Q3 2020 Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining Docie sites third quarter fiscal 2020 earnings conference call.
As a reminder, this call is being recorded at will be available for replay somebody Investor Relations section of the website following the call.
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Ill now pass the call over to Airwatch head of Investor Relations. Please go ahead.
Okay.
Thank you operator.
Afternoon, everyone.
Welcome to Docusign third quarter fiscal 2020 earnings conference call.
On the call today, we had docusign CEO , Dan Bringer CFO , Mike shared it.
A press release announcing our third quarter results was issued earlier today and its posted on our Investor Relations website.
Before we get started I'd like to let everyone know that we will be participating in the U.S. Global TMT Conference on December nine in New York and the Needham growth Conference on January 15th also in New York.
Other bets come up well make additional now.
Now, let me remind everyone that some of our statement on today's call are forward looking.
We believe our assumptions and expectations related to these forward looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different.
We had read and consider the risk factors in our filings with the FTC together with the content of this call.
Any forward looking statements are based on our assumptions expectations to date and except as required by law, we assume no obligation to update these statements in light of future events or new information.
During this call, we will present, GAAP and non-GAAP financial measures Nongaap financial measures exclude stock based compensation expenses amortization of acquired intangible asset amortization of debt discount and issuance costs from our note.
And applicable other special item.
In addition, we provide non-GAAP weighted average share counts and information regarding free cash flows in billings.
These non-GAAP measures are not intended to be considered in isolation from or substitute for or superior to our GAAP result.
We encourage you to consider all measures when analyzing our performance.
For information regarding our non-GAAP information and most directly comparable GAAP measures and a quantitative reconciliation of those figures. Please refer to todays press release, which can be found again on our website under investor Doc Docusign Dotcom I'd now like to turn the call ever to Dan Yes.
Thanks, Dan and good afternoon, everyone on the call I'd like to start today with some brief uptick on two areas of our bid.
One more positive financial results for the third quarter and how we're driving demand for the Docusign agreement clock led by our core E signature offering.
Two.
Recap of our vision and strategy since going public last year, and how we've continued to execute against that.
For Q3.
Although handed over to Mike for deeper discussion our financial after which we can open up the queuing it.
So first let me start with some comments on our third quarter.
As many of you know docusign growth is driven by three primary factors increased adoption and use case expansion within our existing customer base.
The acquisition of new customers.
And the development of new solutions that help companies modernize their systems of agreement.
We believe our Q3 results reflect ongoing progress across all those factors.
With strong demand for the Docusign agreement cloud, we grew revenue by 40% year over year to $250 million and billings by 36% year over year to $269 million.
We acquired 25000, new customer approximately 5000 of which were direct.
Bringing our total number of paying customers to 562000 worldwide of which roughly 69000 our direct.
We were again profitable on a non-GAAP basis with operating income of nearly $17 million.
This is our eighth consecutive quarter positive non-GAAP EPS.
We also saw solid uptick in our dollar net retention rate to 117%.
These positive results showcase the demand for our agreement cloud suite remains strong we head into our largest quarter of year.
Now I'd like to share how we are progressing on the vision and strategy, we laid out when we went public last year.
We continued to execute in Q3.
I know, you're probably familiar with our agreement cloud vision.
It built on top of our global E signature leadership helps companies automate and connect their agreement prophecy, both before and after signature takes place.
We first discuss this during our IPO.
At that time, we reinforced the importance of our core E signature business.
Clearly articulated the 25 billion dollar opportunity.
Which is still only about 5% penetrate.
We also showed how that Tam could potentially double the expanded opportunity for the rest of the agreement class.
Over the past 18 months, we've taken several steps to deliver on that vision.
We acquired spring C M in September last year.
And Weve integrated its technology and talent into our product line and operations.
Our own product development team built and delivered several new agreement cloud solution.
And we partnered with specialist companies to resell select additional products that expand on our offering.
We then brought all this together under the agreement cloud umbrella.
Our suite of more than a dozen products now and over 350 prebuilt integration.
That helps organizations connect and automate their agreement prophecy.
We also collaborated with systems integrators, like 80, G simplicity and Spalding rich.
Who are building out agreement cloud practices and broadening our ability to drive success for our joint customers.
And I met all of them, we've continued to enhance the functionality of our core E signature offering.
With features like responsive signing.
Where the agreement automatically adapts informatics to the size and type of the device that the signer is using.
In Q3, we continue this momentum by announcing two new agreement cloud products. The first is docusign negotiate.
It helps companies that don't yet need full blown CLM to simplify and accelerate the process of generating redlining negotiating agreements.
We just launched the initial version in November and optimize specifically for the Salesforce ecosystem.
The second is Docusign C.L. out.
This is the next generation of spring C.M. flagship product.
It includes all the capabilities of Docusign negotiate.
Plus an end to end work flow builder centralized contract repository and a clause library.
It is targeting the upper Midmarket and enterprise customers.
[noise], but we're still in the early stages of our agreement cloud journey, we are pleased with our progress to date.
By expanding our portfolio were motivating customers to automate more of their agreement prophecy, which in turn right even more E signature revenue.
This virtuous cycle is illustrated by some interesting customer expansions, we had in Q3.
One of the global leaders in the ride sharing space has used both docusign E signatures and see a lab in their sales HR and business operations for many years.
Building on that success the company expanded its use of CLM in Q3 to cover its departments for.
Commercial transaction emerging technology and legal.
This significantly increased the size of our commercial relationship.
Additionally, a large U.S. credit union increases E signature usage by 300% this year.
And in Q3 also made a commitment to use our eighth yacht to integrate E signature into with other systems.
This company plans to expand E signature to 10 additional business units next year.
Also evaluate using docusign CLM for potential implementation.
A mobile analytics company expanded its use of E signature and HR, leveraging our integration with the recruiting software provider greenhouse.
This is a great example, but how the agreement cloud integration drive departmental expense, which in turn drive revenue from greater usage [noise].
[noise] because I'd bring my remarks to a close I want to reiterate when we went public we had a strong E signature business and a vision expand our offerings for the entire agreement process.
We executed on that vision and the customer response has been strong.
Based on our progress I believe we're in a unique position to create and be a leader in the next big platform category of agreement.
But just before I hand over to Mike I also wanted to share two quick executive team uptick.
The first is that our chief product officer Rod herself.
Well be taking a mid career break to focus on a health issue and his family.
Right and I have talked about this transition at great length, and he's going to stay with us through the middle of next year.
Even though we're incredibly sad to see him lead we support his decision we really appreciate his incredible impact during a six year tenure.
And we're proud of the team he's built to continue the innovations docusign.
Second update.
Our creation of a new Chief Trust and security officer role, which former United Airlines C.. So Emily he is taking on.
And we had an incredible pedigree in impose SEC industry and she will oversee information security application and physical security and trust services for the company out of our San Francisco.
We're thrilled to have someone of Emily's pedigree joined us in this vital role.
So that's it for me thanks for joining us today and now Mike will walk you through the Q3 financial.
Also having acquired spring cm in September of last year. This is the first quarter that will include spring C M in comparable periods from year ago.
Our third quarter results reflect solid execution, delivering strong topline growth and profitability, while continuing to drive customer success.
Total revenue rose, 40% year over year to $250 million and subscription revenue grew 41% to $238 million.
Total international revenue grew over 40% year over year to $43 million.
Total billings increased 36% year over year to $269 million.
On a full quarter rolling average basis billings growth was 35%.
Strong demand for our core de signature solutions, coupled with growing adoption of our broader portfolio agreement club products continued this quarter.
We added approximately 25000, new customers this quarter 5000, which were direct customers.
This drove a 30% year over year increase in our commercial enterprise installed base.
This brings our total customer base to 562000 with roughly 69000 direct customers worldwide.
We saw a notable strength in upsells into our installed base with particularly strong contribution from our North American business.
We also continued to see progress in Upsells are docusign CLM into our installed base.
The combination of these factors increased or dollar net retention to 117% this quarter within our historical range of 112% to 119%.
Customers with ACB is greater than $300000 grew 41% year over year to a total of 401 customers.
non-GAAP gross margin for the third quarter was 79% consistent with a year ago.
Subscription gross margin was 84% compared with 85% a year ago.
Total non-GAAP operating expenses for the quarter were $180 million or 72% of total revenue.
Compared with $142 million or 80% of total revenue for the third quarter of last year.
With the settlement of your post litigation gene a return to more normalized levels in the third quarter.
non-GAAP operating profit was $17 million for 747% operating margin in Q3.
This compares to a 1 million dollar non-GAAP operating loss or a negative 1% operating margin in Q3 of the school night team.
We ended the quarter with 3723 employees a year over year increase of 28%.
Operating cash flow was negative $2 million as we paid out your post settlement in the third quarter.
This compares with a positive $4 million in Q3 of last year.
Free cash flow came in at negative $14 million compared to negative $4 million from the prior year.
As anticipated the or post litigation payment together with planned real estate investments, including our office in Dublin, and our fed datacenter impacted our cash flow in the quarter.
Turning to our guidance, we estimate first revenue of $263 million to $267 million in Q4, and $962 million to $966 million for fiscal 2000.
In addition, we expect billings of $346 million to $356 million in Q4, and 1 million 1 billion 83000 to 1 billion 93004 fiscal twice.
We're maintaining our guidance for non-GAAP gross margin of 70, 880% for Q4 in fiscal 2000.
For Q4 in fiscal 2000, non-GAAP operating expenses, we're maintaining our guidance of sales and marketing in the range of 40% to 50% of revenues or in the D. in the range of 15% to 17% of revenues and June day in the range of 10% to 12% of revenues.
For the fourth quarter, we expect $3 million to $4 million of non-GAAP interest and other non operating income, including interest income and expense associated with our convertible debt.
And for fiscal 20, we expect non-GAAP interest and non operating income of $16 million to $17 million.
We expect to tax provision of approximately $1 million to $2 million for the fourth quarter and $5 million to $6 million for fiscal 2008.
We expect fully diluted weighted average shares outstanding of 190 to 195 million shares for Q4 and fiscal 20.
In summary, we are off to a great startup second half of fiscal 20, and look forward to executing on our strategic and financial goals.
Thanks, again for joining us today, and we can now turn to today.
Thank you we will now be conducting a question that answer session.
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Our first question comes from Pat Walsh Walravens with JMP Securities. Please go ahead.
Oh, great. Thank you very much in this forgetting the background and congratulate them Hey.
And you might call turning to start out just on sort of what you saw from a macro point of view is there any weakness anywhere domestically or internationally and then also I'd love to hear your thoughts on how the channel deliberately corner.
Absolutely Pat so from a macro standpoint, we haven't seen anything very different really across the geography.
The thing we talk a lot about is that I'm not sure docusign will be the best bellwether, our understanding economic change that our customers are such a high ROI with our product and I think it would be not the initial.
So the tech spending that will be caught but we haven't seen anything really across any of the theaters in which we play of a different this quarter versus the last few quarters and we and we continue to think it's a strong market for our products and services.
And then from a channel standpoint.
We as you know have a lot of very strong channel relationships with clients. The players and interestingly also become much more focused on the partner side in terms of the S Ethyol systems integrators.
And we've seen good strength in both particularly the progress we have in sort of going to market with systems integrators, and I think that's really an indication of the agreement cloud overall.
Sort of broadening and particularly on the Docusign CLM side. The original spring product, where it's sort of requires more of a statement of work and more integration.
Opportunity there.
So we're super excited about the progress there.
Awesome. Thank you.
Our next question comes from Dan with Wedbush Securities. Please go ahead.
Yes. Thanks.
You can you talk about international in terms of what type of growth you're seeing there I mean is it really feel like it's starting to win slacks engine to what you're seeing in the field. Thanks.
Hi, all started yet we saw.
Good growth globally internationally grew over 40% again this quarter.
So most of that of course as you can imagine I shouldn't say, most but a higher portion of that as new customer logos. Its other emerging markets compared to the U.S., where we had a lot of up so contribution as well in terms of CLM, we're seeing a good growth in the U.S. on CLM, where we're also focusing.
Nationally, but we haven't made as much traction internationally as we haven't domestically.
Great and then can you just talked maybe just from a sales cycle perspective.
How things are changing does it just feel more and more strategically in terms of how the type of conversations are going with enterprises. The upselling Smeby, obviously, we see the numbers maybe you could just talk about it.
In terms of just the conversations you're having with customers now is changing compared to let's say the last 369 months. Thanks.
Yeah, I think the vast majority and remember our business is still.
Signature heavy and so the vast majority that I don't think has changed but where we have seen changes, particularly in that midmarket and enterprise really to the nature of your question. What people are asking for a broader conversation about their overall agreement cloud and as we talked about back at the beginning of this year as expected that would in some cases in long.
Gate, those conversations and sales cycle, but lead to larger overall deal and I think we've seen that and we're seeing some nice uptick.
And in areas like a dollar net retention because I think we're going to continue to have that had opportunity to broaden and upsell there.
In terms of the conversations one thing Thats also interesting is the very beginning when we rolled this out we had a phenomenon that we had some sales cycles that were longer and we pushed into next quarter, but now that we're a few quarters into this we get some deals to get pushed from one quarter to the next and something to get pushed from this quarter out and that's sort of netting each other out so we feel like.
The to accurately understand and forecast that has improved.
As we move through the year.
Awesome. Thanks.
Next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yes, thanks, guys. Thanks.
A quick question how did you do in federal and hasn't tracking given the opportunity that you see that.
So I think federal continues to be one of the areas. We spent a lot of time focused on because we think it's a very big opportunity.
You know we had last time, the very exciting dramatic big ticket when as we said those will come from time to time, but really a lot like our core business. We've always had an app, it's more about that solid quarter end quarter out growing those core relationship one thing that we're quite excited about as we have the Io for investment Mike.
You talked a lot about and we now have that active and our first customer is in fact.
Using that platform, it's still early it's not close to its full potential.
But it's indicative I think of the progress we see their product. We think we're going to continue to see in the vertical.
Thank you.
Next question comes from Alex second with RBC capital markets. Please go ahead.
Hey, guys. Thanks, taking my question. So maybe just the first one is if I look at the the negotiate product the announced at Dreamforce.
Maybe what's the opportunity set within your customer base, how big that opportunity beat the sole negotiate and and then is there an opportunity to announce something similar with some of your other partners like Sep and I've got a quick follow up.
Yes, So I think negotiated you think about it we position. This is the customers. It says I don't necessarily needs an entire CLM solution.
Just the nature of by business and complexity or scale doesn't need that full capability. So we built negotiate just for those customers and I think.
We're really pleased with the initial reception we had at Dreamforce. When we are announcing it there was just very significant amount of demand for people to understand how they could leverage the partner on the signature side Docusign love working with to take on a broader piece of their agreement cloud needs. So we feel good about that.
Will necessarily as I said be focused on that kind of mid market and smaller that's where we see the primary demand. This is a large number of customers, but not our largest customers.
I think primarily where we'll see negotiate.
The successful and then answer your question, yes, absolutely we want to continue to develop that capability across other partners keep in mind, CRM and specifically sort of the ethane portion.
Where where people are really managing their their sales prophecies and their sales for profit. That's one of the most important an obvious places where negotiate is very helpful. So we do think those other partnerships, where it's going to be most common.
As a as capability that people really want to add into their overall docusign agreement cloud solution.
Perfect.
And then Mike just a question.
On the favorite topic of billings, obviously different quarters kind of different different dynamics, what was both pushes and pulls of deals or were durations anything that you'd comment on either as a headwind or tailwind for billings in the quarter and then how should we think about.
Kind of as you look at next quarter with the guidance.
Any any factors that we should consider from from prior periods.
Back in there as well.
Yes, I would tell you how it's that billings this quarter and I would say for next quarter. The dynamics are the same there isn't any underlying changes in the business.
If you look at Q1 to Q2 to Q3 and you go 27 to 41 to 36 and as we've talked about over time doing to four quarter. Rolling average really gives you a better view and I think if you look at our guidance, it's consistent with that so we'll continue to have that statistic subject to.
Fluctuations would have nothing to do with growth can have more to do with timing and I think if I look at Q3, it's a quarter, where it was pretty consistent in terms of impact those kinds of timing factors.
Perfect. Thank you guys.
Next question comes from stands Blocky with Morgan Stanley . Please go ahead.
Hey, guys.
Good afternoon, and thank you for taking my question.
I wanted to come back to internationally because it.
Very impressive results, there within international which which geographies are you guys seeing the most.
Traction and then have a quick follow for off for Mike.
Yeah, you might expect international it's actually been strong sort of across the board.
There are definitely areas, where you'll see us talk more in the coming year about our investments in our focus areas, where you will see where we see that enthusiasm.
But I think what you're going to see it sort of the same strategy. We've had in the passages. We wanted to focus on a core set a country. As you know we initially had most of our success in the common law countries like you asked but that UK, Australia, Canada now, we're actually seeing in the common they're not a civil law on top.
Half of that so that places like France, and Germany, and Brazil in Japan that same sort of market traction. So I think our view is its consistent across the board.
And I don't know, Mike if anything different perspective on it but I think thats, how we look at that international.
Got it and then my just a quick.
One more sanity check on on a favorite topic of billings following up on Alex's question. What was it was FX impact on billings in the quarter and on net revenue retention very nice 117 result, there how should we think about net revenue retention heading into Q4 and beyond.
Thank you, yes, yes, denso on FX, no not really any any material impact or or trending change on that.
The 117 were very happy with that I mentioned, a couple of the contributing factors I also mentioned the range and as I've said in prior quarters I think right now our businesses that is we're going to continue to perform some are those mid teens. We can have strong quarters were takes a bit up quarters, where it's a little bit less than that but overall right in that range.
We feel very good about it and I think.
The proof point for us that being able to offer this broader portfolio of products and starting to gain contraction for us.
Perfect. Thank you.
Next question poster Rishi Jaluria with D.A. Davidson. Please go ahead.
Hey, guys say, if so much hurt for taking my questions first just wanted to maybe ask a higher level.
In terms of the idea of Verticalization. Your solution you, obviously have gotten a lot on.
The state and mortgage side Mars proof of concept and being a mass or vertical in terms of revenue just wanted to get a sense for how you're thinking about.
Yes, your potential for for Verticalization to kind of increase your footprint and vertical that you may not have a massive footprint in today and I've got a follow up.
Yes, so I think first and foremost resi. This is a horizontal software platform is going to be a horizontal software platform at its core three years to calm and that not is just specific to E signature, but I think that really applies across the overall docusign agreement cloud.
That said, you're absolutely right, we had certain verticals, which have been very successful flora leave at certain verticals, where we have done additional software development healthcare life Sciences. It's a great example, where we've actually look at opportunities to develop very specific.
Use cases and specific software around CFR part 11 for the sort of drug development side of that business, but I think in general what you're going to see us continue to focus on how we go to market with verticals and how we build not so much additional separate software, but all the other components around go to market and that.
We are services are working with systems integrators to really bring broader solutions to the verticals and then terms and question about sort of additional new verticals were pretty broadly.
Placed in the market.
Today, we talked a little early on the call about government as a vertical and particularly federal which is one that was was not a large opportunity for his prior pre fed ramp and IR for so that to be an example of a vertical where we see I think additional growth opportunity that might be substantial relative to the the piece.
We have today, but again I really would focus you on the construct of its a horizontal platform and that's how we really want to be building this business going forward.
Got it okay. That's helpful.
Just a follow up on on perhaps earlier question just on the macro sites just wondering in in terms of customer buying behavior. We've heard a couple SaaS companies. During this past earnings. She is I will highlight that they've seen customers, maybe shifting more to some monthly versus annual.
I know you disclose average contact contract length, and that's been typically less 18 or 19 months on a dollar weighted basis. So no change from the numbers that we can all the outside but just wanted to get a sense of is that anything that you're seeing of customers prefer and does not prepay more in advance or anything like that thanks.
Yes, we really haven't as to your point in the earlier macro question I believe me, it's something we talk about we meet with our sales leaders, we try to understand if we see something in the marketplace. It's different.
I hope, it's not that we don't have our finger on the pulls I think we do but we're just we're not seeing anything of any significance and specifically as you said when you look at the contract period that haven't changed in any significant way. So at this point, Mike innovating on to add my view is we're really not seeing anything impact.
Well to our business in the macro environment.
Just to summarize I think that if you look at the underlying billing patterns in the business. They havent changed I do think that there are customers that they would like to push for.
No more monthly or quarterly billings, we we don't really allow for that in the model, but for rare cases, and just as a reminder, where we do have multiyear deals we still build those out annually. So the duration in the business has been pretty stable.
Great. That's helpful. Thank you guys.
Next question comes from Karl Keirstead with Deutsche Blank Bank. Please go ahead.
A question for Mike I'd like to ask you about the seasonality of billings, it's not uncommon for SaaS companies. When when you start moving past a billion in reps to start seeing a little bit more of a.
Traditional for Q skew when I look at your Billings guide for this year as a percentage of total your billings, it's like two the decimal point exactly the same.
32.6% as you put up last for acute so I'm just curious when we when I know you're not going to give us billings guidance for fiscal 21 on this call, but when we get when we model the seasonality.
Similar slightly different bit more of a for Q skew next year any comment Mike.
I would say coral nothing that would look like an inflection change I think you're right. The natural tendency of a SaaS business over time is to have sort of a growing influence of the underlying seasonality and we'll probably see that going forward, but I wouldn't make any dramatic changes from what the what you saw this year got it and my could actually a follow up I I'm sorry, you.
Went through it a little quickly, but do you mind going back to that 117% net retention number because I think that's significant in the highest number you've posted since you went public you might just repeating the the factors that contributed to that and why that wouldn't be.
Leading indicator that we should be paying attention to.
Oh I do think it's a very strong indicator I wouldn't want you to think that it's not something to pay attention to that's why we spend a fair amount of time discussing it.
What I said was there really this quarter was strong and the biggest contributors to that strength as we were particularly strong in or Upsells, and North America and in North America, particularly in our commercial.
Business was just a very good quarter for us in addition to that as I mentioned in the U.S., primarily we also saw.
Good continued traction increasing with upsells subsea them into the installed base. So those combined how to pick up I think just from an expectation standpoint as you've seen in the in the last several quarters.
Continue to reiterate that range of 112 in one night team and within that you can have strong quarters are not as strong quarters, all fall within what we consider to be the norm. My view right. Now is the business. What we have visibility into is that it should stabilize somewhere in those mid teen kind a ranges of performance and we continue to believe that.
Okay. That's helpful and congrats on that good up sell performance.
Next question comes from Kirk Materne with Evercore. Please go ahead.
Oh, yes, thanks, very much and I'll add my congrats on the quarter Dan were there any commonalities when you look across the customer base. That's that's taking on the CLM product at this point time, meaning you any verticals that are maybe more willing to take that are more interested in that product today and I just be interested also within those kind of upside.
I'll opportunities are frankly, just.
Sales opportunities are you going in that serve a higher level within the customer meaning did those become more maybe seemed level discussions or at least heads of business discussions maybe versus where you sell the signature product originally thanks.
Yes, a couple of thoughts I wouldn't say, there's something dramatic from a vertical standpoint, we do see the demand across some of our big verticals Telecom financial services government I mean, we really see a very broad based demand for CLM capability the place that it.
Different maybe than our broader signature mix. It does tend to be focused on people that have some sort of process either in the sales process, which is probably the area. We see most common one of the areas with negotiate we didnt as I mentioned earlier build that out for the Salesforce ecosystem first because of their strength in CRM, but.
Yes, it's less about vertical and more about that business process and then your second question about how we go to market, where we sell in.
I think.
It's very similar to the customer set that we would we would speak to about our traditional signature product, but I think your insight about maybe being sometimes a little more senior.
Can be the case, because you often times have to work with multiple groups and we've talked about this before the CIO like it more engaged because there is the biggest bigger integration.
Well there could be from systems integration standpoint.
Professional service component within Esso W and that might involve additional aspect of legal or CIO to kind of be reviewing that so because we get a little broader and talk to a few more people I think that might slightly push us higher in the organization, but I wouldn't want to give you a sense that significantly different I think it really is.
Those core leaders of businesses business units or functions.
That are looking to modernize their system of agreement and that's why they're talking to Docusign.
That's helpful and then Mike one really quick ones for you on underscore our cash flow in cash flow yield and maybe how we should think about that going forward I really had does the settlement and this quarter, but should casual yield over sort of the longer term may make essentially operating margins for the most part. It is there anything I guess, we should think about that would create a gap.
Between that sort of progress on year over year basis going forward I know you probably won't be too specific about right now on our next year, but just anything we should consider as we sort of think about next year and cash flow fracture. Thanks.
Yes, I would say that just to reiterate what we stated in the past we think we're on track on the long term target model of a 20% to 25% operating margin I think the way to think about cash flow is that over time. It should preceded that I'm just because we are SaaS subscription business and we do bill as we were talking about before upfront.
So you would expect that there would be a lag on the operating margin, which is the with the legacy indicator of revenue and then the the cash flow percentage should should.
Come in overall above that.
Okay. That's helpful. Thanks very much.
Next question comes from above on sorry, with William Blair. Please go ahead.
Hey, Thank you for taking my question and like everyone else will Echo my congrats on just a fantastic.
Quarter in job there I wanted to touch first and the analytics product you talked about using data to offer analytics.
After SaaS companies have I, just love to understand the timeline for the opportunity in sort of potential use case, how do you think about that and actually more importantly, what does that due to your Tam. So a couple questions there and I got a quick follow up.
Yes, So let me start off we talk about analytics to be clear, there's really as your question indicated multiple components of it. So we have an analytics offerings that around what I would really sad reporting not advanced analyze it and helping people administrators that use docusign understand their usage understand where in the organization Pete.
Our effectively using docusign and that's very operational component and we have opportunities where people start to say. This information is contained in my agreements is valuable for potentially running my business better and we have the opportunity for people to to extract information about their agreements.
And again help them.
Run their their core business, better and that's where we're getting down to what I really Clark analytics type products and then we do partner effectively with seal company that we.
Made an investment in.
To do what we would call advanced search capability are intelligent search capability when people now have the ability as they think about their overall.
So the system of agreement, they're trying to manage with the Docusign agreement cloud and that give them the ability to say I can get very significant information about my business and about my agreement one of the examples we like to use.
This thats been very prevalent for some of our bank customers. If they had agreements that were done on LIBOR. They now realize they got to go and then with LIBOR going away go back and find all those agreements and recap.
Gives them an ability to really quickly and efficiently find access to that that will be again, a more advanced analytics. So we look at it across all of those different components.
And we think that increasingly our customers are saying, there's tremendous value in getting knowledge about an information out of our agreement and that will I think continued to be a growth area for us.
Got it got any other contract sort of management and understanding what's in contract I think is critical as the number guys feel obviously one of the legal side right a docs on the manufacturing side, but sort of thinking about these contracted documents and we're just doing them your ability to sort of pull that together is very powerful.
One last quick one any nitpicking on competition here.
Any changes have been environment are you seeing more pelo sign up to the Dropbox acquisition I'm, just anything you're seeing over there that's changed or maybe different and the credit environment. Thank you.
Yes, we don't have anything new for you on competitive you know, Mike and I do a thoughtful review all the time, but particularly before we get on this call. So we can be thoughtful and given you guys any indication something different in the marketplace as we talked to our sellers.
We havent seen any change really across the year.
We continue to be very focused on trying to understand what we see.
Competitors doing in general when we see competitive pressure, it's not about someone having a solution our offering that's better than docusign.
It's about people coming in at a much lower cost and trying to find folks that might be willing to flip.
For a dramatically lower cost.
So that unchanged and I would say that the competitive dynamics are very similar to that they've been throughout the whole yet.
Awesome helpful guys. Thank you so much rats.
Thank you next question comes from Kash Rangan with Bank of America. Please go ahead.
Hi, This is actually Jacqueline channel all free cash thanks for taking the question and congratulations on the quarter I notice that sales efficiency as measured by sales and marketing over incremental revenues have been and a 1.92 0.0 range for some time and this quarter. If you guys actually improve significantly to 1.7.
So can you talk a bit about well cost improvement.
[noise] hijack when I think it's a it is all the factors we've been talking about for some time, which is overtime of course is our salesforce improves.
Down the learning curve of things like Docusign CLM for example in some of these other elements to the business.
We're going to be driving better leverage in the sales organization.
If you look at the fact that some of our markets I mentioned before our newer markets are going to be more weighted towards newer customers than than upsells. Just because were earlier in those markets statistics like that we'll have a mix of various contributors depending upon how long we've been in a particular space or particular product.
So I wouldn't want you to to come away thinking that it is sort of as monolithic statistic that applies to everything equally that's statistical look a little bit better and more mature markets like the U.S. It will look a little bit earlier in markets like for example of Brazil, or a country like that but overall our focus is on continuing to improve the productivity of our salesforce.
Through offering new technologies that they can bring in a then moving down the learning curve.
All of those.
All those elements that I think combine to improve the leverage over time towards what we think that target model long term as a 35% to 40% of revenue type model.
Awesome. Thanks, so much.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Matthew Wells with Citi. Please go ahead.
Sure taking my question. So you added 5000 commercial and enterprise customers in the quarter on the backdrop of it that retention rate.
Hundred, 17% and both of which looked like all time highs was there any change in the average deal size in the quarter on a year or year over year basis are these new customers landing at smaller Atps I have a quick follow up.
I don't think as anything.
At all significant in deal sizes I think the reason we're hitting those records is that we continue to grow the business.
And I think our expectation as you think about guidance for Q4. It will also continue to grow and have that kind of performance I don't because anything thats a different in the make up there yeah I think in any particular quarter anecdotally you can have one quarter have a little bit stronger performance in larger enterprises other quarters have a bit of.
Permits in commercial.
But on a blend I totally agree with Dan if you looked at our overall diversification among customers. We don't have a customer that makes up even 2% of our revenue so that continues to be true.
Thanks, that's helpful and when spring see I'm included in the year over year expansion figure or is this peer you sign expansion.
It's included in both this quarter because this is the first quarter, where we had it in fiscal 19 numbers as well as fiscal 2000 numbers for Q3.
That's helpful. Thank you.
I will now turn the call over to management for final comments.
Thank you all very much for joining US we'll look forward to seeing you a out on the road and talking to you next quarter. Thank you.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.