Walkme Ltd

NASDAQ:WKME

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the WalkMe First Quarter 2023 Earnings Call. [Operator Instructions] Thank you. I apologize for the inconvenience. Just give me one moment. Thank you.

[John Streppa, Head of Investor Relations]

Thank you for joining our first 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, 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 U.S. Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control.

Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including those set forth in the section titled Risk Factors in our annual report on Form 20-F filed with the Securities and Exchange Commission on March 14, 2023, and other documents filed with or furnished to the SEC. See our press release dated May 17, 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 May 17, 2023.

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

[Dan Adika, Chief Executive Officer and Co-Founder]

Thank you for joining us today as we review our 2023 first quarter results and share some of the big achievements.

The investments we've made are paying off. Despite the continued global macro headwinds in Q1, we achieved many incredible milestones. I'm extremely proud of our team execution. They've shown the agile, resilience and innovate mindset that WalkMe is.

I'm even more excited today about the opportunity ahead of us than I was 11 years ago when we launched WalkMe. WalkMe help organization execute mission-critical workflows. The more organization invest in technology, the bigger the need for digital adoption. I'll share in few minutes the whopping ROI our customers obtain with WalkMe.

Let's turn to the numbers. We've made a great progress growing revenue 16% year-over-year and delivering on improving our non-GAAP operating loss to $8.8 million in the quarter compared to an $18.6 million in the same period last year. This represents a non-GAAP operating margin improvement from a 33% loss in Q1 2022 to only 13% in the first quarter of 2023.

We are focused on our commitment to be free cash flow positive by the end of the year and decreased our cash burn from $10.2 million in the fourth quarter in 2022 to $8.3 million in the first quarter of 2023. We are more determined than ever as DAP market leader to be the strong sustainable business, even as we face the current macroeconomic headwinds.

The path to profitability and long-term growth is paved with the tough decisions that we need to make in order to ensure our collective success. We took action in April to create a leaner, more efficient organization that better reflects our near-term growth expectation, while setting us on the path to profitability and long-term growth. Hagit will review more in detail, but I want to take a moment to thank all of those that were impacted and the rest of the organization who have acted with empathy and compassion and remains committed to the strategy moving forward.

As promised, I'm thrilled to announce that WalkMe was officially awarded with FedRAMP Ready status. This is a huge milestone for us as a company and digital adoption as a category. It's a testament to our ability to bring our powerful technology with the intense security requirements of the federal government.

Federal, state and local governments undergoing technology modernization and the [right] (ph) for digital transformation. We've already helped the State of Georgia with their My Voter Page, the U.S. Department of Defense, Defense Travel System, the Department of Veterans Affairs with their HR modernization program, and the City of Chandler, Arizona, along with dozens of other local organizations. And this is even before we were fully certified. Being certified is a big advantage, opening up a vast go-to-market motion that we'll capitalize in the years to come; expect WalkMe in every government organization.

We also continue to execute well with our partner ecosystem, adding NTT Data and Tech Mahindra as new certified global partners. The investments we've made in these segments are paying off, and we're well positioned to capture additional market share and scale. We now count 180 customers of DAP customers, which we define as having four or more application or an enterprise-wide ELA. These customers have embraced digital adoption and are reaping the benefits, and the benefits are monumental.

We recently asked IDC research firm to conduct a thorough objective business value ROI study and then [tried] (ph) to share the findings. The study concluded that on average over a three-year period, our customers experienced 494% in ROI and estimated payback period was only five months; this is massive. They found that as a result of faster ramping time for employees, faster adoption of new software and features and the reduction in business errors, employees satisfaction increased by 48% and overall revenue grew by over $41 million for the customer surveyed.

I'd like to bring a separate example forward. One of the largest retail commercial banking customers in the U.S. has embraced digital adoption to its full capabilities. DAP has been central to their digital transformation and technology modernization project, including one of the first deployments, migrating 250,000 employees to a new HR system where their goal was to focus on a robust self-service support for all team members and deliver the platform with minimal training.

After accomplishing this, the customer rapidly expanded their use cases, became a full DAP customer and scaled their engagement with WalkMe. They now have a strong WalkMe Center of Excellence in-house and deployed WalkMe on 37 applications, and growing. Nearly every employee is engaging with WalkMe with over 40 million interactions just last month. In 2022, based on the customer calculation, they translated to a direct value of over $44 million.

WalkMe is solving a multimillion-dollar problems in some of the most complex and secure environments. And we're just getting started delivering this vision to organizations across the globe.

As you see, we're highly committed to our customer success. Through these times, we must focus on delivering our best and producing value to our customers. Our commitment to them is second to none. I'd like to take this opportunity and introduce our new Chief Customer Officer, Sunil Nagdev. Sunil has joined WalkMe to lead all post-sales functions, including customer success, services and support, and will be extremely focused on customer needs, driving retention and overall customer satisfaction. Welcome to the team, Sunil.

DAP is a mission critical for organization now more than ever. In Q1, Gartner featured DAP and WalkMe as key supporting component in the recently published Innovation Insight, Workstyle Analytics, one of the top 10 innovations profile for Gartner in 2023. Workstyle Analytics helps drive digital and organizational change management via derived insight. WalkMe was the only DAP vendor named, again, proving our leadership in the market. WalkMe was also mentioned in Gartner Business Quarterly review, mentioning DAP and WorkStyle Analytics as two of the tools that have the most impact on the future of work, which brings me to our product.

I can't be more proud of our R&D teams for the recent launch of WalkMe Discovery. This is an example of great agile execution. WalkMe Discovery helps organization unlock the visibility and consumption of their technology investment. In times like this, it's super important for every CIO and department leader to be in full visibility and control of their software spend and utilization. We launched a global campaign on May 1 to offer WalkMe Discovery free of charge to new and existing customer through the end of the year. We're enabling our sellers to expand the reach and our customers to expand their value with WalkMe.

In our recent product release, we've shared a glimpse into the future of work, a fully automatic text-to-action engine, empowering any employee in the world to simply type what they want to do and see it done automatically for them on top of any enterprise application. We believe this is the key to the future of automation and work.

For the five past years, we've been developing and training our Deep UI AI model that understand user interface like a human does. This is our core technology powering most of our products.

We are fulfilling our promise to close the gap between human and computer interaction. WalkMe is constantly improving our GUI AI model. It is the most advanced in the world. Just in 2022 alone, we processed over 6.5 billion interactions between people and software. Imagine the accumulated knowledge distributed to every employee in the world, type what you need and WalkMe understand who you are, what you're trying to accomplish and does it for you; hyper automation, at its best.

We are using three engines: intent, orchestrator and generative automation. Intent understands who and what the user wants. Orchestrators connect to our UII database and compose the relevant sales. Generative automation by using our GUI model does it for the user on top of any app without any API. We are super excited to continue working on new innovations and the future of work.

I'd like to acknowledge that the text-to-action engine is still in the work and will take a bit more time to fully mature as we start to work with design partners to better it. Nothing excites me more than great technology and great execution from our team. These are the innovations that would drive WalkMe, DAP and the future of work to the next frontier.

Before I pass it to Scott to give some insight from the CRO organization, I want to reiterate how excited I am from the future of WalkMe. We continue to develop our proprietary technologies, embracing the cutting-edge enhancements to address the challenges that organizations face today and the challenges that will arise tomorrow. We're growing the value we're delivering at scale to global organizations and we're doing that while building a profitable and scalable business model.

I want to thank all of our employees, customers, partners, industry analysts and other ecosystem partners for their continued dedication and support in helping make the digital experience simpler for many people around the world.

With that, I'll hand it off to Scott.

[Scott Little, Chief Revenue Officer]

Thank you, Dan, and good morning, everyone.

I am pleased with the team's improving execution as we began the new year. We continue to make progress in sales process rigor, forecast accuracy and pipeline creation. Our key to success is choosing the right upmarket accounts who are strong candidates for our DAP vision, because they have sophisticated software portfolios and opportunities for process improvement. These are the customers and prospects that we are laser focused to deliver in 2023 and beyond.

As we move forward in our new organizational structure, we are well positioned to deliver increasing sales productivity and effectiveness in our go-to-market organization. Our team is focused on the enterprise segment, in countries and regions with the highest ROI, and we have very intentionally deferred investments in other areas and with other customer segments, so we can maintain our focus. However, I do believe we have the sales capacity we need to reaccelerate growth in the medium term.

For our overall go-to-market, I am pleased to welcome Sunil to the team. Sunil and I are already deep into the day-to-day work detail, and I'm partnering closely with him to improve and enhance our customer experience, which is so important to our expansion sales motion. Happy, successful implementations drive more adoption. So, Sunil's efforts are critical to our overall success.

As we noted in our Q4 2022 comments, we continue to face elevated scrutiny of our deals and increased pressure on both user accounts and the number of applications licensed. In this tough macro environment, clients and prospects are expecting their vendors to help them build the economic business case to support their investment process, as additional layers of approval are added. Our investment in this capability with the field CTO business value consulting team is the linchpin for our ability to deliver this valuable consulting expertise. And it is important to note that despite headcount reductions elsewhere in the go-to-market organization in the first quarter, we actually grew this organization for 2023.

Other investments that we have made in the past two years are also paying off. I'm incredibly proud that WalkMe has achieved FedRAMP Ready status, and we are moving forward with our plan to sell more broadly into the U.S. federal government. Our pipeline is growing and we expect to see the first fruits of that investment in second half of 2023.

Our early success in the U.S. federal space last year was with the support of our partners like SAP and IBM because we needed their security status at the time. Now that we have our own standalone security confirmation, we have the license to hunt together with the entire federal partner community, not only IBM and SAP, which is very exciting. However, let's not forget about our SLED business. We continue to make great strides there as well. FedRAMP will also help us accelerate in SLED because many large SLED entities looked to FedRAMP status as a proxy for their own security confirmations.

The state and local team had a strong quarter, with wins from the State of Colorado and the State of Ohio. Our higher education team signed deals with University of California, the New Jersey Institute of Technology and Southern New Hampshire University. While our public sector business is small, it is growing fast, and we hope to see it become as much as 35% to 40% of our total business when we are at scale. FedRAMP status is very important for our federal GSI community and they are all very excited to see us reach that goal.

But that was not the only good news in our partner ecosystem this quarter. We also expanded our GSI partnerships with NTT Data and with Tech Mahindra, which will help fuel our pipeline growth for 2024. I cannot be happier with the overall trajectory of our partner ecosystem at this point in our life cycle. That ecosystem is more important than ever for our entire business given the difficult macro backdrop and push for software rationalization that organization across the globe are facing. Organizations are turning to us and our trusted partners for additional ways to gain efficiencies and reduce their costs across their tech stack.

With the recent release of WalkMe Discovery, we are giving our partners and customers much needed visibility into the software they are running across their entire companies, who is using it and how it's being used. Armed with this data, they can make better choices about how to optimize their software spend, whether that be consolidating overlapping tools, redistributing or reducing licenses or paired with WalkMe's other DAP capabilities, driving digital adoption to improve software ROI.

Feedback I've heard from customers has been focused on driving greater visibility into their tech investments. We see this as a great way for customers to understand where they are failing and to begin their digital adoption journeys so that ultimately they can utilize the entire platform from WalkMe to drive the business results they expect and demand.

Lastly, our direct sales team executed well with new customers at Accredo, part of Evernorth Health Services, the Harris Health System, Republic National Distributing Company and [DexCom] (ph). We saw good expansion motion with customers such as UC Riverside, Tesco and AIA Singapore. I want to thank our dedicated team, our customers and our partner ecosystem for a good quarter.

I will now pass it over to Hagit to review the numbers.

[Hagit Ynon, Chief Financial Officer]

Thank you, Scott, and thank you, everyone, for joining us today.

I'm proud of the accomplishment made against our strategic priorities, including getting FedRAMP Ready status, growing in the enterprise segment and taking steps to accelerate our path to profitability and free cash flow positive. As we look forward to our financial strategic model, our leading guidelines are the Rule of 40 is our North Star with an emphasis on the balance between growth and efficiency as we pave our path to profitability. We have set in place a model that support immediate and future scale as the economy recovers.

I'm pleased to report that we have continued to achieve better operational excellence as we improved our operating loss by lowering our OpEx on a non-GAAP basis sequentially while driving to an 83% non-GAAP gross margin. These results demonstrate the strength of our underlying unit economics and the strength of our business and future scale.

As Dan mentioned, we took a decision to restructure our workforce with a reduction of approximately 10% of our global employee base to better align to the continued global economic headwinds and improve our operating margin. These reductions were across the organization and not focused on the individual geography or departments. We expect to save approximately $7 million in 2023.

We will continue to focus our resources in areas that can deliver the highest ROI over the next two years. We are confident that with the team and structure in place, we will be able to scale and reaccelerate our growth into 2024.

Our total revenue for the quarter was $65.9 million, up 16% year-over-year and above our initial guidance range. Our subscription revenue grew 18% year-over-year to $60.6 million. Our revenue growth was led by the strength of the enterprise and DAP segment. Professional service revenue was $5.3 million compared to $5.5 million in the first quarter last year. Going forward, we expect 2023 PS revenue to be lower than 2022, in line with scaling our partner ecosystem strategy.

Before turning to gross margin, expenses and profitability, I would like to note that I will be discussing non-GAAP results going forward. We are very proud of our focus on efficiencies and expense management, which drove improvement in our non-GAAP operating loss for the fifth consecutive quarter.

In the first quarter of '23, gross margin was 83%, up 1 percentage point from last quarter and 5 points from first quarter of last year. We have rigorously optimized our cloud infrastructure to deliver best-in-class secure and efficient cloud environment. Our subscription gross margin remained above 90% compared to last quarter, which speaks to the inherent strength in our underlying business. Our professional services organization was nearly breakeven. Q1 gross profit was $54.6 million, up 24% year-over-year.

Turning now to operating expenses. As we focus on free cash flow generation and the path to profitability, we will continue to optimize spend across our organization as our top-line scales.

Sales and marketing expenses in the first quarter were $39.8 million compared to $38.3 million in the first quarter of last year. This represents 60% of total revenue in the first quarter, a significant improvement from 67% last year and 62% in the previous quarter. We expect our sales and marketing will continue to reduce as a percentage of revenue, gaining leverage from the investments we have already made and increasing organizational opportunity.

R&D expense in the first quarter was $11.9 million compared to $12.1 million in Q4 '22, and $13.9 million in Q1 last year. This represents 18% of total revenue versus 19% in Q4 and 24% in Q1 last year. As the leaders of the digital adoption market, we will continue to invest in innovation and the advancement of our platform, ensuring growing value to our customers.

G&A expense was $11.7 million for the first quarter compared to $11.8 million in Q4 and $10.5 million in the first quarter last year. G&A was 18% of revenue versus 18% in Q4 and 19% in the first quarter of last year.

Operating loss in the quarter was $8.8 million compared to a loss of $18.6 million in Q1 last year and $10.5 million in the last quarter. Q1 operating loss margin was 13% compared to 33% in Q1 last year and 16% last quarter. We have improved our operating margin on both dollar and percentage basis for five consecutive quarters, and believe we will continue to do so throughout 2023.

Net loss per share in the first quarter of 2023 was $0.08, using 87.3 million weighted average shares outstanding, compared to $0.22 in Q1 last year.

We improved our free cash flow margin to a negative 13% compared to a negative 36% in Q1 last year. Free cash flow was negative $8.3 million in the first quarter compared to a negative $20.3 million in the first quarter of last year. We will continue to improve our free cash flow as we gain leverage in our operating model and with our low CapEx investment.

We ended the quarter with $299.6 million in cash, cash equivalents, short-term deposits and marketable securities. Given our sizable cash balance and improvement in our free cash flow, we are well capitalized to continue supporting our growth goals.

Turning now to guidance. We are pleased with the continued improvement of our operating model, while acknowledging the challenged macro environment we continue to face along with our peers. Our guidance reflects that these headwinds will continue throughout 2023. With the actions we took to reduce our operating expense, we believe that our path to profitability is clear. We remain committed to our expectation that we will be cash flow positive by the fourth quarter and for the full year of 2024. We also expect to end the year with an expense base that with continued scale, we will be profitable for the full year of 2024.

For the second quarter of 2023, we expect revenue in a range of $65 million to $66 million, representing growth of 8% to 10% year-over-year, and a non-GAAP operating loss in the range of $7.5 million to $6.5 million, and an operating margin loss of 12% to 10%.

For the full year of 2023, we expect revenue in the range of $269 million to $276 million, represents growth of 10% to 13% year-over-year, and a non-GAAP operating loss in the range of $22 million to $19 million, and an operating margin loss of 8% to 7%.

With that, Dan, Scott and I will take your questions.

[Operator]

Thank you. [Operator Instructions] We will take the first question from the line of Pat Walravens from [JPB] (ph). Thank you.

[Pat Walravens, JMP]

Was that me? So, it's Pat Walravens from JMP. So, congratulations on the FedRAMP. I think the question everyone's going to have is why is the Q2 growth only 8% to 10%. And as I look at my model, it seems like the number of customers with over $1 million in ARR actually went down by three from 39 to 36. Is that why? And what happened to those three customers? Thank you.

[Dan Adika, Chief Executive Officer and Co-Founder]

Hey, thanks. This is Dan. So, I will start with $1 million. As we said last quarter and even in this quarter, we are seeing macro headwinds. Those customers are still with us. Some of them had some negative expansion, which moved them below the line of the $1 million. Still the average of those customers is $700,000. So, it's high six figures and they are healthy customers, but obviously, some of them have some changes and negative expansions and that's something that we saw, I would say, starting Q3, Q4.

Regarding the guidance for Q2, I will hand it over to Hagit.

[Hagit Ynon, Chief Financial Officer]

Yes. So, as indicated in the script, I think with respect to the guidance that we gave, I would look into two. One would be what Dan just mentioned on the ARR for the quarter. So yes, we actually finished Q1 with a lower ARR versus what we have expected. But I think also -- and it was indicated in my script that as part of our PS revenue and our strategy to offload our -- to our partner ecosystem, we expect to finish 2023 with a lower PS revenue both on dollar size and both on percentage size. And this is also part of the reason for the guidance of future.

[Pat Walravens, JMP]

Okay, great. Thank you. And then Scott, if I can just ask you directly, I think you answered. But, so did the sales team hit their number in Q1 the number you had for them? And how -- we're pretty deep into Q2. How does Q2 feel so far?

[Scott Little, Chief Revenue Officer]

Yes, for -- hi, Pat, good morning. For Q1, we were weaker than we expected, but I still felt the team executed well considering the macro headwinds. On Q2, so far, we feel pretty good. We had good linearity early in the quarter and as long as linearity holds together, we feel good about Q2 right now.

[Pat Walravens, JMP]

Great. Thank you.

[Operator]

Thank you. We will take the next question from line of Scott Berg. The line is open now. Please go ahead.

[Scott Berg, Needham]

Hi, everyone. Thanks for taking my question. I want to do maybe a slightly different route of questioning on your sales and marketing efforts. Over the last six months, I've seen WalkMe with a much bigger presence at a couple different HR conferences. Can you talk about maybe your sales strategy through this type of customer or this type of opportunity within the HCM ecosystem? Because it's a little different than the -- I think the go-to-market strategy that we saw at the time of the IPO.

[Scott Little, Chief Revenue Officer]

I'll take that. This is Scott. I wouldn't say it's necessarily different. I mean from our perspective, HR, the CHRO and the HR ecosystem is an important persona force. It's an important way in which we market to enterprise clients. They have significant problems, especially on the upper end of enterprise. So, we have made some changes in terms of the focus of the types of events that we go to. But I don't -- wouldn't really call it a change in terms of the actual persona and the business problems that we chase, if that makes sense, Scott.

[Scott Berg, Needham]

Completely helpful. And then following on the kind of sales line of thoughts. Congratulations on the FedRAMP achievements as well. You all seem pretty positive on that, especially with the success you've had leveraging your partner's certifications there. But as you look at your sales pipelines and opportunities there, are you seeing the similar type of scrutiny that you're seeing with your corporate customers or is the pipeline opportunity there even maybe more enticing than what you're seeing in the non-government verticals? Thank you.

[Scott Little, Chief Revenue Officer]

Yes, the federal business tends to be a little different than the commercial side of the house based on their funding initiatives for any fiscal year. What I can say is that we've been making an investment in Fed now for almost two years. So, we're really excited for the opportunity for it to pay off. And in our current planning, our expectation is the pipeline that we built coming into the year should pay off for us in the second half, that's our expectation. As you may know, the federal government's fiscal year ends in September. We kind of call it Super Bowl season. So, we're excited for that process to come to conclusion for this fiscal year as well as looking into '24.

[Scott Berg, Needham]

Great. That's all I have. Thanks for taking the questions.

[Operator]

Thank you. We will take the next question from the line, Michael Turits from KeyBanc. The line is open now. Please go ahead.

[Michael Turits, KeyBanc]

Hey, guys. Once again -- great on FedRAMP [indiscernible] something you've been talking about before, obviously, a big opportunity for you. So I'm just wondering that again just like on the -- I'm sorry, did you say where ARR dipped come in for the quarter? And then I know you said ended the quarter below expectations. But where do we end up with that?

[Dan Adika, Chief Executive Officer and Co-Founder]

No, we don't disclose ARR, but, yes, it came below our expectation in Q1.

[Michael Turits, KeyBanc]

Can you talk about the net expansion rate? Thank you for telling -- talking about the contraction of some of the large customers, but down to I think where you're 105% in quarterly DBNRR. So I assume that the components of it, you're saying there's no increase in what's called customer churn like actual loss of customers, but they contracted. So how much of that reduction is less expansion that you're seeing? How much of that is more contraction? And where could that expansion rate go over the next few quarters? Does that continue to go down? And where does it bottom?

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. Overall, we're happy with the execution. We are seeing negative expansion as the macro hitting our customers in different industries, if it's banking, tech and so forth. The positive side is that we're seeing those customers staying with WalkMe and then loving the product. Unfortunately, in some areas, they need to reduce if it fits our number of apps. So that's in line with what we saw in Q4. Having said that, we have a lot of amazing progress like FedRAMP and partners. So we are building the growth engines obviously for the second half.

[Scott Little, Chief Revenue Officer]

And I would add to that, as you heard in my prepared remarks, we do believe that we did see rather a combination of both reduction in overall users as well as, in some cases, reductions of applications. There's no particular pattern, it's very specific to the client. In some cases, CIO walks in and says, hey, I've got to cut expenses by X amount of -- X percent; in some cases, it comes down with overall headcount; in some cases, they cancel a project. So, it's hard to make any conclusions about a particular account. On the macro side, it's a combination of both.

[Michael Turits, KeyBanc]

Right. Yes. So just I don't know if you can answer, but I mean we've had some companies that have gotten down to this level of net expansion rate for some of the same factors. Do you have a feeling about whether or not you can hold it above 100% or whether there's any risk of it going below 100%?

[Dan Adika, Chief Executive Officer and Co-Founder]

We believe that net retention will be -- net ARR will be on about 100% moving forward. We don't expect it to be below 100%.

[Michael Turits, KeyBanc]

Okay. All right, guys. Thanks very much.

[Operator]

Thank you. We will take the next question from the line, Josh Baer from Morgan Stanley. The line is open now. Please go ahead.

[Josh Baer, Morgan Stanley]

Thanks for the question. Wanted to come back to ARR. I know you don't disclose it anymore, sort of gave us a real-time look at demand. Just wondering like do you -- should we be looking more closely now at billings? Is that the sort of indicator that we should be focusing on?

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. I think that customers that we're disclosing, that will be the key metric for us. As you remember, we changed our strategy to go up market for large enterprise customers with -- that is our best cohort. The entire mission and basically our -- where we're putting our effort is to move as many customers as we can to be DAP customers to use the best of our platform. This is where they see the most ROI, this is where we're seeing the most expansion, obviously, longer contract length and so on. So I would say this is where we're seeing the company future and this is where we're going. So I would say DAP customer is what I would look at. Obviously you have revenue and everything that we disclose.

Another thing is the company is really focusing on long-term sustainable growth, and we did an amazing job to improve our cash flow and operating margin. And as Hagit mentioned, we are expecting to be profitable for the full year in 2024. So this is big. We pulled forward our path to profitability while we're continuing to expand our biggest customer. So, we're happy with it.

[Josh Baer, Morgan Stanley]

Okay. Got it. Can you talk a little bit about WalkMe Discovery, some of the impact that you're seeing there? And then I have a follow-up.

[Dan Adika, Chief Executive Officer and Co-Founder]

Sure. So the way we're thinking about WalkMe Discovery is like a treasure map. Think about the company putting WalkMe Discovery, and we're able to give them full visibility into their tech stack, showing them exactly where they have issues, and to be frank, to help them with, I would say, short-term value, which is saving costs on licenses and prioritize their [indiscernible]. Our technology is able to give them precise data about what's going on. And we think this is an amazing value to our customers.

We decided to give it free of charge to existing customers and new customers until the end of the year, because: one, we want to help our customers, and we understand the macroeconomic situation; two, for us, it's huge to understand exactly where they have issue, and that's open massive opportunity for expansion for us, because we understand exactly what's going on.

We launched it a week ago. It was amazing. We had a lot of people registered to our webinar, already requesting demo or obviously want to join the platform. So for us, it's part of our digital transformation intelligence, and we're very excited about it. And I would just say our team were able to execute and deliver this with almost no time, that this show how strong is our fundamentals and the data and the models that we have that we are able to go and release something like that within a few quarters.

[Scott Little, Chief Revenue Officer]

Yes. Remember, we've always -- this is Scott. Remember, we've always had this data. It's just our ability to collate the data and present it back to the client in a way that they can actually action. So, we're helping them with short-term opportunities to, as Dan said, save cost, redistribute or reuse licenses, to renegotiate in some cases, and more important, these digital transformation opportunities, the friction within their tech stack is not going away. And if they do the short-term work, we're also helping them with the long-term work to find the real value in the deployment of our platform to support their goals. So it's -- we get a two-fer out of it, which is great.

[Josh Baer, Morgan Stanley]

Got it. And my follow-up on this is just -- so you said free for the rest of the year. If you could talk a little bit more if you know about the monetization strategy after that? And then also just thinking about the top of funnel benefits, but thinking also like are the customers that are initially coming on board with WalkMe Discovery, does it fit the DAP profile? Or are there -- or does it -- is it kind of consistent with the type of customer that you've been going after more? Thanks.

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. So that actually open a new persona for us, and this is why we're super excited. As mentioned before, the way WalkMe scale to DAP, we're starting with one or two use cases. This is a sales, HR, finance, you name it, and we're growing into that. By offering that product, automatically, we're not focusing on one application, we're focusing on the entire tech of the company. So for us, this is a natural progression into DAP, because we're showing that customer or that enterprise exactly all the data they need to know about their entire digital stack, which helps them with their digital transformation.

So, our approach to monetize it would be, one, obviously, give immediate value to our customers, but overall, expanding that customer to DAP. This is why we decided to give it for free, because we're seeing it more as a lead gen than actual product because the value that it can bring as you scale it and you use our entire platform, it's just massive. And I alluded to this and I actually said in my script, the ROI from WalkMe is 490%. And the more you use it, the more ROI you get. What we need to do is just to show you where is the potential. This is why we're calling it the treasure map. So, we do think that, that will actually accelerate the expansion to DAP, with existing customers and even new customers that will be able to get that visibility in no time.

[Scott Little, Chief Revenue Officer]

And Josh, it's important nuance for us because we typically don't start with Head of Architecture or Head of Procurement or Head of IT, we end up there because we're brought there by one of our traditional personas, Head of Sales, Head of HR, Head of Finance. This allows us to begin the conversation in new prospects or expand the conversation in existing customers to a persona group first that is going to take advantage of this opportunity. So it's a different way, an exciting new way for us to come at the problem within a large organization, and to be very specific to your question, it absolutely aligns with that DAP high-end enterprise client that we want to attract and retain. It's perfect for that space.

[Josh Baer, Morgan Stanley]

Thank you.

[Operator]

Thank you. We will take the next question from line [Michael Berg] (ph) from Wells Fargo. The line is open now. Please go ahead.

[Unidentified Analyst]

Hi, thanks for taking my question. I wanted to take another look at some of the forward-looking metrics, this one specifically at billings. I know you have said it's not the most accurate forward-looking, but it did revert to negative growth year-over-year this quarter. So maybe you can help me understand what happened there? What are the puts and takes? And maybe how to think about billings moving forward? Thank you.

[John Streppa, Head of Investor Relations]

Yes. This is John. I'll take that question. Yes, so for billings, we don't necessarily look at that as a forward indicator of our business. It's highly dependent on kind of when deals are signed and when they close versus when cash is collected. So it's not a great indicator. As Dan had mentioned earlier, we would look at kind of -- our DAP customers as the leading indicator moving upmarket there as well as our $100,000 customers, which we're very happy with. And then as we continue to increase our focus on kind of balancing both growth and profitability, looking at the Rule of 40 as our North Star, improving our cash collections, which is helping on our free cash flow as well. So, we would point you towards those metrics rather than billings.

[Unidentified Analyst]

Great. And then, a quick follow-up on the margin side. Your non-GAAP operating income guidance for the full year improved by $7 million, the exact amount -- the amount you saved from the [REF] (ph). Is that way to think about the improvement in the non-GAAP operating side? Or is there some conservatism laid in there with potential upside from here given the [REF] impact?

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. We're always looking for places to improve and obviously be more efficient. We do feel that there is some conservatism there where we improved, obviously, the operating margin by a lot in our perspective, which is really, really good. And yes, we're expecting to look for more places to obviously save. And we have an amazing improvement, obviously, in the gross margin [23%] (ph) and that came from being, I would say, adding more technology to our cloud infrastructure. So, everywhere we can go and leverage and improve our operating margin, we will do it. So, to your question, yes, we think there is a little bit conservatism there, and we might -- we'll see more improvement as we continue.

[Unidentified Analyst]

Thank you.

[Operator]

Thank you. We will take the next question from line Kevin Kumar from Goldman Sachs. The line is open now. Please go ahead.

[Kevin Kumar, Goldman Sachs]

Thanks for taking my question. Just curious on the new packaging model and kind of the starter package that was implemented, I think, last quarter, how has reception been there? And is that starting to impact the pipeline or conversion rates at all? Thank you.

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. So it's still early stage. We started obviously to pilot it with a few of our reps. It will start to be in a larger scale starting July. So hopefully, next quarter, we will be able to give you some initial results. So far, we're happy with the structure. We think it's the right structure. And moving forward, obviously, we will be happy to share some data points. But right now, it's a small scale to actually give you information.

[Scott Little, Chief Revenue Officer]

Yes. And for us, we've started it in our commercial business, which is our mid-enterprise. And so we've got a very small start to it, but so far, initial returns are good.

[Kevin Kumar, Goldman Sachs]

Got it. That's helpful. And then just on kind of partner contributions, I know that's been a big focus and you have ambitious goals in terms of kind of the mix of contribution from partners. Just curious kind of how that's tracking? Is that kind of in line with your expectations? Curious kind of the progress there. Thank you.

[Scott Little, Chief Revenue Officer]

Yes, partners are incredibly important to our plans, not only for this year, but also for '24 and '25. I would tell you, it's one of the areas that I'm particularly pleased with. The partner ecosystem growth as well as their contribution to our performance is in line with our expectations. And I've got a big set of expectations on them. I expect that team to do a significantly improved performance over last year, and last year was good. So I'm very excited about the partner ecosystem. And so far, we're tracking well.

[Kevin Kumar, Goldman Sachs]

Thank you.

[Operator]

Thank you. We will take the next question from line [indiscernible] from BMO. The line is open now. Please go ahead.

[Unidentified Analyst]

Hi, thanks for taking my question. You've talked a lot about reacceleration of growth heading into next year. And even at the midpoint of your full year guide, there's some reacceleration in the back half of the year. Can you talk just a little bit about the dynamics that sort of go into that line of thinking? Are you assuming sort of any improvement in the buying environment? Is it addition of customers moving next and up customers? Can you talk about sort of your expectations for what can we include that reacceleration and not only both the back half of the year, but in the medium term going forward? Thanks.

[Dan Adika, Chief Executive Officer and Co-Founder]

Sure. So obviously, we have seasonality in our quarters like every enterprise company, which Q4 is our strongest quarter. In addition, we do expect, obviously, to have Fed, as Scott mentioned, as the Super Bowl season starting September. In addition, obviously, we have renewals that's coming up in Q3 and Q4, where it's an expansion event for us as those companies are -- continue to add, obviously, users and applications. So, obviously, we have our pipeline and the pipeline coverage and the way we're actually measuring it. So the way we forecast and looking forward, we're thinking obviously that our gross new ARR will improve quarter-over-quarter, but that's based on our initial forecast. So, we're currently according to our plans as we see it, and we're feeling very strong about it.

[Operator]

Thank you. We will take the next question from line Vinod from Barclays. The line is open now. Please go ahead.

[Unidentified Analyst]

Hi, thanks for taking my question. I think you may have mentioned this before, I'm sorry if I missed it, just joined a little late. But you achieved FedRAMP authorization. Can you maybe talk about some of the incremental contribution that may be built up the guide, or is it more of an upside type of opportunity? And then can you also just talk about what you've done on the sales side to kind of prepare for selling more into the government? Thanks.

[Dan Adika, Chief Executive Officer and Co-Founder]

Yes. So I will start and Scott can continue. So one, as we said, we're expecting deals to come in, in the second half. So as you know, it will be ARR. So it will have an impact on the revenue, but a slight impact in 2023, most of the impact will go into 2024. But having said that, those will be probably big contracts, long contracts, like typically with the government contracts.

Regarding the team, and I will let Scott continue, we had the team in place before we got certified. So we built the team. We built the pipeline. We saw obviously the demand. In parallel, we worked with our R&D and engineering team to get certified and run and go cloud, and now everything got in place. We got this really fast relatively to other companies, and we're super happy, obviously, with that achievement. And now it's a go time for us to go and implement and show the value. We have customers that we already signed in Q4. We are now going live with them. So that's going to be a big milestone for us. And they already see the value, and there is a great pipeline in the federal.

Scott, do you want to add?

[Scott Little, Chief Revenue Officer]

Well, and it's important to remember that we've held that investment now for a long time. So it's been sitting on the books and now it's time for it to pay off. Don't forget that we've also continued our investment on the partner side. And partner and our direct sales capacity go hand in hand, right, in the federal space. So I feel like we've got our bench ready to go. Now they've suited up. It's time to step out on the pitch and go sell and close. And we've got a strong partner ecosystem to help us support that direct field sales team.

[Unidentified Analyst]

Thanks, appreciate the color on that.

[Operator]

Thank you. There's no further question at this time. I will hand it back over to your host Dan to conclude today's conference.

[Dan Adika, Chief Executive Officer and Co-Founder]

Thank you, everyone, for joining. Really excited for the future of WalkMe and what to come. You can join us tomorrow to the Needham Conference, and we will discuss, obviously, more about our future and what we're with AI, and all the exciting things that we're doing in WalkMe. So thank you so much for joining.

[Operator]

Thank you for participating. You may now disconnect.