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When WalkMe Ltd. (NASDAQ:WKME) went public last summer, I concluded that I was not walking along with this recent public offering. While the name perhaps suggests otherwise, this is not a revolutionary medtech name, but actually a cloud-based digital adoption platform.
Keeping Track Of Technology
WalkMe is basically founded around the idea or premise that technological changes take place too rapidly for humans to keep track of, so mutual relationships between people and technology are needed to make a technological transformation really work.
With a cloud-based digital adoption platform, employees of an organization can access all websites, SaaS applications, and other apps, all through a single platform. The platform is basically an overlay of many applications, not requiring any code, understanding the gap between interaction and human behavior. This is needed as more technology comes with a paradox, that of being less easy or user-friendly to manage, creating complexity and silo forming which actually outdoes many of the benefits of technology.
The company went public at $31 per share last year, as the pro forma balance sheet revealed an enterprise valuation of just over $2.2 billion. This valuation was applied to a business which posted $105 million in revenues in 2019, although this was accompanied by a $49 million operating loss. Revenues rose a solid 41% to $148 million in 2020 as losses narrowed slightly to $43 million, marking somewhat greater achievements on a relative basis on that front.
First quarter sales of nearly $43 million in the first quarter of 2021 revealed a run rate of $170 million, with annual recurring revenues indeed posted at $177 million. This was somewhat worrisome as that quarterly operating loss of $13 million marked an end to the decline in absolute losses.
With the business valued at 13 times annualized sales, this looked like a steep multiple given the pace of growth and extent of the losses. Hence, I was not surprised to see shares fall to $29 on the first day of trading, but at those levels, the premium valuations remained. Besides the valuation aspect, I furthermore feared the strength of the business itself, as the company is really a unified visibility and insight provider, not a software business itself, at least in my view at the time.
Caution Saves The Day
Fast-forwarding nearly a year in time, we see WKME shares trading at half the valuation seen at the time of the offering. With the exception to a small bump to $35 in the months following the offering, it has been the passage of time, rotation to value, and pullback in technology names as key drivers behind these very poor returns.
By late summer it became apparent that second quarter sales growth stabilized at 28%, with revenues coming in at nearly $47 million, as annual recurring revenues trended at $191 million. Operating losses rose further to nearly $18 million, as the IPO likely provided a ¨boost¨ to this number as well. Third quarter sales growth accelerated to 37%, yet revenues of $46 million marked a small sequential decline, with ARR surpassing the $200 million mark. Operating losses of nearly $18 million were flat compared to the second quarter, only partially driven by higher stock-based compensation expenses, with real operating leverage seemingly having come to a near standstill.
Fourth quarter revenues of just over $53 million accelerated to 37% revenue growth, but that was about all the good news, with GAAP operating losses increasing to $29 million, again only in part driven by higher stock-based compensation. The continued decline in the share price, and still apparent net cash position, means that the enterprise valuation has fallen to just over $900 million here. With revenues trending at more than $200 million, this works down to just over 4 times sales, which looks compelling given the pace of growth, yet the real concern is the reversal of the margins.
After all, the company posted a $78 million GAAP operating loss on $193 million in sales in 2021, with the largest losses posted towards the end of the year, while full year stock-based compensation was stuck at “just” $27 million.
On the positive side, the company holds well over $300 million in net cash, proving a huge buffer to finance losses as growth is strong. Furthermore, reported growth seems to be held back by conversion, as remaining performance obligations keep increasing at a big pace, having increased more than a hundred million to $316 million last year. Another comforting sign came from the most recent conference call, on which management indicated that improvements are seen this year in terms of operating performance.
By the time of the fourth quarter of 2022, the company should post losses which are roughly half of the last quarter of 2021 (at least in percentage terms), with further improvements seen in 2023. While this is somewhat comforting, we have to note that fourth quarter losses for 2021 inched up quite a bit, marking the worst of the margin performance in all of that year, making substantial losses still the base for the current year (and likely into 2023 as well).
A Final Thought – Speculative Play
Right here I consider WalkMe as a speculative position. Strong cash holdings and a 4 times sales multiple have de-risked the valuation quite a bit. While growth is solid, the margin performance has been an utter disappointment in 2021 amidst the incremental losses from stock-based compensation, but also the overall cost structure as well. While some improvements are seen on this front this year, which is key to drive valuation creation going forward, I wonder if the pace is enough with still substantial losses implicitly expected this year.
Safe to say is that the investment thesis has been de-risked in a major way from the IPO in the summer, but I still cannot put myself to walk along here.
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