WalkMe Ltd. (NASDAQ:WKME) Q3 2022 Earnings Conference Call November 15, 2022 8:00 AM ET
Company Participants
John Streppa – Head of Investor Relations
Dan Adika – Chief Executive Officer & Co-Founder
Scott Little – Chief Revenue Officer
Hagit Ynon – Interim Chief Financial Officer
Conference Call Participants
Tyler Radke – Citi
Scott Berg – Needham
Kevin Kumar – Goldman Sachs
Michael Vidovic – KeyBanc
Pat Walravens – JMP Securities
Vinod Srinivas – Barclays
Keith Bachman – BMO
Operator
Thank you all for joining the WalkMe Third Quarter Earnings Call. Kindly be informed that we will have the opportunity to ask questions after the opening remarks. [Operator Instructions]
I will now pass it to John Streppa, Head of Investor Relations for WalkMe. Thank you.
John Streppa
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 Interim 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 expectations and views of future events. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control.
Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including those set forth in the section titled Risk Factors in our annual report on Form 20-F filed with the Securities and Exchange Commission on March 24, 2022, and other documents filed with or furnished to the SEC. See our press release dated November 15, 2022 for additional information.
In addition, certain metrics we 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 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 November 15, 2022.
And with that, I’d like to hand it off to Dan.
Dan Adika
Thank you, John. Good morning everyone. I’m happy to share the progress we made in Q3 in light of the dynamic market environment. We continue to be bullish about our strategy to accelerate upmarket with our DAP offering, which fuels the world’s leading enterprise companies who are seeking to accelerate their digital strategies.
We are very pleased to announce DAP ARR growth of over 60% for the second quarter in a row. Our DAP customers are embracing the platform approach to digital adoption by acquiring an ELA, or deploying working departmental-wide on four more applications. Business processes don’t live in a single application and the progress we’re seeing with DAP customers give us confidence to continue to drive our strategy towards large organizations with complex workflows.
Now more than ever in these challenging financial times, organizations are looking to extract more value and accelerate their technology investment. WalkMe is well positioned to expose usage visibility on the entire tech stack to our data solutions, while empowering the organization with no-code automation and orchestration tools to deliver a seamless digital experience to their employees and customers. Put simply by connecting the user to the business workflow, ROI is achieved.
As we continue to align our internal strategy moving upmarket, we’re seeing the results in our numbers. Overall our ARR of customers over 500 employees grew 31% year-over-year compared to a total of 26% ARR growth year-over-year in all customer segments including SMB. At the end of the third quarter, we had 394 G2K customers, up from 367 at the end of 2021. We are seeing improvement in lending these customers and expanding our current G2K customer base.
At our Investor Day in May this year, we know that the average ARR from G2K customer was $305,000 as of the end of 2021. And today the average ARR for G2K customers is $334,000 up almost 10% year-to-date. The opportunity of growth within our G2K customer is tremendous.
In the quarter, we added four net-new customers paying us over $1 million ARR. We now have 35 customers that are paying us over $1 million ARR and 511 that are paying us over $100,000 in ARR.
We have taken active measures to reduce our exposure to the lower growth and higher cost customer segment of the SMBs. Near-term this will be a headwind to our overall net-new ARR in revenue, as we proactively reduced this segment.
Sub-500 employees customers now account only for 6% of our total ARR. And we expect this to decline further, over the coming quarter, which allow us to focus on enterprise and DAP, customers.
While we are seeing positive signs in our strategy and in the DAP offering, we are seeing headwinds from macro standpoint. We continue to see deals take longer to get through the closing process, including additional layers of approvals in larger deals.
On the expense side, I’m thrilled to see that we held our non-GAAP operating expense flat quarter-over-quarter. We also improved our gross margin by 2% from previous quarter to 80.4%, driven by our investments in multi-cloud approach where our subscription gross margin was 89%.
And we’re seeing better utilizations with our professional services organizations, we drove it above breakeven, on a non-GAAP basis. Operating loss in the third quarter was $12.5 million, compared to a loss of $16.7 million last quarter. Operating loss margin of 20% compared to 28% last quarter.
We are committed to building a sustainable growth business and achieving cash flow positive within 2023. With the progress we made in Q3, I’m even more confident in our ability to reach the goal. There is a growing sense of a tipping point in the market category pioneered DAP.
Validation for Digital Adoption Platform is at an all-time high with an increase in Tier 1 analysts from recognition. I’m proud to share that Gartner, for the first time, published a full market guide, acknowledging the DAP category that we’ve been creating and shaping for the past few years.
And Forrester, have released their first new wave analysis of the DAP market naming WalkMe as a leader. It’s humbling to see, the recognition and appreciation from a global DAP leaders it confirms even further that we’ve been paving the right path for digital ROI.
As market recognition continues to grow we’re also seeing growth in the ecosystem around us. In October we also Elevate, the DAP industry event to Empower DAP Professional.
We as speakers joined from AB InBev, Cisco, Deloitte, W.L.Gore among others to share their amazing journey in digital adoption.
This was our largest gathering of DAP Professional to-date. And I’m excited to see the continued growth and maturity of professionals, driving the category forward beyond the walls of WalkMe.
Lastly, we see an increase in demand coming from our partner ecosystem, as their customers are focused on how to do more with less in a complex spending environment. We’re seeing significant growth in the volume of deals that come through our advisory partners. And we’re making great progress with our ISV partnerships.
WalkMe is consistently being selected as the partner of choice, for the leading providers of change management and digital transformation across the globe. With DAP as the tipping point and our strategy in place we expect an increased number of organizations to turn to WalkMe to drive their digital efficiencies.
Our 2023 plan is focused on improving our efficiency aligning our investment to our new go-to-market strategy and ensuring our product offering continue to lead the category.
With that in mind, I want to pass it off to Scott, our Chief Revenue Officer to highlight some of the improvements and changes, we made to our go-to-market approach and what he is seeing from our sales leaders in the field. Thank you. Off to you Scott.
Scott Little
Thank you, Dan. Now that I’m a full quarter in the seat as the CRO, I wanted to highlight my observations over the past quarter and where I expect us to improve in our execution.
In the third quarter we had mixed results from the sales-execution standpoint. The headline net-new ARR number was below my expectations. But that number hides some of the advancements that we’ve made like growth in G2K customers, improved DAP ARR and the growth of greater than $1 million in ARR customers.
As Dan mentioned, we continued to make progress shifting away from the SMB customer cohort, which we’ve identified as not having a strategic fit with our go-forward enterprise strategy.
In line with that strategy, we’re actively shifting our go-to-market resources to enterprise and large enterprise customers where we have the best opportunity over the next three to five years.
Secondly, I’m pleased with our land-and-expand motion in our larger customer cohorts. We’ve made solid progress expanding our footprint within our G2K customers, but we’ve also worked hard to drive increased renewals and expansions within these larger customers as evidenced by our dollar-based net retention for customers with over 500 employees staying above 120% in the third quarter. We had customer lands with AECOM and Insurance Limited and expanded our relationships with Hewlett Packard Enterprise, Schneider Electric, and Thermo Fisher Scientific.
Looking at how our go-to-market team is structured, I want to highlight a few investments that show our shift toward a customer-centric, enterprise-led sales organization. The first is our value-realization team, which began as an initial investment in 2021 and continues to build momentum in 2022. This presales organization led by our field CTO has invested in a mapping exercise with some of our best customers who have seen the greatest success with WalkMe. The team then creates templates based on those mappings, which our sales teams use to talk about real ROI possibilities with our prospects.
When we deploy these value realization resources to our enterprise opportunities, we’ve seen closing rates that are greater than when they are deployed. In 2023, we will continue to expand on this team’s work to make artifacts like process roadmaps, ROI calculators and deep-value dives more accessible to all of our customers.
The second investment area to highlight is our partner ecosystem. We’ve touched on this in the past, but I’m very excited about accelerating these partnerships globally with leading global system integrators and enterprise ISVs. You will hear us continue to emphasize joint-customer wins, announce new partnerships, and expand [ph] capabilities within our existing partnerships.
As such, I’m thrilled to announce continued global momentum in one of our key growth markets with Deloitte, building on our partnership in the US and in Canada. In Q3, we expanded our relationship to Deloitte Australia, a vital member firm with the Deloitte Asia Pacific Group. This is the latest Deloitte member firm to adopt the WalkMe Alliance. This provides even further validation in Deloitte’s largest Asia Pacific market and also recognizes the accelerated value, WalkMe’s Digital Adoption Platform combined with Deloitte’s capabilities and provide to our mutual clients and prospects.
Our entire partner ecosystem is driving meaningful impact to our results and continues to be one of the fastest growing areas of our business. In the third quarter, nearly one-third of our global ARR was impacted by our partner ecosystem. In the US where our partner business has had the most focused investment this year, Q3 partner sourced ARR quadrupled over last year’s totals. This ecosystem is critical to expand the capabilities and delivery of digital adoption outside of the walls of WalkMe.
Our partners extend our reach and credibility with the largest organizations in the world, undergoing some of the most complex change management. We will continue to invest in the team supporting our partners to better enable their sales and implementation skills, allowing this ecosystem to scale even faster.
Our third key investment area is the public sector. Our US Federal business continues to progress in line with our plans and we’re working towards FedRAMP status by the end of the fourth quarter. This is a massive opportunity, which will be a competitive advantage against our peers for the next two-plus years. The US federal government is ripe for digital transformation for both internal processes and citizen facing processes.
As you may remember, we’re happy to already count a number of international governments as our customers, which include one of our largest expansions this quarter, which became our first government entity having over $1 million in ARR. We’re working hard to deepen our relationships with government agencies around the world as they invest in improving citizens’ experiences and driving process efficiencies.
For example, the government of Canada’s Global Affairs office recently deployed WalkMe on two of their citizen facing websites that manage import and export controls. With WalkMe, the Global Affairs office is able to automatically guide individuals and businesses through the import/export application processes, validate data in real-time and enable them to export/import goods and services at a faster rate, which accelerates time to market for approvals and subsequent revenue generation.
Looking forward to 2023, we’re focused on improving the quality of our pipeline and shifting resources to better align with an account based go-to-market philosophy. This shift from a broad based go-to-market approach to a more targeted one will help our sales and marketing teams focus on the enterprise customers and prospects, which are most likely to benefit from our solution at scale those that we can grow to enterprise DAP deployments. It is just as important to be crystal clear about what we don’t do as it is to be clear about what we do within the go-to-market organization.
In closing, I’m pleased with the work done to date, to make sure our sales and marketing resources are aligned to drive a world-class enterprise go-to-market organization. I’m working hand-in-hand with our new CMO and with our Chief Customer Officer, to deliver a best-in-class customer experience that has at its center, those large enterprise customers with sophisticated application environments that best benefit from WalkMe.
With that, I’ll hand it off to Hagit Ynon, our interim CFO to cover the numbers.
Hagit Ynon
Thank you, Scott and good morning, everyone. Our third quarter results were highlighted by continued progress with customer expanding the relationship with us. We count 35 customers paying us more than $1 million in ARR with, an average ARR from those customers of $2.1 million which grew 15% year-over-year. That customer which we define as a customer with an ELA or have a departmental deployment of four more applications, grew to 155 customers.
ARR from DAP customers now represent 45% of total ARR. Our total revenue for the quarter was $63.4 million, up 25% year-over-year at the high end of our guidance range. Our subscription revenue grew 23% year-over-year to $56.7 million. Remaining performance obligation or RPO ended the quarter at $350.8 million, representing growth of 29% year-over-year.
Current RPO, which is contracted subscription revenue expected to be recognized over the next 12 months grew 27% year-over-year to $199.4 million. Long-term RPO grew 32% year-over-year to $151.4 million.
We continue to strengthen our position with our larger customer cohort of employees greater than 500, which now represent 94% of our total ARR. Before turning to gross margin expenses and profitability, I would like to note that I will be discussing non-GAAP results going forward.
As Dan highlighted, we are extremely proud of our focus on efficiencies and expense management, which drove an improvement in our non-GAAP operating loss for the third consecutive quarter. In the third quarter of 2022, gross margin was 18.4%, up 2% points from the second quarter. Gross profit was $50.9 million, up 29% year-over-year.
We have seen improvement in our gross margin due to our continued optimization of our Cloud Austin operation and better utilization with our professional services organization. We believe we will continue to improve on our gross margin over time as we continue to scale our multi-cloud strategy and optimize our professional services organization, leveraging partners for delivery when feasible.
Turning now to operating expenses. We are prioritizing our resources internally behind highest growth area versus areas that no longer fit our strategic direction such as SMB customers. Further, we are better aligning our sales and marketing organization to drive efficiencies that we expect will be yield margin improvement in 2023.
Sales and marketing expenses in the third quarter was $40.3 million compared to $29.6 million in the third quarter of last year. This represents 64% of total revenue in the third quarter, similar to last quarter’s results and compared to 59% in the third quarter of last year. R&D expenses in the third quarter was $12.2 million compared to $10.7 million in Q3 last year. This represents 19% of total revenue versus 21% in the third quarter last year.
We continue to make investment in our platform to drive innovation and increase our flexibility for deployment. We will continue to invest in R&D, as we extend our product and invest in our ecosystem. G&A expense was $11 million for the third quarter compared to $9.3 million in the third quarter last year. G&A was 17% of revenue versus 18% in the third quarter of last year.
While we do not anticipate the large increase in our overall OpEx for the remainder of 2022 and 2023, we do expect some growth early in 2023, as we continue to align to our strategic growth plan. We have made progress during the third quarter, improving efficiencies in our operating model, which drove our operating loss lower than our initial plan for the quarter.
We are very focused on driving toward positive free cash flow showing increasing leverage in our business model. Operating loss in the third quarter was $12.5 million compared to a loss of $16.7 million last quarter and $10.1 million in Q3 last year. Operating loss margin was 20% compared to 28% last quarter and 20% last year.
Net loss per share in the third quarter of 2022 was $0.14 using 85.5 million weighted average shares outstanding, compared to $0.19 last quarter. With our efficiency metrics expense control and focus on driving forward positive free cash flow, we improved our free cash flow by $1 million quarter-to-quarter.
Free cash flow was negative $11.2 million in the third quarter of 2022, compared to a negative $12.2 million last quarter, and a negative of $12.9 million in the third quarter of last year. Free cash flow margin in the third quarter of 2022 was negative 18% down from a negative 20% last quarter and a negative 26% for the third quarter last year.
Turning to the balance sheet. We ended the quarter with $309.2 million in cash, cash equivalents and short-term deposits. Given our sizable cash balance and expectation of improving operating margin throughout 2022 and 2023, we are well capitalized to continue to support our growth goals.
Turning now to guidance. While we were pleased with our execution against our strategic priorities, the lower-than-expected net-new ARR reduced slightly our total revenue expectation for the full year. We are anticipating the uncertainties surrounding the microenvironment to continue as we focus on reducing our exposure in customers that are below 500 employees.
Today this cohort to represent around 6% of ARR. While we are slightly lower in our top-line revenue estimate, we are improving on our expected non-GAAP operating loss. Likewise we are reaffirming our goal to reach positive free cash flow in 2023.
With that said, for the fourth quarter of 2022, we expect revenue in the range of $62.9 million to $64.9 million, representing growth of 18% to 22% year-over-year. Non-GAAP operating loss in the range of $13.2 million to $11.2 million and an operating margin loss of 21% to 17%.
For the full year of 2022, we expect revenue in the range of $243 million to $245 million representing growth of 26% to 27% year-over-year and a non-GAAP operating loss in the range of $61 million to $59 million.
With that Dan, Scott, and I will take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll now take our first question from Tyler Radke of Citi. Your line is open. Please go ahead.
Tyler Radke
Yes. Good morning, and thanks for taking the question. I wanted to ask you just a little bit about the on the macro environment. Specifically, as it relates to some of your larger deals? Was the elongation of sales cycles was that something you weren’t expecting this quarter? And are you expecting it to get worse in the guide? And then if you could also just comment on how you see the macro environment impacting your renewal rates and expansion rates to the extent that you’ve seen any pressure there? Thank you.
Dan Adika
Hey. This is Dan. I will take this question. So one overall, what we’re seeing is that, there is more I would say process within our customers to get budget approved and deal signed so on the larger deals that more signatures needs to take place, before we can actually execute the deal. Usually, that prolonged the deal a little bit further. And to your question regarding renewals and expansion we’re showing tremendous value to our customers.
So when WalkMe is deployed and when we have a wide-company deployments like that we’re actually seeing that growing very fast. That’s the third consecutive quarter when we’re seeing acceleration in DAP growth 63% year-over-year. And we’re seeing overall in large enterprises growth with 35 customers over $1 million. And Scott, I don’t know if you want to add anything?
Scott Little
Well, I’d just add, the next issue or next question you’ll probably bring up is what are we seeing in terms of demand? We haven’t seen a falloff in demand. We have seen longer sales cycles as Dan pointed out. But I would also say that, when we look forward to Q4 our earnings results for Q4 we would expect roughly the same kind of impact. I’m not saying acceleration and impact on economic headwinds. That’s all.
Tyler Radke
Got it. So pipeline is still strong, just maybe an adjustment on the close rate?
Scott Little
Yes.
Tyler Radke
Got it. And just on the operating income side and just how you’re managing through the expense consider it. Can you just talk about kind of the — I guess what you’ve learned with obviously seeing much higher partner contributions, and then also reducing your focus on SMB? Just help us understand how much of that cost savings is in the numbers that we’re seeing today? And does this maybe accelerate your pathway to breakeven just kind of doubling down on the enterprise and seeing that momentum of partners? Thank you.
Dan Adika
Sure. I will start and Hagit will continue. So obviously, our enterprise customers, is the most profitable segment. And SMB is the one creating a lot of overhead with support costs and so forth and so forth. So yes, by reducing the exposure to SMB, we are able to save costs, because we can be laser-focused with the resources towards the large enterprise and the DAP customer. So that’s what we did and that’s our strategy, and we focused all our energy towards DAP. So with that, it allows us one to improve our operating margins and improving our free cash flow and that will be our strategy moving forward into 2023.
Hagit Ynon
Okay. I will add to that. I would add to that that, yes, we are very much focused on our efficiency metrics and growth organization, starting the SMB and R&D and the rest of the organization. And this takes us throughout in our view to becoming a cash positive within 2023.
Tyler Radke
Sorry, just to clarify, you said, cash flow positive in 2023?
Dan Adika
Within 2023.
Tyler Radke
Okay. So, like in a given quarter, not the full year?
Dan Adika
Yes, correct.
Tyler Radke
Okay. Thank you.
Operator
Thank you. We’ll now move on to our next question from Scott Berg of Needham. Your line is open. Please go ahead.
Scott Berg
Hi, everyone. Thanks for taking the questions here. I got a couple. I wanted to start with, I think a comment Dan made, I believe you had mentioned you’re going to — I think the word was accelerate some of the SMB customers moving, I guess, out of the business here. How should we think about that 6% of ARR kind of troughing out and no longer being a headwind to the business? Does most of that kind of go away here in Q4, or will some of that still continue to linger into next year? Just trying to think about the model here and when things may improve relative to the success you’re having in that market.
Dan Adika
Sure. Thanks Scott. So, we are having active contracts with them. So basically, what we will see is quarter-over-quarter. We’ll see more and more and more of those customers basically going away. So within, I would say, four to six quarters, maybe a little bit more, that portion will be almost zero. It’s already 6% and we’re anticipated to go down from quarter-to-quarter. So, it’s not going to be like one quarter and it’s all gone. It’s more a transitional play.
Scott Berg
Great. Thank you. And then, Scott nice to meet you. You had talked about moving some of your sales resources or I guess, reallocating them from your smaller customers up-market. I think lots of us have seen sales reps from different businesses. They tend to be really good at selling to certain types of customer segments. How long should we think about that transition though from your sales reps are used to selling smaller customers to selling to a bigger enterprise customer that might take time to build pipeline and close deals which is often different than some smaller companies out there?
Scott Little
Yes. You kind of said it yourself there, Scott. We expect that to take a few quarters for us to make that transition. In some cases, we do believe we can retrain those reps that are calling on those smaller clients and help them move up-market with that enterprise story. So part of that’s on us. And part of it will be the situation where we hire additional good quality enterprise and large enterprise reps to help us pursue that market. So it will be a combination of both over the next few quarters.
Scott Berg
Great. That’s all the questions I have. Thanks and congrats on the good quarter.
Dan Adika
Thank you.
Operator
Thank you. We’ll now take our next question from Kevin Kumar of Goldman Sachs. Your line is open. Please go ahead.
Kevin Kumar
Hi. Thanks for taking my question. I just wanted to ask about some of the deals that were pushed out earlier in the year. I believe some of them closed in Q2. Just maybe can you talk about the progress you’ve made with some of those elongated deals and if you closed the majority of them? Thanks.
Dan Adika
Hey Kevin. Yes, so, we closed most of the deals. So, when we have those deals pushing from quarter-to-quarter we’re not losing those deals. We’re just closing them in a different timing. So, yes, I’m happy to say that the deals from Q1 that moved to Q2 we closed most of them. Same goes to Q2. And so that — I hope I answered the question.
Scott Little
Yes. So, I’ll jump in here too as — I’ll jump in too Kevin as well with the question. I mean part of this is also something I’m working on. When I came into the organization, I’m pretty happy with my sales leadership team and what I inherited when I joined.
But there’s some process rigor things that we could do to improve that will help offset some of that economic headwind and will help offset some of the things that we see in terms of lengthening sales cycles. So, there’s things you can control and there’s things you can.
On the things we can control, we’re going to improve. And I’m already starting to see just in the first six to eight weeks an improvement in our ability to shorten sales cycles on the areas that we can control.
Kevin Kumar
Okay. Appreciate the color.
Operator
We’ll now move on to our next question from Michael Turits of KeyBanc. Your line is open, please go ahead.
Michael Vidovic
Hi, this is Michael Vidovic on for Michael Turits. Thanks for taking my question. I was curious on discounting. Are trends up or down and if they’re up, how significant of a change are you seeing in the current period?
Scott Little
Yes. So, for us we haven’t had seen a significant change in discounting trends — accounts mattered by volume and size and market segment, but no real major shifts in discounting trends right now. I know that my peers and other industries have seen that pressure so far we have not.
Michael Vidovic
Great. And then just a quick follow-up. Go-to market for Fed, are you doing a different go-to-market approach to that, or how are you building out the pipeline differently, or is there a different partner ecosystem strategy, different contracting strategy? I guess how much of a pipeline are you seeing in front of you right now with FedRAMP? And then what are you expecting to materialize in 4Q you achieved FedRAMP?
Scott Little
Yes, that’s a bunch of questions at one try. I’ll try to answer them in order. In terms of what we — in terms of what we expect on the go-to-market the major change that our new CMO and I and his name is Adriel Sanchez, is a focus away from kind of a broad-brushed approach with our marketing dollars and our prospecting spend to more account-based approach.
When you move upmarket, I give you the numbers in the US, you can sell to approximately 10,000 total entities in the US. When you move upmarket you’re significantly reducing that down. So, I want to make sure that none of the money we spend in marketing and attention we put from my sales organization is going into the market that we don’t care about.
So, that’s a shift from how the company has done it in the past. Adriel and I are working out now as we come into 2023 exactly which accounts we want to target in the space that fits that enterprise and large enterprise customer base. And then you’ll see that reflected in the pipeline. So, larger transactions, a larger average sale expectation. And hopefully, the intention is a broad-industry presence, which will help us with closing in the second half of next year.
Sorry — and Fed, so next question Fed. So, we expect to exit the Q4 so exit this year with what is called FedRAMP ready stats, okay? We’re very close to having that in place and then we would expect to go what is called FedRAMP moderate status sometime in the first half of 2023. Is that helpful?
Michael Vidovic
Yes. Thanks Scott, for the info. That’s all for me. Thank you.
Operator
Thank you. [Operator Instructions] We’ll now move on to our next question from Pat Walravens of JMP Securities. Your line is open, please go ahead.
Pat Walravens
Great. Thank you. So, Scott not the way ideally you would start your first quarter, right? I’m just wondering when in the quarter did you start to realize the sales team wouldn’t meet your expectations?
Scott Little
Well, as you guys know I joined roughly in the middle of the quarter. So, it took me a while to find the bathroom and my guess it was probably the tail-end of the quarter last month when I started to get a feel that we were not going to close at the rate that I expected.
Pat Walravens
All right. And I mean you’ve talked about it, but what would you attribute it to?
Scott Little
What would I attribute to some function…
Pat Walravens
It’s not come together the way, I thought it was going to — why was it not coming together the way you hoped it would?
Scott Little
Yes. We had some sales execution issues, guys. I’ll just be straightforward. While I’m very happy with my sales leadership team and the quality of leader. They had some process rigor issues, things that I would have addressed earlier in the quarter, they didn’t do. So now they’re doing it my way.
Pat Walravens
Yes, good. And then I caught your — you used the word quality when you were talking about the pipeline for 2023. So can you explain, a little more what you’d like to see in that pipeline that maybe you don’t see as much of now?
Scott Little
Yes. Good question. Great example speaks back to our overall focus areas for the — for 2023 and for the business, as I put in my prepared remarks. Listen, we close at a much higher rate when we have a partner deal. The quality of pipeline that comes in especially, from one of our advisory partners or one of our ISV partners, is just a better qualified deal and we closed on that higher rate. So one of the things that I’m pushing my team and making investments on the channel side, to improve pipeline qualities, to improve deals in conjunction with those most important partners the SAPs of the world, the IBMs of the world and certainly the Deloitte KPMG, et cetera, that we have these great relationships with. So, that’s first and foremost.
And again, those guys aren’t chasing the SMB. They’re in the market that we’re in. They’re enterprise and large enterprise, and they’re tackling those really difficult business problems like digital transformation and organizational change management, that we best service. So it’s a combination of those two things that will help me with quality.
And then for me, if I’ve got an existing client and a relationship in place including contracts, it’s just so much easier to do an expansion. So when I look at pipeline quality, I’d like to see an improvement in the number of expansion opportunities, for our existing clients that are not DAP today that we can take to DAP. And when I’m looking at land — from a land perspective, I’m looking for clients that fit that large enterprise – sorry, enterprise and large enterprise clients that could then turn into DAP for me, if not in 2023 then 2024 2025. So, that’s when I — at a qualitative level and we’re looking for in terms of pipeline quality. If I can improve in those three areas, Katie Bar, The Door it’s good stuff.
Pat Walravens
All right. That’s super helpful. And then Dan, one for you. How are you and the Board thinking about this $300 million plus in cash, that you have sitting on your balance sheet? Do you use it to buy back stock? Do you make an acquisition? Do you not do anything with it? I’m sure you’re discussing it. What are the thoughts?
Dan Adika
Sure. So obviously, as you know we have a new leadership, and we’re really focusing on our strategic points, which is DAP large enterprise, Fed partners and so on. So we’re not in a rush to do anything. We actually want to make sure that we’re fixing all the sales execution, continue to go upmarket and obviously, see what happens in the economy now with over $300 million in cash that put us in a really positive position. And we’re going to just wait to see how the economy will evolve as we’re entering 2023. So no, concrete plan.
Pat Walravens
Okay. Good. Thank you.
Operator
Thank you. We’ll move on to our next question from Michael Turrin of Wells Fargo. Your line is open. Please go ahead.
Q – Unidentified Analyst
This is Michael Berg [ph] on for Michael Turrin. Thanks for taking my question. In terms of the revised guidance, there’s a downtick of about $3 million to $4 million. Can you provide any sort of quantification around the impacts from the shift to — shift away from SMB and the macro? Like, how can we think about, which one was a greater impact to the revised downward guidance? Thank you.
Dan Adika
Yes. So, I will take it. So obviously, we had a bigger churn because as we announced in the Q2 earnings, we took $3 million to $4 million in SMB churn. So obviously, if it’s affecting the ARR, which is an indicator to what will happen to the revenue. So, we’d say that’s a portion of it. And the second portion is what Scott said, regarding not hitting the expectations we had on ARR from sales execution. So I wouldn’t say, that we’re seeing big macro events that’s slowing us down. I would say, it’s a combination of SMB as being better in execution. And I say that will sum it up.
Unidentified Analyst
Got it. And a quick follow-up. Would you say that churn from SMB was as much as you anticipated when you announced it in Q2? You made it sound like you — just now that it was a greater churn than you initially anticipated?
Dan Adika
Yeah, it’s in line with what we expected. You need to understand, we are pushing the customer to cancel. We don’t want to prolong those contracts. So basically upon renewal this is how much we have to churn. And, obviously, if we have customers that I know went under or something like that even though they have active contracts, and we have the opportunity to write it off, we are writing it off as well. But if it’s an active customers that using the product and has active contracts that they’re still going to be in our ARR.
Unidentified Analyst
Got it. Thank you.
Operator
Thank you. We’ll move on to our next question from Vinod of Barclays. Your line is open. Please go ahead.
Vinod Srinivas
Hey guys, thanks for taking my question. Right now we’re seeing a lot of layoffs and hiring freezes in the tech industry and beyond. And I know one use case for WalkMe has been employee onboarding and training. I was just curious has this been a first or second use case when a customer onboard or expands with WalkMe with your G2K customers? And in this environment what are you seeing them adopt and expand with now? And can you talk about maybe some of the other use cases that may be seeing more demand and interest given this environment? Thank you.
Dan Adika
Sure. I will start and Scott can continue. But I talked about it in the call when — actually now when we are seeing the headwinds from economy company is one wants to spend better their IT budget and software. They want to make sure that the investment that they already made yielding better ROI, and they’re executing better against their strategy. And this is where we are actually in a really, really good place, one with our data products and our ability to help them with adoption.
I would say and this is why we’re focusing on DAP customers; it’s rarely that we’re selling WalkMe just for single use case. And usually there is a lot of use cases that companies are buying WalkMe. Yes, onboarding is one of them. But offboarding is one of them too.
So let’s say that you now have a restructuring of your business, you have tons of change management especially when you’re letting people go. So I would say that when you have something like Digital Adoption Platform helping your workforce be better this has actually put us in a really, really good spot. And actually our customers turning to us for more use cases and more solutions like that.
Scott Little
Yeah. You can add to that rescaling and upscaling, right? It’s not just offboarding. They may move out x number of employees but the ones that are left may not be in the same job or have the same skill requirements. So we have an opportunity to help out there. And remember when we talk about that cohort that’s most important to us, which is DAP, it’s for more applications with not just the HR piece. All the other efficiencies we bring to the table around SAP and Concur and Salesforce those are all still in play.
Vinod Srinivas
Got it. That’s helpful. Thank you.
Operator
Thank you. We’ll move on to our next question from Keith Bachman of BMO. Your line is open. Please go ahead. Keith, your line is open. If you would like to unmute it please.
Keith Bachman
Yeah, thank you. Sorry about that. I had a couple of questions if I could. The first one is you’re guiding Q4 revenues to about 20% year-over-year growth rate. And I’m just trying to think about the various puts and takes of that? And really the question is that the right starting point as we look at CY 2023? And the reason I ask is you have incremental macro headwinds that are causing elongation of sales cycles happening to just about every software company. At the same time, it sounds like you have more rigor around pipeline and partner leverage. So I’m just trying to think about how those balance out if we look over the horizon beyond Q4?
Hagit Ynon
I’ll take that, it’s Hagit. So again our approach is local service especially…
Keith Bachman
Yeah. Can you get a little closer to the mic?
Hagit Ynon
Yeah. So yes, yes we have been more conservative especially around the macro environment right now and the fact that we are looking into our 2023 plans. Yes we are more focused on efficiencies on one hand. And we are also looking into our potential growth within 2023.
We are still — it’s too early for us yet to tell where we are. But again, I think for the rest of the 2022, what we gave is what we feel more comfortable with right now. And I believe, it’s probably too early to tell about the 2023.
Keith Bachman
Okay. Well, let me ask a philosophical question. As we look at 2023, you’ve basically been — your OpEx has been about $63 million for the last three quarters. And I’m trying to understand how you improve operating margins next year at the same time trying to stimulate growth?
And so your OpEx for the first three quarters has been growing faster than revenues and yet you have de-selling revenues understandable given the macro environment. How do you balance the objective to sustain revenue growth, at the same time and improve margins in the face of these macro headwinds?
Scott Little
Keith, I’m happy to offer my opinion, because, good or bad I carry the biggest portion of that OpEx and on the go-to-market side of the house. So for me, one of the reasons that I was brought in was to not only help with some of the sales rigor and processing which I’m on top of now, but it’s also having a view to efficiency.
So the way we see margin expansion next year, a portion of it must come from improved top-line performance of course, but another portion of it is going to come from efficiencies on the sales and marketing side of the house.
So I’ll give you a great example. How we spend money on a broad market — on a broad-based marketing program is very different than what you do in account-based. So I think we can get some, efficiencies there.
And there’s, other things that we’re working on that we can talk about as we come into 2023. But you should think about it in terms of improvement around, sales and marketing expense as an opportunity for margin expansion and then, solid top-line performance.
Dan Adika
I want to add to that. This is Dan. So as we enter 2022, if you remember, we had a lot of investments in growth engines, which was our international market our partners and our federal. So those are starting to bear fruit. And they will bear more fruit in 2023. So that’s one growth engine.
In addition, we are laser focused on the enterprise and large enterprise and DAP customers which allow us to reduce costs from the business, because we need to serve less customers, but much more profitable customers that actually expand with us and not just departmental-wise, but company-wise, which obviously is easier for us to serve.
Plus, the market in our category is continuing to evolve. We’re seeing tremendous improvement in what we’re calling, DAP customer. You saw the 63% year-over-year. And we want to see more of those coming from our existing customers.
So CIOs, CDOs finally understand that they need a Digital Adoption Platform, in order to manage and be successful with the digital transformation initiative. So with everything that Scott says plus all the investments that we already made, we feel strongly that one we can get to positive free cash flow within 2023, while keeping the growth momentum.
Keith Bachman
Okay. Dan, if I could just sneak one more in. One of the questions we typically get is in a recession, budgets have to be prioritized and the DAP platforms may fall at the lower end of the prioritization. How do you respond to them?
Dan Adika
So that’s a great question. So conversation that I have with CIOs, when they have their portfolio of applications and digital assets and they are being asked to cut, I would say that in order for them to cut they need data.
They need to know who’s using what, which applications are redundant, which processes are something that they can replace with other software. And we’re offering the exact solution for that.
So, if you’re renewing software or emerging applications and so on, we’re giving you like a full suite of durability, in order for you to make those decisions. So we think that we have a really strong offering especially in that macro environment.
So yeah, it won’t be — and again, WalkMe is a big platform, not just the guidance piece or the automation piece, but we’re actually seeing a good momentum with the data piece that show you the adoption per application and for department and so forth.
Keith Bachman
Yes, okay. And with that I’ll leave the floor.
Operator
Thank you. We’ll take our next question from Michael Vidovic, KeyBanc again. Your line is open. Please go ahead. We’ll take our next question from Josh Baer of Morgan Stanley. Your line is open. Please go ahead.
Unidentified Analyst
Hi. This is Sophie Li [ph] on behalf of Josh Baer today. I just had a question on the customer adds. It looks like you had solid customer adds across cohorts. And I was just wondering how much of the customer adds are customers graduating to higher-paying segments versus truly new customers?
And what kind of assumptions on new versus existing customer growth is implied in your Q4 guidance? And also as we think about your shift to like enterprise-focused sales motion. How should we think about those like new versus existing dynamics?
Dan Adika
Okay. So when we’re talking about the customer adds and higher-paying segments, we are seeing that the majority is expansion. So companies that started with WalkMe with one use case, two use case as maybe one or two apps actually expanding to four and more applications and becoming DAP customers or signing a full ELA. So I would say that’s the majority of our new ARR coming from those expansions. And the second question was regarding the guidance…
Scott Little
New customer versus existing customer in Q4 guidance and it speaks. It’s basically the same as Q3 for Q4.
Dan Adika
Yes. It will still be mainly on expansion.
Unidentified Analyst
Got it. That’s helpful. And are you changing – are you seeing any changes in competitive environment recently?
Dan Adika
No. We’re seeing the same competitive environment as we saw last quarter. But we are seeing that the categories in a tipping point with Forrester New Wave and Gartner Market Guide. So we finally have it, I would say inked that that is the real category and there is players in the category. We didn’t see new players coming in. And so that stays the same from that quarter as well.
Unidentified Analyst
Got it. Thank you.
Operator
Thank you. There are no further questions. I will now hand you back to your host John Streppa to conclude today’s conference.
Dan Adika
This is Dan. I want to thank everyone for joining our call and looking forward to see you in our next earnings. Thank you everyone.
Operator
Thank you. This concludes today’s call. Thank you for joining. You may now disconnect.
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