Q3 2022 DocuSign Inc Earnings Call

December 2, 2021

Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's third-quarter fiscal year '22 earnings conference call. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. I'll now pass the call over to Annie Leschin, head of Investor Relations. Please go ahead.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad I'll now pass the call over to Andy <unk> head of Investor Relations. Please go ahead.

Thank you, operator, good afternoon, everyone. Welcome to DocuSign's third-quarter fiscal year '22 earnings conference call. On the call today, we have DocuSign CEO, Dan Springer and CFO Cynthia Gaylor. The press release announcing our third-quarter results was issued earlier today and is posted on our Investor Relations website.

Thank you operator, good afternoon, everyone welcome to doctors on <unk> third quarter fiscal year 'twenty two earnings conference call.

On the call today, we have <unk> CEO, Dan Springer and CFO Cynthia Gaylor, the press release announcing our third quarter results was issued earlier today and is posted on our Investor Relations website.

Before we get started, I'd like to let everyone know that we plan to participate virtually and a few events in the upcoming weeks. The UBS Tech conference on December 8, and the Needham Conference on January 10th. As other events come up, we'll make additional announcements.

As other events come up we'll make additional announcements.

Now, let me remind everyone that some of our statements 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. Please read and consider the risk factors in our filings with the SEC together with the content of this call.

Please read and consider the risk factors in our filings with the SEC together with the content of this call.

Any forward-looking statements are based on our assumptions and 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. Non-GAAP financial measures exclude stock-based compensation expenses, amortization of acquired intangible assets amortization of debt discount and issuance costs from our notes and as applicable other special items.

In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from or substitute for or superior to our GAAP results.

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

We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP data to most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release, which can be found again on our investor website. Now, I would like to turn the call over to Dan. Dan.

For information regarding our non-GAAP data.

This directly comparable GAAP measures and a quantitative reconciliation of those figures. Please.

Please refer to today's press release, which can be found again on our investor website.

Now I would like to turn the call over to Dan Dan.

Thanks, Annie good afternoon, and welcome to our third-quarter earnings call. First, let me share the financial results. In Q3, we continued to see solid performance with our revenue and profitability. Revenue grew 42% year over year to $545 million and operating margin reached 22% exceeding our guidance. International was again, a bright spot at 68% year over year growth and now 23% of total revenue.

First let me share the financial results in Q3, we continued to see solid performance with our revenue and profitability revenue grew 42% year over year to $545 million and operating margin reached 22% exceeding our guidance.

International was again, a bright spot at 68% year over year growth and now 23% of total revenue.

However, we fell short of our billings guidance coming in at 28% year over year growth. We expanded our customer base to 1.11 million and we continued to see strong dollar net retention of 121%. The market dynamics that we saw in the third quarter were markedly different from what we experienced in the first half of this year.

We expanded our customer base to 1.11 million and we continued to see strong dollar net retention of 121%.

The market dynamics that we saw in the third quarter were markedly different from what we experienced in the first half of this year.

With a boost from COVID-19 over the past year and a half, we experienced exceptionally high growth rates at scale as we captured customer demand at an unprecedented pace. As we move through Q3 and into the second half of the year, we saw demand slow and the urgency of customers buying patterns temper. Well, we had expected an eventual stepped down from the peak levels of growth achieved during the height of the pandemic. The environment shifted more quickly than we anticipated.

As we move through Q3 and into the second half of the year, we saw demand slow and the urgency of customers buying patterns temper.

Well, we had expected an eventual stepped down from the peak levels of growth achieved during the height of the pandemic the.

The environment shifted more quickly than we anticipated.

And these were the primary contributors to our billing results in Q3 and our outlook for Q4. Despite this, it's clear that we are still in the early days of the 50 billion dollar agreement cloud opportunity as digital transformation remains a high priority for organizations worldwide. DocuSign is uniquely positioned to lead and capture E-signature and the broader agreement cloud market opportunity, given our strong brand leading market position and product differentiation.

Despite this it's clear that we are still in the early days of the 50 billion dollar agreement cloud opportunity as digital transformation remains a high priority for organizations worldwide Dr.

Dr. Stein is uniquely positioned to lead and capture E signature and the broader agreement cloud market opportunity, given our strong brand leading market position and product differentiation.

Even as the pandemic subsides and people begin to return to the office, they are not returning to paper. E-signature in the broader agreement cloud are clearly here to stay. And DocuSign's value will persist no matter how the future of work unfolds. To continue to drive growth at scale from new company acquisition to existing customer expansion, we need to ensure our teams are firing on all cylinders. We are doubling down on growth to counter recent trends by aggressively investing in two key strategic areas.

E signature in the broader agreement cloud are clearly here to stay.

And darkey signs value will persist no matter, how the future of work unfolds.

To continue to drive growth at scale from New company acquisition to existing customer expansion, we need to ensure our teams are firing on all cylinders. We are doubling down on growth to counter recent trends by aggressively investing in two key strategic areas.

First, we are increasing investment in global sales capacity training and field enablement to speed pipeline generation with new business and to drive expansion within our customer base. We're globalizing our marketing investments across direct and channel sales to drive brand awareness and qualified sales leads both domestically and in our expanding international markets.

We're globalizing, our marketing investments across direct and channel sales to drive brand awareness and qualified sales leads both domestically and in our expanding international markets.

As part of this effort, we are aligning our worldwide sales marketing and success operations under Chief Operating Officer, Scott Ulrich. With this move Chief revenue Officer, Lauren [inaudible] and SVP of customer success Lambert Walsh will now report to Scott.

With this move Chief revenue Officer, Lauren I'll had us and SVP of customer success Lambert Walsh will now report to Scott.

In addition, Mike Sheridan, who has served DocuSign for over six years, first as CFO and most recently, leading our international strategy has moved on from the company as of the end of November. I'd really like to personally thank Mike for all of his many contributions to DocuSign in key roles through critical stages of our development. And we all wish Mike well in his retirement.

I'd really like to personally thank Mike for all of his many contributions to dock you sign in key roles through critical stages of our development and we all wish Mike well in his retirement.

With the substantial growth of these go to market organizations in the last year and a half. We believe these moves will drive a unified motion towards demand generation demand capture and our overall growth. Our second key strategic area we're investing in is product innovation, which will continue to be an integral part of our success. I'd like to touch on how we are elevating our innovation efforts across our expanded portfolio of products that make up the doctor sign agreement cloud.

Our second key strategic area, we're investing in is product innovation, which will continue to be an integral part of our success I'd.

I'd like to touch on how we are elevating our innovation efforts across our expanded portfolio of products that make up the doctor sign agreement cloud.

Last month, we enhanced the DocuSign notary so administrators can manage the availability of first-party notaries. One more reason, we believe the DocuSign notary will become the tool of choice for real estate, insurance and other financial service providers. A number of financial institutions, including Fidelity added the service in Q3. But M&T bank is my personal favorite early success story in the space. M&T bank has been a customer since 2018, but their DocuSign use cases jumped from about 50 to more than 200.

One more reason, we believe the doctor sign notary will become the tool of choice for real estate insurance and other financial service providers.

A number of financial institutions, including Fidelity added the service in Q3.

But empty bank is my personal favorite early success story in the space.

Empty bank has been a customer since 2018, but they're darkies signed use cases jumped from about 50 to more than 200.

First with the introduction of ID verification and now with notary. That's an obvious win for us, but the wind for M&T Bank is they can now remotely notarize documents in less than seven minutes. The combination of E-signature, identity verification and notary are game-changers for M&T's 700 retail branches and we're hearing that it's making a notable impact on their operating costs as well as a huge plus for their customer experience.

That's an obvious win for us, but the wind for M. T Bank is they can now remotely notarized documents in less than seven minutes.

The combination of E signature identity verification and notary are game changers for EM and TS 700 retail branches and we're hearing that it's making a notable impact on their operating costs as well as a huge plus for their customer experience.

Speaking of ID verification, or IDV for short, last month, we also launched an enhancement that lets customers at SMS re-authentication to ITV envelopes. So after signers paas and initial ITV they enter passcode delivered via SMS text to access the envelope. Adding an extra layer of security that our customers value along with added convenience to our customers' customers.

So after signers Paas and initial ITV they enter pass code delivered via S. M. N S. M S text to access the envelope.

Adding an extra layer of security that our customers value along with added convenience to our customers' customers.

We've also made a number of important enhancements to our DocuSign seal M product this quarter, helping. Helping organizations automate manual business processes and improve efficiency with every agreement. Just this month, we launched a full set of collaboration tools within the product to give users the ability to comment, tag others and assign tasks all in the [COMUI.]

Helping organizations automate manual business processes and improve efficiency with every agreement.

Just this month, we launched a full set of collaboration tools within the product to give users the ability to comment.

Others and assign tasks all in the C O M UI.

On top of those innovations, we continued to make significant enhancements across the entire agreement cloud, including new agreement actions with Google and Microsoft apps to automate the post signature tasks. New delegated signing capabilities for our enterprise customers. And new tech to simplify invoicing using our popular product DocuSign Gen for salesforce billing. There's plenty more ahead to extend our leadership position and guide our customers into the next generation of agreement. As our steady drumbeat of innovation continues to set us apart.

New delegated signing capabilities for our enterprise customers.

And new tech to simplify invoicing using our popular product <unk> Gen for Salesforce billing.

There's plenty more ahead to extend our leadership position and guide our customers into the next generation of agreement.

Our steady drumbeat of innovation continues to set us apart.

We're making significant investments in both product and platform innovation as we believe it drives customer success and positions us well for durable growth going forward. On the customer front, I mentioned earlier that we added 59,000 new customers in Q3, and I'd like to share two of them that are particularly relevant to our focus areas. One of our newest global customers UPS, adopted an enterprise-wide initiative to modernize our entire contracting process with axon CLM.

On the customer front I mentioned earlier that we added 59000, new customers in Q3, and I'd like to share two of them that are particularly relevant to our focus areas.

One of our newest global customers U P S adopt.

Adopted an enterprise wide initiative to modernize our entire contracting process with axon C. L M <unk>.

Having previously used an alternative solution, their 9000 plus person sales organization is now using CLM and E signature products in conjunction with Salesforce. All integrated into one workflow. The successful deployment has led to a much faster and more efficient process with greater visibility. This is attracting the attention of other business units where we're actively exploring expansion opportunities. I think it illustrates that both E-signature and CLM can be effective on-ramps into enterprise businesses and both can open the door for deeper cross-departmental adoption rates. Celerity Credit Union in Washington State is a business that prides itself on pushing the boundaries of technology to elevate the customer experience. Celerity first looked at DocuSign to better enable their residential mortgage process with DocuSign rooms for mortgage. Next, they began using darkey signed notary as a standalone offering.

All integrated into one workflow.

The successful deployment has led to a much faster and more efficient process with greater visibility.

This is attracting the attention of other business units, where we're actively exploring expansion opportunities.

I think it illustrates that both E signature and C. L. M can be effective on ramps into enterprise businesses and both can open the door for deeper cross departmental adoption rates.

Celerity credit Union in Washington State is a business that prides itself on pushing the boundaries of technology to elevate the customer experience.

Celerity first look the Doc you signed to better enable their residential mortgage process with Doc who signed rooms for mortgage next they began using darkey signed notary as a standalone offering.

Then Celerity became the first DocuSign customer to fully integrate these capabilities offer a completely digital solution for remote residential mortgage closings. I expect many more stories like celerity as our customers move to differentiate their own customer experience with seamlessly integrated solutions.

I expect many more stories like celerity as our customers move to differentiate their own customer experience with seamlessly integrated solutions.

We're also continuing to deepen our relationships and drive innovation across our so already thriving partner ecosystem. Building on our collaboration of over a decade, we announced an expansion of our global strategic partnership with Salesforce. Together, we expect to build new joint solutions to automate the contract process, improve the customer experience, drive faster ROI and increase collaboration amongst organizations that use Slack, which is now a part of Salesforce.

Building on our collaboration of over a decade, we announced an expansion of our global strategic partnership with Salesforce.

Together, we expect to build new joint solutions to automate the contract process improve the customer experience drive faster ROI and increased collaboration amongst organizations that use slack, which is now a part of salesforce.

This expansion reflects the fact that Salesforce and DocuSign have consistently succeeded together as partners, which in turn has generated opportunities to partner in priority areas, such as Slack for Salesforce and CLM for DocuSign. Following our E-signature integration with Microsoft teams earlier this year, DocuSign is now also an official electronic signature provider in the Microsoft teams approvals app. Adding to our integration across Microsoft Office 365, and dynamics 365.

And C L M for Darkey side.

Following our E signature integration with Microsoft teams earlier. This year doctors site is now also an official electronic signature provider in the Microsoft teams approvals at adding.

Adding to our integration across Microsoft Office, 365, and dynamics 365.

This latest enhancement allows users to create, manage and share approvals directly from teams. Enabling them to streamline approval requests while keeping up to date on the status of approvals. So to wrap up, we are proactively addressing the rapid change in demand trends that are we seeing as we emerge from the pandemic. By investing in the areas most critical to our future growth. So we've adjusted our near term outlook to reflect the uncertainties of the current environment. We have strong confidence in our vision and strategy.

Enabling them to streamline approval request, while keeping up to date on the status of approvals.

So to wrap up we are proactively addressing the rapid change in demand trends that are we seeing as we emerge from the pandemic.

By investing in the areas most critical to our future growth.

So we've adjusted our near term outlook to reflect the uncertainties of the current environment.

We have strong confidence in our vision and strategy.

We are convinced that the growth opportunity for DocuSign remains largely untapped. We have products that are loved by our customers and their customers in turn and technology that is making a difference in the global speed of business as well as the health of our planet. If the last year has shown us anything it's just how early in the opportunity we really are.

If the last year has shown us anything it's just how early in the opportunity we really are.

In the coming weeks and months, you will see us focus our efforts and investments to drive growth at scale. While disappointed with my execution on billings this quarter, I'm highly optimistic about our long term growth and we remain one of the fastest-growing enterprise cloud companies in history. We will continue to innovate across our platform as we lay the foundation for our future expansion across the entire agreement cloud. With that, over to you, Cynthia.

While disappointed with my execution on billings this quarter.

Highly optimistic about our long term growth and we remain one of the fastest growing enterprise cloud companies in history.

We will continue to innovate across our platform as we lay the foundation for our future expansion across the entire agreement cloud.

With that over to you Cynthia.

Thanks, Dan and good afternoon, everyone. After six quarters of accelerated demand, we saw customers shift their buying patterns in the third quarter. Revenue profitability and cash flow remained strong while billings and dollar net retention came off their highs, especially in light of the tougher year over year comparables.

Revenue profitability and cash flow remained strong while billings and dollar net retention came off their highs, especially in light of the tougher year over year Comparables.

As Dan mentioned, we had expected this to happen more gradually and we saw a more notable shift in Q3 than anticipated. Total revenue increased 42% year over year to $545 million, while subscription revenue grew 44% year over year to $529 million. Our international business expanded at a healthy rate, especially in our Asia Pacific region this quarter. In total, international revenue grew 68% year over year to $128 million contributing 23% of total revenue.

Total revenue increased 42% year over year to $545 million, while subscription revenue grew 44% year over year to $529 million.

Our international business expanded at a healthy rate, especially in our Asia Pacific region. This quarter.

In total international revenue grew 68% year over year to $128 million contributing 23% of total revenue.

Billings grew 28% year over year to $565 million as we were impacted by the shift in customer buying behavior accentuated by a particularly strong first half of the year. With that said, we brought on 59,000 new customers, bringing our total customer count to 1.11 million customers worldwide, an increase of 35% compared to a year ago.

With that said, we brought on 59000, new customers, bringing our total customer count to 1.11 million customers worldwide, an increase of 35% compared to a year ago.

We also added over 11,000 direct customers, bringing the total to nearly 160,000, an increase of 41% year over year. Customers with an annual spend greater than $300,000 grew 45% year over year to a total of 785 customers. After an exceptional year and a half of customer growth, we continue to add customers at a solid pace.

Customers with an annual spend greater than $300000 grew 45% year over year to a total of 785 customers.

After an exceptional year and a half of customer growth, we continue to add customers at a solid pace.

For the sixth quarter in a row, we exceeded the high end of our historical range of dollar net retention. Landing at 121% as our existing customers expanded their deployment of our product offerings. Total non-GAAP gross margin for the third quarter was 82% compared with 79% a year ago, while subscription gross margin was 86% compared with 84% a year ago.

Landing at 121% as our existing customers expanded their deployment of our product offerings.

Total non-GAAP gross margin for the third quarter was 82% compared with 79% a year ago, while subscription gross margin was 86% compared with 84% a year ago.

In Q3, non-GAAP operating margin reached 22% or over $122 million compared with 13% or $49 million in the third quarter of last year. Our Q3 revenue growth continued to outpace our ability to invest at a similar rate in quarter.

Our Q3 revenue growth continued to outpace our ability to invest at a similar rate in quarter.

In addition, the delayed reopening of our offices led to lower than expected travel and entertainment expenses. As Dan discussed, we are committed to investing for future growth with a focus on optimizing our go to market efforts around demand generation, along with customer success in accelerating our product development and innovation engine.

As Dan discussed we are committed to investing for future growth with a focus on optimizing our go to market efforts around demand generation, along with customer success in accelerating our product development and innovation engine.

Non-GAAP net income for Q3 was $121 million compared with $46 million in the third quarter of last year. We ended the quarter with 7,056 employees, an increase of 32% over last year. Operating cash flow came in at $105 million or 19% margin due to continued top-line outperformance. This compares with $57 million or 15% in the same quarter a year ago.

We ended the quarter with 7056 employees, an increase of 32% over last year.

Operating cash flow came in at $105 million or 19% margin due to continued top line outperformance.

This compares with $57 million or 15% in the same quarter a year ago.

Free cash flow reached $19 million or 17% margin in the quarter compared to $38 million or 10% in the prior year. We exited Q3 with $908 million in cash cash equivalents restricted cash and investments.

We exited Q3 with $908 million in cash cash equivalents restricted cash and investments.

Now, let me turn to guidance. Coming off of the strong growth we experienced in the first half of the year, we've done rigorous analysis to understand the current dynamics. As a result, we are maintaining our Q4 subscription revenue guidance and adjusting billings to take into account the risks and opportunities we see in the business.

Coming off of the strong growth we experienced in the first half of the year, we've done rigorous analysis to understand the current dynamics.

As a result, we are maintaining our Q4 subscription revenue guidance and adjusting billings to take into account the risks and opportunities we see in the business.

For the fourth quarter and full-year fiscal '22 guidance is as follows. Total revenue of $557 million to $563 million in Q4 or growth of 29% to 31% year over year. And $2.083 billion to $2.089 billion for fiscal '22 or growth of 43% to 44% year over year. Of this, we expect subscription revenue of $544 million to $550 million in Q4 or growth of 33% to 34% year over year and 2.017 to $2.0 billion to $3 billion for fiscal '22 or growth of 46% year over year.

Total revenue of $557 million to $563 million in Q4 or growth of 29% to 31% year over year.

And $2.083 billion to $2.089 billion for fiscal 'twenty, two or growth of 43% to 44% year over year.

Of this we expect subscription revenue of $544 million to $550 million in Q4 or growth of 33% to 34% year over year.

In 2.017 to $2.0 billion to $3 billion for fiscal 'twenty, two or growth of 46% year over year.

For billings, we expect $647 million to $659 million in Q4 or growth of 21% to 23% year over year and $2.335 billion to $2.347 billion for fiscal '22 or growth of 36% year over year. We expect non-GAAP gross margin to be 81% to 82% for both Q4 and fiscal '22. We expect non-GAAP operating margin to be 17% to 19% for Q4, and 19% to 21% for fiscal '22.

We expect non-GAAP gross margin to be 81% to 82% for both Q4 and fiscal 'twenty two.

We expect non-GAAP operating margin to be 17% to 19% for Q4, and 19% to 21% for fiscal 'twenty two.

We expect to see a de minimis amount of interest and other income. We expect a tax provision of approximately $3 million to $4 million for fiscal '22. We expect fully diluted weighted shares outstanding of $205 million to $210 million for both Q4 and fiscal '22. In closing, DocuSign has become a critical component of organization's digital transformations around the globe. While there may be some short term fluctuations. We remain confident in our long term growth strategy and steadfast in our commitment to top-line growth as our first priority. Thank you for joining us today, we will now open up the call for questions, operator.

We expect a tax provision of approximately $3 million to $4 million for fiscal 'twenty two.

We expect fully diluted weighted shares outstanding of $205 million to $210 million for both Q4 and fiscal 'twenty two.

In closing Darkey side has become a critical component of organization's digital transformations around the globe.

While there may be some short term fluctuations.

We remain confident in our long term growth strategy and steadfast in our commitment to top line growth as our first priority.

Thank you for joining US today, we will now open up the call for questions operator.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions. And our first question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

Press Star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

And our first question comes from the line of Sterling Auty with J P. Morgan. Please proceed with your question.

Yeah. Thanks. Hi, guys. So I'm wondering at this point, what's the sense of visibility that you've got in the business as you exit this year moving into next year? Because the billings guidance at 21% to 23% would kind of imply a growth rate that was actually slower than what it was pre-pandemic. So just wondering if this is just kind of like a whiplash effect coming post-pandemic and you know any sense of what visibility you might have for growth as we exit the year would look like?

It was pre pandemic. So just wondering if this is just kind of like a whiplash effect coming post pandemic and you know any sense of what visibility you might have for growth as we exit the year would look like.

So I don't think we're going to be providing guidance for next year as you would probably expect, but let me talk a little bit about sort of the sources of the change and hopefully, that will be able to give you some perspective on how we think about it.

As we talked about in the comments upfront, first half of this year, we actually expected to see more of that impact coming out of the kind of the COVID-19 extra demand we had experienced and we didn't right. And so we ended up outperforming in the first half, but probably more than we expected but in the second half we saw this now come in a much more dramatically in terms of that impact of the removal of that tailwind if you will and I think there's sort of two components to it.

Extra demand, we had experienced and we didn't right and so we ended up outperforming in the first half, but probably more than we expected but in the second half. We saw this now come in a much more dramatically in terms of that impact of the of the removal of that tailwind. If you will and I think theres sort of two components to it one.

One, that there is it just sort of a change in the buying urgency we've seen from customers. And throughout the Covid era, we had a lot of folks who really needed to get things in place, particularly if they had a large part of their employee base working from home. And needed to leverage the benefits of the work from anywhere solutions that we have at DocuSign. And then I think the second component to that is as it was sort of a change in the nature of some of that buying. And we had realized that as we were an organization that started to more fulfilled demand from us from a go-to-market.

And throughout the Covid era, we had a lot of folks who really needed to get things in place, particularly if they had a large part of their employee base working from home and needed to leverage the benefits of the work from anywhere solutions that we have.

Darkies side, and then I think the second component to that is as it was sort of a change in the nature.

<unk> of some of that buying and we had realized that as we were a an organization.

It started to more fulfilled demand from us from a go to market.

And we were doing less of what we had typically done which was really generating more demand and thinking about that land and expand motion we've talked to you for years about. And I think that was the piece of execution-only. We do not forecast for because we would never forecast that we would sort of take our eye off the ball, there and I kind of own that aspect of it where we realized we were not doing all the other motions we done in the past.

Where we realized we were not doing.

And that's as you see part of the reason we're restructuring ourselves a little bit to make sure we can get back to the mode that we've always been a successful part in driving that growth. So I think you have to look at those are the kind of core components that describe what has changed and that's why if you look for the second half we will have a slower billings rate than we've had traditionally. And I think it's our expectation that in the future we want to go back to the old mode and really go after creating that demand in working with our customers that we've always done.

billings rate than we've had traditionally. And I think it's our expectation that in the future we want to go back to the old mode and really go after creating that demand in working with our customers that we've always done.

Got it. And then maybe one follow up can you characterize the magnitude and the timing of the investments that you're going to make in sales? So we can think about what the margin profile impact from that as well as you know sales for you guys, usually ramps a little bit faster than traditional enterprise software, but trying to gauge when those new sales resources might actually contribute to an improvement in that top of funnel, you know our lead generation.

It'll enterprise software, but trying to gauge when those new sales resources might actually contribute to an improvement in that top of funnel you know our lead generation.

Yeah. So so my view is and again you know, Cynthia can give you some more details on the P&L aspect of it. It's not so much a dramatic shift in the way we're thinking about our investment in sales. I think this is more about the quality of the execution and the coordination as opposed to a dramatic dollar impact. We're going to continue to invest to achieve that apex of the growth opportunity. But I think we've been doing that historically as well and we have become much more efficient with that scale. There's a lot in our model that is super attractive.

That apex of the growth opportunity, but I think we've been doing that historically as well and we have become much more efficient with that scale. There's a lot. There's a lot in our model that super attractive.

And if anything, as you heard Cynthia describing the comment, we're more profitable in this last quarter, even though maybe we would've liked if that's not an oxymoron to describe. We do want to put more money to work in driving the growth, but I wouldn't think of it as some sort of step-function that should dramatically change your view of our P&L overtime.

Overtime.

Yeah, and I would just add to that. To echo Dan's comments about investing for growth, we've been talking about the past few quarters that we wouldn't expect to maintain these types of operating margin levels right. We're kind of at our long term target margin a lot sooner than we were expecting to be mainly because of the topline outperformance.

So we'll continue to invest for growth and we would expect that margin to continue to come down as we do that. The other piece that I would just mention as Dan said, you know the investments that we're making are not a step function on the sales and marketing side. But one area that we are very focused on is enablement. If you think about the number of people and field folks that we have hired over the course of 18 months, they've really only seen kind of one type of customer demand and that's kind of urgent demand. So one thing that we will be investing in is making sure we're enabling folks to generate demand in addition to capture the demand that we have.

Think about the number of people and field folks that we have hired over the course of 18 months, they've really only seen kind of a one type of customer demand and that's kind of urgent demand. So one thing that we will be investing in is making sure we're enabling folks to generate demand in addition to <unk>.

The demand that we have.

Understood. Thank you. And our next question comes from the line of Bob Ansary with William Blair. Please proceed with your question.

And our next question comes from the line of Bob Ansary with William Blair. Please proceed with your question.

Great. Thanks for taking my questions. I guess, just one more to follow up on Sterling's first question about the billings. I guess, maybe we'd be crazy with some color are there specific verticals where you might have seen some of this delay or slowdown in purchasing behavior? I guess just trying to understand given which industries are for as long as the transition well those are the ones, where they might've been a delay or the ones about the benefit from Covid, financial services whatever.

I guess, just one more to follow up on Sterling's first question about the billings I guess, maybe we'd be crazy with some color are there specific verticals, where you might have seen.

Some of this delay or slowdown in purchasing behavior I guess, just trying to understand given which industries are for as long as the transition well those are the ones, where they might've been a delay or the ones about the benefit from Covid no furniture services whatever.

I'd love to sort of get a little more color on sort of the industry. And then sort of you know as you look at those industries. It feels like they should have transitioned to a more proactive. We need DocuSign as opposed to having to salespeople services sort of the government of the newer verticals that need salespeople. So just help me understand sort of that dynamic too in the industries that might've been driving some of the impact on billings.

In your question sort of proposed answers is [pressures] right. So I think you nailed the phenomenon last year. If you thought about the areas, where we had just considerable outperformance from what we expected pre-COVID-19. It was in industries that have actually been traditional strongholds for DocuSign.

But they just accelerated so we saw that in financial services, we saw that in healthcare life sciences, we saw that in some of our technology. Telecom technology, so that was by far are the biggest drivers last year. And that is where in Q3 when we started to see that change in demand. Where we saw the most notable impact in the other direction. So not surprising given that if you understand how we explain the phenomenon of that sort of acceleration of demand that occurred over a number of quarters that that would be the place where they would be the biggest reaction in the other direction. Yeah, obviously that makes sense and I guess the second part of my question you know as you think about the sales investments. There's a number of industries where it's you know real estate, let's pick on that one, where pretty much everyone gets the value and you know, it's generally a DocuSign request.

Telecom technology ours, so that was by far are the biggest drivers.

Last year and that is where in Q3, when we started to see that change in demand.

Where we saw the most notable impact in the other direction. So not surprising given that if you understand how we explain the phenomenon of that sort of you know acceleration of demand that occurred over a number of quarters that that would be the place where they would be the biggest.

Reaction in the other direction.

Yeah, Yeah, obviously that makes sense and I guess the second part of my question you know as you think about the sales investments.

There's a there's a number of industries, where it's you know real estate, let's pick on that one we're pretty much everyone gets the value and you know, it's it's generally a doctor sign.

Request.

They come through with mortgages of Refis or whatever but I guess when you think about sort of investments specific industries you guys are targeting where you think the penetration rates are low or there's low hanging fruit. While you're investing across all of these industries, because there's still demand and say real estate or financial services or account opening or whatever.

Yeah, I mean, we are still underpenetrated. In every geography and every vertical. When we look at the kind of the construct that we're doing about $2 billion of revenue this year. And the bulk of that is still signature centric and we think about the Tam as being $25 billion. It's just lightly penetrated. So I don't think there's any sort of sense of oh in financial services or health care life sciences, we'd be slowing the push there. I think it's what we need to do is execute effectively as I described earlier in those verticals where we already have good footprints.

In every geography and every vertical when we look at the kind of the construct that we're doing about $2 billion of revenue this year.

The bulk of that is still signature centric and we think about the Tam as being $25 billion.

It's just it's just lightly penetrated so I don't think there's any sort of sense of Oh in financial services or health care life Sciences, we'd be slowing.

The push there I think it's what we need to do is execute effectively as I described earlier in those verticals, where we already have good footprints.

Across sell opportunities into additional vert in additional parts of that vertical like other departments, where we haven't yet penetrated them and in certain accounts. So I don't think you should think that we're only going to be aggressively investing in verticals that hadn't been our traditional stronghold. We think there is lot and lot of room to grow in the traditional strongholds as well.

The room to grow in the traditional strongholds as well.

Got you. Helpful. Thanks for the color. Yeah. And our next question comes from the line of Rishi Jaluria with RBC capital markets. Please proceed with your question.

Yeah.

And our next question comes from the line of Rishi <unk> with RBC capital markets. Please proceed with your question.

Hi, this is [inaudible] for Rishi. I guess, just kind of breaking down the slowdown on the regional side. It looks like in three to international growth held up pretty well. Is there anything from an international versus US perspective you could call out as we kind of move forward and how we should think about it? Yes. I'll talk about the historical first and then and then we can talk about the future. On the historical side, it's boringly a little bit of the same answer I just gave on a vertical right. Last year, we really outperformed our expectations more in the United States than even we did and it was great growth internationally and in internationals took share.

I guess, just kind of breaking down the slowdown on the regional side.

It looks like in three to international growth held up pretty well.

Is there anything from an international versus U S perspective, you could call out as we kind of move forward and how we should think about it.

Yes.

Talk about the historical first and then and then we can talk about the future on the historical side its boringly a little bit of the same answer I just gave on a vertical right last year, we really outperformed our expectations more in the United States than even we did and it was great growth internationally and in international or took share.

But we expected it to take even more share. Because we got this extra sort of COVID-19 boosts that was more dramatic in the US. And so similarly, as we look at Q3 and really into the whole second half of this year, that's the area where we see the hit being the hardest as is in North America.

Because we got this extra sort of COVID-19 booths that was more dramatic in the U S.

And so similarly, as we look at Q3 and really into the whole second half of this year, that's the area, where we see the hit being being the hardest as is in North America.

And so I think it's, again for the same reasons are that the vertical explanation made sense. It's the same reason on geography. So that's sort of what's happened. Going forward again, while we are dramatically more successful and 77% of our revenue this quarter came from our home market.

From our from our home market.

Our belief is that we are dramatically underpenetrated still in North America, and so we will continue to be putting a focus on investment and growth in our overall go to market in North America for sure.

And it is true we believe international because we were slower to get there. Think about the past. We've always talked about it that it's not that it's developing dramatically differently internationally than it is in North America. It's just that we got there later. And that's why it's or at even higher growth rates than we see here in North America and our expectation is we'll continue to execute well there. And our aspiration is to continue to see our international markets take share in our overall revenue as they did ticking up to 23% this quarter.

Execute well there.

And our aspiration is to continue to see our international markets take share in our overall revenue as they did ticking up to 23% this quarter.

Okay, great. That's super helpful. And then I guess just kind of, it looks like there's going to be some gross margin improvement and factored into the guidance there and just kind of wanted to maybe dive a little bit deeper on the gross margin side if there's anything underlying from a product mix standpoint or anything to call out there.

Maybe dive a little bit deeper on the gross margin side, if there's anything underlying from a product mix standpoint or anything to call out there.

Yeah, I think there's nothing material. I think the gross margin guide is in line with where we've been performing the last few quarters and so we would expect that to continue. Okay, great. Thanks. And our next question comes from the line of Stan Zlotsky with Morgan Stanley. Please proceed with your question.

Okay, great. Thanks.

And our next question comes from the line of Stan <unk> with Morgan Stanley. Please proceed with your question.

Hey, guys. Good afternoon, and thank you so much for taking my question. Maybe just help me parse out the commentary around demand slowdown versus some of the investments that you're making into the sales organization. Like you mentioned sales enablement. I guess, what I'm trying to understand is you know how much confidence do you have that. If there's this demand deceleration or slowdown there is something that you'll be able to truly fix by really doubling down on things like sales enablement and just you know the overall sales organization.

Good afternoon, and thank you so much for taking my question.

Maybe just.

Help me parse out the the commentary around.

You know demand slowdown versus some of the investments that you're making into the sales organization. Like you mentioned sales enablement I guess, what I'm, what I'm trying to understand is you know what how much confidence do you have that.

If there's this demand.

<unk> deceleration or slowdown there is something that you'll be able to truly fixed by.

Really no doubling down on things like sales enablement and just you know the overall sales organization.

Yeah, well I think there's sort of two different things. If you want to think about the three different factors you know that we talked about in terms of the change from the first half to the second half. We always expected there to be a reduction of that really heightened COVID-19 buying which drove our growth rates dramatically higher than they had ever been even as we got bigger. So we expected that. I think the piece that we didn't expect are really the other two factors. So the one is while we would expect people to sort of return to sort of normalcy and purchasing, we didn't realize that they had been sort of well-stocked with DocuSign if you will and we saw some of that purchasing behavior, where people were as you said that heightened demand model.

We always expected there to be a reduction of that really heightened COVID-19 buying which drove our growth rates dramatically higher than they had ever been even as we got bigger. So we expected that I think the piece that we didn't expect.

Are really are really the other two factors. So the one is while we would expect people to sort of return to sort of normalcy and purchasing we didn't realize that they had been.

Sort of well stocked with Doctor sign if you will and we saw some of that purchasing behavior, where people were as you said that heightened demand model.

Purchasing more aggressively than we would've seen in the past. And I don't think that was one that it was very difficult to sort of understand and calibrate that. And we've seen that in the behavior now. And then the second piece that gets to the investments you are describing is really around our execution there. And the reason I have a high degree of confidence in our ability to be successful now in a sort of post-COVID-19 or normalized environment is because that's the success we had before COVID-19 right. And I think we you know as I've talked about before I think the gap.

Now in a sort of post COVID-19 or normalized environment is because that's the success, we had before COVID-19 right and I think we you know as I've talked about before I think the gap.

As I think about leading the organization there. As it got easier to sort of meet that demand versus generate that demand with that good work we do when we work with our customers. We understand the use cases, where we can expand with them to help them see those opportunities and then and then we help fulfill against those opportunities. We stopped doing that as people just use more and more for their existing use cases, right. And so I think that's the that's the gap in our execution and as you know is a Cynthia described, a huge portion of our field has joined since pandemic began because we've been growing at such a rate and we haven't done the job we need to do at enabling them at the traditional DocuSign to sort of land and expand our processes. So it is sort of a back to the future mindset for us and we have to get back to that discipline that we've always had in the past.

For their existing use cases, right and so I think that's the that's the gap in our execution and as you know is a cynthia describe a huge portion of our field has joined <unk> pandemic.

Began because we've been growing at such a rate and we haven't done the job we need to do at enabling them at the traditional darkey signed sort of a land and expand our processes. So it is sort of a back to the future mindset for us and we have to get back to that the discipline that we've always had in the past.

And that's why I again have that high degree of confidence. It is not a new territory for us. It's one we're very familiar with. Got it, and then and then just the weakness that are I think we were all referring to now is mainly seen around the e-signature because that's what it is that that was the big beneficiary last year. But what are you seeing around just the broader agreement cloud and then the momentum within CLM spare bring CLM seal acquisitions they made.

Got it and then and then just.

The weakness that are I think we were all referring to now is mainly seen around the signature because that's what it is that that was the big beneficiary last year, but what are you seeing around just the broader agreement cloud and then the momentum within our seal the seal M space Spring C. M seal acquisitions they made one.

When could those components start to really come online in a more meaningful size to try to maybe offset some of the challenges we're seeing now on the e-signature side?

And then a more meaningful size to try to maybe offset some of the challenges we're seeing now on the esignature side.

Yeah, well so two things. One, it's a little bit of a complexity as you think about those and we know what we talked about last year that when the focus of our customer base was you just have to help us get sort of these e-signature use cases up quickly. We became very much a fulfilled demand-oriented company and we took some focus away from some of the broader agreement cloud up other offerings, because our customers, where we're pulling us. I think that was the right course.

The broader agreement cloud up.

Other offerings, because our customers, where we're pulling us I think that was the right.

We were a customer success-oriented company and we needed to focus on that. So I think now we see ourselves having come out of the sort of the COVID-19 period and coming out of the first half where we see that demand changing. You'll see us I would say reaccelerate and reemphasize our focus on the other agreement cloud products. And I think that we're putting a lot of focus on not just the product development, but also the go-to-market there. And I think you are going to continue to see. Growth and acceleration. We believe the agreement cloud products will take share from e-signature. And I think at this point because of the scale of the e-signature business relative and I don't just mean, our piece, where it was really dramatic but even in the marketplace things like CLM are just much smaller developed opportunities today. So the ability to sort of become meaningful to our financials you know, it's going to take a while.

So I think now we see ourselves having come out of the sort of the COVID-19 period and coming out of the first half where we see that demand changing you'll see us I would say reaccelerate and reemphasize our focus on the other agreement cloud products and I think that we're putting a lot of focus on not just the product development, but also the go to market there and I think.

You are going to continue to see.

Growth and an acceleration we believe the agreement cloud products will take share.

From signature and.

And I think at this point because of the scale of the esignature business relative and I don't just mean, our piece, where it was really dramatic but even in the marketplace things like C. O. M are just much smaller developed opportunities today, so the ability to sort of become meaningful to our financials. You know, it's going to take a while.

But that's how I would think about our focus and why they are so strategically important to us to build out the overall agreement cloud. Yeah, and the one thing I would add to that you know as Dan said. E-signature does comprise the vast majority of our revenue, but we also have a really big installed base and so one thing that we're really encouraged by is some of the traction we are seeing with CLM and some of the agreement cloud products and customers that have had success with E-signature and moving to kind of a more strategic dialogue around the broader agreement cloud. So we continue to see positive traction in that area, even though it won't show up in the numbers for a while.

With C L N and some of the agreement cloud products and customers that have had success with E signature and moving to kind of a more strategic dialogue around the broader agreement cloud. So we continue to see positive traction in that area, even though it won't show up in the numbers for a while.

Got it, helpful. Thank you, guys. And our next question comes from the line of Kirk [inaudible] with Evercore ISI. Please proceed with your question.

And our next question comes from the line of Kirk and return with Evercore ISI. Please proceed with your question.

Yeah. Thanks very much, Dan could you just talk about you know maybe why this quarter? I mean is there anything specific about from here I know you had a tougher comp. But is there anything seasonal I mean are people, taking more vacations? I'm just trying to get a sense of why was this quarter that sort of execution wasn't where you wanted it to be was it just sort of you know pipelines got pulled down in the first half. You weren't able to reload them or do you think there was a sort of environmental factor that maybe you know added to some things you guys might've been able to do a little bit better.

Sort of you know pipelines got pulled down in the first half you were able to reload them or do you think there was a sort of environmental factor that maybe you know added to some things you guys might've been able to do a little bit better.

Kirk, at a personal level, believe me, I've spent some time trying to figure out how the external factors have caused this more than my performance. Unfortunately, as we've looked at it, I think the core answer to the timing of why now comes back to some of the reasons we talked about earlier. There was definitely some expectation we would have seen more of this in the first half.

I think the the core answer to the timing of why now comes back to some of the reasons, we talked about earlier the reasons, we talked about earlier there was definitely some expectation we would have seen more of this in the first half.

And it just didn't happen. And I just think there was momentum coming out of that sort of pandemic driven demand that lasted a little bit longer than we thought. And if you think about some of the guidance you know Cynthia gave earlier in the year, we actually outperformed that by more than we did thing.

That sort of pandemic driven demand that lasted a little bit longer than we thought and if you think about some of the guidance you know Cynthia gave earlier in the year, we we actually outperformed outperform that by more than we did thing.

And why exactly you know hit more aggressively in Q3, I don't think we have some sort of precise answer for that. You know we looked at all the things like onetime use cases and as we've told you before we saw that there were some you know like PPE loans and where some of those. But that's not a significant driver of that kind of shift in demand. And we really do believe it's this core phenomenon of, the demand was aggressive and we got focused on meeting that demand and so when that demand kind of started to come to back to normalized we weren't ready. We weren't executing. We hadn't taken all those new folks that it only joined in the time of that meet demand sort of mode.

You know we looked at all the things like onetime use cases and as we've told you before we saw that there were some you know like P. P loans and where some of those but that's not a significant driver of that kind of shift in demand and we really do believe it's this core phenomenon of the demand was was.

It was aggressive and we got focused on meeting that demand and so when that demand kind of started to come to back to normalized we werent ready we weren't executing we hadn't taken all those new folks that it only joined in the time of that meet demand.

And we didn't shift fast enough back to a mode of a normal generating demand and even with a very large Tam, you still need to sell right you still need to go out meet customer demand figure out how our use cases will drive their great ROI and then execute against that. And that that really is the underpinning. So I wish I could think of some external things that made Q3 happen, we did have 63% billing growth Q3 last year.

things that made Q3 happen, we did have 63% billing growth Q3 last year.

So I would love to sort of try to point to that and say you know tough compare. But the real the underlying story here is we did not execute in our field of the way you should expect us to execute and we've got to own that and we got to fix that and that's why we're putting the focus as we talked about at the beginning of the call on that execution.

I appreciate the candor. And Cynthia, maybe just one for you as you're going through some of these changes. Does anything change in terms of I know you're going to continue that's the long term does it but do you slow that down perhaps a little bit as some of these sales changes kind of harmonize? I guess does anything change from an investment perspective on the near term knowing that longer term you are still in the early innings of the opportunity. Thanks.

Yeah, but you are still in the early innings of the opportunity. Thanks.

Yeah for sure. So I mean, we're still investing for long term growth and we feel really good about our long term opportunity just given how big the market is. Our position and brand in the market and we feel like we're in the early innings. So we will still continue to invest for growth. I would point out, though you know our margin has been outperforming because the topline outperformance, but also it's really hard to invest in quarter when you're seeing that. So we have some catch up to do that that you'll continue to see us do as we move forward. The other thing I might just mention is that the shifted happened more quickly than we were anticipating right. We were we had been expecting kind of a more gradual step down. And I think given some of the things that Dan was talking about, it did happen more quickly than we were thinking it would.

And the topline outperformance, but also it's really hard to invest in quarter when youre seeing that. So we have some some catch up to do that that you'll continue to see us do as we we move forward. The other thing I might just mention. Mentioned is that they shifted happened more quickly than we were anticipating right. We were we had been expecting kind of a more gradual step down and I think given. Some of the things that Dan was talking about and it did happen more more quickly than we were and we were thinking it would.

So we have some some catch up to do that that you'll continue to see us do as we we move forward. The other thing I might just mention.

Mentioned is that they shifted happened more quickly than we were anticipating right. We were we had been expecting kind of a more gradual step down and I think given.

Some of the things that Dan was talking about and it did happen more more quickly than we were and we were thinking it would.

Thanks. And our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question. Hey, guys, so I'll probably stick to the theme of the call and maybe just try to get at the slowdown from a more geographical perspective first, then and like were there any regions or geographies or even domestically any areas that may have been impacted more than others? And then the other question is given the

And our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Hey, guys, so I'll, probably stick to the theme of the call and maybe just try to. Get at the the slowdown from a more a geographical perspective first then and like were there any regions or geographies or even domestically any areas that that may have been impacted more than others and then the other question is given the.

Get at the the slowdown from a more a geographical perspective first then and like were there any regions or geographies or even domestically any areas that that may have been impacted more than others and then the other question is given the.

this happened faster than you anticipated and it sounds like it'll take at least a few quarters to kind of fully right the ship. A, are you contemplating any meaningful adjustments to the sales leadership or organizational structure and just territorial alignment? And then because it does feel like given the sales cycles for these larger contracts are at least you know six to nine months. This could be something that impacts you at least until your anniversary Q3 of next year. So just get a better understanding of the, how long those elements I guess. Yeah, so I'll hit each of those two buckets in terms of structure as well as the verticals.

territorial alignment? And then because it does feel like given the sales cycles for these larger contracts are at least

At least you know six to nine months that this could be. Something that impacts you at least until you anniversary Q3 of next year, So just get a better understanding of. The. How long. Those elements I guess, yeah, so I'll hit each of those two buckets in terms of structure. As well as the verticals.

Something that impacts you at least until you anniversary Q3 of next year, So just get a better understanding of.

The.

How long.

Those elements I guess, yeah, so I'll hit each of those two buckets in terms of structure.

As well as the verticals.

And geographies, yes, similar to some of the other commentary. I think the right way to think about it is again, the things that were toughest for H2 of this year are going to be the areas that we're dramatically strong all last year and each one of this year. And from a geography standpoint, that's basically the US. And from a vertical standpoint. That's gonna be health care life sciences, that's going be financial services, banks, insurance companies, et cetera. And a little bit on the technology telecom side. So that's that we just clearly see that in the data. And in terms of you know, our structuring and our team, I think we have the right people at DocuSign to build this business. I don't think we executed well in coming off the pandemic. I don't want to try to hit all use this as an excuse but we've never had anything like this pandemic in my professional career. I don't think we knew exactly how to think about it and how to forecast it. We clearly didn't forecast it as well as we could or should have.

That's gonna be health care life Sciences, that's going be financial services banks insurance companies et cetera.

And a little bit on the technology telecom side. So that's that we just clearly see that.

In the data and in terms of you know, our structuring and Ann and her team I think we have the right people at dock you sign to build this business I don't think we executed well in coming off the pandemic I don't want to try to hit all use this as an excuse but we've never had anything like this pandemic in my professional career I don't think.

exactly how to think about it and how to forecast it. We clearly didn't forecast it as well as we could or should have.

But it was not, again, something that I would say to our team how the heck didn't you see this coming, how the heck did you see this coming in this way and this timing. Because we just never had anything comparable to it. So that said, I have a lot of confidence in the team we have because for the last five years, we have built an incredible franchise and pre-pandemic, we were growing at very strong rates and taking that leadership position that we have and furthering it. So I am highly confident we will go back to that level of execution and that quality of execution with the team. We did talk about the structuring question around getting our overall go to market aligned more aggressively and asking Scott to take on that role, which I think is important. We see that we want to put urgency, particularly to your point at the enterprise. You'll see those longer cycles. You don't see that you know in our SMB or obviously in our web business. So that is something I think we can see faster impact. But I do think we have the right people and the right mode. We know how to run this business effectively and we have to think about this. We had a blip and we have to get back to the strong DocuSign way of executing.

We were growing at very strong rates and taking that leadership position that we have and furthering it. So I am highly confident we will go back to that level of execution and that quality of execution with the team. We did talk about the structuring question around getting our overall go to market aligned more aggressively and asking Scott.

To take on that role, which I think is important we see that we want to put urgency, particularly to your point at the enterprise you'll see those longer cycles, you don't see that you know in our SMB or obviously in our web business. So that is something I think we can see faster impact.

But I do think we have the right people and the right mode. We know how to run this business effectively and we have to think about this we had a blip and we have to get back to.

Two two the strong darkey signed a way of executing.

Perfect. And then maybe just a separate topic. Retention, attrition and renewal rates. Can we talk about what did you see there? Was there any companies that may be to the point that you were making, they pre-bought a lot of capacity that they may be you're no longer need as they return to work or any dynamics there that we should kind of take into account from a comparable perspective as we think about the next few quarters?

Separate topic.

Returns from our attrition and renewal rates can we talk about.

What did you see there was there any companies that maybe to the point that you were making they pre bought a lot of capacity that they may be youre no longer need as they return to work or any dynamics. There that we should kind of take into account from a comparable perspective as we think about the next few quarters.

Well, customer health is very strong. And to be clear, we didn't have sort of customers leaving DocuSign or anything close to that right. We have had the continued very strong customer success orientation, and therefore very strong customer success performance, which leads people to stay and want to buy more. However, where we weren't as successful at is getting as much of the cross-sell and upsell opportunity. And so from a churn standpoint, we don't publish churn numbers per se like that. But we have actually seen our performance against the churn be very attractive for the goals and our goals is actually over time, even at scale to lower the churn. I would focus you are looking at the net retention, the 121% number. Our historical range is 114 to 119. That obviously elevated with the pandemic, but it's still performing at above that historic range and I think we think will be at or near the top of that range for the foreseeable future. So I think the customer health is still very very strong.

First of all it is getting as much of the cross sell and upsell opportunity and.

So from a churn standpoint, we don't publish churn numbers per se like that but we have actually seen our performance against the churn be very attractive for the goals and our goals is actually overtime, even at scale to lower the churn I would focus you are looking at the net retention.

121% number our historical range is $1 14 to 119 that obviously elevated with the pandemic, but its still performing at above that historic range and I think we think will be at.

Or near the top of that range for the foreseeable future.

So I think the customer health is still very very strong.

Yeah, and I would just I would clarify, our historic range is 112 to 119, and but Dan is spot on. There were customers kind of digesting what they had purchased. You know and that certainly played a factor given the strength we've been seeing in the first half of the year. But the health of the business and the health of the customers is strong. Perfect. Thank you, guys. And our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question. Thanks. Hey, Dan, I think everybody on the call appreciates the contributions that Mike Sheridan made first as CFO and then heading up international. Do you mind just taking a minute? What were the circumstances under which Mike left DocuSign? Thank you.

Perfect. Thank you guys.

And our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question. Thanks.

Thanks, Hey, Dan I think everybody on the call appreciates the the contributions that Mike.

Mike Sheridan made first as CFO and then heading up international do you mind, just taking a minute what were the circumstances under which Mike Let's talk you sign thank you.

Oh, yes for sure. And I wish Mike were here, we'd do it together. You know, Mike had a fantastic role as our CFO. And I sometimes jokingly said to folks that when we were a private company and said hey, Dan, you showed up and you really turned around the profitability of this business. And I sort of jokingly say, yeah, Mike Sheridan did that. He got here a year before I did and by the time I got here I just got to enjoy the results the finance team had done. Mike has been absolutely pivotal to the success of the company in that role. When we made the decision a year and a half or so ago that it was an opportunity for us to think about the future and think about the new leadership we wanted to have for our finance organization and obviously this we brought Cynthia in at that time. We felt that Mike still had a lot of value because of his knowledge of our business and our strength as a business executive. And we had an opportunity where we thought we could do better at sort of driving the strategy of our international growth.

Wish micro here, we do we do it together.

You know Mike had a fantastic role as our CFO and.

And I, sometimes jokingly said to folks that when we were a private company and said Gee, Dan you showed up and you really turned around the profitability of this business and I sort of jokingly say, yeah, Mike Sheridan did that he got here a year before I did and by the time I got here I just got to enjoy.

The result, with the finance team had done.

Nick has been absolutely pivotal to the success of the company in that role when we made the decision a year and a half or so ago that it was an opportunity for us to think about the future and think about the new leadership, we wanted to have for our finance organization and obviously this we brought Cynthia in at that time, we felt that Mike still had a.

A lot of value because of his knowledge of our business and our strength as a business executive and we had a an opportunity where we thought we could do better at sort of driving the strategy of our international growth and.

And Mike played an important role in helping us think about that. The international teams right didn't report directly to Mike. Mike led the international strategy and brought fantastic insight to how we could continue to enhance that growth. And I feel good about that contribution he played to some of those numbers we've been talking about for growth. But we always knew this wasn't a full-time sort of operating role, but it was a bit of transition where we'd have him here for a period of time. We didn't have an exact timing, we just sort of figured once we felt good that we had the right teams in place, you know, we've really strengthened our leadership in both EMEA as well as APAC. And brought in the folks that we think as part of our operating teams will lead us to where we want to go. So that was how we sort of came to the timing. And I think Mike and I have been something we've talked about really over a year now. But in the last several months came to the conclusion that now was the time when we were ready and as we got ready for the new year going through the planning cycle. We wanted to have those operating people take full responsibility. Got it, okay. Thank you, Dan.

Our full time sort of operating role, but it was a bit of transition where we'd have him here for a period of time, we didn't have an exact.

Timing, we just sort of figured once we felt good that we had the right teams in place you know, we've really strengthened our leadership in both EMEA as well as APAC and.

And brought in the folks that we think are as part of our operating teams will lead us to where we want to go. So that was how we sort of came to the timing and I think Mike and I have been something we've talked about.

Really over a year now but in the last several months came to the conclusion that now was the time when we were ready and as we got ready for the new year going through the planning cycle. We wanted to have those operating people take full responsibility got.

Got it okay. Thank you Dan.

Yeah.

Our next question comes from the line of Scott Berg with Needham. Please proceed with your question. Yeah. Hi, Dan and Cynthia. Thanks for taking my questions here. Dan, I wanted to pivot a little bit on the sales side. From all the questions, but more towards the channel. I know you mentioned a couple of different times about taking ownership of some of the execution. I get a sense it's more from some of your direct sales, but can you talk about what channel contribution was like in the quarter? And there've been similar changes there as your own direct sales force?

Yeah.

Hi, Dan its Cynthia thanks for taking my questions here.

Dan I wanted to pivot a little bit on the sales side.

From all the questions, but more towards the channel I know you mentioned a couple of different times about.

Taking ownership of some of the execution.

I get a sense, it's more from some of your direct sales, but can you talk about what channel contribution was like in the quarter and you know better.

There've been similar changes there as your own direct sales force.

Yeah, the channel side, it's always tricky because as you know there's sort of the challenge on exactly attributing what portion of each sale occurs to a partner motion in some situations versus direct. And most of ours ended up being sort of a hybrid model. Like we don't have a channel business per se where we're not involved and we just sort of licensed the product and someone else goes and runs that business. We tend to collaborate broadly with most of the great SaaS companies out there. But so from that standpoint, it's a little bit more of an indirect model that way. We talked about some of the partner successes on the call. We are very motivated by the success we see in our Salesforce partnership, but one of our strongest partners historically. And we see a ton of opportunity in co-investment there. If you happen to go to Dream Force, you'd see there was just a few companies that they positioned as key partners and DocuSign was one of them and we appreciate that support that they give back to us. Microsoft is an area where I think we're making good progress. We're getting some of the technical pieces right as I talked about particularly around Teams. But Satya and I would both I think say we're disappointed that we haven't done better in building our joint partnership.

Say, we're where we're not involved and we just sort of licensed the product and someone else goes and runs that business we tend to collaborate.

Broadly with with most of the great SaaS.

SaaS companies out there.

But from so from that standpoint, it's a little bit more of an indirect model that way, we talked about some of the partner successes on the call we are very well.

Motivated by the success, we see in our Salesforce partnership, but one of our strongest.

Partners are historically, and we see a ton of opportunity in co investment there. If you happen to go to Dream Force you'd see there was just a few companies that they positioned as key partners and <unk> was one of them and we appreciate that support that they give back to us.

Microsoft is an area where I see.

good progress. We're getting some of the technical pieces right as I talked about particularly around Teams. But Satya and I would both I think say we're disappointed that we haven't done better in building our joint partnership.

It's something we both spend time on. And the fact that we've got such a leaning in at all is a testament to the opportunity and now both sides, we have to do a better job executing there. SAP is another model where we've had great success and continue to see impact on serving our joint customers well together. So that's probably one side to maybe hit at some of the highlights but there are other SaaS companies, the Workdays of the world, the ServiceNow that we see the same kinds of opportunity to build those really strong integrations and strong go to market partnerships. Great, that's all I have. Thanks for taking my question. Sure.

Another model, where we've had great success and continue to see a impact.

Pact on serving our joint customers well together.

So that's probably one side to maybe hit at some of the highlights but there are other SaaS.

SaaS companies the workdays of the World. The service now that we see the same kinds of opportunity to build those really strong integrations and a strong go to market partnerships.

Great that's all happening as for taking my question sure.

Our next question comes from the line of Pat Walravens with JMP Securities. Please proceed with your question. Oh, great. Thanks. So Dan, can I ask two specific ones? The first one is when you're talking about customers digesting what they had purchased, that just makes me wonder didn't usage actually go down? Do you guys, you must track that. Usage is up. We don't have any reductions in usage on the platform. Okay. And then my sort of specific second question is I'm just reading some of the Glassdoor reviews here, which I know you take really seriously. And so it seems like Q3 was tough on your sales force. Do you need to adjust quotas or compensation plans given what you guys saw happen in Q3?

Rubin with JMP Securities. Please proceed with your question.

Oh, great. Thanks, So Dan can.

Can I ask two specific ones. The first one is when you're when you're talking about customers digesting what they had purchased.

That just makes me wonder didn't usage actually go down do you guys. You must you must track that.

Usage is up we don't have any reductions in usage on the platform.

Okay.

And.

And then my sort of specific second question is I'm just reading some of the Glassdoor reviews here, which I know you take really seriously and so.

You know it seems like Q3 was tough on your sales force do you need to adjust quotas or compensation plans.

Given what you guys saw it happened in Q3.

Yeah, I don't I don't know. At a macro level, I say I don't think so. I really believe the core of the sales execution was us not doing the enablement that Cynthia referred to earlier. So that the new folks and our sales organization understand the traditional DocuSign way of selling, right? Where we're out with our customers and we're looking for those cross-sell opportunities. We're identifying the new use cases and that has created opportunities for people to be very successful and we've had very high retention relative to other SaaS sales organizations. And this year I do think that we saw the phenomenon where people got more in the mode of meeting that demand because of the heightened demand. And without finding new sources of value for the customer, we were able to see that growth.

They are selling right, where we're out with our customers and we're looking for those cross sell opportunities. We're identifying the new use cases and that has created the opportunity for for people to be very successful and we've had very high retention relative to other SaaS sales organizations.

And this year I do think that we saw the phenomenon where people got more in the mode of meeting that demand because of the heightened demand and without finding new sources of value for the customer we were able to see that growth.

And so I think we probably are going to have some people in our sales organization that are going to say, maybe I'm not able or not interested in learning the new mode. But I think the vast majority of them will say I joined DocuSign because it's a great company. And to your Glassdoor point, we have incredibly high Glassdoor ratings, and I think that they're going to say I want to be part of this organization. I want to learn and grow to be a more enabled and stronger sales professional. And we think we provide an opportunity for people here too to really become fantastic and do the work of their lives. So I don't think the answer is if the quotas were not structured correctly. I think we've pretty much had very strong consistency in our quotas really over the last several years. They've got a lot easier last year and they went back to normal this year. But if we do our right job on execution around enablement, I think we'll get back to a very high set of our field sales being successful. Alright, great. Thank you.

Organization I want to learn and grow to be a more enabled and stronger sales professional and we think we provide an opportunity for people here too to really become fantastic and doing the work of their lives. So I don't think the answer is if the quotas were not structured correctly I think we've pretty much had very strong consistency in our quotas.

Oh really over the last several years, they've got a lot easier last year and they went back to normal this year.

But if we do our right job on execution around enablement I think we'll get back to a very high set of our of our field sales being successful.

Alright, great. Thank you.

Yeah.

Okay.

And our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question. Oh, great. Thanks, guys for taking my question. I wanted to ask just one on notary an analyzer. I know the broader agreement cloud seems to further out but these solutions seem like they could really help you as you re-pivot back towards that customer success to drive more expansion. Do you feel like you have more in your arsenal of kind of upsell to the customer in the way of product with those two, in particular, that could perhaps get you back on track with that expand motion?

Oh, great. Thanks, guys for taking my question I wanted to ask just one on notary an analyzer I know the broader agreement cloud seems to further out but these solutions seem like they could really help you as you re pivot back towards that customer success to drive more expansion do you feel like you have more in your arsenal of kind of upsell.

To the customer in the way of product with those two in particular that could perhaps get you back on track with that.

That expand motion.

Yeah, I actually think our notary in particular I think is a very significant opportunity to do what you said. I don't want to lose the point that Cynthia made that again, the amount of notary it would take to significantly change to your points are back on track with the overall level of growth. That would be a tall ask because it's starting at, that's a business. If you think about remote online notary I mean, it was virtually nonexistent as a space. You know, really until about a year or so ago. So I think that this is a huge growth opportunity for us and I think that the activity that we're seeing in this fourth quarter around notary is very high. There is a lot of interest and I think particularly go back to the the the last questions last couple questions around the sales organization. I think we had a, have a sales team now that says oh, this is exciting. I have new things I need to sell. But it's also I need to change my motion and it's not just about getting an E-signature upsell, but it's about getting an E-signature upsell and E-signature cross-sell and cross-sell opportunity into some of the exciting new products in the agreement cloud. So I do think you'll see significant success there.

That that would be a tall ask right because it's starting at that that's a business. If you think about remote online notary I mean, it was virtually nonexistent.

As a space.

You know really until about a year or so ago. So I think that this is a huge growth opportunity for us and I think that the activity that we're seeing in this fourth quarter around notary is very high there is a lot of interest and I think particularly go back to the the the last questions last couple questions around the sales organization.

I think we had a, have a sales team now that says oh, this is exciting. I have new things I need to sell. But it's also I need to change my motion and it's not just about getting an E-signature upsell, but it's about getting an E-signature upsell and E-signature cross-sell and cross-sell opportunity into some of the exciting new products in the agreement cloud. So I do think you'll see significant success there.

So I do think Youll see a significant successor.

Great. Thanks for that and one more if I may. It looks like customer count held in real nicely here. So it didn't seem like you had really any impact there. What are you seeing with that cohort of new customers that are coming on? Is there any change in kind of where they're landing and potential for more upsell down the road with some of these newer customers that you signed this quarter?

Quarter.

Yeah, I think it's early to think about cross-sell to the ones that joined this quarter. So we're just getting them onboarded. But a couple of thoughts for you and how to think about that aspect of the business. I think new customer adds were strong. And I think we feel that the core motion of signing up new customers is going to continue to be a strength for us. I think that if you think about the gap I described where we weren't executing as well as we could on the sort of cross-sell type behavior. If you think about the customers that have come in recently, they have also not been effectively cross-selled right. So I think that the, if you think about the different cohorts, we have an opportunity to significantly enhance our performance by going back to those that have joined in the last year. And usually, it does take a few quarters for them to sort of digest, getting onboarded in the first use cases they bring on board, but then usually when you start getting three-four quarters out it's an ideal time for us to go back and say hey, let's look at the opportunities to expand. So I'm really excited that both of these customers coming on in Q3. But more importantly, the ones who've come on in the last few quarters, we have a significant opportunity there. Great to hear. Thanks, Dan.

So we're just getting them on boarded but a couple of thoughts for you and how to think about that aspect of the business.

I think new customer adds were strong and I think we feel that the core motion of signing up new customers is going to continue to be a strength for us I think that if you think about the gap I described where we weren't executing as well as we could on the sort of cross sell type behavior if if.

You think about the customers that have come in recently they have also not been effectively cross sell right. So I think that the if you think about the different cohorts, we have an opportunity.

Two significantly.

Enhance our performance by going back to those that are that have joined in the last year and usually it does take a few quarters for them to sort of digest getting on boarded in the first use cases, they bring on board, but then usually when you start getting three four quarters out it's an ideal time for us to go back and say Hey, let's look at the opportunities to expand so I'm.

I'm really excited that both of these customers coming on in Q3, but more importantly, the ones who've come on in the last few quarters, we have a significant opportunity there.

Great to hear thanks, Dan.

And ladies and gentlemen, unfortunately, we have run out of time for the question and answer session. And I'll now turn the call back over to Dan Springer for closing remarks. Thank you. Hey, as we saw in Q3, there will be fluctuations from time to time in our business. We haven't had one in our almost four years as a public company. That's been in any way notable. But with the leadership position we have with having over $50 billion Tam that we feel is very addressable. I have never been more confident about DocuSign and optimistic about the big growth opportunity we have ahead. I look forward to the opportunity to chat with you all in the coming months. And thank you very much for your support.

Thank you Hey, as we you know as we saw in Q3, there will be fluctuations from time to time in our in our business. We haven't had one in our almost four years as a public company that's been in any way notable but with the leadership position, we have with having over $50 billion Tam that we feel.

L is very addressable I have never been more confident about darkies sign and optimistic about the big growth opportunity. We have ahead I look forward to the opportunity to chat with you all in the coming months and thank you very much for your support.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Q3 2022 DocuSign Inc Earnings Call

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