Q3 2023 Walkme Ltd Earnings Call

Participants

Dan Adika; Co-Founder, CEO & Director; WalkMe Ltd.

Hagit Ynon; CFO; WalkMe Ltd.

John Lewis Streppa; Head of IR; WalkMe Ltd.

Scott Little; Chief Revenue Officer; WalkMe Ltd.

Bradley Reiss Clark; Senior Associate; BMO Capital Markets Equity Research

Kevin Kumar; Associate; Goldman Sachs Group, Inc., Research Division

Matthew Terence Wilson; Research Associate; Morgan Stanley, Research Division

Michael Turits; MD & Senior Analyst; KeyBanc Capital Markets Inc., Research Division

Michael H. Berg; Associate Equity Analyst; Wells Fargo Securities, LLC, Research Division

Patrick D. Walravens; MD, Director of Technology Research & Equity Research Analyst; JMP Securities LLC, Research Division

Scott Randolph Berg; Senior Analyst; Needham & Company, LLC, Research Division

Tyler Maverick Radke; VP & Senior Analyst; Citigroup Inc., Research Division

Presentation

John Lewis Streppa

Good morning, and thank you for joining the WalkMe Third Quarter 2023 Earnings Call. I'm John Streppa, Head of Investor Relations for WalkMe. And today, I'm joined by Dan Adika, CEO and Co-Founder; Scott Little, Chief Revenue Officer; and Hagit Ynon, our Chief Financial Officer.
Before we begin, a few housekeeping items. First, we are doing a new method of our earnings call this quarter, incorporating a video element to help showcase our technology and some of the great things we're achieving here at WalkMe. I encourage you to go to our IR website, ir.walkme.com to watch live or replay, which will be available following the conclusion of our presentation.
(Operator Instructions) Note, 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 in 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 November 14, 2023, for additional information.
In addition, certain metrics we will discuss today are non-GAAP metrics. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to 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 our 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 14, 2023.
And with that, I'd like to hand it off to Dan.

Dan Adika

Thank you, John, and hi, everyone. I'd like to begin by addressing the current situation in Israel. On October 7, the Hamas, a terrorist organization, launched a brutal attack against Israeli civilians that was unlike anything our generation have experienced, and hopefully, something future generations will never experience again. The tragedies we witnessed have left Israel in a constant state of grief. I want to extend our deepest condolences to the families who lost their loved ones in this brutal attack. We also pray for the safe and swift return of the men, women and children kidnapped in Gaza. But if there is anything we have learned over these last few weeks is that we're strong and we will prevail.
I couldn't be more proud of our local and global teams who've been working tirelessly to ensure business continuity and the success of our customers, while coming together to support one another in the most unique way. Around 36 people of our workforce are currently in reserve, and we pray for their safe return. I've seen in the recent weeks, the worst in humanity and the very best. I'm extremely proud of our entire staff. Thank you. Thank you for your passion, commitment through this very tough few weeks.
Turning now to our quarterly results. We had a milestone quarter. A year ago, we set out on an important journey to be a profitable, sustainable growth company and I'm glad to report that we have achieved profitability on a non-GAAP basis for the first time ever ahead of plan, generating $1.6 million in operating profit and continued to drive our free cash flow higher to over $6 million.
On revenue, we grew our subscription revenue by 10% year-over-year to over $62 million. We've added 11 DAP customers, reaching a new high of 194 and gained another over $1 million ARR customers reaching our previous high of 39. We're profitable and we're generating cash. Q3 revenues met expectations as we continue to drive the right efficiencies and business processes needed to scale our business forward on the path to the Rule of 40. The strategic investments we've made over the past 2 years are paying off. We had another fantastic quarter generating new business in the public sector. Our partner ecosystem continues to gain momentum as we saw higher contribution to both new business and the delivery of DAP to our customers.
In Q3, we launched our enterprise-grade partner program, Propel, offering existing and new partners the foundation to unlock enterprise-scale revenue streams through a self-serve, best-in-class knowledge platform. I'm very excited to share that WalkMe has also been certified for the AWS marketplace where now customers can leverage cloud provider annual commitment towards experiment to WalkMe. I believe this partnership will drive shorter sales cycles for existing deals and renewal reducing the friction and also have a huge potential to unlock new business for WalkMe as we invest in the relationship with the cloud providers. Our partners are a huge part of the company strategy and will continue to invest to ensure our mutual success.
Digital transformation spend is at an all-time high according to a recent IDC report surpassing $3.2 trillion, while BCG are reporting that 70% of transformation projects are not meeting their objectives. This paradox is resulting in more process complexity and lack of ROI. In an average organization, there are now almost 1,900 workflows and processes, choking productivity, agility, introducing risk and compliance issues.
As we march towards the AI transformation age, the speed and the volume of change management are increasing exponentially. Everyone is using AI already. Early reports show a high percentage of employee use AI tools without their managers even knowing about it. Through WalkMe Discovery, we're seeing over 6,800 different AI applications in use in enterprises. Organization wants the benefit of generative AI, but they're heavily concerned about risk and security compliance that these tools bring.
AI spend is set to reach $1.5 trillion by 2030, according to President's research. The questions on every CEO mind is not, should we adopt AI, it's how we do it safely and responsibly without hurting innovation. It's transformation was dragging before, it's getting much more complex now. Putting in place a true digital adoption strategy will ensure enterprises can manage through the transformation required. It will align the management and the user expectation by unlocking data to business goals and technology adoption and taking immediate action on top of all of their customer-facing and internal systems to deliver the best experience. DAP, now more than ever, is critical for organizations.
In Q3, we saw 2 of our largest customers renew for an additional 3-year period, signing multimillion-dollar agreements. These renewals were a vote of confidence that the value achieved with WalkMe has high ROI and it's tied closely to the core of their business.
Shifting to product. We continue to heavily develop our proprietary DeepUI.ai technology for the past 5 years. It's an ML-based model that learns how users are engaging with all enterprise systems and workflows to do their jobs. It's the underlying technology behind our entire digital adoption platform. Our new Data AI offering of WalkMe Discovery and user interface intelligence, UII, powered by our DeepUI technology have seen continued growth in Q3 of over 85% quarter-over-quarter in employee coverage with Discovery surpassing 3.8 million employees coverage compared to 2 million in Q2 and UII with 2.2 million compared to 1.3 million in Q2. This continues to be one of our fastest-growing product offerings to date.
The growth in demand is primarily due to our new launch Shadow AI capabilities as part of WalkMe Discovery, unlocking full visibility into all the AI application in use by employee within an organization and allowing the business to build a relevant strategy needed to guide the employees to the right and secure AI assets. This has been a game changer for our customers.
We're also implementing a wide array of generative AI capability throughout our platform, offering our builders more content creation capabilities and offering the end user new AI capabilities in the flow of work. We've launched in beta, our AI Answer product, allowing employees access to other organizational knowledge at their fingertips. They can now tap into all company resources and leverage enterprise-grade secure generative AI to extract their relevant information they need to do their job. It's not just the search, employees can also start action immediately and complete processes. Answer AI is a great addition to WalkMe to help drive employee productivity.
We've also launched in beta, our patent pending data validation capability, which understanding real time why data users are inserting into any enterprise application and make sure the data input is valid according to the company policy. Data hygiene for enterprise is a key component of becoming a data-driven organization. This new product leverages generative AI in the flow of work in the most innovative way, ensuring data hygienes and compliant issues are solved. We will continue to develop and launch more contractual co-pilot capabilities to enhance employee productivity.
I'm happy to share that we just concluded Realize, our annual digital adoption event, where we shared our vision for DAP's critical role in helping companies drive AI adoption. We revealed our product road map, ensured use cases and insights from customers like Cisco, Gap, ServiceNow, Veolia, TUI and Nestle. We also highlighted best practices from our partners, including Deloitte and Tech Mahindra, among others.
During the conference, we had the privilege of hosting one of our valued customers, a Fortune 100 technology company. They are leveraging WalkMe heavily to identify issues, make changes quickly and streamline work processes. Their executives were concerned about the potential risk of inputting sensitive data into unsecured platform in reference to AI products. They leveraged WalkMe Discovery and Shadow AI to monitor all application use and redirect employees to the trusted applications. In just few weeks, they were able to cut down their use of risky software by 30% and drove adoption to certified applications by 25%, successfully avoiding potential millions of dollars lost in compliance fines and loss of customer trust.
Another Fortune 100 leader in consumer packages good joined us with Realize and gave us a great overview of how they're applying WalkMe on a global scale with over 280,000 employees. They faced a major challenge to enhance digital skills across their entire workforce and maintaining competitive advantage. They began the rollout of WalkMe on their HR platforms. Within 6 weeks, they achieved full compliance with security protocols, reduced errors and boost productivity. Over the past year, this move saved them about 600,000 hours of employee productivity. With that, WalkMe has become a key part of their strategy. They've also leveraged WalkMe Discovery to address Shadow AI application and direct employee to secure approved AI solutions. I'm glad to see that our leading customer leveraging our new AI product clients as part of their digital transformation strategy.
It was a milestone quarter. Our relentless focus on operational excellence, strategic investments and enterprise-grade products are paying off. I'm pleased with the team's execution as we were able to move to profitability and cash flow positive ahead of our plans. This is a testament to our strong unit economic and our ability to execute. In the upcoming quarter, we will focus on actions that will help us reaccelerate new business growth.
With that, I will hand it over to Scott, our COO, to share more about our achievements of Q3. Thank you.

Scott Little

Thanks, Dan. Our path to being a profitable, sustainable growth company is clearer than ever. We continued our momentum from Q2 and delivered a strong performance in our investment areas for 2023. Our U.S. federal team had a solid quarter, and we saw another large expansion in the big 4 GSI space.
I'm particularly pleased that the majority of our 6- and 7-figure deals this quarter included significant contributions from our field CTO business value engineering team. This team of seasoned business consulting experts helps our clients and partners analytically demonstrate the real value of digital adoption from both the cost savings and the top line expansion perspective. When the field CTO team is engaged, we see higher win rates and larger average deal sizes when compared to pursuits without their help. And it paves the path forward to delivering the true value of DAP throughout the customer life cycle.
In Q3, we delivered both with our largest customers in the enterprise and through our velocity engine in the mid-market. We've grown our 1 million ARR customers to 39, and importantly, continue to grow our DAP customer footprint, which is now 194. Our DAP customers are the backbone of our installed base. They are the pioneers, ensuring the success of their digital strategies by deploying WalkMe on top of critical business processes that typically span multiple applications and often span the entire enterprise tech stack. These clients expand their DAP deployments with us because they achieve real business value and in the process, they expand the digital adoption ecosystem because they invest in DAP professionals who often go on to bring WalkMe to new deployments at new employers as their careers advance.
This quarter, we had more examples of the commitment of our DAP pioneers. Dan mentioned that 2 of our largest long-term customers committed to WalkMe once again from multiyear renewals. Now this only happens because of the consistent value that we've been able to deliver. We also saw one of the largest expansions we've signed to date from our commercial mid-market team. This deal was amazing to see as the expansion came just a few short months after initial signing, highlighting our improving time frame for value realization with our customers.
As always, I'm pleased to share some of our newest customers, such as Silver Fern Farms from our ANZ region, and Pure Storage in the Americas region as well as expanded relationships with Suncorp and Origin Energy, among many others. Our public sector team had a great quarter, meeting our expectations from local municipalities to universities to the larger deals in the U.S. federal government. Our unique position as the only DAP provider with FedRAMP status is paying dividends. We have seen a significant increase in demand in this segment over the last year due to the go-to-market motion driven in the channel. We now have multiple large system integrators embedding WalkMe as a value-added discriminator into their offerings and oftentimes supporting multiple SIs on the same bid or RFP, which increases our chances of successfully deploying in the government tech stack.
In SLED, we continued our rapid pace of new logo acquisition by signing deals with the Ohio State University, John Hopkins University and the City of Atlanta. In federal, we were very pleased to be awarded 3 new opportunities with the U.S. Army at the Recruiting Command, at the Training Information Systems Group and a prototype for the Enterprise Business Systems Convergence program, or EBS-C. The EBS-C program is a consolidation of the Army's multiple ERP systems down to a single system that focuses on improving force readiness while improving overall user experience. In other words, strong use cases for WalkMe's value proposition in support of the Army's digital transformation objectives. Note that some of the federal transactions have a ramp in revenue recognition. These structures are favorable to us in the long run but have less initial revenue recognition than we previously anticipated.
In total, we're very pleased with the progress our public sector team has made over the last year, and we're optimistic on their continued growth in the fourth quarter and 2024. Our partner ecosystem is expanding and will continue to be an anchor of our commercial, enterprise and public sector business moving forward. More net new ARR is being impacted by the ecosystem than ever before. We expect that by the end of 2023, partners will have impacted over half of our net new ARR company-wide.
We onboarded another large group of global and regional partners in Q3. We're now seeing our largest global system integrator partners incorporating our solutions for driving digital adoption into their own first-party offerings. These are the signposts that our best-in-class digital adoption tool is proliferating in our ecosystem and our partners are expanding the reach of our platform. At Realize in October, we were pleased to announce the WalkMe Ecosystem Partners of the Year. Congratulations again to all the winners and specifically to Deloitte and SAP Concur for being named WalkMe Global Partner and ISV Partner of the Year, respectively.
As I look forward to the fourth quarter and into 2024, we have made tremendous progress to drive internal change in our organization and to improve execution. I am pleased with how we are positioned to close the year and start 2024. If the demand environment continues to improve, we can take advantage of the opportunity.
Now I will pass it over to Hagit.

Hagit Ynon

Thank you, Scott, and thank you to the entire WalkMe ecosystem. I'm very proud to share that we have achieved our goal of being profitable on a non-GAAP basis, generating $1.6 million in operating profit and continue to improve our free cash flow to over $6 million this quarter. This was a huge milestone for the company. We worked closely together as a global team to be more efficient and drive our unit economics higher. We now expect to finish the year with a positive free cash flow and expect to continue to be profitable on a non-GAAP basis in the fourth quarter and for 2024.
In the last several quarters, as part of our journey to profitability, we focus on optimizing our efficiencies and business processes while setting the right priorities that fuel our success. We are on the right path. The changes we have made will set the tone of our expected profitability and growth in quarters to come. We have the right financial plan to continue to support the long-term strategy.
Now turning to numbers. When referring to gross margin, expenses and profitability, please note that I will be discussing non-GAAP results. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Our total revenue for the third quarter was $67 million. We grew subscription revenue by 10% year-over-year while also growing our subscription gross margin to 90.6%. Our improvement in subscription gross margin over the last few quarters reflects our strong unit economics.
Our professional services revenue were at a similar level as Q2 as expected and down 30% compared to Q3 last year. Our customer success organization continues to grow through transformation, mainly with respect to the focus on outcome-based services and the shift to recon services model. We are now forecasting a slight sequential decline in our PS revenue for the fourth quarter as the trend continues. Professional services gross margin improved and was positive at 16%, driven by better workforce utilization. Our total gross margin was 85%, up from 80% in Q3 last year. Gross profit was $57.2 million, up 12% year-over-year. We believe we can maintain this gross margin for the rest of the year.
We remain on a positive trend for 7 quarters in a row, improving our operating leverage to achieve our goal of profitability ahead of schedule. I'm incredibly proud of how the entire company came together to reach this milestone. With our current cost structure, we have best-in-class subscription gross margin, combined with a scalable OpEx structure that will allow us to achieve a flexible balance of growth and profitability.
Our R&D expenses were $10.2 million, representing 15% of revenue. We will continue to invest in R&D as we enhance our strategic data and AI capabilities. Our sales and marketing expenses were $34.5 million or 52% of revenue, an improvement from 64% in Q3 last year. The improvement year-over-year was driven by headcount reduction earlier in the year, better optimization of our marketing channels and improved efficiencies within our go-to-market organization.
G&A expenses were $10.9 million or 16% of revenue, below the 17% we saw in Q3 last year. We will continue to gain leverage through scale and drive efficiencies across organization by streamlining processes and workflows, utilizing our own digital adoption solution. Operating profit was $1.6 million or 2.4% of revenue compared to a loss of 3.5% in Q2 and 19.8% in Q3 last year. Net income for the quarter attributed to WalkMe were $3.8 million compared to a loss of $12.2 million in Q3 last year. Earnings per share for the quarter was $0.04, using 92.7 million fully diluted weighted average shares outstanding compared to a loss of $0.14 in Q3 last year.
We generated $6.2 million in positive free cash flow, an improvement from the $5.2 million generated last quarter and a cash burn of $11.2 million in Q3 last year. Our free cash flow margin for the quarter was 9% compared to a negative 18% last year. On free cash flow, we expect to maintain a positive level, but it will fluctuate given seasonality in our cash management cycle.
Ended the quarter with $311.5 million in cash, cash equivalents, short-term deposits and marketable securities. Given our sizable cash balance and generating free cash flow, we are well capitalized to continue supporting our growth goals and explore strategic investment opportunities.
Turning now to guidance. Q3 was a positive quarter as we saw continued momentum from our strategic growth drivers and achieved a record milestone of being a profitable company for the first time. Looking forward, we expect we will maintain our profitability in the fourth quarter and for the year of 2024. Additionally, we expect to end 2023 with a positive free cash flow for the full year. With that said, for the fourth quarter of 2023, we expect revenue in a range of $67 million to $68 million and a non-GAAP operating income in the range of $1.3 million to $2.3 million.
For the full year of 2023, we now expect revenue in the range of $266.1 million to EUR 267.1 million, while improving our expected operating loss range due to the outperformance in Q3 and the expected continued leverage in Q4. We now expect our non-GAAP operating loss in a range of $8.3 million to $7.3 million.
Thank you, and we will now take your questions.

Question and Answer Session

Kevin Kumar

I wanted to maybe start with the guidance. I think top line revenue guidance was reduced a little bit at the midpoint. So just curious if you can maybe talk about some of the drivers there. And Scott, I know you had mentioned renewals of some large customers, but curious if you're seeing any lingering pressure from down-selling more broadly within the customer base, particularly as some of your enterprise contracts come up for renewal?

Dan Adika

I'll let Hagit answer it first.

Hagit Ynon

Yes. Thank you for the question. I'll start with sharing our PS -- the PS side and it's similar to what we have shared last quarter. The fact that we are changing how we are structuring our services, and we are moving to a more an outcome-based solution along with the shifting to a more recurring PS revenue that is being recognized over the contract life cycle. So we do anticipate with slight decline also in Q4. And also, we continue to see the headwinds for the macro, with delayed projects. This could need and would all lead to a longer deal cycle.
Scott and Dan, do you want to comment on macro headwinds?

Scott Little

Yes, I can jump in. We've seen some alleviation and see downsizing over the course of '23 as the impacts of rips and layoffs that were prevalent in Q1 and Q2, seems to have trailed off. We do see some optimization of contracts that continues, but we've seen a quarter-over-quarter improvement throughout 2023 and it's a similar story for logo down-sales.

Kevin Kumar

Great. That's helpful. And then I wanted to ask about WalkMe Essentials. I know that's still kind of early, but just curious kind of the progress there, how that's resonating with new customers? And if you're seeing any positive impacts on the new customer side?

Scott Little

Yes. It's been a really nice positive impact, giving us the ability to compete for lands. I mean I have to balance both sides of the house. I need to continue to grow that DAP customer base and expansions remain an important part of our plan, but I've got renewals too. So it's been great to have that tool with essentials when we've needed it. We don't use it in every situation. But when we've needed it, it's been nice to have it. And like you said, it's early for us. We expect it to continue grow in 2024.

John Lewis Streppa

Our next question will come from the line of Josh Baer at Morgan Stanley, followed by Scott Berg from Needham.

Matthew Terence Wilson

This is Matt Wilson on for Josh. So I'd love to just double-click on the NRR metric that you guys reported today. On my math, it looks like 104% for the customers above 500 employees is the largest sequential decrease that you've seen to date. So recognizing that this is a 12-month trailing metric. I'm curious if there's any commentary you can give on how that trended throughout the quarter? What I'm really trying to get at here is was the exit rate there implying anything to the tune of maybe a bottom in NRR near term? Or did that metric continue to deteriorate throughout the quarter?

Dan Adika

Yes, this is Dan. I will take it. So I can tell you that Q2 was better than Q1 in almost in every metric, and Q3 was better than Q2 almost in every metric. So I would say the decline that you see is because, I would say, mainly of Q1 this year. Other than that, we're seeing all the leading indicator metrics are improving quarter-over-quarter. So we're very happy with that.

Matthew Terence Wilson

Got it. Maybe just as a follow-up to that. What is kind of the metric that you all would point to that we should focus on to kind of prove out those improvements?

Dan Adika

Yes. So we're not disclosing the ARR. We're going to disclose it only on a yearly basis. So hard to get those specific metrics. What eventually we will see and what we will focus on, obviously, is DAP and DAP customers, that's something that can really tell the growth there and, obviously next year, our guidance and our ARR growth for 2024.

John Lewis Streppa

And our next question will come from the line of Scott Berg from Needham, followed by Tyler Radke from Citi.

Scott Randolph Berg

Wishing you the best of luck during a difficult time. First question is on the federal pipeline. I don't know if Dan or Scott want to take it. I guess kind of a 2-part question there is, one, did those opportunities meet or exceed your expectations in the third quarter because I know you're pretty excited about the opportunities there? And then the second part of the question is probably for Hagit. How is the rev rec on those contracts work that's different than your initial expectations?

Scott Little

Yes, I can take the first portion of that, Scott. Yes, it absolutely met our expectations. And more importantly, we see the trend continuing into 2024. So we were hoping for a good quarter. We had a good quarter. So we were very, very pleased by that. Hagit can talk about the revenue recognition piece.

Dan Adika

Yes, this is Dan. I want to add a few things. One, I want to remind everyone that we got FedRAMP certified in late March of this year. And we already have multimillion dollar deals -- multiple contracts. So we're very happy. Specifically, we already answer your question. As some of those deals, specifically in this quarter, has ramped up, so it's not linear. So overall, on rev rec, we're actually obviously recognizing only basically month by month. So therefore, on revenue contribution, it was less than the full potential of the deal when we'll see it next year when we'll see a significant boost to the ARR and the following year. I want to remind, it's a multiyear deal. It's a 5-plus year deal, some of them. And in this specific case, we're very pleased and way above our expectations, the results, et cetera. And even in federal pipeline and the opportunity for 2024.

Scott Randolph Berg

Great. And then from a power perspective, I know you released your new Propel platform Realize. I guess maybe talk to us about how that's going to help your distribution with your, I guess, in the ecosystem. And then do you -- are you going to be able to drive any direct economics for it? Or is that platform does it really just kind of help sell the broader DAP suite?

Scott Little

Yes, I can take that, Scott. First of all, from a distribution standpoint, it does 2 things for us, right? It provides the ability to onboard partners quickly and efficiently for 2 reasons: first, for them to be able to deliver services and support of their own implementations. And second, and most interesting for me is the ability for them to learn how to sell and support the product from a resell and a recommendation perspective.
So I win twice because I get clients -- sorry, I get partners that are good in putting my product. I get happy customers. And then I get partners who are willing, in some cases, to resell, and in most cases, to recommend my product and help us sell the story of DAP within their client base. And then in terms of overall lift, I don't expect any distribution lift in '24 because the resell portion of my business is very small. But you'll notice we talked about AWS as well as our relationship with Azure. So the cloud providers being able to provide the product on their stores as well as a focus on improving the product capability-wise, so that it can be more systematically resold. That's our focus for '24, and we expect to see that help us in '25. But you got to start somewhere, and that means you got to have a consistent program. And up until now, we've never had a program. So that's a tribute to a lot of hard work in '23 to get the program launched. And the initial response from our partners has been very good.

John Lewis Streppa

Our next question will come from the line of Tyler Radke from Citi, followed by Pat Walravens from JMP.

Tyler Maverick Radke

So just going back to the comments on stabilization and Q3 is better than Q2, which -- Q2 was better than Q1, how should we just think about the bottom in terms of subscription revenue growth, 10% year-over-year this quarter? I think sequential growth was slightly higher than you saw in Q2. So do you feel like you can kind of hold double-digit growth on subscription going forward? And just can you elaborate if there was any better linearity throughout the quarter, which would have driven the slightly better sequential growth in subscription revenue?

Dan Adika

Sure, I can take it. This is Dan. So the way we're looking at it, obviously, that was a transformational year for us. We did a lot of great things and a lot of investments, and we focus our energy to be a sustainable growth company. We're more than pleased with the achievement. Cash flow positive last quarter and profitability this quarter, way ahead of original plan. As I said in my script, now we're focusing on doubling down on how we can reaccelerate our revenue. Obviously, revenue is a lagging indicator to ARR growth. So we will see an accelerated growth in ARR probably next year, followed by revenue growth.
So now that we've got, I would say, the first mission done, and we're a profitable company, our unit economy is fantastic, super stable, over $300 million in the bank and we're ready to go in doubling down on where we're seeing the opportunities are working. And Scott and the entire ELT team, Hagit, Sunil, Adriel had a lot of, I would say, operational changes this year to set us up for continuous growth. Obviously, we're investing in the category sharing partner. So many things that we did in WalkMe, and we did it while we're becoming more efficient, generating cash and becoming profitable. That takes a lot of pressure off which will allow us now, as I said, to really focus on what's working. And hopefully, we will see that growth coming in the upcoming quarter.

Tyler Maverick Radke

Okay. Great. And a follow-up for Hagit on the profitability side. So another strong quarter of operating income and operating cash flow. It looks like operating expenses were down again quarter-over-quarter. Can you just talk about what drove that? Was there kind of further headcount reductions? And if I look at the operating cash flow margins here in the last 2 quarters, 11% and 9%, is that kind of how we should be thinking about the operating cash flow margins heading into?

Hagit Ynon

So I'll start maybe with profitability, just to remind that we are probably in the seventh quarter in a row that we continue to focus on efficiencies, and we continue to optimize our workforce. We took the RIF in April, we -- in Q3, we see the full impact of the RIF coming in. And we still continue on streamlining processes and many, many other initiatives around our OpEx improvement. And we see that coming in also in Q3 and Q4, I assume that we will be probably on the same level. Around cash flow, we did improve our position. We will continue to be cash positive in the coming quarters, but it will probably fluctuate due to the seasonality around managing our cash.

John Lewis Streppa

Our next question will come from the line of Pat Walravens from JMP, followed by Keith Bachman from BMO.

Patrick D. Walravens

Okay. Great. And first of all, Dan, our thoughts and prayers are with you and your families and the entire WalkMe family. First question, Scott. So I mean, federal was clearly good. Was, overall, did the sales team meet expectations?

Scott Little

Yes, we had a good quarter. So I was very pleased with our performance this quarter. And again, Q2 was better than Q1. Q3 was better than Q2. So Pat, we've talked about it before. We expect the Fed to anchor the quarter and they did, but we had a good quarter across the board.

Patrick D. Walravens

All right. Terrific. And then secondly, so there's north of $300 million in cash and you're free cash flow positive. So can we talk a little bit about what to do with all that cash? I mean your stock is really depressed, right? So would you consider buying some back? And then what are the strategic things you would like to do with it?

Dan Adika

Yes, I will take it. Pat, thanks for thinking about us. Really appreciate again. And so yes, obviously, our cash position is amazing, and we're going to look on M&A opportunities. We're not going to look on buyback, stock buyback, especially when we don't have a lot of float. So we are going to look, as I said, on M&As, and as we're working on the annual plan for 2024. And we're going to invest in things where we're seeing great ROI like federal, like partners, like certain regions. As I said, we're going to focus on how we can reaccelerate growth now that we have a very strong foundation with our cash and profitability. So that's probably what you will see from us in the upcoming quarters.

Patrick D. Walravens

And then as a follow-up, Dan, can I -- I mean, what -- where do you see white space that you could fill with M&A? Is it just buying companies that have data scientists so you can do more AI? Or where is the white space?

Dan Adika

So I would say all the acquisitions we made so far was pure tech acquisitions from DeepUI to Zest, and obviously, we make those technologies to our product. Now we're looking not just tech and revenue opportunities in markets and even, I would say, certain fields that we believe that DAP can have a huge added value. And if we can go in and open a new market for us, that's something that we will look at. So there's a lot of areas from automation to data, obviously, workflows, analytics, obviously AI. And so there is a lot of opportunities right now, especially in the private markets as well. There's great companies out there, and we are going to obviously use the power that we have and the cash balance.

John Lewis Streppa

Our next question will come from Keith Bachman of BMO, followed by Michael Berg of Wells Fargo.

Bradley Reiss Clark

This is Brad Clark on for Keith. I want to ask about the notable expansion that you highlighted during the quarter. Can you highlight any common themes, whether that'd be new departments, new product lines, creative employees that were present in need of expansion and sort of how this can be replicated going forward among the other notable clients?

Scott Little

Go ahead, Dan. Go ahead.

Dan Adika

Yes, I'll start. Scott, you can add. So as we mentioned in the previous call, there is a journey to that, right? They're starting with 1 or 2 applications or use cases. And then obviously, we're showing the value and then we're going bigger and bigger and bigger. And we're seeing that, and we're repeating it. Obviously, we want to do it more in a larger scale. But when it's working, we're seeing amazing ROI.
So it's not just those notable expansions. I actually referred to it on my script. We had massive renewals, 3-year renewals or 3-year contracts that were multimillion dollars. That means that those companies already were a multimillion-dollar customer for WalkMe and they renew for an additional 3 years. That show huge confidence. Some of those renewals had massive uplift over $1 million in ARR uplift just on the renewals. And basically, we're focusing on value, how we can create value for our customers and how we can measure that ROI. Once we're doing a great job, obviously, the deal follows. And that's what we saw this quarter. And Scott, I don't know if you want to push more on that.

Scott Little

Yes, I'd add a couple of things. First of all, any time that a client is adding applications, that's good for us. And the ones that tend to be the stickiest and the largest we have user workflows that cross applications, right? You do use our onboarding or you do order to cash, they will typically be anchored in one of the big applications like Workday or SuccessFactors or SAP, but they will cross multiple applications. And that's when it gets interesting and that's when we see a lot of value.
And the second is when customers are rolling out major upgrades to large applications. I mentioned one of the large, big 4 GSIs that expanded with us. It was a multimillion dollar expansion. And for this portion of the group, it was specifically on a major upgrade process for them around SAP. So they were moving from SAP, ECC 6 or 3 to S/4HANA. And it was critical for them that they have the right digital adoption environment in place to do it. It was driven completely by their desire to make sure that they roll out a clean implementation of SAP. And this particular member firm, which was in Europe is going to be the prototype, they'll now go back to both the U.S. firm as well as the other firms in the rest of the world. So we'll see another expansion that builds off this big SAP update. So for us, those are the things we look for because they tend to be large, they tend to be complex, sophisticated and that's when we shine.

John Lewis Streppa

Our next question will be from Michael Berg from Wells Fargo, followed by Michael Turits from KeyBanc to round up the call.

Michael H. Berg

I want to share my thoughts and prayers for WalkMe team and all of us to overcome this difficult time. My question is on product. You recently launched Discover and also just discussed data validation capabilities and beta. Obviously, those are very new products. But from my standpoint, are highly intriguing especially as we move into this generative AI world with a lot of enterprises focusing on data readiness. So maybe you can help us through understand, I guess, early adoption or feedback from customers as well as how you think these 2 products can contribute in the near term or at least in 2024?

Dan Adika

Sure. It's a great question. So as I mentioned, those are one of the -- those are 2 of the fastest-growing product lines that we have. We're already growing there almost 85% quarter-over-quarter, covering millions of employees. So we're getting really good feedback. And just to be fair, we offered it until the end of the year for free. So next year, we're going to start seeing the conversion. For us, and that's basically the blueprint value. That's what we like to say that the treasure map.
We're giving the customers the data to understand exactly where they're having issues and where they have bottlenecks in their digital transformation strategy. The fact that we have that data and we're showing them the data beside of immediate value like cost saving and optimization really help them shape the strategy for the upcoming years as they're moving and pushing digital transformation.
Adding to that, we added what we call Shadow AI, which allowing companies to understand the generative AI usage they have in their companies. Add that to the ability of WalkMe to actually guide you and show you what to do, we're actually boosting the adoption of generative AI within our customer base. And this is a huge, huge priority for them. So we're looking at generating AI like digital transformation 2.0. And the fact that we're there helping our customers get on generative AI that will drive amazing outcome for them. So that's what we're doing with Discovery and Shadow AI.
On the UII. UII is absolutely amazing. Obviously, we can show them exactly where they have issues. It opened so many use cases for us like compliance, data validation, data hygiene. Obviously, generative AI is relying on clean data and the fact that we can tell them exactly where they have data issues automatically without doing anything. This is something that is super valuable for them. And this is our foundation to the next generation of what we call text to action. So overall, we're very, very pleased. The usage and the adoption of those products were well above our expectation -- well, well above our expectation. And we're looking forward, obviously, to continue investing there and making it part of the DAP platform and that will lead to, obviously, better use of WalkMe and what we're focusing on, moving more and more and more WalkMe use case-based customers to be DAP customer.

Michael H. Berg

Great. And a quick follow-up for Hagit. Headcount has gone down sequentially a couple of times, presumably from the impacts of the RIF. Maybe you can help us understand how you're thinking about going back to the hiring markets and investing more directly for growth now we're back with profitability moving forward?

Dan Adika

Yes. I will take this one. So obviously, we're looking at profitable growth. We're constantly hiring some of the places we're cutting down because we're not seeing ROI. In other places, we're continuing to grow. So we never just stopped. We're more like, I would say, restructured and focused on the right things. As we're entering 2024, as I said, we are going to look at the opportunities that will allow us to reaccelerate our growth. And so obviously, we will be hiring in the right places. Some examples, obviously, Fed and Partners where we're seeing huge momentum, obviously, in R&D and product teams where we're seeing great success in certain products. So we're going to always balance it based on profitable growth. This is how we're looking at it. And if we're seeing amazing opportunities, always we have the cash and the power to go and double down. And this is how we're looking at it holistically.

John Lewis Streppa

Our last question will come from Michael Turits from KeyBanc.

Michael Turits

Of course, loads of payers with you and with all of Israel. I want to make sure, first, you said that each of the metrics have been improving sequentially. So I assume that, that means ARR as well as in-period NRR as well. But -- and I know that we still have the headwinds from macro and the service shift. But what was it that made you bring down the guidance for the year in terms of the back -- the fourth quarter? What was incrementally more of a headwind that we saw there?

Dan Adika

So yes, everything was better in Q3 compared to Q2 and Q1. One, as Hagit mentioned, some of the ARR deals and the deals that we closed were very impressive and has a step-up mechanism, especially in Fed. So from revenue perspective, we're not recognizing them as their full potential. That's one.
The second piece is the weakness on the services. And although Q3 was better than Q2, and obviously, it could have been much, much better and that's what we're pushing for. So it was a great quarter, and the sales team executed, as Scott mentioned, but we still have really big deals that pushed to Q4. And that's the theme that we saw from obviously the headwind. So we are seeing a constant improvement in all SaaS metrics. But I would say the services, this is something that hits us immediately when we're not meeting the revenue aspect and that's the reason.

Michael Turits

If I could squeeze one more in for Scott. It's great to see what you've done in Fed. I'm just curious what the -- I mean, Fed is obviously an enormous set of opportunities. If you could maybe talk a little bit about how you focus or think and we're now are directed set about those opportunities on the civilian side, potentially on the non-civilian side and what types of agencies -- what's really the way to get in stimulus in most effectively?

Scott Little

Yes, it's a very good question. While we're investing in the space, I don't have 1,000 sellers in the federal space. So exactly as you've laid out, we've been trying to be very thoughtful about where we spend our money and our focus. So we're doing well in the armed services, on the DoD side of the house. So we have taken the work that we've done with the Army, and we springboard to opportunities at the Marine Corps as well as at the Navy. Probably not going to invest in the intelligence community because it's really expensive to gain and it takes a much longer time than to get in with one of the armed services.
On the civilian side of the house, we're going where the money is. So VA is already a large customer, and we expect to see expansions from them next year. We're looking at Justice. We're looking at homeland security. Probably not going to chase interior, probably not a chase HUD. Not that if something came to us in one of the large programs, we wouldn't be interested in it. But I've got to be able to focus. And so we're chasing the money on the civilian side of the house budget-wise, trying to leverage some of the work that we did with the VA and on the DoD side. It's with the armed services and not intelligence. Hopefully that makes sense.

John Lewis Streppa

Thank you, Michael. And that concludes our Q&A session. With that, I will pass it back to Dan Adika CEO, for closing remarks. Dan, the floor is yours.

Dan Adika

Thanks, John. I want to thank everyone, first, for thinking about us and encouraging us in those difficult times. I want to take the stage and thank our team. They did amazing, amazing work in the past 5 weeks. So I want to thank everyone the support from customers, partners, and looking forward to speaking with you next quarter. Thank you, everyone.