Walkme Ltd
NASDAQ:WKME
Earnings Call Analysis
Q4-2023 Analysis
Walkme Ltd
WalkMe ended 2023 with substantial improvement compared to the previous fiscal year, having achieved a turnaround from burning $54 million in cash in 2022 to generating over $11 million in cash in 2023, marking a significant advancement in operational efficiency and profitability. The company concluded the year with $267 million in revenue, aligning with previous guidance, while attaining over $8 million in operating profit and $8.4 million in free cash flow for Q4 on a non-GAAP basis. Despite facing macroeconomic pressures resulting in lower than expected annual recurring revenue (ARR) of $276 million, WalkMe's meticulous strategic adjustments enabled a profitability leap from a non-GAAP operating loss of $58 million in 2022 to just $5 million in 2023. The company's subscription revenue grew by 8% year-over-year to over $63 million, indicating a solid base for future growth.
Central to WalkMe's revival has been the strategic decision to prioritize operational excellence with a goal of becoming profitable. This involved optimizing the internal structure and focusing on high-value accounts. A new outcome-based approach has been adopted to reduce deployment time by nearly 80% and increase overall effectiveness. The company’s fine-tuning of services strategy and alignment of customer-facing teams have set the stage for accelerating revenue growth and better customer retention moving forward.
Innovation remains at the core of WalkMe's strategy, with the launch of WalkMe Discovery for enterprise tech stack visibility and a new AI offering for managing new AI technologies. The enhancements and broadening of the product line have cemented WalkMe's position as a leader in Digital Adoption Platforms (DAP), as evidenced by the recognition from top analyst firms like Gartner, IDC, and Forrester.
WalkMe has seen a decisive expansion with its customer base in 2023, reaching 199 DAP customers and 41 customers with over $1 million in ARR each. Growth and retention have been notably strong in the enterprise segment (referred to as G2K customers), who on average pay over three times the amount that non-G2K customers pay. The company aims to leverage these relationships to further expand and deliver enhanced workflow solutions.
Looking ahead, WalkMe plans to double its 2023 net new ARR in 2024, expecting this acceleration to translate into tangible revenue growth in the latter half of 2024 and into 2025. The company remains committed to improving customer life cycle value and enhancing unit economics. Anticipation of an improved net retention rate is embedded in this outlook, spurred by an anticipated increase in ARR and a focus on the value provided to customers.
Despite impressive reports on the ROI delivered by WalkMe's digital adoption solutions, challenges remain in educating the market and achieving widespread adoption. However, the company's more flexible pricing structure and focus on quicker deployment and value realization for customers bode well for addressing these hurdles. WalkMe's competitive landscape remains positive, as they are still leading the DAP category without notable changes to competition.
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Good morning, and thank you for joining the WalkMe Fourth Quarter and Full Year 2023 Earnings Call. I'm John Streppa, Investor Relations for WalkMe. And today, I'm joined by Dan Adika, CEO and Co-Founder; Scott Little, our Chief Revenue Officer; and Hagit Ynon, our Chief Financial Officer.
Before we begin, a few housekeeping items. First, we're continuing to incorporate a video element to help showcase our technology and some of the great things we're achieving here at WalkMe. And I encourage you to go to our IR website, ir.walkme.com to watch live or a replay, which will be available following the conclusion of our presentation.
[Operator Instructions]
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 February 21, 2024, 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 will 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 February 21, 2024.
Now before Dan kicks off our regular prepared remarks, we wanted to share a brief clip from our sales kickoff event earlier this year, where we debuted a new company narrative to the organization. We trust you'll come away with a solid understanding of the broader market forces we are connecting ourselves to, how we're adding more specificity into the business problems we're solving and helping companies prepare for the wave of change AI transformation is about to unleash. Please enjoy.
After 2 decades of digital transformation, we find ourselves with a paradox. On one side, we have more and more powerful technology than ever, yet most digital transformation projects fail to meet their goals. There is a gap between the rate at which we've introduced these technologies and the value that we're getting, what we hear time and time again from customers is that their people aren't using the tools they have access to. And when they are, they're not using them to their full potential. And that's because we've been thinking about this problem in the wrong way. We thought we had a technology problem. What we actually have is a change management problem. We've underestimated the amount of change, all this new technology would mean for our people. And as a result, we've introduced an unsustainable level of friction into our organizations friction that is hiding where your technology and your people meet in the workflows that you've built to support your key business processes.
Your HR workflows, like employee onboarding and performance appraisals. Your sales workflows like lead management and sales reporting, access management in IT, purchase order creation in finance and the thousands of other workflows you might be running and they're breaking, they're breaking. They're breaking from the weight of all of this technology change that you're asking your people to take on. Some workflows aren't being adopted at all. Others are being adopted incompletely or improperly. And even when your people are adopting those workflows correctly, it's simply taking too much time away from high-value activities.
The consequences are getting in the way of you achieving your goals. Change fatigue has set in with their existing people. And it's taking way too long to ramp new employees. So you're not getting the productivity gains that you expected. Risks are increasing as some of these workflows have key compliance and legal implications. Poor adoption means your money is tied up on software that's not used or it's taking way too long to realize value from those investments. And all of this technology that was supposed to help you be more agile is actually getting in the way of your ability to adapt quickly as market conditions change, to remain competitive and to execute on strategic shifts. Imagine that. And more change is coming.
The average enterprise is already using 44 generative AI applications. This is going to explode as your existing applications introduce new AI capabilities and newer AI native tools enter the market. But just like we saw with digital transformation, success from AI transformation is not guaranteed.
Last fall, Boston Consulting Group studied the impact of GenAI on their consultants. They found the consultants who use AI performed way better in certain kinds of tasks. But here's the rub. They also found a reduction in performance when generative AI was used on other kinds of tasks. Change has always been with us. Our job as leaders has always been to help people use new technologies the right way for the right activities. But AI transformation represents the biggest change to how we work in our lifetime. And it will be the biggest change management challenge organizations face in the next 1 to 2 years. And the same legacy approaches that were already failing us in digital transformation, like over relying on traditional training or trying to manage change incrementally aren't going to help you in a world where your applications, your workflows and the people using them are constantly changing.
That's because these legacy approaches are based on the flawed belief that change is a 0 to 1 exercise. Change has no finish line. There's a better way to deal with it, and it requires 3 things. First, you can't solve the problem you can't see. You need a single watchtower that pinpoints all the friction in your organization, workflow-by-workflow, task by task and across any number of applications.
Second, you need to create experiences with people at sense, experiences that eliminate friction, automate mundane tasks are consistent across the organizations and optimized for the jobs, your team needs to get done.
Lastly, this is not just about your existing technology. You need a tool that will help you manage through the surge of change that technologies like generative AI are about to unleash, one that helps you make better choices about what technology you're going to buy in the future and how it's adopted consistently across your company. You cannot do this on your own. You need a system to help you manage the change brought on by technology. That system is called the digital adoption platform.
WalkMe is the undisputed leader in that. We pioneered this category. And many of the biggest companies in the world rely on us because we are required equipment for navigating constant change. WalkMe's DAP sits on top of your tech stack giving you information about the applications deployed across your company, who's using them, what workflows are associated with and where friction is preventing them from being executed as intended. We then give you tools to automate routine tasks and deliver personalized guidance to people when and where they need it most. Your people get interactive in-app guidance at the moment of need, a conversational interface to kick off tasks and get answers through natural language and helpful notifications to stay informed and remain compliant, all in the flow of work.
The WalkMe platform is powered by DeepUI, our proprietary AI technology that understands software the way a human does. So it automatically adjusts to the constant change in your underlying applications and can make recommendations for eliminating friction before it becomes a problem. It's delivered via web desktop and mobile and prepackaged to support the key workflows where friction is most often hiding, whether that be in one application or more commonly, workflows that span multiple apps. So you know exactly where to get started. And when you're ready, you can pick the workflows that you want to optimize next. These and 2,000 other global customers have turned to us because we have an unmatched data-first approach that lets you see all your biggest friction points, workflow by workflow, across applications.
You can customize KPIs and dashboards so that you and your leadership can keep track of how you're progressing against goals that you can define. Every year, we processed over 7 billion transactions for our customers. Our security is enterprise grade. In fact, we are the only FedRAMP certified DAP, and we have world-class professional services and support that enterprises like you demand. We solve problems for almost every workflow and application out there. So when you come to us, you can be confident we've seen it before, and we know how to get to value quickly. We have the strongest partnerships from the largest systems integrators in the world to regional partners you can work with. And we have the largest community of DAP professionals, so you'Il always support it.
This is why we're consistently rated the #1 digital adoption platform among industry analysts and why our customers see close to 5x return when they choose WalkMe. Change is a constant folks. WalkMe can be the consistent partner to help you navigate through it.
Good morning, everyone. I hope you enjoyed Adriel's short clip from a recent SKO event. It really demonstrates how WalkMe is solving a mission-critical problem for the largest enterprise companies in the world. With that, I would like to begin. 2023 was a transformational year for us. We concluded revenue with $267 million, consistent with our guidance last quarter. We ended 2023 with an ARR of $276 million. Although this was below our expectation in the beginning of the year, it was in line with our updated forecast. The macroeconomic headwinds put pressure both on renewals and new deals, mainly in the first half, and we needed to adapt fast. We made a strategic decision to focus on operational excellence and become a profitable company while investing in future growth drivers, customer value and our foundation. I'm super happy with how fast we were able to accomplish this transformation, and I'm happy to share some of the highlights today. We shifted our business from burning $54 million in cash in 2022 to generating over $11 million in 2023. This is a $65 million improvement in our cash flow, outstanding achievement all around, and we did it within a few quarters. We've been a profitable company since Q3 2023, way ahead of our original plan. We optimized our internal structure and strengthen our executive leadership team. We added Sunil Nagdev as our Chief Customer Officer, and we are laser focused on delivering customer value fast. We continue to invest in our growth driver in order to accelerate our revenue growth in the upcoming years. We obtained FedRAMP certification, allowing us to sell deep into federal organization and increasing our TAM. It's already proving a significant contribution to our ARR. We signed new global partnerships and expanded our relationships with some of our top partners, including Deloitte, Accenture, Tech Mahindra, among others. We launched a new partner program Propel which already showing signs of early success and we became an official AWS marketplace seller offering our customers the opportunity to buy WalkMe through their AWS budgets.
On the product side, we launched WalkMe Discovery for enterprises to unlock full visibility into their tech stack and have seen tremendous success now, covering over 7 million employees worldwide, growing more than 75% in Q4 over Q3. We continued to distribute WalkMe workstation to our top customers, who are utilizing it for their everyday enterprise workflow needs. We launched our unique AI offering focused on tracking Shadow AI visibility and adopting new AI technologies. We are giving enterprises organizations the foundation they need to take immediate action and achieve change management at scale while ensuring safety and privacy. We continue to invest deeply in our advanced proprietary DeepUI AI technology. DeepUI learns and understand every user interface like a human. It is the foundation of our existing product lines and our vision of a powerful AI text to action solution.
On our Market category, we saw the release of market guides from all the major analyst firms, including Gartner, IDC and Forrester. This was a huge testament to the growing demand and DAP inquiries coming from enterprises. We were named leaders and star performers in the Everest PEAK Matrix and leader of the Forester New Wave. We saw DAP featuring over 7 different Gartner hype cycles, which demonstrate the depth of our technology use cases and its influence across the digital workplace. We're entering 2024 stronger than ever. We are better as a team, profitable and generating cash with a very strong balance sheet. We have a better product with a wider offering and we're leading the DAP market. These changes are felt in our Q4 results. We ended the year with a strong Q4, surpassing our expectation, generating $4.8 million in operating profit and $8.4 million in free cash flow on a non-GAAP basis, another record high profitability milestone.
We grew our subscription revenue by 8% year-over-year to over $63 million, and we reached a new high of 199 DAP customers and 41 customers paying us over $1 million in ARR. We've proven in 2023 that with the required measure and the right processes in place the WalkMe engine can produce cash at scale.
Q4 marks the end of our transformational phase, and now we turn to accelerating net ARR growth in 2024. Our path ahead is very clear as we aim to double the 2023 net new ARR in 2024 to a double-digit ARR growth, which will drive a revenue growth acceleration in 2025. We continue to invest in our strategic growth drivers, driving expansion opportunities from G2K enterprise companies, accelerating our DAP business, which show the true strength in our GTM consistently throughout the last 2 years, delivering value faster for our customers by focusing on key enterprise workflows and on our partner ecosystem as a growing source of revenue. I'm excited about our upcoming product roadmap. We will focus on delivering greater value to our customer base with the launch of workflow accelerators. Workflow accelerators is positioned to be a game changer in how we sell and deliver the WalkMe value. This will also be a key contributor to ensure faster customer value, which will result in higher customer retention and faster expansions. Another exciting product is our new version of our workstation product that is evolving into a true enterprise workflow copilots for employees. We have many more exciting announcements coming up in the next few months regarding AI in the workplace and how the next generation of DAP will play a key role in enterprise technology adoption. To summarize, 2024 will be a very exciting year for us. I'm thrilled for the upcoming innovations and the execution of the team aiming to accelerate ARR growth and deliver the DAP value to our customers at scale. I want to take a moment and thank our employees for their amazing execution in 2023. And to all of our partners, customers and investors, thank you for your continued support and belief in our vision and mission. We are shaping the future of digital workplace, and we will continue to innovate and scale our business. Now I'll hand it over to Scott, our CRO. Scott, over to you.
Thanks, Dan. I want to echo Dan's sentiment. The go-to-market team is energized as we head into 2024 with a clear purpose to accelerate our net new ARR growth. I've now had a full year in the seat as CRO, and we've made a lot of changes. In 2023, we streamlined our team priorities, and realign territories to focus on the highest quality accounts with the best expansion potential, developing deep relationships with our customers. The sales team is now tightly coordinated with the revamped customer success organization, which will foster happier customers experiencing the value of DAP. We're using value selling across the customer's life cycle to identify and deliver solutions based on critical business workflows rather than just applications. This is a big change. The new outcome-based discovery methodology creates the foundation for the handoff from our land to the successful implementation for our customers. We've shifted our services strategy to an outcome-driven model as well, selling our services as a scope of work tied to business workflows accelerates the time to value. We started this transition in the third quarter, and we've already seen the time to deployment decrease by nearly 80%.
We've redirected resources internally to improve the coverage of our customer success group across our renewal base which was a big factor for churn in 2023. We now have over 90% coverage for our renewal base in 2024, focused on highlighting successful value creation and expanding the scope of our platform to new workflow opportunities. This transformation across our sales and CS processes focusing on outcome-based value for critical business workflows will benefit us twofold. First, by reducing the risk of churn and second, by increasing expansion opportunities. These benefits will enable us to accelerate our net new business throughout 2024. We're laser-focused on top growth areas, expanding with our G2K and large enterprise customers, U.S. public sector and partners. Our public sector team had a great year in 2023 from kicking off with FedRAMP-ready certification to landing multiple deals that were well above our expectation.
In 2024, we plan on doubling their contribution as we continue to expand our footprint in the U.S. public sector market. The U.S. federal market, in particular, is ripe with opportunity. And WalkMe being the sole FedRAMP-ready provider of DAP is well positioned to take advantage of this opportunity. U.S. federal deals tend to be much larger than our traditional enterprise land deals and can extend for longer duration. We're very excited about the progress that's been made so far. We're just getting started. Our partner program is an integral part of the entire organization. We've done a phenomenal job building out a world-class partner enablement program and expect their contribution will continue to grow our overall business.
Our GSI partners are working on some of the largest business transformations in the world. And as a trusted contributor to their change management practices, we are an integral part of their strategy. Our partners sourced or influenced nearly 58% of our business in 2023, and they implemented over 1/3 of our net new ARR. When we engage our partner ecosystem, we see stickier customers, greater value realized and bigger opportunities for expansion. When partners source deals for us, we see an uplift of over 40% on the average deals new ARR. The impact in public sector is even higher. Lastly, our G2K customers are a key target for us to continue to expand. We ended the year with 410 G2K customers whose ARR represents over 50% of our total. On average, these customers are paying us over 3x what our non-G2K customers are paying. This group represents a great opportunity for us to expand our customer base as we deliver value and enhance our workflow footprint. It is crystal clear when we prove value, we expand.
I want to highlight an example, customer from 2023. This global NASDAQ 100 pharmaceutical company first landed with WalkMe to drive the implementation of a new procurement platform across over 12,000 global users. With WalkMe, they focused on increasing the percentage of transactions involving structured spend that go through the platform by simplifying navigation, easing initial setup and encouraging users to follow the new process as the business intended when investing in the technology.
In the first year, they saw engagement with WalkMe reach 86% of their interactions. They saw an improvement in NPS score, and they directed their users to the right buying channel over 97% of the time, which was the intended outcome of their software investment. Following this success, the customer established a center of excellence focused on other workflows that could benefit from WalkMe, and I am thrilled to say that they expanded with us in 2023, as they recognize the value we add to their mission-critical processes. Accelerating these expansions is a great example of what we can do when we prove value. The alignment between our sales, customer success and professional services organization is accelerating our path for larger revenue streams. In the fourth quarter, we added new customers such as Crow, DS Smith, Big-D construction, among others, and we expanded with great clients such as BDO Canada or Core Hotel Group, Flight Centre Travel Group, Republic National Distributing Company and many more. We're now a cohesive go-to-market team, and we're excited about the opportunities ahead of us in 2024. We're focused on execution this year with a clear purpose to drive value for our customers and in turn, expand our capabilities to sell. With that, I'd like to thank our entire go-to-market organization and hand it over to Hagit.
Thank you, Scott, and hi, everyone. 2023 was a transformational year for WalkMe, where we optimize and rebuild our fundamentals to become a profitable company with a focus on operational excellence. When I took over the role of CFO, WalkMe was an unprofitable company burning cash. I'm proud to share that WalkMe has been a profitable company since Q3 2023 with an improvement of 22 percentage points year-over-year on a non-GAAP operating margin and ending the year with a non-GAAP operating loss of $5 million a huge leap compared to a loss of $58 million in 2022. From a negative free cash flow of $54 million in 2022 we generated over $11 million of free cash flow in 2023, an improvement of over $65 million in just 1 year. This is a huge achievement for the entire company as we now have a clear path to scaling in a profitable way. These achievements are a direct result of our internal changes made in 2023, which focus on high-growth areas, adjusting our cost structure and steering the entire organization towards operational excellence. We will continue on this path by improving our unit economics, focus on subscription revenue with higher margin of 90% as we continue the transition of professional services business to our partner ecosystem in line with our strategy. By aligning our customer-facing teams and our go-to-market structure to be more effective and efficient with time to value top of mind, we are now positioned to accelerate growth and execution with our current investment in 2024. Our main priorities for 2024 our focus on ARR growth, improving customer retention and driving DAP expansion with our customer base as we shift to outcome-driven value of key business workflows.
As we continue to improve on Rule of 40, we are balancing our incremental investments. Using free cash flow margin, we improved from 5 in 2022 to over 13 in 2023. We expect to continue to improve on this metric in 2024 and beyond. With that, let's turn to numbers. I would like to note that when discussing gross margin, operating expenses, operating and net income and free cash flow, I will be referring to non-GAAP numbers.
Our total revenue for the fourth quarter was $68 million and for the year, $267 million, which represents 9% growth year-over-year. We grew subscription revenue for the quarter by 8% year-over-year and for the full year by 12% year-over-year, with subscription gross margin of 90%. We expect to maintain the subscription margin level throughout 2024. Our professional services revenue for Q4 was $4.5 million, slightly down compared to Q3 and down 26% compared to Q4 of last year. This is in line with our internal partner strategy and the shift to outcome-based project. We are now forecasting a slight sequential decline in our PS revenue for the year ahead as the trend continues. PS gross margin continued to improve to over 27% in Q4, driven by better workforce utilization as we reallocated resources to improve our coverage within the customer success group. Our total gross margin for Q4 was 86%, up from 82% in Q4 last year. Gross profit was $58.5 million, up 9% year-over-year. We expect to maintain this level of profitability throughout 2024. For Q4 OpEx, we remained on a positive trend we have seen for the last 8 quarters in a row, improving our operating leverage and profitability. Our flexible OpEx structure enables scale by balancing growth and profitability. R&D expenses were $10.3 million, representing 15% of revenue. We continue to invest in our core platform, strategic data products and AI capabilities. Sales and marketing expenses were $33.8 million or 50% of revenue, an improvement from 62% in Q4 of last year. With our core sales and marketing structure, we now have the capacity to accelerate growth in 2024. G&A expenses were $9.6 million or 14% of revenue, below the 18% we saw in Q4 of last year. I would like to note that this excludes a onetime GAAP expense of $3 million in connection with our Q4 settlement in principle of class action lawsuit claims related to exempt classification of certain employees. This is a nonrecurring expense. Q4 operating income was $4.8 million or 7.1% of revenue, an improvement from 2.4% in Q3 and from a loss of $10.5 million or a negative 16.2% in Q4 of last year. Net income for the quarter attributed to WalkMe was $6.8 million compared to a loss of $8.9 million in Q4 last year. Net income for 2023 was $3.7 million compared to a loss of $56 million in 2022. Net income per share for the quarter was $0.07, using 94.2 million fully diluted weighted average shares outstanding compared to a loss of $0.10 in Q4 of last year.
In Q4, we generated $8.4 million in free cash flow, an improvement from the $6.2 million generated in Q3 and a cash burn of $10.2 million in Q4 of last year. Our free cash flow margin for the quarter was 12% compared to a negative 16% last year. On free cash flow, we expect to maintain a positive level, but it will fluctuate given seasonality in our cash management cycle. We ended the year with $322 million in cash equivalent, short-term deposits and marketable securities. Turning now to guidance. Given the headwinds we face with moderate growth in net new ARR in 2023 and the continued decline in our professional services revenue, we expect subscription revenue to accelerate on a year-over-year basis each quarter while first quarter revenue growth to be in the low in 2024. Our PS revenue will show a slight decline as we continue our transition towards partner delivery in line with our strategy. On OpEx, we plan to maintain a similar level of OpEx from Q1 throughout the year with some fluctuation due to seasonality in sales and marketing events. We are now well positioned to accelerate our net new business, while slightly growing our expenses at a lower rate than overall revenue growth. With that said, for the first quarter of 2024, we expect revenue in the range of $67.6 million to $68.6 million and a non-GAAP operating income in a range of $0.3 million to $1.3 million. For the full year of 2024, we now expect revenue in the range of $279 million to $283 million and non-GAAP operating income in the range of $8 million to $11 million. Thank you. And now we will take your questions.
We will now turn to Q&A portion of the call. [Operator Instructions] Our first question will be from Michael Berg from Wells Fargo. Second question will be by Kevin Kumar from Goldman Sachs.
Congrats on the quarter. I just wanted to dig into the reacceleration and what's driving that? If you can think about what's embedded in guidance, what are the key drivers in this reacceleration between either macro improvement, go-to-market alignment, some of these new exciting products layering on. Maybe just help us understand some of those key drivers.
Sure, I will take it. Michael. So as we said in the script, we saw the pressure mainly on H1, and we started to see improvement moving forward both on gross new ARR and improvement in churn. So as we're seeing the net new ARR improving, if we can grow the net new ARR or as we said, double the net new ARR in 2024 to 2023, we will see acceleration in revenue mainly on the second half and in 2025 on the subscription revenue. So as we're adding more net ARR per quarter, that will drive revenue acceleration as the ARR is the new indicator.
Helpful. And then just a quick follow-up on the products you launched. In terms of the -- is that a meaningful in how you're leveraging your technology and products? Or is it more of just a go-to-market alignment strategy? I wanted to be clear on that.
So as we always say, we're looking at WalkMe as a full platform. And one of the main things we did, we are focusing on enterprise and large enterprise customers. So the feature sets that we're giving them, the visibility, the connection of data action and experience, that's what makes them going from a use case-based specific to a full platform, as we mentioned, DAP customers. So that's, I would say, a holistic approach to how we think companies to drive digital transformation. And the more value we're giving to those customers, the more they're expanding with us. So at the end of the day, worsened than the entire platform, we did do a change to our pricing and how we price and basically we're much more flexible in letting those customers grow with us [indiscernible] approach. So overall, it's just a complete solution to DAP.
Our next question will be from Kevin Kumar from Goldman Sachs, followed by Josh Baer from Morgan Stanley.
I wanted to touch on net retention rate. Have we reached kind of a trough there in terms of kind of churn and expansion? And I guess how are you thinking about kind of 2024 and your expectations for kind of moving that up and kind of what's implied in the guidance?
Kevin, it's Dan. So yes, we think it's tough Q4 2022 and Q1 2023. I would say we're at the -- quarter. So we're showing the data on the trailing 4 quarters. So as, the quarters, we get out of the trailing 4 quarters, we will see it bounce back. That's at least our expectation. And when we're saying that we're going to double the net new ARR, obviously, it will show on the net retention numbers as well.
That's great. And then maybe just on federal and an update there in terms of kind of how the pipe is developing and kind of how is execution in the quarter and kind of how you're thinking about kind of 2024 here?
I can take that one, guys. We had a very good quarter from that perspective with federal. You saw in my prepared remarks other than we expected, which is always good to hear. And we have enough confidence in the pipeline that we're building that, that team has taken on over double the expectation for 2024. So it's a big highlight and a big investment for us. It's one of the areas that I put additional resources in for the year in my annual operating plan. And like I said, we're just beginning, very excited about it.
Our next question will be from Josh Baer from Morgan Stanley, followed by Tyler Radke from Citi.
And like your own digital adoption reports are just extremely impressive. Like your customers that are saying they're saving hundreds of thousands in productivity hours, millions of dollars, quick payback time, huge ROI, just seems so attractive to an enterprise. So with that in mind, hoping you could talk through some of the challenges in getting prospective customers to adopt and over the line? Like what are the main hurdles? And then what can you do to help improve that looking forward?
Sure. I will take it. So I would divide it to 2. One, the ROI is phenomenal, and I heard few reports. I think the latest one from the IDC, and we're a new category. We invented the category, and there is a lot of market education. This is why in today's call, we're even open with the company narrative. So that's something that we're doubling down.
And the second piece was our shift to enterprise and large enterprise. That was something that we started, I would say near the end of 2020, beginning of 2021, and we're seeing the results. So taking that, having the entire company laser-focused on that result, product, marketing sales, partners, everything that we're doing, it's starting to show results. And we're seeing it if it's the customer is over $1 million ARR. And it's not just the number, it's the average of how much they pay is growing. So when a customer is paying us over $1 million, it's not staying at the low digit, it's actually starting to go up. So we have a lot of work to do. We're super pleased with the platform. We added more capabilities that will allow our customers to measure the ROI faster, and we added a lot of data products that is easier to deploy.
So if today, when you're doing a full deployment of WalkMe, you need to build the content, you need to have a full strategy in it. When you start with data products, we can actually show you where you have issues and actually have a faster ROI.
The third piece actually is as Sunil has started it at around May of 2023, and we set a goal to go live faster with our customers. We already have a few pilots group when we're trying to go live between 4 to 6 weeks. And we have the data to show that the expansions are happening faster. And obviously when we're delivering value fast the customers are happier.
So as I said, 2023 was a transformational year. We put a lot of effort not just on the financial side when you're seeing -- when you just saw the results, but on the fundamentals of the business, how we deliver value and how we, as a company, are laser focused to deliver value to our customers.
Got it. Very helpful. And then just hoping you could comment on the competitive landscape. Any changes to know, any response to your more flexible pricing?
So we're seeing the same competitive landscape. We're pleased that we are leaders and star performers, so we're by far leading the category. And I would tell you, we want to see more. We want to see the category growing more, and we're putting a lot of effort on that. And so overall, for us, it's still a huge greenfield. And our biggest competition is companies that we are educating on the fact that they need DAP, and we're doing really well.
So on the pricing standpoint, what we did is, we are allowing companies to actually start smarter. So we want to actually shorten the sales cycle on the land. And then once we're showing value, we have a better and clear path for the expansion. So it's still early to share data. We'd launch it in the summer. But so far, we're pleased with the results.
Our next question will come from the line of Tyler Radke from Citi, followed by Pat Walravens from JMP.
This is [ Matt Pride ] on for Tyler. Just curious what caused the slowdown in DAP growth? I see 4Q has historically been a stronger quarter. And secondly, should we anticipate a slowdown in DAP growth into next year?
So we actually think it will accelerate as the net new ARR will accelerate as well. Overall, I would say that we got some down sales across all the segments, and it came mainly from pressure from the macro. And as I said, that was mainly in H1, and we're still carrying those quarters, obviously in our numbers. But as we said, we think it's troughed. And now as we're starting to accelerate the net new ARR, we think those metrics will go up as well as in the retention.
Any reads since macro going forward?
So I would just say that even after H1, it's -- for us, it's become much better. I can tell you that in the macro is solved. And I'm not an Oracle to foresee the future, but I would tell you that we, as a company, adapt to that situation. So we're not standing here and waiting for the macro to improve. We have our technology and we bring value even in a downturn economy.
Got it. And lastly, you have over $300 million of cash on the balance sheet, accelerating free cash flow story. Any change to your appetite for M&A? And any specific areas or technologies that you'd be interested in looking at?
I would say our appetite stayed the same. Obviously, it gives us much more confidence when we're generating cash quarter-over-quarter. We're looking for the right timing. And I would tell you that the way we're looking at the DAP category is massive. So there is a lot of room to grow organically. But obviously, if we will see interesting opportunities, this is a vehicle that we will use. And I would tell you that, obviously, there was a big macro headwind. But now when we're seeing that quarter-over-quarter, we're generating cash, and were profitable quarter-over-quarter. Yes, it's changing a little bit the confidence and how we're looking at it, but nothing else that I can add in this moment.
Our next call -- our next questions will come from Pat Walravens from JMP, followed by Scott Berg from Needham.
This is Austin Cole on for Pat. So I wanted to ask about partners. So these GSIs are a big tailwind behind your business. I'm wondering, is there more that you guys can do to leverage your partners in 2024? And how can Propel help you better manage those partners?
Yes, I'm happy to take that one. We absolutely believe there's more that we can do in the partner space. And we've got more than just the GSIs. Remember, we have a wide variety of partner styles we have regional -- [ SIs ] that support us. We have our OEM relationships with SAP, for example, we have MSP relationships with other partners. So we're trying to address all of it with Propel.
And Propel does two things for us. One, it streamlines the ability for us -- and for our clients and for them to be self-sufficient through the onboarding process. And two, it gives them visibility to the pipeline that they generate with us and the support they need from us. So this was something that was required and we needed to get it done. We spent a lot of time and effort on it. We're very pleased. But my plan for '24 is improved performance in the overall businesses and partners.
And then for '25, we have an eye to more revenue that is like touch. So an example would be the agreement with that we have and the SAP guys concurred to us almost all the marketing concurs, all selling they do, all the paper in the deal and they do the implementation. And we use that as a land to go try to sell clients something else, but the revenue from an agreement is very light touch, and we're working on more of those kinds of relationships in 2024 with an eye to see more revenue that is light touch coming in for 2025. So hopefully, that gives you a feel for it.
And our last question will come from Scott Berg from Needham.
This is Michael Rackers on for Scott. Congrats on the quarter. I was just wondering if you could double-click on some of the go-to-market changes you talked about earlier. And maybe how the sales force is adjusting to these changes? Has the sales energy improved since kind of the shift or the change in strategy was initially announced?
Listen, let me take it. I would tell you the energy is off the charts for us. It's rare when people who are not associated with sales come away from the sales kickoff saying, hey, I was really impressed with not only what was presented, but the energy and the focus of the sales kickoff. So for us at the end of January, one of the best that I've ever participated in. So very pleased with that.
And listen, that is not easy to do when you're making significant changes throughout the year and then those changes, especially process changes, culminate at SKO announcement. So listen, salespeople are pretty straightforward. They want to know what to sell. They want to make sure they've got a good product to sell. They want to understand how they compete. And then they want to be turned loose with a good comp plan to go make money. And I would tell you that, that's what we did at our sales kickoff and that alignment with our counterparts and customer success and professional services and our partner team was really good.
But to double-click on it for you, a couple of things that, as I mentioned in my prepared remarks. First and foremost, we are moving to workflow-led discovery and that workflow led coordination to actually implementing for clients. It may seem obvious, but that businesses have a problem that is related to a business workflow or a cash or [indiscernible], whatever it is. But we've always thought about it in terms of the applications that we support.
But what do we know about our DAP clients? Our DAP clients are our stickiest, they are most profitable and they are largest, and they're that way for one really, really important reason. They saw business workflows that tend to cross multiple applications. If you're a sales organization, you're not just a Salesforce shop, you probably got Clari or Gong or DealHub or one of those other products, oftentimes, a handful of products involved in your order to cash burn... So we're good at both the automation and the real-time personalized support for workflows, they cross multiple applications. So we've always done it. We've got tons and tons of successful implementations, but we haven't talked to the client in that style. And it's really important not just to talk to the client in that style, but when we create our statements of work and we implement for the client, it's important to tie that back so the client can easily understand the value that we're delivering for them. In places where we did it really, really, really well, look at partners -- sorry, customers like Wells Fargo, we've talked about in the past, who are large clients and get significant [indiscernible] from us. We just kind of did it naturally and organically. We didn't do it systemically.
One of the major changes for us in 2024 is we're doing it systemically. And that's a function of the fact that I've got a great partner in Sunil Nagdev, who is helping with that transition from land to implementation to that first set of reports after we've got a client up and running and they're successful. But so you got to have that good 360 view of the client, it's great on a chart, but you've got to operationalize it. And that's what we've done in the second half of the year. That's what we highlighted and educated our teams on and sales kickoff. And that's why we're so excited about those changes coming into '24 because that heavy work is behind us. And now it's kind of the more straightforward stuff. We just got to go sell. Hopefully, that makes sense for you.
And that will -- [indiscernible] our Q&A section. Thank you, everybody, for the questions. And now I will turn it back over to Dan Adika for closing remarks. Dan, the floor is yours.
Thanks, John. So as I said in my script, I want to thank our employees for amazing execution in 2023, moving from losing over $50 million in 2022 to generating over $10 million in 2023. That's absolutely amazing.
So guys, I know you're hearing us. So thank you. And obviously, for customers, investors, partners, thank you for the support and believing our vision. And thank you for everyone who joined the call and participated. See you next quarter.