Q1 2021 DocuSign Inc Earnings Call

Docusign first quarter fiscal 2021 earnings conference call.

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Thank you operator, and good afternoon, everyone.

Welcome to Dockets I first quarter fiscal year 21 earnings conference call.

Call today, we have dockets I see a data center and see if I'm not sure.

The press release announcing our first quarter results issued earlier today and it could sit on our Investor Relations website.

Before we get started I'd like to let everyone know it we will be participating in the William Blair 40 annual growth stock conference on June 10.

Another has come up we will make additional announcements.

Now, let me remind everyone that some of our favorites on today's call are forward looking we believe our assumptions and expectations related to these forward looking statements a reasonable.

They are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different.

In particular, our expectations rally in back to covert 19.

In our business financial condition results cooperation are subject to change.

Please reading through 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.

Patients today.

Except as required by law, we assume no obligation to update these statements in light of future about our new information.

During the call 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 cost from our nose and I'd just like all other special item.

In addition, we provide non-GAAP weighted average share counts and information regarding free cash flow and billing.

These non-GAAP measures are not intended to be considered in isolation from a substitute for far superior to our GAAP results.

We encourage you to consider all measures when analyzing our performance.

Information regarding our non-GAAP financial information, that's directly comparable GAAP measures and a quantitative reconciliation of those figures. Please refer to today's press release, which you guys can be found at the Investor Relations website now.

Now I'd like to try to call ever to Dan Dan.

Thanks, Danny good afternoon, everyone and welcome to our first quarter fiscal 2021 earnings call.

For today's call I will share updates in context around three primary topics first the company business performance and financial results for the quarter.

Second the ways to covert 19 has led customers to accelerate their digital transformation initiatives for agreements.

And third.

Our views on the future based on the best data we have today.

Before I get to that though I wonder what knowledge just how much life has changed since our last call.

Over 19 pandemic has fundamentally shifted the global macroeconomic environment impacted countless lives around the world, we've seen all manner of private public and nonprofit organization step up to help.

I'd like to take this opportunity to personally think all the first responders healthcare workers medical researchers and local leaders who have made such a difference to the lives. So many.

Docusign, we've done what we can to step up to both in our initial response to the pandemic and as we all continue to adapt to this evolving impact.

For safety reasons in early March we transitioned to our more than 4000 employees across 15 countries to remote work environment.

We offered $1300 and assistance to employees for tools and services to help ease that transition.

Then we offered additional programs and assistance to streamline the process even further.

We also mobilized resources to handle a surgeon urgent needs from our customers.

Some cases this meant directly supporting covert 19 responses by government agencies health care organization and those on the front line.

In other it met helping organizations to keep their business process, he's running well their workforce has transitioned to remote work.

I'll give you specific examples later, but suffice it to say that over this time, we had a lot coming at us.

To make this transition while maintaining the highest levels a platform availability customer service and remote onboarding.

All while facing unprecedented levels of customer demand.

Nothing short of exceptional.

I'd like to salute truly extraordinary efforts of the Docusign team for their agility and commitment to our customer success.

Now this collective effort is reflected in our Q1 result.

Our billings grew 59% year over year to $342 million and revenue grew 39% to $297 million.

This strong growth was driven by use case expansion across a broad cross section of our installed base.

Well as adoption by new customers.

We added more than 10000, net new direct customers and almost 58000 self service customers.

Bringing our global total of paying customers to nearly 661000.

And our operating margins and cash flow remained strong.

Even as we made key investments to address this heightened demand.

Much of the strong Q1 performance was driven by increased demand for E signature from organizations that suddenly needed a way to sign and manage agreements from wherever they work.

Typically E signature is the first step that many customers take on their broader digital transformation journey with us.

So from a financial point of view, we believe this surge in E signature adoption bodes well for future Green and cloud expansion.

Now let me share some examples how we've helped our customers respond to covert 19, and keep their agreement prophecy up and running a mid depending.

We worked closely with a global pharmaceutical company to accelerate E signature expansion to hundreds of use cases across 80 different countries.

This is a pattern that we saw many times over the quarter.

Customer already had a plan to expand.

Cobot 19 greatly acceleration.

We engage a new public sector customer department of labor in one of the largest U.S. states.

To help transform its previously complex and lengthy process for handling emergency unemployment benefit.

Supported by Docusign E signature the department distributed over $500 million and benefits.

More than 500000 residents in less than one week.

We are unable to hundreds of U.S. national and regional financial institutions to accept applications for small business administration loans more efficiently.

And one of those large banks, we were involved with over half a million loan applications.

75% of which are signed in less than 24 hours.

We worked with the regional telecom provider using Docusign intelligent insights, which is our contract analytics tool.

To analyze potential pandemic related risks in thousands of their supplier contracts.

Finally, we hope the European Tele medicine provider issued eat prescriptions and online sick leave certificate by using our video identification capability to confirm the patients identity.

Just a few examples you can find many more on our dedicated koeppen 19 webpage.

[noise], let me speak briefly about where we see things going from here.

Remote work is here to stay.

Core business processes will only become more digital and agreements will need to be completed from anywhere anytime on almost any device.

As a result organizations that hadnt already embraced docusign free signature <unk>.

The only using us for a few select use cases.

The pandemic has been a catalyst for the greater digital transformation of their end to end agreement process.

We always believed this transformation would happen and that a unified platform for agreements would be needed.

Coping 19, it's just happening faster.

That said, even when the cobot 19 situation is behind US, we don't anticipate customers returning to paper from annual based process.

Once they take their first digital transformation steps that.

And they realize the time cost and customer experience benefits they rarely go back.

So in short we expect the adoption of our core E signature offering by new customers and the expansion of used cases by existing ones to continue.

It's also acts as the Onramp for the adoption to other agreement cloud products, sometimes at the same time, sometimes this fall.

Of course, and Mike will tell you, we're not immune to the broader economic forces at play.

Some businesses and industries will continue to contract.

Some will continue to expand.

Some of our customers may request payment deferral and accommodations and some will require even more hands on support and assistance.

Even with these dynamics our view of the business remains optimistic.

We're off to a good start in the second quarter as digital transformation remains a high priority.

We feel truly fortunate to have built solutions that can help customers carry on through this time a crisis.

And to deliver even greater value as we transition to a world where work becomes more digital.

And more remote.

In the meantime, we will continue to do whatever we can wherever we can to help our customers succeed.

With that I'd like to hand over to Mike to walk us through the financials in more detail I'll talk to again, when we get to the Q Onec Mike.

Thanks, Dan and good afternoon, everyone.

As Dan mentioned worldwide ship to remote work has accelerated digital transformations across organizations and has resulted in an unprecedented levels of demand for docusign products.

We believe this accelerated growth in new customers and expansion within our installed base was driven by a sudden prioritization of our products.

But we also believe that these customers will remain with us because they are realizing the value that our solutions deliver in any working environment.

Strong sales led by our E signature solutions drove a 59% year over year increase in first quarter billings to $342 million.

This growth also drove a 39% year over year increase in total revenue to $297 million in the first quarter.

Subscription revenue increased 39% year over year to $281 billion.

We saw similar strength outside the U.S. as total international revenue grew over 46% year over year to $55 million.

This quarter, we added almost 68000 new customers.

Of those approximately 10000 were direct customers.

An increase of 43% year over year.

This brings our total customer base to nearly 661000 worldwide.

With roughly 89000 direct customers.

These totals include a catch up adjustment of 4000 direct customers related to review and reconciliation of prior year customer acquisitions.

Strong signature expansions and upsells into our existing customer base led to dollar retention.

119% in the quarter.

Customers with CBS greater than $300000 grew 46% year over year to a total of 473 customers.

Total non-GAAP gross margin for the first quarter was 79%.

System with a year ago.

Subscription gross margin was 84% compared with 86% a year ago.

Margins were impacted by investments we made in our data center capacity, particularly for hosting services to ensure our ability to meet significantly higher transaction volumes.

Non-GAAP operating expenses totaled $210 million or 71% of total revenue in the quarter.

Compared with $160 million were 75% a total revenue in Q1 of last year.

To address current demand to prepare for future growth, we pulled forward some of our sales capacity hires and expanded our marketing efforts, leading to higher sales and marketing expenses in the quarter.

Additionally to help ease the transition to remote work after closing our offices in early March we've been provided employee stipends for virtual work spaces and other cobot related expenses.

These costs were partially offset by a decrease in travel and entertainment expenses due to the recent pandemic.

We generated $23 million in non-GAAP operating profit.

Or an 8% operating margin in the quarter.

This compares with $10 million or or 5% operating margin in the first quarter last year.

Non-GAAP net income was $24 million in the first quarter compared with $13 billion in the first quarter of last year.

We ended the quarter with 4281 employees, an increase of 33% over the first quarter of last year.

Operating cash flow in the first quarter increased almost 30% year over year to $59 billion compared with $46 million in the same quarter a year ago.

Capex increased during the quarter due to a two leasehold improvements and expansions to our existing offices.

As well as the scaling of our federal data Center.

Free cash flow came in at $33 million compared to $30 million a year ago.

Now, let me turn to guidance.

We anticipate.

The total revenue will range between 316 and $320 million in Q2.

And $1.313 billion to $1.317 billion for fiscal 21.

Of this total we expect subscription revenue of $298 million to $302 million in Q2.

$1.243 billion to $1.247 billion for fiscal 21.

For billings, we expect $333 million to $343 million in Q2.

And $1.515 billion to $1.535 billion for fiscal 2001.

We expect non-GAAP gross margin to be 70, 80% to 80% for both Q2 and fiscal 21.

For operating expenses, we expect sales and marketing interest expense in the range of 48% to 50% of revenues for Q2.

47% to 49% for fiscal 2001.

We expect R&D expense in the range of 14% to 16% for Q2.

And 13% to 15% for fiscal 21.

And we expect DNA expense in the range of 9% to 11% for both Q2 in fiscal 21.

For the second quarter, we expect $2 million to $3 million of non-GAAP interest and other non operating income.

And for fiscal 2001, we expect $8 million to $12 million of non-GAAP interest and non operating income.

We expect the tax provision of approximately $2.5 billion to $3.5 billion for Q2, and $6 billion to $10 billion for fiscal 21.

Finally, we expect fully diluted weighted average shares outstanding of 200 to 205 million shares for Q2 and fiscal 21.

As a reminder, we closed the seal acquisition on May Onest. So all of the guidance I. Just provided includes the anticipated impact of seal.

Since we anticipate that steel will add less than 1% to our top line performance.

We don't expect it to impact our near term growth rates.

Costs and operating expenses related to the steel business are also a small part of our total expenses. However, we expect in the near term that they will have a small dilutive effect on our gross and operating margins.

Thanks for joining us today and now we will open up for today.

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Our first question is from Sterling Auty from JP Morgan Please.

Please proceed with your question.

Yes, Thanks, Hi, guys, let everybody safe and healthy just wondering if you can give us a sense of vertical industry.

Volumes are you maybe percentage of revenue you know is this primarily focused on a few key industries like finance are you seeing broad spread increase in adoption.

I think they're fairly broad we don't have any one industry that is a significant portion we have a lot of strong industries and some of those like financial services did particularly well like this specific example, I gave around the FDA.

Loans Sterling, we also saw a lot of strength in healthcare and life Sciences. We also saw the government sector.

Being very strong as a lot of folks had that phenomena. We described the they knew at some point they were gonna have to.

Do more digital transformation to their business and cover 19 has accelerated at so we see that you very bright obviously, there's some industries.

Think about particularly hospitality and travel that we see that have been.

In weaken industries and some of those are to continue running their business need to run on Docusign.

So we haven't seen some sort of collapse or anything, but we would see less growth.

In those segments that are hit harder and that's kind of how we're seeing that across the board.

Great and then one quick follow up you mentioned investment in capacity can you give us a sense of what capacity utilization. The docusign platform system is and perhaps what additional investments might be necessary to keep up with the increasing volume.

Yes, Sterling I think when we're talking about capacity, it's a couple things.

Well in terms of our capacity to manage volumes, we have plenty of headroom.

We've always remain well ahead of the curve and ensuring that our capacity is ahead of the volumes that we're seeing and even when we had spikes with coated.

We have data demonstrates that we were very safely above any capacity constraints.

We look at capacity.

To to the can impact things like our gross margin expanding our customer service support organization as an example, or customer success organization. As an example to deal with issues that come up there some of our hosted a bandwidth for Canada in for Australia, where we don't have our own proprietary datacenters transactions.

James can have an impact there, but overall I think we entered Q2 very comfortable that we put ourselves in a position to deal with whatever transaction. Other volumes are going to are going to materialize.

Great. Thank you.

Our next question is from Bivens Siri from William Blair. Please proceed with your question.

Hey, guys. Thanks for taking my question and congrats I was on phenomena billings number and.

And the television and MDR. So congrats on another great quarter I wanted to touch on the sort of a more structurally complex question I guess when you think about.

The signature product is great you think about sort of real estate some of the fairly straight forward contest, where you're seeing a little more complex workflow I guess I'd love to understand a when you think about the complex workload, what do you find that most exciting one let's stick you want to wonder will continue over time.

And then sort of as you think about that is that driven by new was driven by people who are building really complex workflows like the notary part not having a lottery and person for mortgage is something that by the cottage industry has developed around docusign.

Well I'll give you a couple of thoughts.

On that I think the first pieces, we get most excited when people build workflows that integrate with our software and lever JP.

And almost two thirds of the transactions that occur on our platform or not from someone going into our web or mobile.

Interface, and creating a document to be sign or for that matter in a in a CLM framework a document to be route at around and manage its from people who are actually building integrations to their systems and that can be the prebuilt integrations, we have with Sep and Salesforce dot com and workday other great SaaS businesses.

It can be apiay, they've integrated themselves using our developer tools. So those are the ones that we get most excited about because as you indicated sticky.

The second dimension that I would think about as we get really excited about the situations, where as I said People's are running their business on docusign. So if those are back office use cases, where they might be managing their financial processes and their PEO processes and all those get integrated through those.

Back office tools into Docusign, that's great, but also on the front office situations, particularly and you mentioned real estate when you see something like a mortgage products, our digital rooms product and there's multiple players involved so whether or not that all using a P. I call. It but there is multiple individuals that need to have an agreement routed around to them and.

I was front office use cases can then tend to be quite complex leverage the functionality and the capability. We've built very sticky because the ROI is so high.

For companies and so important that they have a great customer experience, which is why we get such a high net promoter score because our customers customers.

Like using docusign with our customers. So those would be the two dimensions I would point to that I think we're most focused on when you talk about building those deeper.

Integrated use cases.

I was very helpful. Thank you and then one quick follow up here.

Obviously, there was the PPP program things like that you alluded to some of these sort of onetime event now obviously offset by maybe lower mortgage application, but because of the environment.

But is there a way to give us some color of how much you feel like part of the business the growth that billings was sort of a onetime aspect.

Offset by decline what this Reg Reg way regular rate business, but just trying understand sort of what that onetime bump I might have been if you got any color around that.

Yes, there are definitely will be some examples that that are used cases that are more project oriented or onetime in nature, we see that as the extreme minority what we really saw was that companies largely.

Either begun with us and hit not got to scale or we're thinking of moving onto docusign, but it wasn't as high of a hierarchy lift of southern priorities.

The recent events pushes up the priority list and also accelerated some of the scale that our existing customers were experiencing so there was the effective of recent events in the Corona virus that maybe brought some of that demand to us.

As I mentioned in my script, we believe strongly that it will stay with us because the value proposition that we're selling is the same and what they're realizing from that value proposition is going to apply to work from home environment, but it's also going to extend to whatever.

Our remote working or in office working looks like in the future.

Awesome. Thank you guys congrats again.

Our next question is from Rob Owens from Piper Sand. Please proceed with your question.

Yes, good afternoon, and thanks for taking my question I was hoping you can expand a little bit around the federal sector and I know you've been building out that the data center for a couple of quarters were just cost cap cost Capex excuse me, but in terms of where ranks now in terms of verticals and really where this opportunity could go over the next couple of years.

Yes, absolutely and I think government overall as an important vertical for us although as I mentioned before it no. One vertical is a dramatic portion of our of our revenue and we don't see government overall in the top couple, but it is important and growing segment. Nonetheless I meant.

And some of the examples I gave around government you think about the state and local segments in the State example, I gave round.

Health and human services side and people doing a processing of emergency needs the unemployment benefits of folks.

We saw that is a very strong quarter for us than we've had a lot of momentum there a federal had been newer for us and because part of that within the fed ramp certification as required to serve a lot of folks and now we're building the dedicated Datacenters, you referred to which will unlock another.

Set of opportunities for us with different federal agencies, but we also.

Also mentioned before we see this as well that even in a coping 19 situation. We may see that some aspects of the federal government still moves a little bit more slowly than some of the other private sector.

In terms of adoption of digital technologies. So we will be a patient provider to them as a customer and I think from a long term perspective, we continue to see this is a dramatic.

Growth opportunity.

Great and then second for Mike Your days Goings Outstandings been running a little higher I guess over the last couple of quarters than the three prior just curious if this is just deal sizes getting larger so payment terms youre getting extended was there anything relative to concessions for customers in the quarter given given the pandemic. Thanks.

[music].

Yeah, So Rob I think when we attractive internally and we can off line go through that would you think or do you view us have actually been pretty stable.

That said.

Sure we remain disciplined around not extending payment terms as we get larger and maintain good healthy appeal dynamics around that did we get some inbound requests for.

Slower payment, we did and it was more or less anecdotal, but when it came in we were responsive to it, especially if you have smaller businesses that were good cash strapped, we tried to be responsive to that what we wouldn't do as we weren't changing the underlying contract terms, but we are allowing our collections organization to give more latitude and back off.

Companies needed little more room. So there was some of that in the quarter. It didnt really treat change major trends in our cash flows, but I think if we see some of that materialized in the coming quarters will respond in a similar way.

Great. Thank you.

Our next question is from Pat Walravens from JMP. Please proceed with your question.

Oh, great. Thank you had a one for each of you if that's okay.

Mike you for.

Just wondering how much of the growth and I don't I know you don't actually gives us out some projects would be great. How much of the revenue growth comes from the self service channel.

And because if I look at that I mean, your number of direct customers with sort of from.

About 10000, thank you for the Q1, but the self service went from 21000 last quarter that 58.

And in the context, there as I'm sure you listen to yesterday.

Guidance was pretty flat.

Massive Q1 because of their concern that that those smaller customers signed up Brazil might turn it off.

We opened back up so I just love to hear his perspective on that.

Yes, let me start on the on the churn perspective.

We don't think that that our situation is analogous to too.

Volumes and so forth as I mentioned previously we believe that of course.

Our business like any has turned we think it's going to remain pretty stable because we think that value propositions again, we're delivering are sustainable whether its work from home environment or not in terms of contribution from our ecommerce platform or self service business. In Q2 was about 12 or 13%, which is pretty consistent with what it has been in them.

Remember that the significant majority of our customers come to us through E commerce, albeit that they represent a relatively small percentage of our revenue, but there are two really important dynamics of that theres. Some critical verticals that are serviced in their verticals like real estate.

As a source for many of our customers when they first engaged with US to then gradually to move up to a direct relationship with us and it's also a major driver of branded awareness for our products. So while it's a relatively smaller percentage of our top line. It's a critical element to the overall model.

As Super helpful. And then Dan for you just sort of around why it takes so long to adopt some things.

So you mentioned mortgages, we refinanced our mortgage and an incredibly at the end of the process.

A very nice notary came to our house with the math on and gloves and medicine, the backyards, where we had Matt sovereign club and handed a 50 pages that we signed with our own pad.

Yes. The bank is one of your pets right and so they're using it in some parts, but for whatever reason they aren't using it for the mortgages. So why not what's the challenge there. It seems like that's an obvious use case why isn't everyone using docusign for their mortgage.

I asked the banks that question everyday Pat that's a as you'd imagine something we lee posed to them as well I think the reality is theres two things that I would point to that stop adoption, where the consumer proposition is so high. As example, you just said with the need for a remote.

Model for notary.

And I think the really come into said these two buckets. The first one is just perceived regulation and we see a lot of time companies will say yeah. That's not that's not legal here, it's not allowed.

And of course, it probably is.

It's just practice and people have done something for a long time, we see this in with some of the attorneys and the legal profession, who use.

Do a lot of contracts and agreements and they'll failure, we love Docusign, but we can't do it for these types of contract oftentimes they are incorrect and they just don't they don't understand that and then the second thing that I think occurs as we have to you on the consumer side is is changing that behavior and that's one of the organization needs to change whether it's the company.

At the end consumer.

And you don't change management is not trivial, we see that a lot and back office situations, where an example, if you're using your HR Department is onboarding employees and they're used to doing that by sending off or letters in the mail filling out I nines and person when people show up and one of things. This great about koby 19, as we realize people at the onboard.

Our employees without doing that and so the offer letters now are going out with dockside and NII nine can be done remotely and so I think it's just one by one we kind of have to hit each of those.

Barriers that are usually perceived not real from from a legality standpoint and on the notary side. Just give me last comment I mean, that's an area. We see is a big growth area for us.

And we believe we're going to be in the coming quarters talking a lot more about how we want to expand on the capability to meet our customers' needs across a variety of solutions.

To make notary easier for people, but that's I think that those are the reality of things that we face.

The hurdle to driving that adoption.

Okay, great. Thank you.

Next question is from Ricci.

Julian from D.A. Davidson. Please proceed with your question.

Hey, guys. Thanks for taking my questions on hope everyone staying safe out there.

Wanted to start by just drilling down a little bit more on on the billings, obviously I really impressive billings number a nice acceleration I wondering if you could give us a little bit more color on what what drove that and.

Given that the guidance on that call sure what looks to be a little bit of a d. So in Q2 and I'm a little bit of an acceleration from the back half of the year was there any kind of pull forward of billings that you expected in Q2 that got into Q1, just any kind of color and bridging. These together would be helpful. And then I've got a follow up.

Yes, so a couple of things.

One of the exciting parts of Q1 was we had a lot of things contributing to that growth as you heard.

Large growth and direct new customers, we had 10000 in the quarter. We also had really strong expansion inside the installed base. Our dollar net retention hit the high end of our range to 119%. So we really saw strength across all those those primary growth areas I.

I think if you look at the the cadence between quarters I've always talked about look at.

Billings statistic is a rolling four quarter average as opposed to a particular data point I think if you look at last year's Q1 as you recall is a little bit lower if you look at last year's Q2. It was it was pretty strong so you'll see some of that dynamic impact the percentage.

Overall, if again if you look at it on it on an average basis over the course year I think the growth.

Is pretty correlated to.

The underlying growers in the business. So those are really contributing to it obviously in Q1.

The suddenness of people having to change their their work habits as a single data point that we wouldn't want to draw a.

The trend line through that single data point to aggressively but we are entering Q2 continuing to see a good start so we're incorporating all of that into the into the guidance that I gave you.

Great that that's helpful.

Kind of a little bit of a follow up.

It seems like.

Among other trends that you're benefiting from one of them would be not not just work from home, but that the longer lasting line.

Companies kind of having travel bans and.

More contract agreements in negotiations being done virtually and that's probably longer lasting then kind of work from home. So wanted to get a sense a is that something that you're seeing as as a big driver and more so on the broader agreement cloud versus.

Solely E signature and then B is that something that you're seeing as being a little bit more temporary in nature and maybe some of that benefit starts to dissipate as as the travel bans go away or is this a major process change that's that you're viewing is more irreversible. So so you're seeing it has maybe more sticky and long lasting thanks.

Yeah, you did say I actually think we think about work from home and the travel restrictions and the very similar way I think we believe that there's quite a lot of change that's going to occur we see it by the way in our own company as we start thinking about coming back into the office and how we want to safely bring our employees back I mentioned began to call.

All 4000 plus of our employees.

Our working from home now.

We think that that the things have changed sort of forever and we talk about this amongst our executive staff and we meet now that were rethinking how we think about travel and where are we thinking about which job we believe need to be in an office or always in an office.

So I think we're going to see that the need for people to.

Do their agreements as you said not just the signatures, but the overall agreement processes from remote.

Setting is gonna be real and increased but as we'd like to think about it is that might be the impetus for people to for the first time say this is the way I need to manage my business today. They don't have the ability to do manual paper based processes in offices, but then when they see the cost savings the time savings in the better experience.

I think they're going to look at it and say I want all of my business process to run this way and if even if some of the work from home and some of the travel mitigates those restrictions mitigate which I do believe they will I don't they'd be completely back to the old normal, but I think it would be.

Somewhat.

The need to have those.

Digital services are going to be just as strong and they will maintain that usage. So that's kind of how we see that developing.

Great. That's very helpful. Thank you so much.

Our next question is from Stan.

Lasky for mortgage then please proceed with your question.

Perfect. Thank you so much and congratulation on a very strong quarter.

A couple of questions from my end up first one on the.

Just what you saw in the quarter, maybe help us to bifurcate that between strength within the core E signatures versus strengthen the then the spring cm CLM solution in the broader agreement cloud and then.

And how are you thinking about that.

Moving forward.

The rest of the and then have a quick follow up.

Well, so so I think one of the things that we saw was the dramatic portion of the acceleration that we wouldn't have seen pre covert 19 was signature centric and that's for a couple of reasons. One you know the ROI on E signature so incredibly high so people have always found that when they have that opportunity.

To find solutions.

That can meet its a great. It's a great answer for folks and so I think we saw a lot of people say this is a great opportunity for you to be smart about where my business second thing is anything about your overall agreement cloud work. It seems your tends to be the entry 0.1 of the reasons, we built such a signature businesses scale before we broaden into the other agreement cloud it's just the starting.

Point for most people and in fact, we think about the broader CLM capability. If you don't have digital agreements digital signatures on them. It's hard to think about a digital solution for managing your contracts and agreement.

So you really have go the other way first so we think thats absolutely happened and then the second phenomenon is that because we saw the need for remote work and for people to be able to get these transactions, both internal ones as well as external ones with customers.

Management people are working from home. It was there was a again an urgency to get a lot of those E signature projects up and running.

And CLM interestingly enough tends to be longer sales cycle.

Hey, usually a statement of work is involved some sort of systems integration or professional services involved I think we're seeing across the software world. The slightly more complex projects that are little larger in initial scope less land and expand and more one one bigger entry point are the ones that are going to face little pushback and delays.

And so from a standpoint of the time to close those deals.

Those times would extend a little bit so thats why we saw a signature being particularly strong in the quarter when we look out.

Over the next several quarters, we see that phenomenon will dissipate overtime. Some of the deals that might elongate from a Q1 into the Q2 then some into a Q3 continue to see some of those pushing forward into those later quarters, which will give us tailwinds there, but most importantly, as all these new E signature wins, you think about the 10000.

Direct customers. They came in a significant portion of those came in with the signature and in the quarters ahead, they're going to be our most fertile opportunity to cross sell and expand their overall agreeing the cloud solution.

Yeah.

Makes sense and you started the call.

With really outlining the momentum that you're seeing across your business requires different industries and government as one of the ones that you mentioned.

How are you thinking about the.

The federal burned a goal as you get into the back half of the year with the federal purchasing.

Total fiscal year.

Coming up is that an opportunity to perhaps close more business than you. Initially expected as you entered the year. That's it. Thank you, yes, yes, yes, I think we're pretty bullish as we talked about earlier on the call I think we're very bullish about the government vertical into your specific question around timing of the year, we've never been.

Because our core business.

And you think there is still the you know the significant biggest part of what we bring to the government is more of a land and expand model. We don't have the same phenomena that you might see in some other software companies. We're all about getting that end of year contract on whether the big sales cycle that maybe goes for a couple of years and they're trying to get a big splash.

At the end of the year, we tend to see it happening more evenly across the year. So sometimes is a budget cycle opportunity for us around something like a CLM deal and we saw that number last year, where we had the VA discussion, where we had sort of.

Very large deal the most of our government work and specifically talk about federal here.

Really does occur in the land and expand model with lots of small expansions as we build overtime.

Perfect. Thank you and congrats on great quarter.

Thank you.

Our next question is from current return from Evercore. Please proceed with your question.

Oh, thanks, very much I mean, maybe just to start Dan.

Following up on the earlier question on the CLM side, you mentioned that obviously E signature is the landing spot for most of your customers that come in you know how long did.

That relationship that the gestate before you can start talking to them and a big away about CLM or some of the more.

Yes, there may be more complicated services around the agreement cloud, meaning if it's that's cohort comes in this quarter, obviously in a big why is it six nine months I'm sure. It differs on companies in terms of sophistication, but I'm just any general thoughts on how that's trended over the last year in terms of when you start to see that outsell opportunity.

Yeah, So it's really interesting and.

At the time for IPO, one of the things we talked about when we had left brought up an agreement cloud set of offerings, but we had the phenomenon the land and expand and we shared some customer stories, we had some.

Customers that started off very small with us and over a series of six years head on into very large.

Vince is that there wasn't sort of nestle an inflection point it was a lot of small additional at now in a signature owning world. That's what I would expect if you think about the broader agreement cloud to your question, we are likely going to have scenarios, where we do get a signature land. We continue to add additional use cases and expansion of a signature but also.

Make a very large agreement cloud slash with customer and I think that can happen in that sort of three four quarters time period. When it had a chance to implement signature get that early success and win in the organization gets excited about Docusign and we come back to really start working on the agreement, but keep in mind.

Some of those other components do have a longer sales cycle and implementation so even if within one or two quarters.

Have a land with the signature someone expressed a lot of interest to a broader let's say a CLM solution you would probably be several quarters from then before we got the sale done and got the statement of work in place and you see that's showing up as Docusign revenue. So I don't think you should think about it quick hit we should think about that as a as a nice elongated.

Revenue growth path path for us to go into that's sort of how I would generally think about the opportunity for us to do that expansion and the only other thing I would just add though is that when I look at our opportunity around the agreement class.

The the clear obvious thing to point to as Mike talked about with over well over 600000 customers. The majority of those ours signature only that's really the cross sell opportunity. So it's not like we're thinking about the CLM sale opportunity and saying well we can't go talk to someone for CLM other than the people to join last quarter a signature we've got.

Years of signature customers, that's sort of a pent up opportunity for us to bring the agreement cloud and that's where we're really focused today.

That's really helpful and thanks for the color on that.

The other question I had was obviously with 10000, new direct customers. This quarter. It's a really nice job of your sales team taking about a process that many deals frankly, where a lot of those sort of incremental deals that came in where they in the pipeline that kind of maybe came earlier, where there are lot add ons kind of left field that I was just a really quick sales process.

Yes can you just give us some color on that maybe not the direct number but when you think about how you're able to kinda accomplish that.

It seems obviously again curious your sales team as just kind of curious how many of those might have already been early stage relationships that accelerated versus customers that have you had never even talk to you before that John Yeah. Let me give you a couple of thoughts and Mike have it might have some additional perspective as well, but but the answer as is the case with a lot of things the docusign, it's all the above where.

Usual company and that we serve from the smallest customers up to the absolute largest customers across all verticals across the variety of geographies. So number 150 countries. So we are we are very broad and that's exactly what happened here. We had a good solid pipeline of business had nothing to do right with Coca 19, the what to set us up.

For a solid quarter in Q1, and a lot of those deals then process as we would expect to have happened our sales team executed across US. We also had to the nature of your question. Some additional much faster timeline deals where people came to us and said I really need to kick going with docket I've always known that but I just haven't gotten around.

Doing it so some of those where people had conversations going on with us and those accelerated and some that whole cycle was done within the quarter, where someone called us that you need to help me get up to speed quickly.

South care.

Attunitys were big if you think about the situation. We are trying to your now trying to do covert 19 testing and you've never been an organization that did that kind of testing before and now you say I got to figure out a way to get people information and get them to fill out formed Oh, but I don't want to touch him I don't want to touch anything they've touch I have they need a digital solution for doing that.

And we had sales cycles it that happened in that and in a matter of days what people came to us explained that business needs that they had or that healthcare needs that they had and we were able to get up and running that use case, so that really with quite a range across each of those pieces. Yes. One other piece to that question that you brought up but I think is important as if you if you.

Imagine.

Back in March when we very suddenly.

Had to close or offices and send 4000 people home.

Very same time, we had a dramatic increase in our in our demand and we had process that we talked about transactions earlier on or infrastructure. You mentioned the sales teams others. The robust team that has to process.

Increased quantities from location that they're not used to working all of those things together it really tested our environment and one of the things that came out of Q1 very happy about as it was a very resilient environment, even with some of the pressures put upon is to have to change how we were doing our business.

That's helpful. Thanks very much.

Our next question is from.

Walter Pritchard from Citi. Please proceed with your question.

Hi, Thanks.

Two questions just the first one on.

On the new business versus expansion.

Is it safe to say you were seeing a smaller new contracts as people just try to get up and running in that leaves more of an expansion opportunity on there's or do you see the reverse as people sort of understood. But this is the way things are headed just curious how to how to factor in what you saw this quarter in terms of calibrating our expectations right expansion. The next few quarters.

Yes, hi, well through yet so a couple of things I think one of the great strengths that we've talked a lot about with Docusign is we sell to the very small those businesses and our self service ecommerce world, we sell to the Fortune 10, and we have strength selling into the us it moves and the majors the small businesses direct through commercial so.

If we looked at the.

Broad growth that we had over the course the quarter.

We talked a little bit before about there'll be some anecdotal things around PPP or other project.

Cases, but if you look beyond that at the overall growth the I'm sort of touched upon how is spread across verticals spread across those segments as well it really did and it was a nice combination of new direct.

As well as expansion of scale within in the installed base. So it was it was broad.

Within there there is going to be some pockets, so travel and entertainment might be one pocket that wasn't as strong.

You might look at healthcare life Sciences that showed a bit more strength of the common quarter, but when I went back and looked at the complexion of the growth. It was it was nice and broad based and then tier deal size very specific question, when Mike and I do a review, which used to two days ago. When we look at our pricing and we look at what's different and Tom quarter to quarter in terms of.

How people are buying from us on what the nature of those deals look like there wasn't anything in this quarter that would suggest larger deal sizes on average even within the segments that Mike was just walking you through so I don't think there was anything notable I think other than to keep in mind is that when we talk about our land to expand opportunity. It's so significant that it's hard for me to imagine.

You know what are they could be some dramatic change in that initial land that would change the kind of up sell or long term expansion opportunity because it's such a big multiple other typical initial land. So I wouldn't expect anything different than our typical great growth opportunity for that going forward.

Okay got it and then just curious how you're thinking about sales cycles.

If they permanently changed or obviously.

Theres been a lot of awareness created in the market for your brand and so forth curious if you if adjusted all in terms of your forecasting this year, maybe longer term the sort of sales cycle more in the enterprise larger customer segment.

I don't think we see anything that we would call a significant change from that standpoint, I think the phenomenon in Q1 that we alluded to earlier was that there were some increase in sales cycles for some deals because of the urgency of those use cases, I think that will probably revert to the mean overtime.

And then to your point about is the docusign sell get easier as we become more prominent around the brand I suppose there could be something there incrementally I don't have anything I can point to yet to tell you. We as observed something I can clearly tell you we're not changing at this point our expectations are our plans.

For our cycle, yes by segment as Mike said different for each segment, but we don't have anything at this point that we would point to and say within a segment. We think the sales cycles would be different going forward.

Okay, great. Thank you.

Okay.

Our next question is from Dan you do you guys from Wedbush Securities. Please proceed with your question.

Yes. Thank you.

So can you hit on international in terms of the opportunities there obsolete strength this quarter and maybe some the different dynamics when you think international versus domestic in terms of though what you're saying.

Yes, Hi, Daniel So couple of things as I mentioned in my script.

International grew 46% year over year. So we continue to see a really strong contribution.

From that part of our business I think as we've talked in the past some of those markets large markets like a Germany, France, and so forth it or a civil what countries or it a bit of an earlier stage than what we've seen domestically, but each quarter, we're continuing to see improvements in those major markets.

And I also mentioned before that some of the infrastructure, we have around how we structure datacenters and so forth we built into those markets as they expand so markets like Australia might Canada that maybe a bit earlier, we're going to leverage infrastructure like Georgia to address those but overall, we look at those markets as a it's a significant part of.

Our Tam.

We are seeing evidence that the needs of customers in those regions are the same as the needs that we're servicing in the U.S. and that continues to drive.

A huge opportunity for us that we're investing aggressively in.

Great and just on each signature are you finding.

That you are in enterprise within the Department, maybe two departments and now just going enterprise wide is that I mean, maybe you can you drill into that trend relative to those coven environment from the acceleration.

Typically on the E signature going from departments Enterprisewide.

Yes, I don't think we've seen anything, particularly from coded that would accelerate that move where we work with one or two divisions and now we get more of an enterprise solution other than the same macro piece, we talked about which is as companies are increasingly seen the need to try to digital transformation, that's accelerating it probably.

At the same rate would accelerate those expansions from divisional projects to broader enterprise.

Wide solutions, but I think at this point, we'd say that phenomenon is occurring it can it's always been a big growth opportunity for us and I think it's the same big growth opportunity for its going forward, but I don't think a co vid acceleration of digital transformation is going to change.

That phenomenon or that rate at which we see that going other than just making everything go a little bit faster.

Great. Thanks.

Our next question is from Shebly Seyrafi from.

The and Securities. Please proceed with your question.

Yes. Thank you very much so your sub growth margins.

Looks like they declined by about two points year to year I think in your script. You said that you had increased hosting costs can you talk about recovery in sub gross margins you see going forward.

Yes, so probably the biggest contributor to that is the.

In addition of.

CLM to the business in some of the the costs associated with that business that aren't as levers deserves scale the signature business.

If you look at our long term target model. It stay the same and 70% to 82% and I think that what will allow us to remain in that range and the increase in that range overall, both in terms of subscriptions and professional services is really just going to be continued scale. So if you look at seal is another example feel as I mentioned in my comment.

It's going to have a near term small dilutive effect on gross margins as well just because they are topline contribution won't match the infrastructure, we're bringing over as part of that acquisition, but those are near term and they're fairly minor and I and I remain.

Guiding that 70% to 82% for up for gross margins for a long term model.

Okay. One more your dollar net retention rate is now 119%, which is at the high end of your targeted 112 to 119, what do you see going forward in that rate.

Yes. So at this point I'm really not changing the at the range I don't I don't foresee us being anywhere near the lower side of that range. I think if we remain in that range. We are continuing to drive a healthy outcome in the business.

If we see something more sustainable over time, we'll always have reconsidered and look at that but for now we're keeping a keeping the range the same.

Thank you.

Our next question is from tailored to begin his home do some bank. Please proceed with your question.

Hi, and congrats on the quarter and thanks for taking my question. The billings growth rate of course is super strong, but I would just be curious if you feel the level. You said you saw on the Docusign platform in the quarter is fully reflected in that number.

And by that I mean, maybe you could talk about the process of true ups and Overages and what happens when a customer needs more on blips you guys before the second half billings guidance implied most thirtys not implies mid thirtys. So I'm just wondering if some of these since that we potentially on the quarter, it's embedded in into renewals as well.

So a pillar couple of things first one thing that we don't too much of very little of is we're not a model that has a lot of buildings for overages.

We look at opportunities where customers have exceeded their capacity of their subscription is a time to go back and up sell them in an early renewal.

So the volume of transactions aren't necessarily going to correlate to near term billings trends, which will see over time, however, as as customers we've talked about a lot adopt.

Their capacity and it becomes part of their business then that drives that that dollar net retention that upsell opportunity in that expansion opportunity in the future, but in the near term if you're looking at.

How much of Q1 billings was affected by our going back to customers and billing them for Overages, it's very very small.

Got it and then maybe just a second question could you maybe talk about the kind that aptus merger in yellen fees I'd be curious if you feel that that has but that could have any impact to the competitive landscape or your efforts in Sally Springs yeah.

Yeah, I mean, we Oh, we don't have a strong point of view that it's significant in any big way for us.

We look at all the players in the space and you know, where we think we're really proud of what we've built and believe we built the software.

Particularly in CLM that will win and we're particularly pleased if you had a chance to see the recent Gartner report that I had us at the top.

Their assessment, we're obviously very pleased being in that up for quadrant.

But we think that there's going to be a lot of activity like this.

And we think that ever changing landscape is definitely something we look at closely but there's nothing about that particular combination that we saw a is having any significant impact on our and our business or our go to market.

And we Didnt when Congo was for sale, we didn't look at that as an asset that we thought I really brought something special to Docusign.

And I guess, if you put aptus see something there and hopefully they will be able to get what they were hoping to get out of it.

Great. Thanks.

Your next question is from Sean Kennedy from Goldman Sachs. Please proceed with your question.

Okay.

Good afternoon, and great job on a quarter guys.

I was wondering what areas of the business were most challenged in the post endemic environment, although doesn't seem like many that could potentially recover over the next few quarters I'm thinking of.

Since challenged sectors like travel hospitality and also combined.

Yeah, and I think it's interesting if you think about from a vertical standpoint, I am I actually think your real estate example is a great one.

I mean that we've actually done a lot to accommodates an industry that weve been close to is a big part of the initial success of this company and so we've created programs with the National Association of Realtors to give so 90 day free trials to Realtors, who are smaller users that might not be able to afford document they don't have enough transaction volume.

Now we think over time as those folks get to love Docusign product in their their business recovers and the opportunity to upgrade them to paid products and so there could be a good sort of bounce to our business from that.

Things like travel hospitality or some of the other industries that are hit harder one of the big jobs in when are they going to see that bounce back in their business.

I think when that happens, we'll probably see some more increased growth opportunity for us in those verticals, but I don't think it's so much of a like a pent up demand I think it's just more in that case, a model of they're not doing business transactions. So if you're a travel agent as an example, and use docusign for some of your packages, you're not sending travel packages right now so.

Your you when you come to US you don't need to renew it as high volume when that recovers. We do believe they'll go back to their old volumes and then hopefully overtime continue to grow with us as their business gross that's how I think about some of those opportunities.

Great and then just a quick one on CLM I was wondering what the customer mix is like compared to E signature and does it seem much higher towards larger pumping since it deals with more complex work processes and how does that affect the cross sell opportunity, yes, I think it's great question.

And I think what you find is that.

To some extent, even small companies have a effectively a CLM like need to manage all of their contract, but if you're very small company have a small number of contracts.

In terms of the number of contracts you have.

The different contracts that you have and then a small volume of those contracts you tend to say I don't need a complex CLM system. So we see that skewing more to our upper mid market in the commercial segment and then into the enterprise and I think we think Thats. The case that we'll have for years to come at the very small customers. They want they might want like our gen probe.

It was a sub segment, but you'd find in CLM and Gen and negotiate functionality, which we released at Dreamforce.

Last year than last year, that's what we see being sold more into the smaller customers as opposed to the full or.

I am proud.

Great. Thank you.

So what that looks and the rest of the year.

Thanks.

We have reached the end of the question answer session and I will now turn the call over to management for closing remarks.

I think you guys all for joining us Oh, we like to say, we look forward to senior out on the road I guess, we like the new virtually out on the road over the next quarter.

We got a lot of opportunity set up to see all and we'll see again next quarter. Thank you so much.

This concludes todays conference and you may disconnect. Your lines at this time. Thank you for your participation.