WalkMe: Not Taking A Walk (NASDAQ:WKME)

In April of last year, I last had a look at WalkMe Ltd. (NASDAQ:WKME). I concluded that many questions remained, even as shares had lost half their value since the IPO in mid-2021. Appeal was improving based on lower sales multiples, but the increased losses made me cautious, as I continue to believe that management has quite some to prove here, given the huge cash burn, even if it did not pose an immediate to medium-term threat.

Keeping Track Of Technology

The header of this paragraph is essentially the promise behind the company, with WalkMe being founded on the idea that mutual relationships between people and technology are needed to make technological transformation work efficient and effectively, as technological changes otherwise happen at a far too rapid pace for humans to keep track of.

A cloud-based digital platform allows employees to access all websites, SaaS (Software as a Service) applications, apps, and other software components through a single platform. The platform is an overlay of many applications, without need for coding. A single overview is badly needed as increased technological changes come with a backdrop, that of greater complexity and potential silo-forming, often times outdoing the benefits of the same technology.

The company went public at $31 in the summer of 2021, granting the company a $2.2 billion operating valuation at the time. This valuation was applied to a business which posted $105 million in revenues in 2019, albeit accompanied by a $49 million operating loss. Revenues rose by a solid 41% to $148 million in 2020, as operating losses fell to $43 million, as relative improvements were much more pronounced.

First quarter sales for 2021 came in at $43 million, for a $170 million run rate, yet a quarterly operating loss of $13 million increased a bit. The resulting 13 times sales multiple was a bit steep (at the IPO valuation), given the growth and losses. This valuation discussion and the fact that its solutions mostly seemed to be that of an aggregator, made that I deemed the business not very strong from a fundamental point of view, and hence it made me a bit cautious.

I picked up coverage again in April of last year, a time when shares had fallen to just $15 per share. In the meantime the company grew second quarter sales for 2021 by 28%, to $47 million, as losses actually rose. Third quarter sales growth accelerated to 37%, yet revenues fell on a sequential basis to $46 million, with operating losses increasing further to $18 million. Fourth quarter revenues rose another 37% to $53 million, yet operating losses rose again to $29 million. A $900 million enterprise valuation and $200 million sales run rate revealed that sales multiples collapsed from 13 times to 4 times, as margins (or better said the lack of margins) were my concern. This came as the company posted a full year $78 million operating loss on $193 million in sales.

The losses were no major concern given a net cash position in excess of $300 million and the fact that WalkMe Ltd. management guided for losses scheduled to come down quite a bit. At the time I called the shares a speculative play, yet I could not commit to getting involved at the time.

What Happened?

Since urging a cautious tone last year, WalkMe Ltd. shares quickly fell to the $10 mark in the summer of last year, as shares have traded in a $7-$15 range ever since, currently trading at $10 per share. The company grew first quarter 2022 sales by 33% to $56.8 million, with operating losses approaching $30 million again. The company reiterated the midpoint of the full year sales guidance at $253 million, with non-GAAP operating losses seen at $76 million, a huge loss as this is ahead of stock-based compensation (“SBC”) expenses, of course.

Second quarter sales ended up growing 28% to $59.9 million, yet operating losses totaled more than $31 million, as the company cut the full-year sales guidance to $247.5 million, while cutting the adjusted operating loss guidance to about $66.5 million.

Third quarter sales rose 25% to $63.4 million, with operating losses narrowing to $26.4 million, with full year sales now seen around $244 million and losses narrowing a bit further to $60 million.

And Now?

The continued dilution meant that the WalkMe Ltd. share count has risen to 85 million shares, and with these shares now trading at $10, the market value has fallen to $850 million. Net cash holdings still stand at $310 million as a great deal of the losses were financed by issuing stock, resulting in an operating asset value of around half a billion. Slower growth is not welcomed, nor is the resignation of the CFO, but the losses remained huge, even as they are rapidly coming down a bit as it appears.

With a revenue base of nearly a quarter of a billion, WalkMe Ltd.’s resulting operating asset valuations come in at just 2-times sales, as the multiples are relatively modest, but the burn rate is quite substantial, of course.

The burn rate makes me a bit cautious about WalkMe Ltd. even as the current losses do not pose an immediate threat to the business, given the huge net cash position. Amidst all of this, I look forward with great interest to learn about the outlook for the upcoming year, not necessarily the pace of revenue growth, but really the outlook for margins.

Right now, I see no reasons to be involved with WalkMe Ltd., but I will keep a close eye on the near-term comments to see how 2023 is setting up.