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Making Markets EP40: WalkMe CEO Dan Adika on Q2 Earnings & Latest State of Digital Adoption Report
by Daniel Newman | August 26, 2022

In this episode of Making Markets, WalkMe CEO Dan Adika talks with host Daniel Newman about why the company’s digital adoption platform is seeing a strong resiliency during this uncertain market. As companies pour investment into digital transformation, it is incredibly costly to not understand asset performance and adoption–Adika shares why WalkMe has been growing and showing customers a better way. We also discuss the challenges of the Rule of 40 pivoting between growth and profitability. The show wraps up with a rundown from WalkMe CEO Dan Adika on findings from WalkMe’s 2022 Digital Adoption Report and a look at key findings.

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Transcript:

Daniel Newman: Companies are spending big on digital transformation, but are they getting the most out of their investments? This week, I speak to WalkMe CEO, Dan Adika. And we discuss the trends, the forces, and the opportunities for companies to get more out of all the investments they are making in digital transformation. We also look at how the company is pivoted around the rule of 40, to be more profitable in the near term, to meet current investor sentiment. And finally, we look at the recent state of digital adoption survey done by WalkMe, what it means, what are the surprises, and how companies can get the most from those digital investments. All this and more on this week’s Making Markets.

Voiceover: This is the Making Markets Podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets innovation, and the companies featured on the show. The Making Markets Podcast is for information and entertainment purposes only, please do not take anything reflected in this show as investment advice. Now, your host, Principal Analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Dan Adika, CEO, WalkMe, welcome back to Making Markets.

Dan Adika: Thank you, Daniel, and thank you for having me again.

Daniel Newman: Yeah, it’s always great to have you. In just a matter of six, 12 months, the world has changed so much.

Dan Adika: Mmm-hmm.

Daniel Newman: We think that we are done with the pandemic, and maybe we are. We think that maybe, we’ve solved inflation, and maybe we have.

Dan Adika: Mmm-hmm.

Daniel Newman: We think that maybe, everybody’s going to go back to the office, and maybe they won’t [inaudible 00:01:47]. In your world, I’m sure things are moving extremely fast, so even though you’ve been on the show before Dan, the situation right now is very different. So, we got a lot to talk about today, but first and foremost, how goes it? And where in the world are you right now?

Dan Adika: So, currently, I’m in Tel Aviv. I moved back to Tel Aviv in 2020, just mids of COVID. Yeah, great weather, right by the ocean, so loving it.

Daniel Newman: Yeah, I got to get there. I was just in the Greek Isles, and actually your head of AR, reached out to me when he saw a social post. He’s like, “You’re so close to Israel. You should just come down while you’re here.” I do need to get there. I do want to get to Tel Aviv. I want to see you. There’s lots of innovation going on there. Anyone out there that’s not aware of this, Tel Aviv’s an absolute hub for some of the most [inaudible 00:02:41] disruptive and exciting technology innovations. Things like, security, software, pay attention, there’s lots of great companies, including WalkMe, that their genesis was there and have obviously spread and become really exciting companies around the world. So, want to talk a little bit, you just got through earnings, you’ve just got this new digital adoption report.

Before we do that though, I always like to talk to the CEOs that join my show, especially during times like now when it’s a bit turbulent, the world’s in a bit of a state of uncertainty, are we going into a recession? Unemployment’s really low. Actually, things are great. How are you seeing the economy right now and the overall state of business?

Dan Adika: Yeah, I think that overall, tech got a lot of attention in the public markets and now we’re seeing it in the private markets as well. I think, that growth was something that most of the company was focused on. So, it was gross on any price. And it was hard to tell between companies with real business and unit economy with profitable growth, versus just companies that are buying revenue. So, I think that once the interest rate went up and people understand that money is going to be expensive. Suddenly, people looked at companies and said, “Okay, if company is losing money, it might be very hard for them to raise. Therefore, we’re staying away and we’re not investing. So, we saw huge downturn in valuations and multipliers for SaaS companies and software in general. But, I think that it will correct itself. So, I think it went down too much. It will correct itself somewhere in the middle and good businesses will thrive and good businesses will get, obviously through this headwinds of the global economy that we’re seeing today.

Daniel Newman: Yeah, Dan, I love that you said that. I always say, even on a personal level and of course, on a business level, every time we come out of a tough situation where the markets really squeeze us, but we survive, we actually get a little thicker skin. We get a little tougher and we learn, this is part of the ebb and flow of building great businesses is that there’s going to be situations where interest rates arise. There’s going to be situations where enterprise spending goes down. And I always use this really basic example with unemployment when it jumps 3%, there’s certainly a big economic effect, but if 94% or 97% of people that want to work are employed, that still means largely most people that are highly capable, competent in the desire to be working are working. And so I always say it’s alpha and beta alpha and beta the companies right now that are doing things well on alpha are going to still succeed in even a tougher economy.

And of course, companies that were dependent on money, falling out of helicopters and really great quantitative easing and economic policy. Those are the companies that will probably get hit. So, that’ll take me to talk about your earnings, which before I do that, just, because WalkMe is a bit of a newer public company. Not necessarily, everybody knows straight up. Give me just the 30 second, 60 second, what WalkMe’s focusing on? Because, I know it’s evolved a little bit-

Dan Adika: Yeah.

Daniel Newman: But, for people that are investors, or just want to know more about the company, how do you explain WalkMe? Because, I think it’s worth a quick-

Dan Adika: Yeah.

Daniel Newman: Overview.

Dan Adika: Yeah. So, we created a new category called Digital Adoption Platform. We started with showing people how to use applications. So, think about GPS for the internet. We literally, guide people and show them what to do. This is how we started. As it evolved and we created this new category called Digital Adoption Platform, what we’re seeing, is that organizations, big enterprises, are actually going through a massive digital transformation in the past 10 years. It goes through banks and any financial institution, to insurance companies, to tech companies, to even heavy industries. And that’s involved buying software. And when you buy a lot of software and you’re doing a lot of change management and you introduce a lot of new processes, there is real adoption issues. And if you don’t use the technology the right way, you basically don’t get the real ROI of your investments. So, what WalkMe does, it allows organization one, get full visibility into their tech stack, meaning this is the software you use, this is how you’re using it, this is the processes, this is what’s working, this is what’s not working.

And allow us to create great experiences, on top of those application, to make sure users will use it the right way. With automation, with guidance, with in-app help, with data validation and so on. So, you won’t need to learn for five hours, how to do a process. WalkMe will just be there and show you what to do. So, the big shift that we did, is not just introducing this new experience, which is an overlay on top of the application, is the data layer that actually understand the processes, cross-app processes and so on. One more thing to mention, is that companies are using multiple applications to do one single business process. So, sometimes you want to just, I know, create an invoice, or get a quote and you’re going through three, or four different applications. So, that’s what we’re focusing on, helping companies achieve their digital transformation goals.

Daniel Newman: So, it’s a little bit of analytics. It’s a little bit of AI.

Dan Adika: Mmm-hmm.

Daniel Newman: It’s a little bit of RPA, done in its own way though. You’re evolving though, to be multi-category and you’re taking all these things together and saying, “Hey, we have the ability to understand the different softwares that are doing a process. We can therefore create a workflow, that can potentially automate and streamline that service.” So, I think it becomes an interesting story about your TAM. Of course, you have to be thoughtful of how you decide to come in with these different services, because then you’re competing with new competition.

Dan Adika: Yeah.

Daniel Newman: But, I also think those areas are growing really, really quickly. So, give me the quick skinny, you had recent Q2 earnings and if I recall, they looked pretty good.

Dan Adika: Yup. Yup [inaudible 00:09:04].

Daniel Newman: Give me that… Tell me about it.

Dan Adika: We had a great Q2. I think, we focused on two things. One, improving our free cash flow and operating margin, while keeping our growth rate. So, that was one main area that we focused on. Another thing that we’re talking in guidance, is what we call DAP customers, because when we started with WalkMe companies bought WalkMe for a single use case, helping their sales rep on their CRM, helping their employees with their ACM. Now, companies are using WalkMe across their entire digital stack with the Data Action Experience, the way we’re actually packaging it. So, we saw 60% growth in ARR for DAP customers, which is massive. And we’re seeing more and more and more enterprises expanding with WalkMe. So, we actually had three customers that were already paying us over $1 million, expanding with additional 1 million and above. So, that show real confidence in WalkMe.

So, overall we had a really good quarter. I think the street and the investors really looked at WalkMe and saw a new category. And they were like, “Can WalkMe reduce their cost? Can WalkMe still grow, while maintaining a better operating margins?” And we show that we are, and quarter over quarter, we’re improving that and we improved our free cash flow. And we actually set a goal to be free cash flow positive within 2023, which is above 12 months, or even 18 months of what we originally planned, that shows our strong unit economy.

Daniel Newman: Yeah, it shows two things. One, is it shows that you know can make some very strategic decisions, to put profitable growth ahead. And it shows that you probably, put your ear to the street and you’re listening to what they’re saying. And the street is saying, “Right now we value companies that can create cash flow, a little bit more than we value companies that can just grow.”

Dan Adika: Yup.

Daniel Newman: Of course, you know this though Dan, and there will be a moment and that switch will flip again. And then, all of a sudden it’ll be risk on. And everybody’s going to say, “All right, start growing fast again.” But, I think that nimble, “Hey, we can be a little bit morphous to what the market needs us to be right now. We can be a growth and cash company, maybe more conservative growth, more cash now. And then, when growth and risk on comes back in vogue, again, we can start to spend, we can raise capital inexpensively, interest rates come low, we can push the next accelerator to growth, and then we can turn that corner as well.” And I have to imagine, you’re watching those macros to make decisions.

Dan Adika: So, I’ll tell you two things. One, I do think that yes, it will flip in the future and investors will have confidence in companies that they know that can turn free cash flow positive, and actually generate cash. And then, if they see that your unit economy is strong, then when you want to re-accelerate growth and you’re re-investing in the growth, yes, even if you will lose money again, they know that you can, any time you want, you can be free cash flow positive. So, I do think that, that’s something that a lot of investors wanted to see. They’re like, “Oh, there’s companies, just spent money in the last 10 years. They never even one quarter showed a profit.” So, I do think that showing that, will allow companies to go and invest again in the future. So, that’s one thing. The second piece, is we’re looking at the rule of 40 and we are actually balancing growth and spend.

So, you can be in rule of 40, 40-0. You can be 50, -10. You can be 30, +10. So, I think each company will find their way. I don’t think that will just be profitable. We will always grow, because we have such a huge TAM and we’re building a new category. But, if there is headwinds from the economy, yeah, we’re going to be more cautious. And because, we have strong unit economy and strong customer base, yeah, we can turn, within a year, to be free cash flow positive. So, that’s something that we’re pushing forward. And that’s what we said in earnings. And it got a really positive feedback from investors and the stock went up right after.

Daniel Newman: Well, the lever might be 50, -10 to 30/10, you know what I’m saying? Where you’re going to work in a continuum there, you’re never going to go to a 10/30 model, where you’re really slowing down with pure… But, you’ve obviously got to show the market, you’ve got that muscle-

Dan Adika: Yup.

Daniel Newman: And that you’re able to flex it at the right moment. One thing, having worked with WalkMe in the future, and we have an advisory relationship, it’s always important to disclose those things. I’ve talked a lot to your team about being more forthright with partnerships, customer wins, collaborations. I thought you did a better job this quarter. I think that might have also been one of the levers that helped the street appreciate the growth of the business. Talk a little bit about maybe one, or two of those partnerships, customers that you’re really excited about, proud of right now.

Dan Adika: Sure. So, when we’re looking at partnerships, we have two types. One, is with the GSIs. So, we had a Deloitte, an Accenture, HCL, IBM, we announced all of those. And those partnerships are basically huge companies building WalkMe practices, DAP practices, and actually going and implementing WalkMe, or selling WalkMe to the companies that are already advising in their digital transformation effort. The other type of partnership is technology partnership. So, one of the partnership that I’m most excited about is the partnership with Salonis. And so, I don’t know if you know, or the people that are listening what Salonis are doing. But, basically they’re doing business process discovery on the backend. They can actually go and help companies with supply chain, within efficiencies in their processes. One of the things that companies our joint customer ask for, they’re like, “Okay, I’m using Salonis and I’m figuring out I have one, or two, three issues in the processes, how am I actually going to change it immediately?”

And we did this integration where, from Salonis, you can interact with the user automatically, and then push the user for an action. So, let’s say, we’re seeing a rep doing something wrong in the order management. We can immediately pop up and say, “Hey, you need to do those steps, in order to fix the process, therefore we’re saving a lot of money.” So, that integration was pretty awesome. And we announced that we have a lot of traction there and we’re going to obviously expand it. So, we’re running in parallel in both GSIs and tech partnership.

Daniel Newman: Yeah, that’s fantastic. And obviously, that’s a scale mechanism for WalkMe-

Dan Adika: For sure.

Daniel Newman: Some companies have to make a decision to go for the direct to market. And of course, I’m sure you have a pull through channel of account people that are inside these global companies explaining how it works, but to deploy at scale, a lot of tech companies need that. So, to have those mechanisms, companies like Accenture, Deloitte, companies, like Salonis to have the ability to provide you with pure scale-

Dan Adika: Yeah.

Daniel Newman: To be able to deliver so many more projects and to customers. And by the way, time matters in this business, how quickly, because this is like a switch. Once you get it turned on, it’s a recurring switch and I’m guessing, well, I’m not even guessing, based upon your comments, Dan, the net revenue expansion is very successful. So, once they’re in these customers, they’re turning on more nodes, expanding the number of systems being monitored and watched, and the number of processes being developed. And every time that gets added, you don’t need to get more new customers. You need every customer to do more with WalkMe-

Dan Adika: Exactly.

Daniel Newman: Which, is a big deal for you.

Dan Adika: Yup. And one of the things that we posted in earnings, is the average sale price for a DAP customer is over 700K in ARR, right? Which, is massive. So, if we can take just our existing customers, or even the G2Ks that are already WalkMe customers and move them to be DAP customers, and that’s exactly what we’re doing, we can double, or triple our revenue within few years. So, with our current customer base, we have so much potential. And obviously, with those partnerships, we’re getting to that point faster. And obviously, we’re building a new category. So, getting that validation from those GSIs is something super important for us.

Daniel Newman: Absolutely. So, we’d love to end talking about something a little bit off the revenue path, but one of the things that you guys do, is a state of digital adoption report every year.

Dan Adika: Mmm-hmm.

Daniel Newman: And as a researcher, I love this stuff, but where you’re looking at assessing the market to understand, because digital transformation is this great catchall buzzword, but companies spend a lot of money, tend to not always get a lot of value out of their investments. And that tends to put a bit of a negative jilt on the overall investments. It hurts all the companies in the ecosystem, and of course, you’re out to help solve that problem. So, what problems are you identifying? And what opportunities are you seeing to solve?

Dan Adika: Sure. So, one, we surveyed over 1500 IT leaders across 10 countries. So, this was a really big survey and I totally agree with you, right? Digital transformation, is such a big buzzword. And we wanted to know what IT leaders, CIOs, CDOs actually facing and what type of issues they have. Because, it’s not just the race for digital transformation, with COVID everybody worked from home, how you keep productivity up? So, I can tell you that, few numbers there, but over 60% of decision makers are actually really concerned about adoption and getting ROI from the software they’re already bought. So, this is a real concern, over 60% are actually saying it. And I would say that, over 60% of enterprises really understand that change management is no longer a fit for all. And there is actually need to be very data based and very data oriented. This is something that companies never did before, right?

They would just go there, like a huge ERP project. They dumped all this feature and they’re moving to the next project. If you’re not data oriented, if you’re not data first, if you’re not monitoring it, understanding what to do and actually improving, you’re actually set your organization for failure, right? And I would tell you, another big thing was the awareness gaps across, call it, the three Ps. People, products and processes. A lot of those leaders, they don’t even know who should own some of those project and who should own the productivity of the employees and who should own the data of those processes. So, there is a big buzzword, companies putting a lot of money, but when you’re actually asking them, a lot of them have no idea what they’re doing, or what to do. And the reason we did it, is because this is exactly what we’re actually saying, is that, “You can have a successful digital transformation, within your organization without digital adoption platform.”

Putting WalkMe aside for a second, you need digital adoption platform. You need to be able to monitor and have full observability on your digital stack. And you need to have the ability to take action and be agile. If you don’t have that, you will see poor adoption, you wouldn’t be able to know what’s working and what’s not working, so you won’t be able to improve. And when we did that survey, we actually saw those things, like they’re not monitoring, they’re not using data. They don’t know who owns the application. Is it the business, is it the IT? And so on and so on.

Daniel Newman: Well, it’s worth pointing out too. You’re talking about big enterprise companies with massive deployments. And sometimes, it’s easy to look at that, your comments about, “They’re not doing this and they’re not doing that. And they’re not observing.” You’re talking about large, fragmented, multinational organizations that spend millions and millions of dollars on a number of different softwares and technology stacks that are still not figuring out how to maximize value. We’re hearing you use the word observability. We’re hearing words about that. We hear more about automation.

Dan Adika: Mmm-hmm.

Daniel Newman: We hear things about analytics and all these things. And the point is that largely, companies have still only scratched the surface, in terms of the potential to get more out of every technology investment. And if I really had to summarize the opportunity for WalkMe, that’s the opportunity, is to be a key partner, to all these companies to say, “Hey, we’re getting 10%, or 30% of the value that we could get out of a Salesforce deployment, or out of a-”

Dan Adika: Yeah.

Daniel Newman: “ServiceNow, or whatever you’re deploying, let’s talk about how to get the rest.”

Dan Adika: For sure. So, let me give you this point of view, right? We’re a software company. When we are developing software and I’m sure that every software company is like us, right? When we’re developing our software, right? We monitor every server, every click, every interaction that our customers are doing with our product. And we’re constantly improving it, right? Every software company is doing it. Is every CIO doing it, when they deploy enterprise software to the employees? Are they actually monitoring every interaction and working like a software company internally in enterprise software? The answer is no, right? And this is exactly what we’re doing. We’re giving them those tools to really run a software lifecycle management, within their enterprise software.

So, if we’re using Data Dog to monitor our servers and our microservices, what’s the equivalent for a CIO, when they have 5,000 pieces of digital assets and some MNAs and so many software that people are using? How are they monitoring it? How do they know, if it’s being used, or not? If it’s slow? If people are having good interaction? If people are completing the processes? So, this is DAP, this is what we’re actually showing to them and allowing them to take action, which is very-

Daniel Newman: And

Dan Adika: Very important.

Daniel Newman: And how to do that across maybe, five [inaudible 00:24:32] 100 different software solutions. And that’s-

Dan Adika: Yup.

Daniel Newman: It’s been a point solution business up to this. I remember 20 years ago, back in the Unified Communications, when you had put video conferencing systems in rooms and someone would build a software. It’s like, “Hey, let’s monitor how much this video system’s being used.” And it was a special software. Point is, that was one piece of hardware in one room across a huge enterprise. Now, you have most things done on software and most things are being done, very distributed with remote and hybrid and on-prem. And then, of course, you’ve got your sales, your HR, your operations, your project management. Everything’s been satified now, as you made all these investments and you have no idea if you’re getting a ton of value out of it. Dan, I got it close up here. So, give me last words.

Dan Adika: Yeah. And one, thank you for having me. And I think, that will be massive. And I’m looking forward for the next time we’re going to have this conversation.

Daniel Newman: Yeah. We’re going to have you on again, every few quarters, I’d love to bring you back on and keep talking to you. What you’re doing is very important. I’m a long time purveyor and promoter of digital transformation, as one of the biggest opportunities. It gets lost a little bit in the buzzword, but let’s not lose the fact that this is what’s going to change the world. And in a tougher economy, utilizing the investments we’ve already made more efficiently, is going to be everything. Dan Adika, CEO of WalkMe. Thank you so much for joining Making Markets, my friend.

Dan Adika: Thank you. Thank you so much.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio