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WalkMe IPO | S-1 Breakdown

By 

Alex Clayton

May 25, 2021

Company Overview

WalkMe, a leading Israeli-based SaaS company in the digital adoption space, filed for a $100M IPO with Morgan Stanley leading the IPO. The $100M is a placeholder figure for now and the company plans to trade under the ticker “WKME” on the Nasdaq. WalkMe is the second Israeli company to file for an S-1 in the past week, following Monday.com. The company’s vision is to “fundamentally transform the productivity of humanity by harnessing the power of technology” and their platform’s goal is to enable companies to realize the value of their investments in software -- they help make software easier to use and deploy. As companies digitally transform, they require tooling to make sure users are gaining the most value out of the software (especially in a remote/virtual world), and this is exactly what WalkMe offers. The product is mostly overlaid (and not integrated) onto a software application without code to help users navigate websites, SaaS applications, and mobile apps through a guide-like experience online. The company also offers insights on usage to help companies understand pitfalls and usage in their digital products. WalkMe’s product is focused on CIOs, employees, and customers -- essentially every software user. Companies spend a ton of money on SaaS applications, and learning how to use them is challenging, particularly as the amount of applications inside companies continues to grow, so a product like WalkMe that enables users to learn and reach the full value of the software applications they already have makes sense. And because the product is overlaid onto an application, it can be deployed across any application and operating system.

WalkMe reports ARR (annualized recurring revenue), and was at $177.5M as of last quarter (ending March 31, 2021), growing 29% year-over-year and had a 111% dollar-based net retention rate in the last quarter. The company releases quite a few non-GAAP metrics which I’ll get into later. The company has ~2,000 total customers, 368 of which pay more than $100K in ARR and 22 that pay over $1M in ARR. The company was founded in October of 2011 under the name Make Tutorial and changed its name to WalkMe in March of 2012. WalkMe has raised $258M in venture capital with the most recent round being a $90M series G led by Vitruvian Partners in December of 2019 at a $1.9B post-money valuation (according to Pitchbook). More information on investors and funding later in the post. WalkMe is headquartered in Tel Aviv, Israel, and has 940 full-time employees (as of March 31st, 2021). The company’s name, WalkMe, is short for “Walk me through it”.

Below is a timeline output from the S-1.

Source: Company S-1

Product

WalkMe’s Digital Adoption Platform enables organizations to measure, drive, and act to maximize the impact of their digital transformation and accelerate the return on their software investment. WalkMe helps software companies understand what’s going wrong in the user journey in their product, and offers guidance to those same users on how to better use a software tool. For example, WalkMe mentions how a global pharmacy chain used WalkMe’s product to drive digital adoption across applications used by 220,000+ employees, and they saw a 50% reduction in support tickets, which is a significant ROI. WalkMe gives you the tooling to overlay a guide inside a software application, all without code. The product is focused on CIOs and business leaders, employees, and customers. It’s important to note the product is an overlay and WalkMe does not talk about being implemented into the code of their end-customer’s product, which is probably a double-edged sword -- it’s easy to get the product in but also easier to churn off. The product has a few main pillars:

  • Data and Visibility: WalkMe Insights provides CIOs and business leaders with visibility across the software stack and the insights needed to maximize the impact of their digital transformation strategies.
  • User Experience: The foundation of WalkMe enables enterprises to design and overlay contextual and personalized experiences that drive the adoption of its digital assets on mobile, web, and desktop interfaces.
  • User-Centric Technology Applicable Anywhere: Designed to leverage the application user interface (“UI”) as the primary integration point. Unlike APIs, which are not consistently available across applications and require developer resources to implement, WalkMe’s UI-focused approach allows the company to deploy its Digital Adoption Platform across any application and deliver contextually aware, dynamic workflow guidance, automation, and analytics, without code.

WalkMe provides insights to help CIOs and business leaders drive business outcomes, delivering visibility into their software stack and business processes, optimize software usage and technology spend, increase employee productivity and improve customer engagement. WalkMe’s extended functional capabilities are summarized below:

  • Experience: Drives WalkMe’s platform and allows its customers to design contextual and personalized experiences that engage and drive user adoption of their digital assets on mobile, web, and desktop. This includes products such as Smart Walk-Thrus, Flow Steps, SmartTips, ShoutOuts, Onboarding, TeachMe, Workstation, and WalkMe Mobile. 
  • Automation: In the form of either an automated Smart Walk-Thru that can run simultaneously with a visual Smart Walk-Thru or an ActionBot, which is a natural language chatbot that allows users to perform entire tasks from a central conversational interface.
  • Build: Allows users to create, design, and manage content through a no-code editor, platform-specific solution templates known as solution accelerators, and Shield, which is an automated testing solution that ensures users’ experience is up-to-date.
  • Insights: Provides CIOs and business leaders with visibility across the software stack and the insights needed to measure, drive and act to ultimately maximize the impact of their digital transformation strategy. This includes features such as visibility into software application utilization, real-time assessment of user productivity, digital experience analytics, user journey insights, tracked events dashboards, and custom reports. 
  • Integration Center: Supports both incoming and outgoing integrations to strengthen data analysis on the one hand and create segmented and personalized user experiences on the other.
Source: Company S-1

Summary Metrics and GTM (Go-to-Market)

Below are a few high-level metrics around WalkMe’s financial performance and metrics.

  • $177.5M of reported ARR, up 29% year-over-year. LTM revenue of $156.7M, up 34% year-over-year. 90% of revenue was subscription-based as of last quarter.
  • LTM non-GAAP gross margins of 74%. Subscription non-GAAP LTM gross margin was 85% and non-GAAP pro-serv gross margin was (13)%. WalkMe is losing money and LTM non-GAAP operating margin was (18)% and LTM adjusted free cash flow margin was (4)%.
  • WalkMe had 1,984 customers as of last quarter and on average, each customer pays them $89.5K annually. Note their overall customer count is down (1)% year-over-year.
  • Net dollar retention in the latest period for the whole business was 111% and for customers with 500+ employees, was 118%.
  • Sales efficiency is not best-in-class; WalkMe’s implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR multiplied by gross margin/sales and marketing spend of the prior quarter), was at a 35-month median over the past 7 quarters.
  • WalkMe’s contracts are typically 1 → 3 years and multi-year contracts are increasing. Customers are billed annually in advance.
  • WalkMe has $111.7M in cash and cash equivalents and has raised $258M, implying they have burned $146M to get to $178M in ending ARR, an ending ARR / net cash burn ratio of 1.2x.

WalkMe utilizes a direct sales and partner-assisted sales approach with a focus on larger enterprise customers. While total customers in aggregate are actually down year-over-year, customers that pay more than $100,000 in ARR are up 30% YoY, and the ARR from those customers represents 71% of WalkMe’s total ARR, up from 63% in Q1 of 2020. There is likely significant churn at the lower end of the market given overall logos are down YoY, although WalkMe doesn’t disclose it. The company sells either a single department or an enterprise-wide deployment and the company has a wide range of buyers within a customer and targets the CIO or VP of IT, VP of Sales, head of HR, head of product, or the head of contact center. Partner-assisted sales are done through strategic systems integrators such as Accenture, Deloitte, IBM, PwC, and Cognizant. Their largest customer represented less than 3.3% of ARR last quarter, so they must have at least one customer that pays them ~$5-6M a year.  

When COVID-19 started, WalkMe implemented a short-term hiring freeze across the company, which limited their sales capacity, and sales cycles increased. It’s clear from looking at their quarterly P&L that COVID had a negative impact on the company -- they added $6.6M of net new ARR in Q1’20 and had a couple of flat net new ARR quarters in Q2 and Q3 before things picked up in Q4. WalkMe did have a strong Q1’21, where they added $13.2M of net new ARR, their biggest quarter since Q3 of 2019.  Year-over-year ending ARR growth was 29% last quarter, up from 25% in Q4. A concern for WalkMe is the declining year-over-year growth rate in ARR -- it is to be seen if the company’s reinvestment in sales will deliver accelerating new logo growth or new enterprise customers. Given they are smaller than most public SaaS companies (median ARR of ~$600M), and growing slower than the median (median implied ARR growth rate of 36%), they will have to reaccelerate growth to justify a premium multiple / valuation.

One area that WalkMe will get questions about is what are the biggest applications and use-cases on the platform and where the company is spending most of its sales and marketing efforts? Is it focused on training users on the large software platforms such as Salesforce, SAP, ServiceNow, Microsoft for internal-facing applications, or is it on getting WalkMe into software companies to help their end customers use their products more effectively? WalkMe releases quite a few interesting customer case studies that span a wide range of use-cases, but it’s unclear the concentration of use-cases (and revenue) around training employees on the large software platforms vs. customer-facing applications.

Below are more stats on the business and industry from the S-1:

  • WalkMe had ~2,000 customers in 42 countries at the end of Q1’21, including 155 of the Fortune 500 and 243 of the Global 2000. 30% of revenue came outside the U.S. last quarter.
  • As of Q1’21, WalkMe had 368 customers with ARR $100K+, which represented 71% of total ARR.
  • 22 customers are $1M+ in ARR, which was 22% of total ARR at the end of Q1’21.
  • Customers that have 500+ employees represented 86% of total ARR at the end of Q1’21. 
  • There is some seasonality in WalkMe’s business and they acquire more customers in the 4th quarter of each year.
  • Growth in existing customers represented 59% of WalkMe’s subscription revenue growth in 2020.
  • Sales commissions are amortized over a period of 4 years. 
  • WalkMe owns 6 issued U.S. patents, 6 U.S. patent applications, and 8 foreign patent applications as of the end of Q1’21.
  • WalkMe’s platform processes billions of events every day.

WalkMe releases quite a few stats around digital transformation and KPIs from a few studies, one of which they commissioned. A few of them are below.

  • Enterprise software spend is expected to increase from $506B in 2021 to $715B by 2024 (Gartner) and global enterprise spend on digital transformation is projected to reach nearly $2.4T within the next 4 years, representing over 57% of all business spending on technology, according to IDC.
  • According to Insight Enterprises, 20%+ of licensing spend is on software that is not utilized which represents $3M a year in wasted investment for most organizations.
  • According to the U.S. Bureau of Economic Analysis, digital investment, defined as private non-residential fixed investment in software, research and development, and information processing equipment, comprised 56% of all non-residential fixed investment by U.S. businesses as of the fourth quarter of 2020.
  • According to Boston Consulting Group, 70% of digital transformations fall short of their objectives. 
  • According to a recent Harvard Business Review Analytic Services (sponsored by WalkMe), 80% of respondents stated that to increase the chances of digital transformation success, it is important or very important for senior management to have a clear and complete overview of their organization’s digital adoption progress via analytics. Moreover, 81% of those surveyed agreed or strongly agreed that adopting new tech is a competitive advantage.
  • According to research by Accenture, digital leaders, defined as the top 10% of companies leading technology innovation, achieve 2-3x greater revenue growth as compared to their competitors—a widening divide that Accenture calls the “Digital Achievement Gap.” 
  • Based on Blissfully 2020 SaaS trends report, enterprises maintain 288 SaaS applications, on average, representing ~10 applications per employee, with the usage of applications growing at an estimated rate of 30% annually.
  • According to a 2020 Forrester Consulting study, The Total Economic Impact of WalkMe Digital Adoption Platform (commissioned by WalkMe), WalkMe’s platform was estimated to deliver net present value savings of $9.8M from increased application usage and process efficiency over three years.
  • The same study saw a 60% reduction in training time on applications and savings of 50% from reduced IT support calls and Help Desk tickets. It also saw an increase of 35% in customer retention and 10% growth in upsell opportunities from existing customers over three years.
  • Lastly, the study saw that the payback on WalkMe’s product was less than 3 months.

Market Opportunity

WalkMe believes their market size to be $34B and they arrive at this figure by looking at the total number of companies from S&P’s company database and segmenting those customers based on their employee size and applying their average annual contract value to each cohort using their internal data. Given their market is relatively new and their use-cases are broad, there isn’t a specifically defined market segment. They also likely take market share from professional services and consulting services that teach users how to build software, but they don’t mention that in the S-1.

Competition

WalkMe believes they are the pioneer in a new market and does not name any competitors in their S-1 and mentions, “we do not believe that any of our competitors currently offers a solution that effectively competes with the full functionality of our integrated platform technology solutions.” While they don’t name any competitors, WalkMe believes they compete against 1) status quo of offline, internally developed, or non-dynamic FAQ-style approaches, 2) point solutions embedded natively into products such from companies like Salesforce, SAP, Oracle, and Microsoft, and 3) software vendors that offer in-app guidance or analytics for SaaS applications. The company also mentions home-grown and open source technology. WalkMe certainly does have competitors across their guide functionality against companies such as WhatFix, Spekit, and Appcues, and some companies that have broader product suites than WalkMe, such as Pendo*. WalkMe does mention they expect competition to intensify.

Investors and Ownership

WalkMe has raised $257.5M in equity financing according to Pitchbook. Investors include Insight Partners, Greenspring Associates, Scale Venture Partners, and others. Unfortunately, in the initial S-1 filing, WalkMe does not disclose the number of outstanding shares and each shareholder’s corresponding ownership (this post will be updated when we see their S-1/A). The last round was a $90M Series F in Dec 2019 led by Vitruvian at a $1.9B valuation ($21.93 per share). As mentioned, the ownership section will be updated in the next filing and below is their price per share disclosure over time.

[Update as of 7-Jun-2021] WalkMe released an updated S-1/A with the ownership filed in. See the cap table output of major shareholders below.

Source: Company S-1

Price per Share Disclosure

Source: Company S-1

Financials and Other Metrics Outputs

WalkMe is a ~$180M ARR business growing 30% YoY and with non-GAAP gross margins in the mid 70’s and had a (22)% non-GAAP operating margin in the most recent quarter. Revenue growth has slowed year-over-year, and quarter-over-quarter revenue growth has been relatively flat for the past few quarters although it did tick up in Q1’21. The year-over-year revenue growth rate in the past 4 quarters has been 47%, 38%, 28%, and 25%, respectively. Given WalkMe did slow down hiring when COVID happened, a question will be if they can at least sustain their current revenue growth rate or even increase it. On a net cash burn basis, WalkMe has been fairly efficient by adding ~$1.20 of ARR for every $1 they burn. Outputs of other metrics are below:

Historical P&L ($000's)

Source: Company S-1. *Stock-Based Compensation and Amortized Intangible Assets distributed ratably to subscription and professional services COGS.

Historical Non-GAAP Metrics and Other KPIs

Source: Company S-1

Quarterly Revenue ($M)

The chart below shows the growth decay I referenced above; revenue growth has slowed dramatically in the past 5 quarters. The company also mentions the following in the risk factors “Even if our revenue continues to increase, we expect our revenue growth rate to decline in future periods.”

Source: Company S-1

Subscription and Services Revenue Mix

Source: Company S-1

Ending ARR ($M)‍

WalkMe added $13.2M of net new ARR over the past quarter and $39.7M over the past year.

Source: Company S-1

Quarterly Non-GAAP Gross Margins and Operating Expenses as a % of Revenue

Source: Company S-1

GAAP and Non-GAAP Operating Margins

Source: Company S-1

Implied Average ACVs per Segment

WalkMe does release some percentages of ARR for certain customer segments along with customer count, so the following interpolates the average ACV per segment.

Source: Company S-1

Implied ARR Composition by Segment

Using the same disclosure as the chart above, the following looks at the composition of ARR based on the end customer segment. Larger customers are making up a greater percentage of ARR over time.

Source: Company S-1

Net Dollar Retention and Cohorts

Below are WalkMe's dollar-based net retention metrics which they release for two customer segments.

Source: Company S-1

WalkMe does release some data on their cohorts and expansion over time. A few stats on their cohort disclosure and the associated graphic are below.

  • The ARR from customers for the 2015 cohort, 2016 cohort, 2017 cohort, 2018 cohort, 2019, and 2020 cohort as of March 31, 2021, represented an increase over each cohort’s initial aggregate ARR by 2.2x, 1.0x, 1.6x, 1.2x, 1.2x, and 1.0x, respectively. 
  • ARR from customers with 500 or more employees for the 2015 cohort, 2016 cohort, 2017 cohort, 2018 cohort, 2019, and 2020 cohort as of March 31, 2021, represented an increase over each cohort’s initial aggregate ARR by 4.3x, 1.8x, 2.7x, 1.5x, 1.4x, and 1.1x, respectively. 
  • These ARR multiples reflect both decreases in customer contract values and customer cancellations that have occurred since the comparative ARR calculation date.
Source: Company S-1

Sales Efficiency and Payback Periods

WalkMe doesn’t release customer counts by quarter, but the below output plots their implied months to payback using the inverse of a CAC ratio (net new ARR multiplied by non-GAAP gross margin/non-GAAP sales and marketing spend of the prior quarter). The magic number is defined as net new ARR/non-GAAP sales and marketing spend of the prior quarter. The median months-to-pay-back over the disclosure period is 35 months. It’s worth noting that WalkMe’s total customer count is actually down slightly year-over-year.

Source: Company S-1

‍U.S. vs. International Revenue Mix Percentage

Source: Company S-1

Cash Flows ($M)

Source: Company S-1

Quarterly P&L (000's)

Source: Company S-1

Valuation ($M)

WalkMe will trade like other high-growth SaaS companies: on a multiple of forward revenue. The output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value) / NTM revenue multiples from other public, high-growth SaaS businesses. It also includes an implied ARR multiple range. As mentioned in other posts, companies do not release projections or guidance in S-1's. It’s likely WalkMe trades above their last round price of $1.9B.

Source: Multiple ranges from https://www.meritechcapital.com/public-comparables/enterprise. Enterprise value ranges are illustrative.

Final Thoughts

WalkMe is the pioneer in the Digital Adoption Space or software “guide” market and their product makes sense -- the ability for software vendors to both enable their employees and customers to get more value out of their software investments is and will be an important part of the SaaS stack going forward, particularly as the amount of SaaS applications increase inside companies. WalkMe does mention they offer analytics, but the core of the product is focused on training and guides. Are we moving towards a world where software vendors are already building better software so that the need to train users -- as millennial and Gen Z consumers make up more of the workforce, who are, more likely to understand how to use software, making WalkMe’s product less relevant? Possibly, but on a macro market level, their platform has tailwinds as every company becomes a software company but there could be some factors hindering their growth moving forward, let alone significant competition from guide vendors like WhatFix, Spekit, and broader suites like Pendo*. Another risk factor they call out is on the security side. Given the company does not control personally identifiable information or other sensitive information that their customers transmit, a significant breach could hurt the company and vendors would be less likely to overlay their guides in their product.

On the numbers side, revenue growth is slowing to <30%, overall customer logos are flat, and sales efficiency is mediocre. Investors will have to believe in their reinvestment in sales headcount which the company paused during COVID. The bright spot in their metrics disclosure is the growth in larger customers, which is growing 30% year-over-year and make up the vast majority of WalkMe’s ARR. Given WalkMe is almost an index of the broader SaaS market given their guides / training product overlays onto SaaS applications, and with continued sales execution, there is certainly a market opportunity for the company to continue to grow. WalkMe is also on the smaller side of SaaS IPOs in the past year, and they could be an attractive M&A target. Even with the slowing revenue growth, I bet there is interest from the public markets so that they should trade above their last round of $1.9B.

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*Meritech is an investor in Pendo.io.

Special thanks to Chris Gaertner for the help on this post.

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