WalkMe - Q3 2021

Transcript

Operator (participant)

Good day, everyone, and welcome to the WalkMe third quarter earnings call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. John Streppa, Head of Investor Relations. Please go ahead.

John Streppa (Head of Investor Relations)

Hello, everyone, and welcome to WalkMe's third quarter 2021 earnings conference call. On the call with me today are Dan Adika, CEO and Co-Founder of WalkMe, Rafi Sweary, President and Co-Founder of WalkMe, and Andrew Casey, the company's 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 US 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. In addition, these forward-looking statements reflect our current views with respect to future events and are not guaranteed of future performance.

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 prospectus filed with the Securities and Exchange Commission on June 16, 2021, and other documents filed with or furnished to the SEC. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this press release. You should not put undue reliance on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events, and circumstances reflected in the forward-looking statements will be achieved or will occur.

Except as required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made, or to reflect the occurrence of an unanticipated event. See our press release dated November 10, 2021, for additional information. In addition, certain metrics we will disclose 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 the key metrics used by management in its financial and operational decision-making. For more information on the non-GAAP financial measures, please see the reconciliation tables provided in our press release dated November 10, 2021. With that, I'll pass it over to Dan.

Dan Adika (CEO and Co-Founder)

Thanks, John, and thanks, everyone, for joining us on our call today to discuss our third quarter results. We had a strong third quarter, which exceed our guidance on all metrics, as well the signing of two strategic partnership agreements that are important for the company's future growth. We continue to execute well and accelerate our growth, and I can share a quick summary of all the achievements. Subscription revenue continued to accelerate to 37% year-over-year to $46.1 million, up from 31% growth in Q2. Total revenue grew 31% year-over-year to $50.6 million. ARR at the end of the quarter totaled $201.7 million, up 31% year-over-year.

We're seeing continued growth from our DAP customers with ARR growth of 120% year-over-year, representing 35% of total ARR, up from 21% in Q3 last year. Non-GAAP operating loss was $10.1 million, a margin of -20%. I'm excited to announce another huge milestone in the continued growth of our go-to-market approach with the signing of two strategic alliances. One with Deloitte US, where they have created a digital adoption service business in conjunction with WalkMe. We believe that this partnership is evidence of the growing market need of digital adoption and will support our accelerated growth for years to come. On the ISV front, SAP and WalkMe are entering a strategic partnership to launch a Concur user interface for all global SAP Concur users.

Once again, this shows the underlying power of our technology to drive success and business outcomes for our partners and customers. I'll share more details about the agreements and strategic importance of this partnership later in the call. As market leaders, we continue to heavily invest in our platform and technology with over 20 new features launched this quarter and new data capabilities aligned to our data expansion strategy. At a high level, we continue to execute well and are excited about the growth of our partner channel and innovation. I wanna take a step back and highlight why we believe in the long-term future of WalkMe. We believe that our digital adoption platform can help every organization achieve their digital transformation goals by connecting data and action to improve business processes and outcomes.

When I talk to leading CIOs, the two problems they consistently face when driving digital adoption is the lack of visibility into their tech stack and the poor user experience for their employees and customers. We solve both those problems. Understanding the business processes and software usage are fundamental to developing scale and agility to fulfill the promise of technology. The technology in itself is nothing without adoption. Organizations need to adapt to new industry macro trends of digital workforce and remote hybrid ecosystems as the imperative to success. With no clear view on the CIO or CDO part and no clear enterprise user experience strategy deployed, the two clash. This clash is causing over 70% of organizations to fail at reaching their digital transformation goal.

WalkMe has the unique ability to take action on the data, unlock and deliver a global scalable digital experience on top of any device. WalkMe platforms help solve the gap of digital adoption by offering deep data insights to decision-makers and improve business processes to end users through our no-code editor, which can be deployed on top of any enterprise software. Imagine every employee in the world start their enterprise software journey through a personalized user interface and can get things done leveraging automation and guidance at their fingertips. No frustrations, no delays, while the organization's leadership have complete control and visibility over their technology asset and can scale change management fast. This is DaaS, and this is why WalkMe is changing the way people interact with technology and how organizations work. With that, I'm excited to share some recent company development.

I will start with our partner strategy. I'm humbled to have the privilege to share that we have signed a strategic alliance agreement with Deloitte US. Through this agreement, Deloitte is investing in a dedicated team in the U.S. to advance technology adoption best practices. Clients of its newly created Digital Adoption Services business can now leverage Deloitte's know-how and WalkMe technology to gain the rapid results the digital transformation strategies are expected to deliver. The knowledge, expertise, and investments of Deloitte will expose WalkMe's DaaS to additional stream of customers and ensure their expansion and success. I'm thrilled to have them as partners and look forward to signing more agreements with other global leaders soon. The demand for DaaS continues to grow as more enterprises realize there cannot be digital transformation without digital adoption.

Across its vast client base, Deloitte has been observing this hand-in-glove relationship between the two initiatives. Through this alliance, WalkMe and Deloitte are making digital transformation success a reality for more enterprises simply through making DaaS a readily available complement to digital projects. We believe that this type of partnership with GSIs will help drive acceptance of DaaS as a new way of doing business and help WalkMe diversify and accelerate our go-to-market strategy and drive meaningful growth over time. Next is an extraordinary partnership with SAP Concur. ISVs has always had a vested interest in implementing WalkMe into their main offering to ensure the success and adoption of their customers and their end users. With that, SAP Concur has been a WalkMe customer leveraging our platform to do exactly that.

Today, I'm excited to share that due to a massive customer demand for customization of business processes, we have signed an agreement to launch a joint offering for their customer base named Concur User Assistant. Available today, Concur User Assistant by WalkMe comes in a freemium version to all Concur users via a newly released user interface. This version provide the basic workflow assistance, new user profile setup, on-screen help directory, and new UI introduction. The premium version, available through the SAP SolEx program, provide a full license of WalkMe from which clients can create and deploy custom guides for training and onboarding, getting insights regarding the user experience and business goals completion, support custom fields and workflows, and create organization-specific messages.

Unlocking customization and the full utilization of WalkMe for every SAP Concur customer is a breakthrough in our ISV strategy and will enable us to operate our land and expand motion to grow each account into a full DaaS customer. Thinking about the bigger picture, strong ecosystems are important. The most valuable companies in the world have them. Our ecosystem, we call it WalkMe Beyond, is about expanding beyond WalkMe's core platform by bringing together two key elements, talent and technology. Deloitte and SAP are important addition to this ecosystem and further validates both our vision and our ability to execute against our vision. We're also pleased to announce our new Chief Customer Officer, Wayne McCulloch, who joined us during Q3.

Wayne's expertise in extracting more value from the technology investment and user experiences of global enterprises while leading the industry's most customer-centric client success teams, make him the perfect executive for this role. Wayne joined us from Google, where he oversaw customer success for Google Cloud's entire SaaS portfolio of 7.1 million customers. Prior to Google, he held senior leadership roles within the customer success group of Looker and Salesforce.com. At WalkMe, he will lead all post-sale functions, including customer success, services, support, and the Digital Adoption Institute. Our success can be best measured by the success of our customers, and I wanna take another moment to thank all of our customers for their true partnership with us. For us, our customers are key to growing the market and potential of DaaS.

Driving high ROI, delivering on their digital transformation initiative is critical while expanding and deepening the relationship with our product throughout their organization. Let's look at some specific evidence of customer success. A number of our customers received awards this quarter for their successful digital adoption initiatives powered by WalkMe. For example, CHRISTUS Health and Red Hat each took home gold in Brandon Hall Group's Annual Human Capital Management Award, winning the best advance in business automation and best approach to HCM innovation respectively. Nestlé, the world's largest food and beverage company, was named a winner in Constellation Research annual SuperNova Award in the category of Future of Work and Employee Experience that took place recently in October. WalkMe even appeared with a customer in a Magic Quadrant this quarter.

I'm referring to a Fortune 50 enterprise customer whose total implementation of WalkMe called out by Gartner as a contributor to one of their three primary strengths in their Magic Quadrant. For ease of use, the report said that the company partnered with WalkMe to include our Digital Adoption Platform in its product. This integration helps IT administrators learn and use the product in the context and flow of work rather than offline. We don't expect it to be the last time you see WalkMe in this kind of report. Moving on to DAP category. As the creator and leader of this category, WalkMe has more than 45% market share, according to Everest Group PEAK Matrix. By far the highest among the 18 vendors that qualify to be in the Everest Group PEAK Matrix.

As the market leader, WalkMe has more than 900 million unique users, 21 billion user interactions, and 38 million automations triggered on the platform on a yearly basis. We have customers in over 42 countries. This number demonstrates not only the significant demand for Digital Adoption Platform, but for the WalkMe formula specifically. In the Everest Group PEAK Matrix, WalkMe demonstrated the strongest year-to-year movement on both market impact and vision and capability category. This is yet another proof point of the progress we're making in both creating the DAP category and establishing ourselves as the leader in the market. This recognition is happening because of the positive changes we're driving in business outcomes for our customers. These strengths in the DAP category, as well as many other achievements, include Gartner shortlist of WalkMe as a composable technology vendor among some of the world's largest leading technology companies.

A key strategic theme for Gartner analysts and the top priority for CIOs worldwide. Gaining more momentum with research analyst firms is a strong indicator the DAP category is growing and impacting many organizations globally. Moving on to the product and innovation. We continue to invest a lot in our core technology and our platform. In Q3, we focused heavily on our biggest differentiator, our ability to start with data. We released over 20 features just in Q3, but I would like to focus on our new UI Intelligence technology as well as our Automated Insight technology. With WalkMe discovery capabilities, CIOs will have a full view in their tech stack. They can analyze adoption, business processes, and utilization across applications, users, and departments, and can manage and track digital transformation initiatives by defining KPIs aligned to their business goals.

From there, organizations can analyze digital behavior, usage, and experiences across workflows to see exactly where user dropped off in the process, which capabilities are not being adopted, and general behavior across application and business products. Finally, WalkMe UI Intelligence, a machine learning algorithm which understands UI in the underlying application, takes over to provide actionable insights to be addressed with WalkMe content. With this new innovation, organizations will, for the first time, have full visibility into their tech stack and the insight into where users are struggling so that they can ensure full adoption and usage of software. In other words, they will be able to ensure that their business stakeholders will be able to drive software users to achieve the business goals for which the software was intended to do in the first place.

For example, with UI Intelligence, our customers can see exactly where their employees or customers have errors, which errors they got, and how much time it took to complete the process. All of it is being done completely, automatically, without any setup or configuration of the process from the customer side. This is a complete game changer in UI process discovery. The challenge for digital transformation and digital adoption is similar to what has been seen in other disciplines like IT service management or Governance, Risk, and Compliance, where the first roadblock is just to figure out what you have in the environment. This is especially difficult in the middle of digital transformation, when as a CIO or a CDO, you are trying to manage a situation where literally anyone who uses software and keyboard to do their job can bring new application into the environment.

This can be done without the CIO or their team knowing about it. Employees might just be building new apps using no-code platform, tools that were given to them by their very own same CIO now grasping for control. Either way, it's yours as the CIO to manage now. Just like ITSM and ERP, where an efficient and accurate discovery mechanism was a requirement, the same is true with digital adoption. This is why we're excited to bring this innovation to our customers and are looking forward to telling the world more about them soon. We have a strong plan to further advance the digital adoption platform category as a whole and our leadership position in it. We are still in the early stages of the opportunity and look forward to discussing our accelerating progress with you in future earnings calls.

With that, I'll turn the call over to Andrew to walk through our financial results.

Andrew Casey (CFO)

Thanks, Dan, and thanks to everyone for joining us. Before I get into the results from the quarter, I wanna provide a quick overview of our business model and remind you of the key metrics that we look at to measure our business. We deliver our digital adoption platform through a subscription SaaS offering in the cloud, which represents our subscription revenue. Our services revenue includes professional services and training. In terms of key metrics, we focus on remaining performance obligations, or RPO, as well as annual recurring revenue, or ARR, which we believe provide a better view of our current business momentum relative to revenue growth. As a reminder, I'll be referring to some non-GAAP numbers in my remarks, and the reconciliation to GAAP is available in our press release and the investor deck on our website.

Moving on to the third quarter results, as Dan discussed, we had a strong third quarter that exceeded our guidance with continued customer momentum. The strength we are seeing is reflective of the strong value proposition of our platform, the horizontal application of our solutions, and strong operational focus. In the third quarter, total revenue was $50.6 million, an increase of 31% year-over-year. Subscription revenue grew 37% year-over-year to $46.1 million, a continued acceleration from growth in the second quarter. Remaining performance obligations, or RPO, ended the quarter at $272.2 million, representing a growth of 49% year-over-year. Current RPO, which is contracted subscription revenue expected to be recognized over the next 12 months, grew 32% year-over-year to $157 million.

Long-term RPO grew 79% year-over-year to $115 million, an acceleration of growth from 68% in the second quarter of 2021. ARR at the end of Q3 was $201.7 million, representing growth of 31% year-over-year, showing consistent growth from Q2. These strong top-line metrics are reflective of the growing importance of digital adoption with the world's largest organizations. We have seen continued momentum with large enterprises, which we measure as organizations with more than 500 employees. Looking at ARR from customers with more than 500 employees, this grew 36% year-over-year in Q3 to $173.5 million, representing 86% of total ARR, up from 83% in Q3 of 2020.

In addition, we look at enterprise-wide DAP customer additions as a sign of the growing strategic nature of our platform across our customer base. We added nine new DAP customers in the third quarter to reach 112, representing customer count growth of 93% year-over-year. ARR from these DAP customers grew 120% year-over-year and represents 35% of total ARR, up from 21% in Q3 of last year. Taking a look at dollar-based net retention, the natural land expansion motion of our platform translates into a strong net retention rate. We look at dollar-based net retention with our enterprise customers, who are notably stickier throughout the disruption that COVID caused than smaller businesses last year.

Our enterprise dollar-based net retention, which we measure as customers with more than 500 employees, was 118% as of the end of Q3 on a trailing four-quarter basis and remained above 120% on a quarterly basis for the second straight quarter after bottoming out in the fourth quarter of 2020. Before turning to gross margin, expenses, and profitability, I would like to note that I will be discussing non-GAAP results going forward. Gross margin was 78%, up 470 basis points year over year. Gross profit was $39.5 million, up 39% year over year. The improvement in gross margin this quarter was largely driven by the acceleration of growth in our subscription revenue, which carries a higher gross margin profile.

We expect our overall gross margin will increase over time as we continue to optimize our hosting operations and improve our services engagement model, primarily by leveraging partners where feasible. Turning now to operating expenses, we remain focused on investing for growth to capture share as the category we created continues to grow and expand. Sales and marketing expenses for Q3 was $29.6 million, compared to $21.3 million in Q3 last year. This represents 59% of total revenue compared to 55% in the third quarter last year. The year-over-year increase in sales and marketing expense is a direct result of the hiring freeze we put into place at the onset of the pandemic last year, followed by an acceleration in hiring as the business activity returned to more normalized levels in the subsequent quarters.

We also continue to invest aggressively in our go-to-market teams to address increasing opportunities we see in the US federal market, partner expansion, and broader coverages across all geographies. R&D expense in Q3 was $10.7 million, compared to $7.5 million in Q3 last year. This represents 21% of total revenue versus 19% in the same period last year. We've been making investments in our platform and plan to continue to invest in R&D as we build out our product and invest in our ecosystem in the quarters ahead. G&A expense was $9.3 million for the third quarter, compared to $5.9 million in the third quarter last year. G&A was 18% of revenue versus 15% of revenue last year. We continue to invest in the infrastructure of our business to drive long-term scale.

Going forward, the primary areas of investment for us will be in R&D and sales and marketing as we look to capitalize on our large market opportunity. Operating loss in the quarter was $10.1 million, compared to a loss of $6.3 million last year. Operating margin of -20% was down 370 basis points compared to the same period last year. We held back on spending and investing meaningfully last year during the pandemic, as we chose to preserve cash. We will continue to hire aggressively in our go-to-market operations as appropriate to support our goal. Looking forward, we expect to see ongoing improvements in operating leverage as we scale and are structuring our investments in sales and marketing and R&D accordingly. Net loss per share in Q3 was $0.13, using 83.3 million weighted average shares outstanding.

Free cash flow was negative $12.9 million in Q3, compared to negative $0.2 million in Q3 last year. Free cash flow margin was negative 25.5%, down from negative 0.5% for Q3 last year. In the near term, we expect to see fluctuations in cash flow. Longer term, we expect the increase in operating levels will result in positive free cash flow, though margins will fluctuate on a quarterly basis in the near term and improvement will not be linear. Turning to the balance sheet, we ended the quarter with $361.9 million in cash and cash equivalents and short-term deposits. Turning now to guidance. For the fourth quarter of 2021, we expect revenue in the range of $51.5 million-$52.5 million, representing growth of 32%-35% year-over-year.

Non-GAAP operating loss in the range of $19 million-$17 million. For the full year 2021, we expect revenue in the range of $191.5 million-$192.5 million, representing growth of 29%-30% year-over-year. Non-GAAP operating loss in the range of $50.3 million-$48.3 million. With that, Dan, Rafi and I will take your questions.

Operator (participant)

At this time, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're calling from a speaker phone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, star one to ask a question. We'll take our first caller from Scott Berg from Needham. Your line is open.

John Devine (Analyst)

Hey, everyone. This is John Devine in for Scott Berg. Congrats on the great quarter, especially the partnerships. First question for me, just wondering if you could give us an update on how some of the more direct sales cohorts over the past few quarters have been ramping. Are you guys seeing any pressure in the hiring environment for direct sales going forward? Thank you.

Andrew Casey (CFO)

I'll take it, Dan, and then, you can jump in. Thanks for the question. Certainly we're just like every other company right now in the U.S. and frankly across the world that's dealing with you know, a difficult hiring market. Now having said that, we did make some really smart choices, I think, early on in hiring most of the sales reps we had invested in for 2021 at the beginning of the year. That put us in a really good position to have sales reps ramping throughout the year and really getting to that point of where they're getting fully ramped by the end of the year. Our ramping period is somewhere between nine and 12 months.

It's always gonna be a tough environment as we're starting to look for other enterprise reps that fit our mold and understand our market and can really go after those large enterprise clients. I'd say we're executing on our plan, and we're happy with the progress we've made.

John Devine (Analyst)

Awesome. Just a quick follow-up. As far as the Concur partnership goes, how are you guys thinking about reorienting, you know, positioning your go-to-market plan there as far as looking to drive, more expansion, from the free users? Thank you.

Dan Adika (CEO and Co-Founder)

This is Dan. I will take it. Great question. When we're looking at the SAP Concur partnership, we're seeing two major opportunities. One, SAP Concur was a WalkMe customer. They implemented WalkMe on their product to help their customers onboard and feature adoption. They got a lot of requests from their customers to customize those guidance and experiences because as we said many times, it's not about the UI, it's about the business processes, and each company has their own business processes. Now we have a channel to actually go with SAP Concur through the SolEx agreement and sell to every SAP Concur customer, WalkMe, so they can go and customize their business processes on top of SAP Concur. This is one.

The second, which for us is the bigger opportunity, each customer that will buy it and create those experiences on top of SAP Concur is a potential expansion for us to go and expand on other systems if it's their HCM, CRM and so on. Two things and two drivers that now we're gonna focus on. Obviously we already have customers that's using WalkMe on SAP Concur, so we will work with them to expand this and put our expansion motion into place. We're very excited with this partnership.

Operator (participant)

Next, we'll go to Keith Bachman from BMO Capital Markets. Your line is open.

Keith Bachman (Analyst)

Yes. Thank you. I'd like to also ask about go-to-market activities. You mentioned you hired Wayne to help on go-to-market related things. I was wondering if you could identify some of the key activities, whether he's already surfaced some opportunities. What's most important you think next year, as we look at 2022 for your go-to-market activities? If you could just give us some, you know, some of the key ones. In particular, could you also address where you think your direct capabilities will land towards. I know you've done a bunch of hiring. On your website, it looks like you are still trying to hire a number of internal sales positions as well. How do you see that changing?

In other words, where do you think you'll land in terms of direct capabilities at the end of 2021, and what do you think that looks like at the end of 2022? Is, you know, is it up 30%? Is it up 40%? Is there any kind of dimensions you could give us on how you see the ongoing efforts associated with the direct touch model as we think not only where we are at the end of this year, but as we look at next year. Thank you.

Dan Adika (CEO and Co-Founder)

Yeah. I will start, and I will then hand over to Andrew. Wayne is our Chief Customer Officer. His role is customer success, services, support, and everything that is post-sale activity. A lot of effort there because WalkMe has massive expansion with our existing customers. Wayne will focus on that, and obviously, we are landing more customers, and now we have more partnerships, so making sure they're getting the value they get the full potential of WalkMe, and at the end, becoming a DAP customer. As we've just published, we saw a 120% increase in ARR from those customers and 95% increase in number of customers. We're pushing forward the value, and that will be Wayne's main focus. Regarding where we land in Q4 and the hiring activity.

Obviously, we're now doing a massive hiring campaign, and we are seeing it succeeding, but I will hand it over to Andrew to talk about the numbers.

Andrew Casey (CFO)

Yeah. Keith, this is Andrew. The thing I would really point to is when you think about the expansion of the partner business within our overall revenue framework. I think I mentioned before that this is a very nascent part of our business to date, and that most of our ARR is generated from our direct relationships. The profile of how the partnership evolves over the next, call it, few years is you start with these big partnership agreements where we structure a foundation through how we're gonna go to market and how we plan with one another. You know, the partners typically start using and developing on the technology that they're taking to market so that they become very strong experts and advocates for their customers.

Then you start seeing things like joint account planning with the vendors, and you start to see things around joint announcements on customer success. That's some of the milestones that we should look at as predictors towards our future revenue from partner stream. In the past, I've said that I believe that could be 40%-45% of our total business over time. Certainly, the initial steps down that path with SAP and Deloitte should be looked at, you know, our first forays into really expanding with many more partners.

Keith Bachman (Analyst)

Okay. Any comments on the direct side, Andrew, as we look at next year, like how much you think you could ramp your direct side?

Andrew Casey (CFO)

We haven't really started talking about next year's guidance yet, Keith. It was something we will share with you, but I will tell you that there certainly is continued opportunity for us to go hire additional direct reps. You know, that's the mainstay of our current revenue profile today, and we certainly intend to continue growth in the future. It's logical that we'll continue to add towards our sales and marketing investments as we go forward.

Keith Bachman (Analyst)

Okay, great. Many thanks.

Operator (participant)

Next, we'll go to Michael Turrin from Wells Fargo Securities. Your line is open.

Michael Turrin (Director, Equity Research Analyst, and Software)

Hey there. Thanks. Good afternoon. The subscription revenue growth number is certainly impressive at 37%. The delta between ARR and that 37%, Andrew, anything you can add on what's driving that? Would you expect those growth rates to end up more tightly coupled as we kind of roll the model forward over time? Last part of the question is just there's seasonality on the greater than 500 segment we should be mindful of heading into Q4.

Andrew Casey (CFO)

I would say that over time, yeah, they should be more tightly coupled from a modeling perspective. I do think that there's nuances in that and how ARR is recorded versus the way revenue is actually recognized, and that has, you know, implications on, you know, how you do your segmentation and other issues. Generally, yes, I would agree that it gets closer and tighter over a period of time. I think the thing that I would increasingly focus investors on though is our remaining performance obligations and the growth we're seeing there.

You know, it's not only a great indicator of future revenue, but it also showcases the movements that we're seeing and the broader importance we have with customers, and that we're not seeing just single year engagements, smaller engagements. We're seeing these larger, longer term engagements, and that profiles through our long-term RPO. Additionally, I'd point right back to our DAP customer growth rate, which is continuing to show great promise and growth, both from a customer perspective and on a year-over-year basis from ARR. One last thing in that category, the average dollar size of those contracts is also increasing. We're very happy with the progress we've made.

These are strategies we've put in place, you know, well over a year ago now, and it's really great to see that they're starting to take shape and show up in the results.

Michael Turrin (Director, Equity Research Analyst, and Software)

All very helpful. Since you did such a great job ticking through some of the metrics, one more on the retention rate. It looks just from the chart you'll have the benefit on the trailing twelve-month basis, at least of rolling off of last Q4. Would you expect the trailing twelve-month metric to trend higher? Is that 120% you're operating at on a quarterly basis a good target level for the business from your view?

Andrew Casey (CFO)

Certainly, I think that the largest customers for us are the ones that expand the most and they retain. You know, we really don't see any major churn in our larger customers, and it's because they're getting value from us, and we're continuing to deliver value to them. So, you're right from a mathematical perspective, you know, that low point in Q4 2020 of 112% is gonna drop off next year or next quarter as we do our trailing four. I would tell you that we're not just gonna stop at 120%. We're certainly shooting for much higher percentages and expansion, as Dan was mentioning earlier, will drive a lot of that.

You're right that our expectations are for increased momentum there.

Michael Turrin (Director, Equity Research Analyst, and Software)

Good to hear. Thank you.

Operator (participant)

Next, we'll go to Tyler Radke from Citi. Your line is open.

Tyler Radke (Director, Senior Equity Research Analyst, and Software)

Hey, good afternoon, Dan and Andrew. I wanted to ask you about ARR. I mean, it seemed like you know, the net new was down a little bit from Q2 and you know, total ARR might have been a little bit lower than where the street was modeled. Just anything to call out, obviously subscription revenue was strong, but do you see any you know, deals kinda push into Q4 just given you know, you target the enterprise and we've heard that from a number of companies, just kinda more pronounced Q4 seasonality. Anything you could add there would be helpful. Thank you.

Andrew Casey (CFO)

Hey, Tyler, it's Andrew. Thanks for the question. You know, I would tell you that our Q2 and Q3 look pretty similar in profile. You know, absent any major changes in U.S. federal growth we see as we start to invest in that space, I would say that's kind of our expectations for the Q2 to Q3 periods. You're right to think about seasonality in the way our business profiles. Q4 is typically our largest quarter. As we target enterprise, large enterprise clients, you know, the timing associated with when those deals get done sometimes isn't always under our control. It's somewhat dependent upon customer availability of budget and a whole host of other factors. I think we feel very strong about the position we're in for Q4.

We raised our guidance, that's reflective of the strong subscription business we see, the pipelines we're seeing, some of the large engagements we're working on. I wouldn't pay too much attention to it. I think that for us, the better future predictor of revenue is RPO and I'm pushing, you know, our internal teams to focus on that, and so far they're executing well. That's where I'd put my focus and we're certainly, as an organization, I will tell you we're very focused on executing in the Q4 timeframe.

Tyler Radke (Director, Senior Equity Research Analyst, and Software)

Okay. Maybe just on total customers, I'm not sure if you gave an update on that number. I know you have some moving pieces between, you know, some of the smaller customers that some of those you're kinda intentionally moving away from servicing in the capacity that you did. Can you just help us understand, you know, where that total customer number is and then if there were any headwinds to call out on that small customer size, just given the focus on the large enterprise?

Andrew Casey (CFO)

Well, I'd tell you that the SMB business, which is certainly one that, you know, we focused as we've given our metrics on companies that have greater than 500 employees. We did that intentionally because there is certainly headwinds with the small and medium-sized clients. By the way, you know, the pandemic isn't over for them, and a lot of them are still struggling, and it's still reflective in our business. Over time, I think it becomes less and less important for our total business.

One of the reasons we're disclosing the percentage of our ARR that comes from the greater than 500 employees is to point to the fact that as we get more and more relevant with those larger customers, that the SMB business is gonna become smaller and smaller and smaller. I wouldn't say we're intentionally trying to move away. It's just that the SMB clients have had a lot of struggles over the last year. You know, where the big expansions exist is with enterprises who have lots of software applications and lots of employees that are dealing with the problems that we solve.

Tyler Radke (Director, Senior Equity Research Analyst, and Software)

Okay. Thank you.

Operator (participant)

Next, we'll go to Michael Turits from KeyBanc. Your line is open.

Michael Turits (Managing Director, Senior Analyst, Enterprise Software, and Equity Research)

Oh, you got it right the first time, Turits. Anyway, thanks. Hey, so Andrew, just a couple more financial questions. Yeah, the RPO growth is awesome and shows that expansion of multi-year deals. The CRPO growth decelerated a little bit, 36% to 32%, and was, you know, pretty much in line with subscription growth. You know, we like to look at that obviously as a forward-looking annualized indicator. Any thoughts on that as well as on quarterly view, quarterly NRR having dropped 121 to 120?

Andrew Casey (CFO)

Like I said before, I don't think I'd point too much on that. I'd look at the overall trend, Michael. I think we're confident enough in our Q4 that we're raising guidance. I do think that, you know, the timing on engagements isn't always something we can control. The pipelines we've got, the focus we've got for the teams in Q4, that's what we're driving towards, and it's given us the right level of confidence to raise guidance. That's what I'd focus on. I wouldn't focus too much on a single point in time.

Michael Turits (Managing Director, Senior Analyst, Enterprise Software, and Equity Research)

Great. Dan, if I could ask you a big picture strategic question. You know, this is a fascinating space since you're not only in digital adoption, but more broadly in product. There's some overlaps with some other approaches to the product space. People in product analytics, for example, overlap with what you're doing in external customer adoption as well. I was just wondering if you view others as moving into your space or perhaps you broadening out into other areas that are within that, you know, the broader scope of product focus.

Dan Adika (CEO and Co-Founder)

Yeah. I would take it. It's the latter. We're now focusing on data and we signed a release that we're doubling down on data. What we understood is that with digital transformation and digital adoption, you need to start with data. We have a unique capability to actually understand the user interaction. We basically have another dimension of data that no one has. Because if you're looking at your entire digital stack, WalkMe is not just giving you basic data, like who logged in. We can actually understand the business processes. We have the data, but that data is coupled to the action. When you take data and action together, this is what creates true adoption.

Because when you see something is wrong, you can easily go back to the WalkMe guidance or WalkMe automation and drive that action. This is very unique to WalkMe. Yes, we're broadening the way we're looking at digital transformation and our capabilities by adding more data pieces. Now on top of it, what we released is what we call automated insight. I know we're not asked a lot about it, but this is true game changer because we are able to actually understand the processes that they have and actually give them insights automatically without them actually need to go and ask. Unlike other analytics tools that you need to create or ask a question or create a query.

Overall, this is very exciting for us, and this is something that we're leading and we're creating, and we're getting a lot of great feedback from our existing customers.

Michael Turits (Managing Director, Senior Analyst, Enterprise Software, and Equity Research)

Thanks.

Rafi Sweary (President and Co-Founder)

This is Rafi. I would just like to add.

Michael Turits (Managing Director, Senior Analyst, Enterprise Software, and Equity Research)

Oh, hi, Rafi.

Rafi Sweary (President and Co-Founder)

This is Rafi. Hi, how are you? I would just like to add that one of the core and very hard things to do is that we're able to do it on post-market. Products and software we already bought, and you don't have an integration to, most analytics products do require to be installed and to have access, and we're able to do it from the UI. Very hard to do.

Michael Turits (Managing Director, Senior Analyst, Enterprise Software, and Equity Research)

Rafi, thanks. Thanks, everybody.

Operator (participant)

Next, we'll go to Josh Baer from Morgan Stanley. Your line is open.

Josh Baer (Vice President and Software Equity Research Analyst)

Great. Thanks for the question. Wanted to ask one on use cases, just any commentary on the difference in performance across internal and external use cases. And then I guess separately, you know, what types of use cases are you typically landing with? Is it still a lot of onboarding? And just wondering how, you know, how to think about the, you know, more strategic, maybe digital transformation use cases.

Dan Adika (CEO and Co-Founder)

Yeah. I would start, and Andrew, feel free to add. We're landing based on the use cases and mainly it's CRM and HCM today. The use cases are very diversified. It can be onboarding, but it can be data accuracy, it can be employee productivity and so on. Usually, we're starting with high profile applications like a CRM or like an ERP. In addition, what we're starting to see, and this is why we're focusing on the data, is we're actually coming to the CIOs, and we can give them visibility. Now we're actually starting to sell to IT and CIOs as well. We're always getting there eventually, but the land is usually on the business side, and then we're actually expanding to more applications.

Now on the difference between external and internal, obviously internal is the strongest suit here as we're focusing on digital transformation mainly. We are seeing very great cases of external use cases as well. Obviously those are tied together both internally and externally with our customer. I would say that with the new data capabilities, we'll be able to have more personas that we're starting with because we're not gonna go and immediately land on the onboarding, as you called it. We would be able to actually go and start with the data. With that, we needed something that is super easy to install, two clicks, and you actually get the value. This is where Automated Insight coming into play.

Imagine that you are coming into an organization, you put WalkMe, and literally within five clicks you're getting value. This is something that we didn't have before, and now we're super excited with it.

Josh Baer (Vice President and Software Equity Research Analyst)

Great. Thank you.

Operator (participant)

Next, we'll go to Vinod Srinivasaraghavan from Barclays. Your line is open.

Vinod Srinivasaraghavan (VP and Software Equity Research)

Thanks for taking my question. Congrats on the results. I just had a question on Enterprise DAP customers. I just wanna get a better idea of, you know, who is an Enterprise DAP customer. Are they mostly Fortune 500 or F2K customers, or is there a significant kind of SMB presence in the mix? Then also, sorry if I missed this, but, did you disclose the number of million-dollar customers this quarter?

Andrew Casey (CFO)

Hi, it's Andrew. I'll take that. Then, on the DAP customers in particular, it's customers who have four or more applications that are licensed on a departmental level or enterprise-wide. In a lot of cases, that would obviate many of the SMB customers being considered, so I actually don't think there's any of them in our total list. It's because the average size of those engagements is $631,000. It's a relatively large investment that a customer is making and one that they're typically using WalkMe and the full capability of the platform to really drive their transformation processes. You know, you see the ability for them to actually use it across multiple different applications throughout the enterprise.

That's the type of customer we consider a DAP customer. We're increasingly seeing. We haven't disclosed anything on the number or types, I mean, the names of the DAP customers, but I will tell you that we're very pleased that the types of customers represent a lot of different industries. We had one customer that was brand new this quarter. It was a fast-growing fintech company, and they're a showcase for how they're trying to be digital first as they're bringing their services to market. They landed with us as a new customer, a new DAP customer, you know, at a really great level. You know, meaning they are consistent with that average that we're seeing.

DAP customers are really customers that are, you'd say, there's a lot of overlap with Fortune 500. There's a lot of overlap with enterprise, large enterprise clients, 'cause these are the ones that have the broad array of problems that we can really address and are willing to pay us, you know, that level of fee because the value, they're getting.

Vinod Srinivasaraghavan (VP and Software Equity Research)

Got it. Thanks. Sorry, did you disclose the number of million of dollar ARR customers this quarter?

Andrew Casey (CFO)

We didn't.

Vinod Srinivasaraghavan (VP and Software Equity Research)

Got it. Then just last, just wanted to talk about Deloitte, you know, you're expanding your relationship with them, but, you know, it usually does take some time to kinda hire and train their team up, get them up to speed. When do you think, they could start to meaningfully contribute, to your pipeline?

Andrew Casey (CFO)

Well, you know, I think in some cases you're right. Those types of relationships, you gotta think of like design wins, and they take a while to foster and really get going. I will tell you that our partnership with Deloitte didn't begin when we signed the contract. We've actually been working with them for a while on what I'll call an opportunistic level. We're very enthusiastic about some of the new opportunities they're bringing forward. I don't think we'll have to wait a long time for them to start using us more broadly internally or for us to start working on joint account plans. I'm not gonna prognosticate for you at the level of revenues that's gonna come from them.

I'll let you talk to them about how much they're excited about this service tower for them. At the end of the day, we're very excited about it, and we think it can be, you know, very material to our overall results. You know, the thing that is exciting about it is just how quickly and how readily they're jumping in and partnering with us on different engagements. We're excited about it.

Vinod Srinivasaraghavan (VP and Software Equity Research)

Great. Thanks, and good luck.

Operator (participant)

Our last question comes from Pat Walravens with JMP. Your line is open.

Pat Walravens (Director of Technology Research , Senior Analyst, and Software)

Oh, great. Thank you. Congratulations you guys. Can we talk a little bit more about the SAP Concur partnership? The reason is, I mean, I use that app all the time, and I think most of the people on this call do. You know, Dan, while I was waiting to ask this question, I opened my Concur app. I used the ExpenseIt function to take a picture of my parking receipt. It asked me was the amount $31.05. I said, "Correct." Then it figured out the rest from there, and then that all goes up into my save expenses, and a couple weeks from now, my poor associate has to spend a couple hours turning it into a report.

I'm just wondering where is the friction in that process that you guys are addressing?

Dan Adika (CEO and Co-Founder)

Yeah, sure. A few things. One, I'm not familiar with the exact same process, but I will tell you that in WalkMe, for example, it's not sometimes that easy to submit an expense or sometimes, you know, it's deviating from the process, and this is where WalkMe comes up and show you what to do. What we did with SAP Concur. SAP Concur was already a customer, so they used WalkMe for feature adoption, onboarding new users and so on, and not necessarily on every process. The reason is that every customer customize their process. That's what we're seeing across all the platforms. It's not about the UI, it's about the process. Now you can actually go and get WalkMe and build your own experiences there.

Maybe just submitting an expense is simple, but maybe booking a flight or doing a.

Pat Walravens (Director of Technology Research , Senior Analyst, and Software)

Mm-hmm.

Dan Adika (CEO and Co-Founder)

an expense that exceeds the policy, that's starting to be a little bit more complex. You need to get more approval and so on and so on. On top of it, obviously there is a lot of data issues. People are not categorizing it correctly, and this is obviously where WalkMe can come in. We will be happy that you will be a customer now with our joint effort with SAP Concur, and you can customize your own experiences. Next quarter.

Pat Walravens (Director of Technology Research , Senior Analyst, and Software)

Got it.

You can tell us all about it?

Rafi Sweary (President and Co-Founder)

Pat, also maybe.

I will. Here's a quick follow-up.

Pat.

Dan Adika (CEO and Co-Founder)

Oh, sorry. Go ahead. Yeah.

Rafi Sweary (President and Co-Founder)

Pat, this is Rafi. Actually, it might be easy also because WalkMe is there. You just don't realize it. Somebody looked at your journey, saw what people are struggling with, and built the experience so it's simple and intuitive, right? You don't necessarily all the time know that WalkMe is there. It makes it intuitive in different ways.

Andrew Casey (CFO)

Yeah. The other thing I'd add too is a lot of customers actually have different types of processes. It's not just about learning how to use Concur, it's actually how to go about using the expense policies associated with their business. You know, do they have an expense request process? Do they actually have limitations? Are there specific requirements that they have to do in order to process the expense in the right way?

It's not always just about the app, but sometimes it's about the business processes and how difficult they are to navigate. One other point I wanted to make, I'm sorry, I made a mistake there. We did actually have a disclosure on our greater than million customers, where we did have 27 for the quarter. That's in our investor presentation.

Operator (participant)

At this time, I'll turn it back to Dan Adika for closing remarks.

Dan Adika (CEO and Co-Founder)

Yeah. Thank you everyone for being on the call today. We're really looking forward to keep you posted on our progress in the quarter ahead and thank you so much.

Operator (participant)

That does conclude our call for today. Thank you for your participation. You may now disconnect.