3 and Q4, so around the $4.7 million-$4.8 million that we had this quarter. That's one. The second piece is, the second piece is that it's not just that we're offloading hours, it's the way we're packaging it and the way we're selling it, for example, managed services and so on. And that's we're just recognizing a little bit differently. There's many, I would say, different variables regarding that, and-

Hagit Ynon (CFO)

I'll add to Dan, when Dan referred to a different packaging. We're seeing more services that we're selling in the recurring model versus time and materials, and there is a difference in revenue recognition on recurring model. Also, I think one of the outcomes of our new CCO that is leading the organization through a major transformation, that the focus of our organization is on outcome-driven model versus what we've seen in the past on just, you know, delivering hours. I do believe that we are probably paying the price for that in the PS revenue right now, but we will see the benefit coming in in 2024.

Tyler Radke (Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. We'll now take our next question from Matt Saltzman at Morgan Stanley. Your line is open. Please go ahead.

Matt Saltzman (Equity Research)

Great. Good morning. So I, I just wanted to go back to, to the DAP customer growth, just kind of looking at the slowdown there over the last several quarters. I recognize, you know, some of that can be macro impacted. Some of that is just, you know, as you, you know, as you get to, you know, further, further out in the maturity curve, you know, customer growth slows. I'm curious if there are any drivers of this kind of beyond macro, 'cause on one hand, it makes sense that in a budget-constrained environment, customers add fewer new tools or consolidate the existing tool set. I would think that DAP actually helps from that standpoint around license optimization and application analytics.

curious if there's kinda anything that you guys can, you know, give us incremental there that might be driving some of that slowdown in customer growth.

Scott Little (CRO)

Well, this is Scott. I'm, I'm happy to give you my perspective, and I'll let Dan follow up. We, we had a, a change in our approach to positioning DAP as well. That took place at the end of 2022, coming into 2023. There were, at least in 2021 and 2022, the desire, in some cases, to try to land at clients with a multi-app first deployment. While that's possible to do, it's more risky for us, and it's more risky for the client to land that way. One of the changes we made was to go back, a little bit back to the future and go back more straightforward, more targeted land environments, one to two applications instead of multiple applications at, at one time, in order to get the client up and running and receiving value faster.

Going back to a more traditional expand motion, which is land the first two clients, get them happy, and then first two projects, and then get them happy and move on to additional projects and additional, additional personas within the account. Part of it is a function of macro, part of it's also a function in the style in which we're trying to land with clients today. We are very rarely landing at a, as a DAP installation, a multi-app installation. Does that make sense?

Matt Saltzman (Equity Research)

Yeah, no, that makes a lot of sense. Thank you.

Operator (participant)

I will now take our next question from Michael Turits at KeyBanc. Your line is open. Please go ahead.

Michael Vidovic (Associate VP of Equity Research)

Hi, this is Michael Vidovic on from Michael Turits. Thanks for taking my question. Just wanna quickly follow up on the NRR comments. I guess, from here, where would you expect the metric to kind of trough, and then when should we really expect improvement as you expect revenue to reaccelerate next year?

Dan Adika (CEO and Co-Founder)

Talking about the net retention, the trailing four quarters? Once it's a trailing four quarters, so obviously we'll see some lag as we're getting improved. Obviously, we were having some quarters in the... only seeing that cohort. We are focusing on improving our growth, our growth retention, and once we will do that, what we will see, we'll see the net retention starting to go up. It will take a few quarters. That's the, the trend that we're pushing for.

Michael Vidovic (Associate VP of Equity Research)

Okay, great. Then just a quick follow-up on the WalkMe Essentials. Is that something you'd expect, like, a materially large portion of your customer-- potential customers to use on initial deployments, or is that kind of more relevant only towards the, the lower end or down-market focused? Thanks.

Dan Adika (CEO and Co-Founder)

WalkMe Essentials is basically aimed for new customers, land new customers, that then will grow to our platform. It's less relevant to our existing customers. It's more relevant for landing motion. We launched it in July, so we'll have more data to share with you, probably in the upcoming quarters. The idea is to allow companies that want to have digital adoption platform do a crawl, walk, run, and that's all. They can start fast with pre-built content in Essentials and then just grow with us to what we call DAP deployment. That's the idea and the purpose.

Scott Little (CRO)

I would add, this is Scott, that my customers are pretty excited about it. Again, we dropped it within the last 30 days. We'll see how it goes, but and we, we didn't highlight that in my, in my, my comments, but it's also for specific target applications. It's not, it's not a product designed to land in every target application. It's a very specific target application, so that does limit the applicability of it a little bit. We've been smart about it. It's the biggest applications in our portfolio, and, my team's excited about it. Michael, any other questions?

Michael Vidovic (Associate VP of Equity Research)

No, that's great. Thanks, guys.

Scott Little (CRO)

You got it.

Operator (participant)

Thank you. That's all the time we have for Q&A. I will pass it back to Dan Adika for closing remarks.

Dan Adika (CEO and Co-Founder)

Thanks. First, I wanna thank everyone for joining the call. I wanna thank our customers, partners, and most importantly, the WalkMe team, the WalkMe employees that help us drive such an amazing quarter. I know that it wasn't easy at the beginning of the year, but we had a goal to be cash flow positive, and we did it together, and I'm super proud of you all. Thank you.

Operator (participant)

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