Needham analyst Scott Berg reiterates WalkMe Ltd (NASDAQ:WKME) with a Buy and a $20 price target.

• Monday after the market close, WKME announced a ~10% reduction in force, affecting 112 employees, to create a leaner, more efficient organization that reflects near-term growth expectations and sets up the path to profitability and long-term growth. WKME attributed the job cut to a more challenging macro environment.
• The job cut marks WKME's second downsizing of 2023 as the company faces significant macro headwinds and has shifted its focus toward profitability and margin expansion.
• The analyst held his estimates steady yet saw the potential for four to five points of non-GAAP operating margin upside in FY23 following the impact of the reductions, which he believes should enable the company to be roughly breakeven on a Non-GAAP operating income basis exiting FY23.
• WKME reduced their workforce by ~3% at the beginning of 2023, which he believes was almost entirely underperformers within the SMB or smaller deal segments of the sales force as the company focuses on upmarket.
• The additional downsizing highlights the company's intense focus on gaining operating leverage as growth decelerates from 26.7% in CY22 to Berg's estimate of 11.7% in CY23.
• The analyst thinks the downsizing provides significant operating margin upside.
• While he does not believe this incremental reduction will drive the company's operations to a profitable status in FY23, given that he modeled a 10% operating loss, he would not be surprised if this change leads to rough breakeven operating margins exiting FY23.
• He will look for additional color during the upcoming earnings call, which will likely be in mid-May.

Price Action: WKME shares traded lower by 2.69% at $10.85 on the last check Wednesday.

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