Q1 2023 DocuSign Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining Darkey science first quarter fiscal year 'twenty twenty-three earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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 will now pass the call over to Roger Martin Vice President of Finance. Please go ahead.
Thank you operator.
Afternoon, and welcome to the talk you saw in Q1 2023 earnings call I'm Rocky Mountain Chocolate <unk> VP of finance.
With me on the call today are Dr. <unk>, CEO , Dan Springer and CFO Cynthia Gaylor.
The press release announcing our first quarter results was issued earlier today and is posted on our Investor Relations website.
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.
In particular, our expectations regarding the pace of digital transformation and factors affecting customer demand, including as a result of the pandemic.
And our best estimates at this time and are therefore subject to change.
Please read and consider the risk factors in our filings with the SEC together with the contents 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 employer payroll tax on employee stock transactions.
<unk> of acquired intangible assets amortization of debt discount and issuance costs from our notes Act.
Acquisition related expenses.
Bobby you adjustments to strategic investments impairment at lease related assets and as applicable other special items.
In addition, we provide non-GAAP weighted average share count and information regarding free cash flow and billings piece.
These non-GAAP measures are not intended to be considered in isolation from a 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 financial information the most directly comparable GAAP measures and a quantitative reconciliation of these figures. Please refer to today's earnings press release, which can be found on our website at investors talk he signed dot com.
I'd now like to turn the call over to Dan Springer Dan.
Thanks Roger.
Afternoon, everyone and thanks for joining our Q1 earnings call today I want to begin by highlighting some of the quarter's results and then go into some important announcements we made around building a scalable organization and enhancing our Darkey signed agreement cloud suite of products.
<unk> scientists began the year delivering solid results first quarter revenue was $589 million, representing 25% growth year over year.
International revenue grew 43% year over year, making up 25% of total revenue versus 21% in Q1 of last year.
Our billings grew 16% in the quarter and we delivered dollar net retention of 114%, which is within our historical range.
Lastly, we added nearly 67000, new customers in Q1, an increase of 25% year over year, bringing our total to 1.24 million paying customers around the world.
These results have required our team's unwavering commitment and flexibility as we are adapting our go to market strategy for the post pandemic world.
Our results also highlight our continued momentum in the digital transformation of our green Dot workflows for businesses across the globe.
Well, we are experiencing many of the macro challenges that our peer companies are seeing.
[noise] scenario concerns a volatile workforce environment and general global instability.
We are ramping our execution and go to market capabilities as well as strengthening our leadership team for the growth opportunities ahead.
The dynamic macro environment only highlights the need for digital investments like kokusai.
We will continue to partner with our customers to advance their digital transformation journeys.
We're confident in our strategy and path to becoming a $5 billion revenue company.
Keystone continues to be the clear market leader in the electronic signature space.
And we are excited about our progress in defining the broader agreement cloud category as well.
Our dedication to innovation and our investment in attracting high caliber talent position us to build upon our leading market share.
Our plan to scale is well underway and we are encouraged by the early traction you're seeing so the level of growth in certain areas is lower than our prior expectations.
Let me share some of the specifics with you.
In Q1, we made further progress in strengthening the foundation for our next phase of growth.
Building for scale and tackling the go to market challenges, we've seen in recent quarters as we transition from the height of the pandemic.
Last quarter I shared that we would be bringing in a world class sales and success leader and I'm very pleased to note that we made an important hire with Steve shoot as our new president of worldwide field operations.
Also as I mentioned last quarter, we on boarded a number of outstanding sales leaders in our North American commercial and F. N B segments, who now had been in their seats for a quarter.
Finally, just hired a new North American enterprise team leader.
Rounding out our initiatives to scale, our go to market leadership.
This seasoned team that has hit the ground running focused on recruiting training and enablement.
And with a laser focus on driving doctor sign to $5 billion in revenue and beyond.
We also bolstered our team and other key areas just announced the appointments of in he chose to from IBM, who will transition from being a doctor's highborn matter to becoming president of product and technology, where she will be instrumental in accelerating innovation in our agreement cloud.
Jim Shaughnessy as Chief legal officer previously in that role at Workday.
And Jennifer Christy as Chief people Officer, formerly the CH Arrow of Twitter.
In light of these key hires and with the team. We now have in place. We are focused on our second half growth plan that allows us to be successful. Despite some of the current macro headwinds and gives US a foundation for sustainable and predictable growth going into fiscal year 'twenty four.
I want to now turn to some noteworthy product call outs.
The Big announcement in Q1 was our launch of C. L M essentials.
New addition to our expanding family of contract lifecycle management products.
It's a streamlined seal and solution focused on faster time to value and it's built specifically for growing organizations to centralize and automate the creating negotiating and secure storage of their contracts.
Essentials also allows customers to easily accelerate contract work and the quote to cash process via a deep integration with Salesforce.
And as our customers needs grow Theres, a seamless upgrade path to our full C O N E.
Or C L M plus products.
The other big area of innovation last quarter was an esignature, but we continue to release a steady pace of features to further simplify and secure signature workflows.
Our latest aidid verification feature enables diners to verify their identity. He a trusted financial institutions like Bank of America Chase and Wells Fargo.
This is a great example of how we're continuing our steady pace of innovation, where it counts.
And leading our category as the name and E signature.
And that lead is reflected in our customer metrics. For example, we grew our customers with a greater than $300000 a C V by 32% from a year ago.
As our successes during the quarter demonstrate we continue to see both growth and leadership in E signature as well as progress across the rest of the agreement cloud suite.
But whether the customers are fortune 500, or digital that's N B's in our high growth international markets like Germany or here in the U S. We see the same land and expand opportunities.
<unk> tend to start with esignature, but the expansions are quite varied.
Let me share a couple of brief examples.
One of the largest multinational payments corporations, who has been a customer for over a decade has steadily and significantly expanded their use of esignature over the last few quarters.
Last quarter the company deployed a new remote work request system with any signature to their over 60000 global employees.
This is in line with their flexible work from home policy, which predates the pandemic.
Additionally, this customer recently opened new employee health clinics within each of their main U S office locations, where they have turned to darkey sign for a streamlined process when using forms with in the clinic operations.
In Q1, we also saw the continued trend of deeper agreement cloud adoption.
For example, one of the world's largest and most prestigious global consulting firms made the jump from being a longtime esignature customer to implementing C. L M plus globally.
With this move they can now build and execute standardized and and agreement processes.
Have centralized document repository.
Prehensile metadata.
And leverage our AI to identify risk levels and previously executed as well as in flight agreements.
So to summarize we posted a solid first quarter for fiscal year 2023.
We're beginning to see benefits from the optimizations, we are making in our go to market motions post pandemic.
And from our new scaled sales and success leadership.
While we continue to invest in our employee base to capitalize on the considerable opportunities ahead, we are moderating the tempo of our hiring plans to appropriately balanced growth and profitability.
With a $50 billion Tam we have confidence in our business strategy and importantly, the outstanding team we have in place.
As we work to build momentum and niche macro headwinds, we're seeing a steady stream of wins and increased interest from our partner ecosystem to build deeper relationships.
Just this week, we announced that we are expanding our global strategic partnership with Microsoft.
To accelerate what we call anywhere work.
And reinforce the docs, who signed agreement cloud as a preferred solution within the Microsoft App source.
We have a deep relationship with Microsoft has been a long standing customer and a partner of Darkey side, we expect to continue to broaden these ties and deliver a number of new integrations and capabilities across Microsoft business solutions, including office dynamics and the power platform applications.
So we have a vast market.
The industry, leading product portfolio and a growing world class team is focused on driving both growth and margin expansion with discipline and operational excellence.
Our plan to reignite enviable growth is underway and progressing.
With these objectives plainly in sight and are optimistic about the future as I've ever been.
With that I'd like to hand, it over to Cynthia to walk through our results and outlook in greater detail Cynthia.
Great. Thanks, Dan and good afternoon, everyone.
Overall, we delivered a solid Q1 as we continue to focus on execution and delivering on our long term strategy and made a more challenging macro environment.
We made steady progress towards our operating and financial goals added customers at a healthy pace and expanded our international footprint.
Let me review some key highlights within our Q1 result.
Total revenue increased 25% year over year to $589 million and subscription revenue grew 26% year over year to $569 million.
Our international revenue continued to outpace our domestic growth with a 43% year over year increase to reach $144 million in the first quarter and contributing 25% to total revenue.
While the strengthening U S dollar caused some FX headwinds during the quarter the impact to our results was not material.
Customer growth remains strong reflected in approximately 67000, new customers in the quarter, bringing our total installed base to nearly $1 two 4 million customers worldwide at the end of Q1.
25% increase compared to a year ago.
This includes 12000 additional direct customers, bringing our total direct customer base to 182000, a 34% increase year over year.
We saw customers with an annual spend greater than $300000 grow 32% year over year to a total of 886 customers.
We achieved 114% dollar net retention for the quarter, which is within our historic range of 112% to 119%.
And while we have added customers at a steady tempo and they continue to expand their usage of docking time are expanding at a slower rate relative to their peak levels.
Total non-GAAP gross margin for the first quarter was 81% in line with last year, while subscription gross margin was 84% compared with 85% a year ago.
Q1, non-GAAP operating profit reached $102 million compared with $93 million last year.
non-GAAP operating margin was 17% compared to 20% last year.
non-GAAP net income for Q1 was $77 million compared with $92 million in the first quarter of last year.
In light of consistent non-GAAP profits for the prior three years as of Q1 fiscal 'twenty, three we're including our non-GAAP tax rate and our non-GAAP net income calculation.
For fiscal 2023, we are using our projected long term non-GAAP tax rate of 20%, which reflects currently available information as well as other factors and assumptions.
We ended the quarter with 7642 employees, a 26% increase compared to last year.
We exited Q1 with over $1 billion in cash cash equivalents restricted cash and investments.
Both operating cash flow and free cash flow reached all time highs in Q1 with strong cash collections building on our strong Q4 finish.
Operating cash flow in the first quarter grew 45% year over year to $196 million or a 33% margin.
This compares with $136 million or 29% from the same quarter a year ago.
Free cash flow came in at $175 million or a 30% margin in the quarter compared to $123 million or 26% in the prior year, an increase of 42% over last year.
We recently moved to accelerate our infrastructure migration to the cloud as we continue to scale, our business and drive efficiency.
This move will have minimal in year financial impact and over time will shift our model away from capital intensive physical data centers to a more flexible and sustainable model at scale.
Yeah.
Now, let me turn to guidance.
As we've indicated we are confident in our long term opportunity and in our ability to add new customers and power their digital transformation across the agreement cloud was talking Si.
However, we are not immune to the macro challenges with our customers and tier space.
As Dan discussed we are focused on that which is within our control innovation across our product portfolio and improving our go to market execution.
While we have made considerable progress bringing in leaders with significant experience at scale, it's important to recognize that meaningful traction and better visibility will take multiple quarters.
We have operating leverage in our business model and are committed to balancing growth with profitability, while also exercising expense discipline.
We remain on track to reach our long term target operating margins, we will continue to make thoughtful and disciplined investments across the company with a particular focus on our highest priorities, which will drive our growth and success over time.
Specifically in fiscal 'twenty, three we are moderating our expenses and managing our hiring plans at a more measured pace appropriately aligning our investments with the current climate and our growth.
These elements have been incorporated in the current outlook.
For the second quarter and fiscal year 'twenty, three we anticipate total revenue of $600 million to $604 million in Q2 or growth of 17% to 18% year over year.
And 2.47 to Q4, a $2 billion for fiscal 'twenty, three or a growth of 17% to 18% year over year.
Of this we expect subscription revenue of $583 million to $587 million in Q2 or growth of 18% to 19% year over year.
And to 394 to $2 $406 billion for fiscal 'twenty, three or growth of 18% year over year.
For billings, we expect $599 million to $609 million in Q2 or growth of 1% to 2% year over year.
And 2521 to two five for $1 billion for fiscal 'twenty, three or a growth of 7% to 8% year over year.
We expect non-GAAP gross margin to be 79% to 81% for both Q2 and fiscal 'twenty three we expect non-GAAP operating margin to be 16% to 18% for Q2 and fiscal 'twenty three.
We expect to see a de minimis amount of interest and other income and.
And we also expect a tax provision of approximately 7% to $11 million for fiscal 'twenty three.
We expect fully diluted weighted average shares outstanding of $205 million to $210 million for both Q2 and fiscal 'twenty three.
In closing, while we are pleased with our Q1 performance. We also acknowledge the work ahead to Reaccelerate our growth there.
The market opportunity is compelling we have the leading product portfolio and an unwavering focus on driving sustainable growth at scale.
We are in a strong position to execute on our go to market strategy that will deliver on our commitments to our customers, while helping them transform their businesses across the agreement cloud.
We are taking the necessary steps and we are confident and energized by the plan we have in place.
We're focused on execution and on balancing growth with profitability as we partner with customers to transform how agreements are prepared signed after the PON and managed around the world.
Thank you for joining us today with that we will now open it up for questions operator.
Thank you we will now 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 may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from Josh Baer with Morgan Stanley . Please proceed with your question.
Great. Thank you I appreciate the question.
Wanted to get a better sense of kind of just between macro and a normalization post COVID-19 as far as demand and competition that just like what might be impacting the revised outlook I guess so first on competition was wondering if you've picked up any change in win rates or.
Any change in the need to discount pricing and then related to macro and Covid normalization was hoping you could characterize the pipeline.
Is it healthy and deals are getting push because of macro or is it a weaker pipeline just given the.
The gap in demand as demand normalizes post the pandemic. Thank you.
Hi, So a couple of different questions in there let me start with your first piece and trying to disaggregate, if you will sort of.
Global macroeconomic versus the post pandemic.
No impact to Doctor sign it's very difficult as you would imagine on this sort of a deal by deal basis too to do that disaggregation I think we believe the larger impact for us is coming off the.
Sort of very aggressive buying that we had during COVID-19, but.
But we also do see and as we talked to other software companies, they're sort of reiterating particularly in Europe that there may be some impact there. So it's very difficult to to really quantitatively disaggregated, but I would say the most substantial piece is coming off the COVID-19 high there as opposed to the.
<unk> component in terms of the competitive set you know sitting I do an assessment before every single earnings call. When we sit down with our competitive team and our pricing team and we have not seen anything substantial that changes things are a little bit different in different markets.
But in general we're not seeing any change from the standpoint of thinking about win rates thinking about the average price that we are achieving a.
And I'm talking primarily the signature here because it's the largest piece of our business.
Substantially, but but that's sort of the core analysis.
Let me dive into.
Is it the standpoint of pipeline.
Hey, a couple of things.
I'd say that we have had a reasonable amount of churn and change in our field organization. Some of that is absolutely attributable to the so called great resignation and I think it's consistent with what we're seeing other software companies, who traditionally had very very low attrition in our company.
A single digit you know are you back to the last couple of years.
And we're now sort of more AD industry averages. We think so that's been a big change for us and I think one of the challenges when you have a turnover in the field, it's tougher to build pipeline right. If you think about most of our revenue.
In any given period doesn't come from the Newco and Cynthia, particularly with very strong newco again.
Because a good testimony to the strength of our business and the value proposition and the strength of our brand.
It's really more on the upsell and that is where our field, whether that CSM or aes <unk> need to be out with our customers and say hey, great. You got good ROI from your first sort of use cases of the dark side, let's expand into the next one and what we're seeing is with that change in the team not as much focus has been on building pipeline I would say.
That would be a factor.
In the change in guidance for billings.
Cynthia articulated.
Hopefully that got each of your questions covered.
Yes, thanks for the answers I'll leave it there since that was three questions all right. Thanks.
Thank you. Our next question comes from Brad Sills with Bank of America. Please proceed with your question.
Oh, great. Thanks, Thanks for taking my question guys.
I wanted to ask about some of the Ah.
Execution challenges that you kind of outlined earlier in the call I think you know three quarters ago. When would you when you're barked on this refocus on expansion activity.
You outlined some steps being taken there and some changes in leadership, where we're now.
Two to three quarters into that and.
It looks like this effort is turning out to be.
Bit more material than perhaps you thought initially I guess my question is what are what are some of the learnings as you've pivoted back towards expansion what's already working.
Do you feel like you have the leadership in place now with these changes to be able to continue on that path to kind of refocus on that expansion activity.
Yes, so first off I would agree with the assessment that initially.
Robley underestimated I underestimated the impact in the post COVID-19.
Demand acceleration.
Maybe how dramatic that was clearly we saw that the business groups say practically doubled.
We doubled the size of the company you know and in sort of like six to seven quarters. So it wasn't that we were not aware of the dramatic economics of it I think we just didn't understand what portion of that would be things like onetime use cases, or an acceleration where people bought in a more fulsome way so that the removal of that.
Very very strong tailwind effectively felt like the headwinds I think that's absolutely a fair.
Articulation of the mine missed understanding of how dramatic that was.
The second piece.
I think what we talked about the need.
To sort of enhance it.
And augment the leadership, we had for both the scale, we've now achieved as well as for this new model going forward. It wasn't really until more recently in the last quarter or so that we in fact started to bring in the new sales leadership and go to market leadership that we talked about earlier on the call. So associates fairly early days for most of those leaders.
North American commercial and SMB leaders are just probably about a quarter in course, Steve is just the number of weeks in a new enterprise I mean, it hasn't been just higher hasn't begun yet so I would say it's still.
Fairly early in the tenure of that AR augmented leadership.
And lastly, I would say I think.
In terms of lessons learned.
It is at the core.
Core things that doctors haven't had always done sort of pre pandemic about really driving customer success being an organization thats focused on driving adoption and consumption of what people have purchased are the is the core things we need to do and as I mentioned in the last question we did have.
Reasonable Q1, a turnover in our field, which means it means that we are now on boarding at a higher rate of a number of people we need to to fill those slots to drive growth, which makes it a lot of activity has to be spent on the onboarding and enablement of those folks in sort of a doctor sign way.
I think probably the biggest single contributor to why it's going to take longer than we would have initially said to get back to the enviable growth rates, we'd like to see.
Thanks for that Dan and then one more if I may. Please I think you alluded to some some some early signs of perhaps slowdown in Europe . In particular, if you could just articulate a little bit on what youre seeing in the different regions North America Europe Asia with regard to demand just given all the all the moving parts of tobacco.
Again.
Sure what I would tell you you know overall international has continued to take share right now up to 25%. So we're quite pleased with the relative growth rate of international in Europe is substantially the largest piece there, but I would say.
Sort of as you move further east across Europe .
We've seen.
Probably some some stalled and delayed deals where people said, we're not sure what's happening to our economy.
And we want to be maybe a little bit more prudent.
So that's where we would probably see the places where sort of the unrest.
Hit us the most because of the war in Ukraine, and I think the German economy is probably.
The substantial economy was going to be most impacted.
Cross Western Europe .
We I wouldn't say, we've seen anything from the global unrest in other regions like Latam our R. J.
And then in terms of the global macro I don't think we have an ability to really give you a huge insight other than saying, we just generally see across the board from all regions are sensor companies are thinking about inflation, there thinking about potential looming recession.
And maybe being more cautious.
On their buying behavior.
Thanks, so much Dan.
Thank you. Our next question comes from Karl Keirstead with UBS. Please proceed with your question.
Oh, Thank you Cynthia I think everybody just wants to stress test the the back half billings guidance just to arrive at our viewpoint as to how conservative. It is so I think your your second half billings guidance implies a 1.31 billion.
Or call it roughly 650 and billings per per quarter, three queuing for Q I'd, just love to ask you, what what assumptions you're baking into that guidance.
What what you're assuming in terms of the continuation of the.
Customer hesitation that that Dan.
Just flag, what you're assuming in terms of sales productivity improvements in the third and fourth quarter. Just so that we can get a good understanding of how conservative. It is appreciate any color. Thanks.
Yeah. Thanks for the question. So I mean, our guidance philosophy hasn't changed and we guide to what we see and the visibility we have and we don't have.
The level of visibility that we would like.
However, you know.
I would say the philosophy.
It makes into the risks and opportunities we're seeing in the business and so some of the things that Dan touched upon in terms of bringing in new leaders ramping up the field teams.
Looking at customer demand and use cases and product opportunities within the customers and then the macro environment that we're seeing that is baked into our current outlook in the back half of the year.
Okay. Thank you Cynthia.
Yeah.
Thank you. Our next question is from Pat Walraven with JMP Securities. Please proceed with your question.
Oh, great. Thank you if I may I'll do one for each of you.
Dan why are so many of the reps quitting so I'm I'm sure you've you've analyzed that what are sort of the top two reasons and then Cynthia.
If you have 7% to 8% billings growth. This year doesn't that suggest that you would have sort of seven to eight.
Percent revenue growth next year.
I'll go in the order you put them out there Pat I'd say the key things one and I do think the most substantial component for us and pretty much everyone I talked to in the software world.
Is this construct that equity values are clearly down pretty much across the board.
The re assessment of multiples.
And people live through some tough years in Covid and the tired and people want to change and I think the concept that we see a lot of people who have been.
Darkey signers of the people that have left us a bit longer term doctor sign who said I love the culture I loved the place I just want to change I'm tired and it was tough and there was a lot of hard work in the two years with the big growth. But then it's also difficult to feel like Hey, where is that the opportunity is not what it felt like it used to be and so that's probably those conversations. We also had a significant number of people.
That we added during those two years, the very dramatic growth and they kind of knew only one doctor sign which was quite frankly.
Cheating the sales success was a heck of a lot easier than it had been previously and definitely a lot easier now for some of those folks. They said you know the market is telling me that I can get guaranteed compensation someplace else.
And because I'm no longer brand, new a doctor sign I don't have that opportunity and so from a compensation standpoint, They said I think I'd be better off.
Try and simplest, particularly that a lot of startups up until at least recently I have been saying he will guarantee your first your compensation.
I think those are probably the two biggest.
Drivers that we see for why people would say in the field I want to try a different sales force.
And then.
There's a question on the back half of the year. So we're not.
Not the back half of the year not the back half of the year, sorry, if I wasn't clear so if its 7% to 8% billings growth for all of fiscal 'twenty. Three does that mean fiscal 'twenty for revenue growth is going to be something like 7% to 8%.
Yeah. So I mean, we're not we're not guiding to next.
Next year at this point and as Dan said, we have a.
New leaders in place we're ramping the go to market.
We are guiding for this year to what we're seeing Pat and.
So I think it wouldn't be prudent for us to go beyond this year, we're very encouraged by the steps we've taken.
Very focused on what's in our control, whether that's the innovation and the.
The go to market pieces, we've talked about bringing on new team members kind of prioritizing the investments.
Those are the things we're focused on along with and importantly make.
Customers successful on the platform so that they can continue to grow and expand with us right.
Those are the things, we're really focused on them and you know we'll have more to say as we move through the back half of the year, but we're certainly facing headwinds across a few of those different dimensions.
Okay, I, just figured we might as well get the bad news out now isn't that kind of the mechanics of how the business works.
Yeah.
Yeah, I wouldn't say that the mechanics, I mean, where every every day of every quarter, we're looking to make the right investments to grow the top line across the go to market and so our guidance reflected on what we're seeing in the business and as I said and as we move through the back half of the year.
Currently anticipating.
Headwinds relative to what we saw 90 days ago is as we've looked at how the markets have developed and the go to market changes that we're making are going to take a little bit longer to actually see in the financial results.
Ah Okay, alright, thank you.
Thank you. Our next question comes from Jake Roberge with William Blair. Please proceed with your question.
Hey, Thanks for taking my questions wondering if you could just touch on how the C. O M solution has been tracking I know you talked about some exciting new product launches, but is that solution seem the same cross sell headwinds that signature is experiencing right. Now are you starting to see some better growth in that segment of the business.
Yeah C O N. Thanks for asking was a bright spot in Q1, we were over 100% of our goal for what we wanted to see in terms of growth. There as you may recall <unk> had before the pandemic started to look like it was really picking up and then across that entire space or other CRM providers. During the pandemic, you've got much tougher as people sort of.
<unk> tried to focus on those shorter term ROI wins that you'd see in something like signature alright.
Really took off during the pandemic and some of those longer cycle deals.
And C O M, where you take more implementation time, you know you need to have some sort of systems integration work.
As a sort of a requirement to to execute.
On installing that software now we're seeing that there's a lot of enthusiasm for that and I would tell you, particularly bright spot as you know, we just launched CRM essentials, and we already have dozens of wins there with people that are saying. This is a way that says we say democratize C. L. N. So we're quite bullish on the momentum is building.
Great and then just just thinking about international again, so it sounds like EMEA Eastern Europe might be a little software, but I'm just curious how you're watching in Mexico, three or four quarters has that geography been tracking as expected and when we think about the moderation in some of the sales investments.
You're talking about will that mainly be international or will you be moderating investments in the states.
So the first piece in terms of international Yeah, I think your assessment that the impact from global instability.
Eastern Europe would be the area for obvious reasons that would be most impacted and so then as you move I mean, we don't have a significant business and we have no direct business in the Ukraine or in Russia.
And the very small about of business, we've had through our digital we sort of stopped.
Taking a look.
Customers in Russia, as part of our support for Ukraine. So it's not meaningful in any way, but as you move further into Europe I suppose.
That's probably the most likely impacts of that to happen in terms of other markets like Mexico, and Mexico is a very very early for us of course, which is a small number of employees. There. So it wouldn't be any sort of meaningful.
Impact even in the overall international business in the short run.
I wouldn't look to that.
For for an insight there.
And I'm, sorry, and the last piece I apologize.
<unk>.
Yeah, just in terms of the you were talking about moderating some of your investments and so yeah.
Yeah, sorry, yeah.
Yeah, Yeah, absolutely no I think the answer is international would probably have less impact quite frankly, we see that as a growing continuing to grow and take share as it's been our plan to.
Two to grow faster internationally. So I think when you think about the moderation of hiring so two things to think about one week.
We are committed to deliver on the profitability goals that we've set forward and if we're going to have any reduction in the topline growth that we want to make sure we're being thoughtful about the spending level and of course, our largest spending item is head count we're not doing layoffs were not reducing.
Reducing our workforce, we're just tapering the growth rate and the number of hires that we will make.
The vast majority of those would be in North America and the other thing that I would say to that 0.1 of the challenges we talked about earlier with the fact that there has been heightened attrition, which may be starting to.
There's a particular startup community started pulling back a little we may see that get a little bit easier, but our concern was that the amount of new people. We're hiring to try to drive that growth rate was just very difficult to onboard them successfully into the company. So the other aspect in moderating the hiring again, primarily in North America is to ensure that.
We can dig darkey signers and bring them on and make them successful for the long term growth of the company. So that's how I'd think about those factors.
Great. Thanks for taking my questions.
Sure.
Thank you. Our next question is from Tyler Radke with Citi. Please proceed with your question.
Thank you Cynthia you talked about some lower visibility in your guidance and I'm curious, what you're assuming for renewal rates and.
And net retention I know that in the past you've talked about kind of underestimating. The onetime use cases. So are you expecting that churn picks up just as there's maybe more one time use cases on the platform.
And how should we just think about the assumptions on net revenue retention rate relative to your historical range for the back half.
Sure sure Yeah. So so we've reported one 2014, which is within our historic range for Q2, we're expecting expecting it to be around the low end of the historic range and.
Remember.
Net retention is.
More of a lagging indicator than a leading indicator and given how the measurements taken off of last year.
And the court it snapped on customers, who are customers last year and how they expand it over time. So that metric does include churn and as you noted.
Does factor in if there were one time use cases, it would be factored into that metric.
We're not guiding to the year, but I can tell you as we usually give color on one quarter out and that we are anticipating it to be around the low end of that historic range of <unk> 12 2019.
Okay. Thank you and Dan you talked about some of the go to market changes just as you're looking to Reaccelerate our growth and obviously.
Sounds like you still believe in a $5 billion target at some point. So I guess, just how long do you think how many quarters will it take to kind of drive that growth back to a level.
You know that you're targeting and where do you kind of aspire.
If the post pandemic growth rate to be Preoccupying.
Yes, we don't have sort of long term growth rate that we've ever put out or no.
Published as a perspective I would tell you. This from your core part of your first question is is that we've provided guidance today that says hey, this is probably a longer term set of changes to work those through the field than we initially thought but if you take a look at sort of the growth in absolute.
<unk> dollars, we want to see that picking up in the second half we want to see.
Getting impact from the changes, we're making are quickly.
And I think it would be.
Probably not prudent to say we have a specific date, where we think we're kind of there, but rather just say, they're going to be making progress.
And as we continue to come out of the kind of post pandemic impact because he talked about sort of the second half we'll start to lap.
Those quarters, where we will post the most dramatic impact that we had from a tailwind standpoint, I think you'll start to see.
That's getting more and more excited about the growth come back.
Thank you.
Thank you. Our next question comes from Alexander Duncan with Wolfe Research. Please proceed with your question.
Yeah, Hey, just two for me I guess I'm, having a little bit of trouble understanding it sounds like most of the issues. Dan that you guys are talking about are still to prior ports execution driven.
Rather than macro oriented, but then I guess just in the guidance I think everybody would appreciate a little bit more clarity is are you are you assuming sales cycles lengthen are you assuming particularly in the U S are you assuming that your retention rate goes down or your churn increases or that small business.
The digital portion goes down.
I think I'll appreciate that today it's.
Most companies are talking about Europe , but theres definitely companies that are talking about domestic deals.
Pushing and seeing domestic impact and then as a follow up.
Talking about the moderating hiring but I think you reaffirmed your margin targets for the year. So where are we going to is there a playbook for a more volatile macro that you're anticipating and planning for from a margin perspective, and where if you think about the free cash flow, which a lot of investors focus on for your stock.
There is kind of the bottom.
And of that that you'd be comfortable with for the year.
Yeah. So let me take some of the guidelines and first and then Dan.
Duncan can China. So on sales cycle, we haven't necessarily seen elongated sales cycle I think the biggest factor that we talked about in the prepared remarks was really around he expansion right and that customers, which Alex as you know customers. You know, we have a land and expand model customers start small and they expand over time.
<unk> got expansion rate and rate of expansion is coming off of the peak levels and so there are smaller expansions and that is the that is a big driver of some of the metrics whether it's the.
On the growth rates and then on that dollar net retention is the expansion and the customers are expanding at a smaller rate or slower rate and so we're focused on things like making sure that.
We're talking in enabling talking to the field and enabling customers around different use cases different product feature functionality on selling into different departments and as well as landing new customers and our new customer rate continues to be strong in terms of our net adds. So we're quite pleased with that metric I think when you think about kind of.
That that back half of the year, we're not guiding on the dollar net retention.
But it's fair to say that it is reflected in some of the growth rates and in Q2, we would expect it to be around the bottom end of that that historical range.
And then hopefully when we get to next quarter, we'll have better visibility and we'll be able to tell you what it looks like more specifically, but that's kind of where we're at now on that Dan.
If you want to talk about the other people just took two other pieces one I've just pick a take a finer point on what Cynthia talked about in terms of the deals you you ask a question around think about our field and execution one of the things I think early on when we did not see the growth. We wanted to see we sort of looked at that and say do I feel hey, why are we not achieving it and I think initially.
A lot of focus on the fact that we need to sort of sell more and again most of the dollars that come in come from the growth of our existing business not the newco Newco, we haven't seen a dramatic change and we see continue to see very strong numbers, there, but if we look deeper into it from an execution standpoint, we're doing the same number of deals it's not that we're not getting deals done.
And to your macro question, whether it's Europe or North America, we're not seeing the customers are saying I don't want to transact with Doctor sign they're saying I bought a lot in the last couple of years and I'm Gonna have smaller deal sizes now and we did not forecast we thought about the book of business. Instead, we initially assumed we would grow at the same percentage we had grown.
Before off that book of business, which was now twice as big as it was before the pandemic and a lot of our customers that I'm not going to grow at twice the rate.
In a dollar standpoint, the same rate kind of growing with you before and we probably had unreasonable expectation of what the field could deliver on that but again. This is a deal size as opposed to deals pushing or customers, leaving we're just getting smaller incremental.
Growth because were one off a larger base and two people had so fulsome when we bought.
During the pandemic time with US and then just to your margin question.
We're actually saying, we're holding our margin so we're saying despite seeing some macro or broader headwinds that other people are also as you said commenting on other software companies are coming on we believe we have a really strong model and we can continue to deliver those margins and that sort of an operating income if you take a look at it from a.
Free cash flow, we had an unbelievably strong quarter in free cash flow and we expect we're going to continue to have strong cash generation business, because we have a really attractive business model a doctor.
Got it got it maybe just following up on that answer from from an expansion perspective is it still to the extent that you have those expand deals that you are in the pipeline contemplating and theyre, just not occurring they're taking longer to get done or these customers are literally saying we.
What we need for an <unk>.
Indefinite period of time.
Now.
In order to make up for that you need to land double the volume of new deals.
So a couple of thoughts across the you know 1.24 million customers or even 180 odd thousand direct customers there's no <unk>.
I'll answer because we have quite a range of customers of course, but if I tried to think through it.
On average it's dramatically more people, saying I only need a little bit more as opposed to a lot more which I needed.
Last year as opposed to people, saying I'm pushing or deals are taking longer to close we haven't seen anything significant on that dimension. It is people, saying I've got a lot I love it I want more but just not the same percentage increases.
Wanted to floor.
Got it thank you guys.
Thank you. Our next question comes from Richard Deloria with RBC. Please proceed with your question.
Hey, Dan and Cynthia and thanks for taking my questions I've got two here one I want to really understand the mechanics of the Q2 billings guidance right because if we if we look at it not only is it optically.
Really disappointing and 1% year over year, but you're talking about effectively adding $0 in deferred revenue from Q1 to Q2 and I mean.
Yeah.
I guess, what assumptions are baked into that I don't think I've ever seen that historically happen in your business from a Q1 to Q2, where you're adding zero dollars of net new D. R.
What is it like some pull forward of business from Q2 that landed in Q1 or what what what what's going on in that in that guidance. Maybe you can just help us better understand that and then I've got a follow up.
Yes, so it's a good observation so yes, it's unusual for a Q1 to Q2, but we have had other quarters that I would characterize it as flattish quarter on quarter.
So I understand.
It's unusual for a Q1 to Q2, however, remember with billing there are timing.
When deal fall in or out of the quarter Q1, and that one that came out pretty much where we were expecting but they were definitely puts and takes.
That what fell in the quarter versus what fell out of the quarter any impacts on Q2. So.
I understand your point, but I would just remind you that billings can fluctuate quarter to quarter. We do look at the trailing four quarter averages on those growth rates.
And as we said that we also look at kind of first half second half. So you can kind of look at first half second half growth rates and what that implies as well.
I understand it and understand the question, but I just remind you about timing of deals, particularly when it comes to billings and that's why we tend to look at averages there.
Okay point taken.
Get it but like unless there was an actual a pull forward of business from Q2 to Q1 right.
The Q2 billings is a is a guidance you're giving US right. It's not a number that's actually happened that we can say things that moved around.
I I I guess I'm still struggling to understand that but I'll leave that alone I wanted to turn to geographies right. So international growth slowed down that itself is disappointing, but then if I look at the U S side of the business that grew 1% I'm, sorry 0.6 person.
Sequentially from Q4 to Q1.
And yet you're talking about being underpenetrated in and the market opportunity is this just a one time use cases churning off.
Or what was leading that because where we're effectively on the edge of U S revenue starting to decline sequentially right, where we're not that far away from that especially because revenue is a lagging indicator and macro is only going to get worse from here right not better.
Help me understand what what what's going on and how we should be reading that number. Thank you.
Let me take the first piece and you can add onto that.
Thank the answer is I don't want I don't want to give you the sense that one time use cases is substantially the driver, but I would say that's absolutely significant contributor we gave some examples that we've talked about before around we had some very large deals around some of the government loans PPP loans that occurred in <unk>.
Our biggest.
The sort of growth in the prior year was in Q1.
P loans. So we knew that was going to come to an end, obviously this quarter and that was quite substantial.
And I would say that other particularly where interest rates are right now other loans, which is financial services big vertical for us.
And as interest rates go up.
We'd expect that people would.
Do fewer loans and in a higher interest rate environment, particularly on the mortgage side, So I think our expectation.
Is that sort of a phenomenon from that macro issue that you're describing but for us. The the onetime truly disappearing use case I think is smaller than the broader component. It up here, we really grew quickly over those two years and we pulled forward.
A significant amount of demand where customers wasn't somewhat stocky side, pushing our customers, saying, hey, we really want to buy in a more fulsome way and those pieces I think in aggregate are bigger than the actual onetime use cases, but one time use cases in Q Q1, Q2, and we would say that those would be meaningful driver.
Drivers as well.
Okay got it thank you.
Thank you. Our next question is from.
Shelby say Rafi with SPN Securities. Please proceed with your question.
So thank you very much so can you describe what areas.
In field sales needed most improvement and what actions do you think Steve shoot is going to undertake accordingly.
Well and again I look at it.
To augment the capabilities that we had there I'd say, there's a couple of things. One was we just got to a different scale level than we have been and we had strong you know many many years of strong growth, but at a much smaller business and then again we doubled over.
Six or seven quarters.
I think we needed to enhance the overall sales leadership that we had and that is probably around the sum of a discipline around forecasting and planning is probably the single biggest area in terms of the actual execution in the field, which we have talked about.
I do believe that we have had a challenge where we brought in a lot of people in a very hectic environment of growth and did not.
You'll have the opportunity to enable them for the post pandemic because they were only here during the pandemic mindset and it was easier in that period of time. So it's not that all of a sudden our field became capable but we did bring in a lot of people who hadn't worked in a more.
Traditional <unk>.
Environment for buying <unk> and I think that's the core piece, but he's focused on now is enabling the current for us on the Doctor sign way and it is that core land and expand model that we talk about there was sort of a back to the basics and.
And I think Steve is going to do a fantastic job of working with the new sales leadership, we've brought in to augment the talent we already had.
In stronger delivery there.
Thank you there are no further questions at this time I'd like to turn the floor back over to Dan Springer for any closing comments.
Thank you very much as we said just in summary, we are pleased with the Q1 delivery that we had but we're really focused and locked in on what we need to do to continue to deliver strong profitability.
And reigniting the growth that we talk so much about on the call today, we look forward to having the opportunity to speak with you all soon and thank you very much for joining us.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.