Q3 2023 DocuSign Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, thank you for joining darkey signs third quarter fiscal year '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.
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Now pass the call over to Heather Army and head of Investor Relations. Please go ahead.
Thank you operator, good afternoon and welcome to the Doctor You think Q3 2023 earnings call I'm, Heather Harwood Ducky finds head of Investor Relations.
On the call today are Dr. Stein, CEO , Alan <unk>, and our CFO Cynthia Gaylor. The press release announcing our third quarter results was issued earlier today and is posted on our Investor Relations website.
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 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.
Our patients regarding the pace of digital transformation and factors affecting customer demand are based on our best estimate 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 content that's cool.
Any forward looking statements are based on our assumptions and expectations today 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 wont prevent GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share count and information regarding free cash flow and billings.
These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results.
I 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 those figures. Please refer to today's earnings press release, which can be found on our website at investor <unk> Doctor you find dot com and now I'd like to turn the call over to Alan Alan.
Thanks, Heather and good afternoon to everyone I'm.
I'm happy to be here for my first earnings call as <unk> CEO .
I'd like to begin by thanking Maggie wilderotter for leading the team as interim CEO .
You set the stage for a smooth and seamless transition and we're grateful to her for her leadership and for her continued stewardship as our board chair.
There are three main points I'd like you to take away from today's call.
First we delivered solid third quarter results exceeding the key operating metrics, we laid out last quarter. Despite the continued macro headwinds.
Our results are a reflection I think of the continued signs of stabilization across the business.
I'd like to commend our team for their unwavering commitment despite the considerable distraction.
Second.
As the global leader in the E signature category Doctor signs is expanding across broader agreement related workflows.
We have challenges to address but we have an exceptionally strong foundation and meaningful competitive advantage.
Which leads me to my third point.
I believe our future is bright.
And with the team I am personally energized by the opportunity and the work that lies ahead.
Given our progress and I believe we are unequivocally well positioned for long term.
Now before I move on.
To discuss the future of our business I want to share what compelled me to join Doctor side.
I followed the company for many years and like our over 1 billion users I find our value proposition distinctive and valuable.
Built a powerful brand that is recognized by decision makers well before we even engage with them.
That combination of affinity of the Doctor Sun has with customers and users and our untapped market potential is very rare in the enterprise software space.
Our doctor sign created and built the E signature category.
Agreement processes are still at the early stages of moving from pen to paper to more automated ways of working.
I believe we're just at the beginning of revolutionizing how businesses initiate negotiate and managed agreements and we will leave that as we did for E signature.
We provide solutions for customers of all sizes industries and functions.
During my almost 12 years at Google I first let the global SMB and mid market business and then the enterprise business in the Americas, including managing our relationships with our largest global partners.
I've experienced firsthand, how exceptionally powerful a broad diversified customer base can be.
I'm excited to bring that experience to doctor side.
So in my first 60 days I've focused on gaining a deeper understanding of our business meeting with employees across the company as well as spending time with customers and partners.
These conversations have started to identify some critical areas in which we can improve to strengthen our value proposition. In addition to scaling the business by streamlining and creating efficiencies.
I continue to see customers embrace and expand with our core esignature offering for example, this past quarter one of the Uk's largest health care providers expanded their use of E signature. They began the journey as a customer during the pandemic and they've now migrated their entire patient onboarding process.
And adopted our products across their HR legal joint ventures in other departments.
Key criteria in the recent competitive selection process included privacy and security of their customer data.
And the ability to utilize the advanced workflow features we offer.
Notwithstanding our considerable strengths.
I believe it is important to acknowledge where we have not executed as well.
It's clear we did not pivot quickly enough and we were slow to make changes as.
As we experienced tremendous growth during the pandemic, we did not scale the team properly we lost some innovation velocity, we didnt fully address the changing market dynamics, nor mature our operations systems sufficiently.
We understand those gaps we're committed to moving forward with more transparency.
The good news is that the future is in our own hands.
So let me turn to our focus going forward.
We are committed to broadening the category.
That starts with a more clearly defined product road map that leverages, our core esignature strength and our vision of delivering easier smarter trusted agreements.
We see opportunities beyond the replacement of paper signatures to deliver innovative new experiences and to integrate more deeply with partner applications.
About it.
Many use cases don't require editing or completion of a static unstructured highly format a traditional agreement.
Instead, I think data capture for agreements should happen through digital forums on the web or in and out there.
The agreements themselves should be dynamically generated and the metadata should be automatically captured to enable personalization for future interactions.
Without new web forms offering which is currently an early beta we're enabling our customers to transition from a PDF centric experience to guided web native experiences.
We're also continuing to innovate on the seal upfront.
Further solidifying our vision customer validation of execution within the seal M space. Most recently Doctor sign was named a leader in the Gartner 2022 Magic quadrant for CRM for the third consecutive year.
We placed highest of all vendors on the ability to execute axis and second highest on the completeness of vision axis.
These products directly support each other.
We're encouraged by how existing E signature customers continued to embrace our CRM capabilities.
To enhance and speed their workflows.
For example, this past quarter, we expanded our relationship with one of the largest ridesharing organizations are.
Our team identified key areas of expansion using our signature and CRM product to support their evolving business needs. They expanded their esignature footprint and a more streamlined and their internal processes. Thanks to our seal them offering.
Over the next few quarters will expand at work here and augment the roadmap to broadened the power of managing workflows throughout the agreement lifecycle.
We're not seeing dramatic shifts recently in the competitive landscape. It is important to recognize that today's market is more competitive, particularly for the basic sign use cases, which further highlights the importance.
Of an innovative and differentiated product portfolio like Doctor sites.
I wanted to touch on our plans to improve operations and sales productivity.
While we are continuing to lead with innovation, we're staying hyper focused on making the customer experience more seamless and integrated particularly with our go to market motion.
That starts with bolstering our self service initiatives I was deeply involved in enabling self serving for every stage of the order cycle for customers.
All sizes of Google and I know the power of our frictionless experience.
I am confident we can achieve both improved customer experiences and greater go to market efficiency as we move in this direction.
Already have over 1 million customers, who self serve.
Traffic to our website continues to grow and we have a highly recognized and trusted brand. So we have a lot to work with.
We also want to create stronger efficiencies in our direct sales.
Sales and field efforts and strengthen our partner ecosystem.
So I'm pleased that sales attrition is continuing to moderate and we're seeing stabilization in the field.
Moving forward well.
Focus on improving following conversion consolidating and streamlining our teams strengthening our focus on customer success and retention and implementing new incentive structures.
All with the goal of driving efficiency and accountability.
We're also leaning in on simplifying our pricing and packaging strategy reasons.
Recently began rolling out new product bundles.
Customers to more easily access useful and differentiated productivity features which in turn further customer ROI and improve retention and then getting the customer a richer experience. We know that customers use more than three features are more likely to expand their footprint with us that will be critical for more profitable growth at scale.
Yeah.
We already have an industry, leading partner ecosystem. This represents a significant opportunity to expand customer value and distribution reach through our network of Isps resellers system integrators and developers.
By re imagining how we engage that ecosystem, we expect to create a platform that will see stronger revenue contribution from our partners.
Unlock and fuel international expansion opportunities in particular.
I personally visited customers and teams in four of our key European markets last week.
During the trip I had the pleasure to meet with one of the world's leading communications carriers.
I've been a customer for seven years now our Kam team identified key areas to drive growth with expanded use cases, which accelerated adoption, which in turn led to an early renewal expansion.
We're excited to grow our footprint and their ecosystem as they continue to leverage our products to digitize their customer experience and reduce operating expenses.
I was hoping to create a more sustainable future.
Lastly, internally our operational focus has been on streamlining our processes upgrading our internal systems and modernizing more of our own workflows to improve efficiency and scalability.
Sample, we just closed our first quarter on our new ERP system, which has been a key dependency for automating more of our operations.
In summary, I believe we are acting with urgency to recalibrate the business and leverage our strong foundation to adapt to the evolving business landscape and the changing and challenging macro environment.
These efforts will take time and they represent the continued evolution of the Doctor side.
I am fully confident that the opportunities here for Doc side.
It's within our reach with a clear strategy focus and execution.
Thank you for your time today, I'm thrilled to be leading doctors signed and I'm committed to being transparent with all of you about our progress as we move forward now.
Now I'll hand, it over to Cynthia who will take you through our Q3 financial results and outlook.
Excellent Thanks, Alan and good afternoon, everyone. We delivered solid Q3 results delivering on the top and bottom line.
We continue to expand our customer base and remain focused on progress against our key priorities as we execute against our long term strategy.
At the macro becomes more challenging we are seeing softening demand trends materialize, including smaller deal sizes and expansion.
With increased customer scrutiny on priorities and budgets in some cases.
On the other hand, we are still seeing healthy results as customers recognized occupying offers high ROI applications that are easy to be efficient and cost effective.
Let me now review our Q3 results.
Total revenue increased 18% year over year to $645 million.
Description revenue grew 18% year over year to $624 million.
The continued strengthening of the U S. Dollar resulted in a couple of point headwind to total revenue growth in the quarter in line with our previous expectations.
Impact was not material to our results.
Our international revenue grew 23% year over year to reach $157 million in the third quarter, representing 24% of our total revenue.
Third quarter billings grew 17% year over year to $659 million as our installed base continues to expand.
The strength in billings growth was partially driven by early renewals, particularly renewals from Q4.
As a reminder, our quarter to quarter billings can fluctuate due to the timing and complexion of deals, including timing of renewals and expansions.
Customer growth remains strong as we added approximately 42000, new customers during the quarter, bringing our total installed base to 132 million customers worldwide at the end of Q3, a 19% increase compared to a year ago.
This includes the addition of approximately 10000 direct customers to meet the total direct customer base of 202000, a 26% increase over last.
Last year.
We also saw a 34% year over year increase in customers with an annualized contract value greater than $300000, reaching a total of 1052 customers.
These results demonstrate progress against our key initiatives. However, we continue to see the effects of a more challenging macro environment.
Real estate and financial services verticals continue to see headwind so even within these sectors, we see pockets of expansion with customers for specific use cases.
Expansion use cases, underscore our product differentiation and value for our customers as we continue to invest in innovation around broader agreement workflows.
As it relates to verticals. We are also encouraged by relative strength in our manufacturing retail business services and technology sectors, highlighting the important benefit of our diversified customer base.
And while the global slowdown presented challenges more generally we saw varying degrees of strength and weakness across all regions and segments.
Dollar net retention was 108% for the quarter, we continued to see more muni buying patterns and slower expansion rates from customers in the current climate.
We expect buying patterns to remain cautious in the near term, resulting in dollar net retention continuing to trend downward for the remainder of the year.
Total non-GAAP gross margin for the quarter was 83% compared to 82% last year.
Q3, non-GAAP operating profit reached $147 million compared with $122 million last year.
non-GAAP operating margin was 23% from 22% last year.
non-GAAP net income for Q3 was $118 million compared with $121 million in the third quarter of last year.
As noted on our Q1 call. This year, we introduced a non-GAAP tax rate within our non-GAAP net income calculation as we reach consistent non-GAAP profits for the prior three years.
We're using a non-GAAP tax rate of 20% for fiscal 'twenty three.
Q3, non-GAAP EPS was <unk> 57 chats.
In September we announced a restructuring plan, which included a workforce reduction in response to the changing environment.
This was not an easy decision, but it was an important step for the health of the business.
Our GAAP results include $28 million in Q3 and restructuring related expenses as we take a long term view of the opportunity ahead, we will evaluate the best ways to reinvest capital into areas that accelerate initiatives and present the strongest return.
We are committed to making progress in a sustainable way towards our long term target margin.
We ended Q3 with 7522 employees compared to 7056 last year.
The restructuring process is well underway and we expect to be substantially completed by the end of the fiscal year.
The workforce reduction coupled with more disciplined spending and cost containment throughout the company drove strong Q3 non-GAAP operating margin.
While we are pleased with the Q3 margin we delayed some spend in the quarter and will continue to evaluate the most critical areas for investment.
Operating cash flow in the third quarter was $53 million, representing an 8% margin.
Free cash flow was $36 million or a 6% margin.
As we mentioned on our Q2 earnings call during the third quarter, we implemented a new ERP a foundational system for our company.
Go live was successful with smooth implementation and no material disruptions to our core processes.
As noted on our last call the timing of cash collections and payments were impacted by the ERP transition as we anticipated and some were pushed from Q3 to Q4.
We also incurred one time cash expenses in Q3 related to the restructuring.
On a more normalized basis, excluding the impact from the restructuring and our ERP implementation, our operating cash flow margin would have been approximately 14% and our free cash flow margin would have been approximately 12%.
This compares with operating cash flow of $105 million or a 19% margin and free cash flow of $90 million or 17% margin for the same period last year.
We expect lower restructuring cash payments to benefit fourth quarter cash flows relative to Q3.
We exited Q3 with more than $1 $1 billion in cash cash equivalents restricted cash and investments.
Turning to our share repurchase program, we repurchased approximately 740000 shares during the quarter for approximately $38 million, which demonstrates our confidence in the durability of our business and the opportunities ahead.
As of the end of Q3, we had approximately $137 million in remaining buyback capacity.
We remain committed to Opportunistically return capital to our shareholders.
With that let me turn to our Q4 and fiscal 'twenty three guidance.
For the fourth quarter and fiscal year 'twenty three we anticipate total revenue of $637 million to $641 million in Q4, our growth is 10% year over year and $2 49, three to 497 billion for fiscal 'twenty, three or growth of 18% to 19% year over year.
Of this we expect subscription revenue of $624 $628 million in Q4, or a growth of 11% year over year and $2 43 to $2 $47 billion for fiscal 'twenty, three or a growth of 19% year over year.
For billings, we expect $705 million to $715 million in Q4, a growth of five 7% year over year.
And 26262 to 636 billion for fiscal 'twenty, three or growth of 11% to 12% year over year.
We expect non-GAAP gross margin to be 82%, 83% for Q4, and 81% to 82% for fiscal 'twenty three.
We expect non-GAAP operating margin to reach 20% to 22% for Q4, and 18% to 20% for fiscal 'twenty three.
We expect to see a de minimis amount of interest and other income.
We expect non-GAAP fully diluted weighted average shares outstanding of $205 million to $210 million for both Q4 and fiscal 'twenty three.
Looking ahead, we are in the early stages of planning for next year and focused on executing across our critical priorities to finish the year strong.
While we will not be formally providing guidance for next year, we would like to share our preliminary outlook for fiscal 'twenty four informed by what we are seeing across the business and in the broader macro environment.
We currently expect a slower start to the fiscal year.
For total revenue, we would expect high single digit growth during fiscal 'twenty four.
For billings, we would expect low single digit growth for next year.
Committed to maintaining our disciplined approach to expenses carefully addressing and prioritizing strategic investments that will drive our sustainable growth at scale.
As a result, we expect to operate at the lower end of our long term target operating margin range of 20% to 25% in fiscal 'twenty four.
In closing, we delivered a solid Q3, despite a challenging operating environment.
<unk> growth will continue to invest thoughtfully and closely monitor the returns on our investments pivot as needed and evaluate opportunities to drive growth efficiency and profitability at scale.
Our Q3 results are a meaningful indicator of the strength of our business and the customer value proposition, we deliver that allows us to delight our customers in a meaningful way.
We are thrilled to welcome Alan <unk> I wanted to take a moment to also thank our team for their exceptional work and focus during this time of transition.
While we know it will take time for our profits to be fully reflected in our financial results. We are committed to advancing the business and executing against our long term strategy, while delivering sustainable growth at scale.
We look forward to updating you on our progress. Thank you again for joining us and with that operator, let's please now open up the call for questions.
Okay.
And at this time, we will be conducting a question and answer session.
We 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. You May press star two if he would like to remove your question from the queue.
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One moment, please ask me pool for questions.
And our first question comes from the line of Tyler Radke with Citi.
Please proceed with your question.
Yeah. Thanks for taking the question and welcome aboard Alan I wanted to ask you. He made some comments just around broadening the category.
[laughter] integrating with with partner applications.
Maybe talk about where where you see the most low hanging fruit.
And.
If you look at the business I mean, clearly this is a business that has gone from high growth and into more low growth mode as you're looking at the outlook, but but where where do you kind of see the medium term opportunity here in terms of where you can get back to if you accomplish all your strategic initiatives and then I had a quick follow up for Cynthia.
Got it thanks for that so.
So first thing I'd say is.
If you think about all the steps in the agreement workflow.
We did an excellent job nailing the specific use case of signing an agreement, but all of the other steps I think remain there remains plenty of opportunity to revamp that so as I alluded to in my prepared comments. We're excited about the opportunity for example to redefine what an agreement looks like it doesn't have to be this highly formatted.
Document, it's something you can enter on a on a webpage, we already have clients, who do this with US mobile carriers have people signed up to doctor sign, but it looks like a web interface and variety of health organizations use our new functionality to do this for patients. So once they've gotten through it once they can pre fill the agreements in silence for future.
So I think this functionality around helping people both create the agreement in essence negotiate and complete them.
Online is a significant opportunity looking on me.
Personalization side, you can imagine we do this today with Salesforce in a variety of other platforms reps can send out documents.
That a personalized and tailored to the customer based on data that's already in the system again, a way of integrating directly with third party applications and leveraging the simplicity and power I'm talking side.
Post agreement I think the seal them space hold tremendous.
Promise for Doctor side both.
Both in terms of extracting more value more business value from agreements as well as on the risk and compliance side and I've had a number of meetings with large enterprises that are excited about both of those use cases.
Feel like this is actually quite.
Quite a bit of breath there.
Just at the early stages of a deliberate against that opportunity.
Great and Cynthia you talked about some early renewals in the quarter end.
I guess I'm wondering since the.
Q4 guidance was kind of in line with with the prior implied guide was was the early renewals kind of that.
Driving most of that that upside that you saw in the quarter and if you could kind of just unpack what what you think drove those early renewals was it was it customers kind of consuming a ahead of of contracts that they renegotiated down post pandemic and if that's the case do you still think there could be some more of that as you look out in the end.
Coming quarters. Thank you.
Thank you. So we were we were super pleased with where.
Where the billings number came out it did come out better than we were expecting and it was driven primarily by early renewals and when you look at kind of the customer dynamics. There I would say a few things as we have dug into it one is it.
It's mainly we have a certain level of early renewals in every quarter.
We had a more early renewals coming in from Q4 into Q3 this quarter than we normally would have from acute plus one.
It's really driven by where customers are in their usage of the product and capacity and what we were seeing was that we're going where our customers add capacity, who are looking to expand or.
Increase their usage with add on products and so that was leading to early renewals because they were at capacity on their subscription and so those were brought in a quarter earlier than renewal would've con would've come due until I think Kim to commend our sales team taking deals off the table as they come due in the <unk>.
Quarter is great and we feel good about where we are for Q4.
We're not anticipating that that dynamic and we will have early renewals as we always do but that that level is kind of baked into the guide now for Q4.
Thank you.
Okay.
Our next question comes from the line of Josh Baer with Morgan Stanley . Please proceed with your question.
Great Congrats on a really strong quarter and a welcome Alan.
I wanted to wanted to ask you about.
Comment you made around around increasing competition for the core signature use cases I was wondering how much of your business would you say fits in that category and then more broadly as you've been digging in on on the space I'm just wondering for your take or your view on the competitive landscape and Doctor sites are positioning thanks.
Yeah. So first of all I think at the highest level from a category perspective, we feel good that.
Fundamentally helping businesses close agreements electronically as both the cost and productivity savings and better customer experience and so we think that's a relatively resilient from a macro perspective in terms of the competitive landscape. We do see some some competition at the low end of sort of generic signature without.
Much of the value add that I think we excel at.
And so we got to become a little bit more.
Engaged competitively in that space.
Without.
Damaging our our our value and premium positioning so we're looking at ways to do that but the vast majority of our products of our of our revenue come from customers, who appreciate the value that our doctor sign liver is I'll just give you a couple of examples we are we know from a variety of surveys that.
Customers see that when they send agreements with doctor side people tend to sign faster, they're more likely to sign therefore satisfies has a more positive brand halo all of that feeds into.
Our premium positioning in.
In addition to that we tend to do very well on on helping with the internal workflows and.
And the companies that adopt doctor side, which creates cost savings and efficiencies. So I feel pretty bullish that that we can maintain our position, but it's absolutely true at the low end to the Super high volume commodity esignature, there's more competition and we need to be more agile in responding to that and we're working on that as we speak.
Great. Thanks, I appreciate it.
Our next question comes from the line of Michael <unk> with Wells Fargo. Please proceed with your question.
Hey, Greg this is off the minds on for Michael.
I just wanted to go back to the expansion rate it looked like expansion ticked down a touch here is there anything you'd call out as it relates to those expansions and how we should think about that settling in from here.
Yeah.
Yeah.
Yes that was on the dollar net retention number you broke up a little.
Yeah.
Yeah. So I mean on last quarter's call, we talked about kind of that trend line and as I said in my prepared remarks, we continue to expect their trend line to push downward in Q4.
What's embedded in that number.
Is it mainly expansion rates are moderating and so the growth and expansion is declining as a reminder, that's a it's.
It's a dollar net retention numbers that we said based on our book of business that book of business is quite large so it takes larger dollars and larger rate of expansion to move that number up.
Just given some of the dynamics.
<unk> about the last few quarters around expansion rates and deal size is contracting we would expect to see continued pressure on that particular metric for Q4.
And our next question comes from the line of.
Sills with Bank of America. Please proceed with your question.
Oh wonderful thanks for taking my questions and welcome Alan.
Wanted to ask a question on the agreement cloud as the company starts to transition over over the longer term I understand towards a more workflow oriented business.
Today, we think of.
That'd be signature is transactional.
Do you think there is a different go to market that's required here to really materially move the needle and gain some traction there you talked about some that Si efforts that are global S size et cetera, I assume they would play a role there, but any thoughts on that thank you.
Yes, so a couple of points there I think.
From a customer segment perspective, we have a very nicely balanced book of business, our process of EBIT marketing and and enterprise.
A lot of our enterprise adoption has been departmental level historic but we're negotiating more enterprise level agreements I think we need to.
<unk> to evolve our sophistication and readiness there we brought in some leaders with great experience there, but I think we're still coming up the curve in terms of of being fully ready to being a.
Broad enterprise AR platform supplier, if you will.
So that would be my main point I'd make on all of that in terms of the the other parts of the business.
Yes, I think the seal M business is already very much an enterprise play and as we've rolled that out we've seen a lot of our larger deals.
Have a significant seal them element. So we are a we're.
We're pushing hard on that I think that is still at a relatively early stage market opportunity.
You noted.
Yeah. There is it's so it's so complicated and theres so much customization auto vertical a company specific basis.
Inevitably there's a strong services element to that while we will have a base level of services, we absolutely need third party partners like the biggest size.
And others and they are very eager in fact, we have a lot of inbound interest to partner with <unk>.
And creating combined solutions to address those needs. So I'm bullish on that but I want to maintain Doctor science focus as a as a SaaS software company.
With necessary.
Customer success and professional services elements, and then augment that with the with the.
Isps in that size than others.
To present solutions to enterprises that have more complicated needs.
Great to hear thanks, Alan and then one for you Cynthia if I may please just on the guidance for <unk> for next year low single digit billings growth.
Quarter, you saw it looks like 19%.
Obviously, you had some some deals pulled into Q3, but good.
Good results.
In comparison to kind of the guide. So just what are you factoring in for next year is it is it a worsening macro you talked about somebody logging sales cycles that perhaps deal size compression or are you just assuming that that environment sustained here and any color on just what's factored into that next year.
Thank you.
Yeah sure so we're not.
Technically guiding to next year, we're kind of giving you our best view of what we're seeing and again in the spirit of being transparent we did want to provide some direction to what we're seeing and actually looking to as we look into Q4 and next year.
Got it assumption there I guess when you look at Q3 was 17% and.
Q4 is I think 6% and so and we're certainly seeing kind of a more challenging macro environment and some softening trends materialize right and I talked about kind of smaller deal sizes smaller extensions and expansions at a slower rate. So I think those those things in particular between the macro and then what.
We're just seeing with customer behavior on the softening trends in expansion customers are still expanding that theyre, just expanding at a lower rate and that puts pressure on the on the growth rate.
Our customers.
Spending budgets and so we're not we're not modeling a material degradation there or material improvement. So we're kind of assuming just kind of a softening macro environment that we're currently seeing.
Thanks Cynthia.
Okay.
Our next question comes from the line of Mark Murphy with J P. Morgan. Please proceed with your question.
Yes, Thank you very much and I'll add my congrats Alan I'm interested in how commonly do you sense that some of your customers might have over provisioned themselves with doctor sign capacity during the pandemic and maybe now they're they've been drawing down some of that.
E signature inventory in.
In a manner that maybe it could position them to run out of the excess capacity. It sounded like you actually might have seen a bit of that here in Q3, and where they might be able to reengage on new purchases, maybe it's in the back half of next year or somewhere else beyond that.
Yeah.
I do think that we're.
We're on the tail end of that part of the cycle is as we are.
There are a lot significantly lapping our cobot.
As a broad phenomenon and understand the company's took them at that time.
At the same time of course, some of our customers solve very inflated volumes during.
During COVID-19.
Entering a very low interest rate environment youre familiar with the government loan scenario I think the mortgage and real estate volumes, which is simply lower now even if they have completely exhausted their pre bought.
Our envelope allotment so.
I think yes.
I'd like to be cautiously optimistic along the lines that you did you note.
But I think there is that that's counteracting factor of some of the things that were the most volatile weather was the most pre buying probably also people who are now at a different demand environment.
Okay, Yeah understood and just as a quick follow up.
How are you viewing the partnership between <unk> and Microsoft.
It may evolve over time, because I think there's a viewpoint out there that Microsoft is conspicuously absent from this market in some ways that.
Perhaps they could end up offering E signature as part of office 365, and I'm. Just wondering if you see any opportunity to be involved there or perhaps did you see some other angles to that relationship.
Yes.
Yeah, I mean, there's a lot of pieces to that first I'd just say look we're really excited about our evolving partnership with Microsoft.
As you know we entered into a large strategic partnership deal with them earlier this year.
They are and we've delivered a number of really I think exciting new integrations with Microsoft with teams Sharepoint, all builder and others. So.
And we have I think we're still just scratching the surface of what we're capable of in terms of integration with a variety of Microsoft platforms.
So I <unk>.
Look I expect that Microsoft and Google will have some basic E signature capability embedded in their office suite, but I don't really think that that's that's the core value that we provide we provide a lot of richness workflow around.
Signature that goes well beyond I think the core office suites will supply.
I don't I don't feel that that is the biggest competitive risks that we face.
I think we were very pleased with the progress of the partnership with Microsoft and with the other software suppliers I think most of them use it as a.
You know the best of breed partner for them.
We want to capitalize on that and of course, they are a huge partner for us with our migration to Azores. So that's a whole separate topics.
Thank you.
Yeah.
Our next question comes from the line of Jay <unk> with William Blair. Please proceed with your question.
Hey, Thanks for taking my questions and congrats on the great quarter, so, giving signature usage from existing customers and the incremental new logo next year may be impacted as a result of the macro how do you expect your expansion motion so thinking about C. L. M notary, our premium priced signature capabilities like I'd verification to perform next year.
Well I think on the one hand, I think you will see us expand the number of.
Products that we have that we can offer across the entire agreement workflow as I outlined earlier and at the same time I think if we make it too complicated and itemize the by too much.
We make it harder to buy and we don't necessarily include some of the features that truly differentiates us from low end competitors and so one of the big pushes this quarter.
Initiated was.
Better bundling mechanism to bring together some of these features so that we make and as well as the as the initial.
Initial onboarding for new clients to make sure they get off to the right start and that they are using not just the core esignature capability, but some of the other features you allude to.
And the early signs are that are promising so we are.
At the same time, I think packaging more features that directly relate to signature and making sure that we're fully selling that bundle of features.
And expanding our footprint to other aspects of agreement workflow that we would charge for separately.
Great. Thanks, and then Cindy if you could just add any commentary on the linearity of demand trends month to month throughout the quarter and into November did anything change over the last months, leading into Q4 as it relates to demand or usage of your products.
Yeah, I would say that there hasn't been material changes from exiting Q3 into Q4 and that and that kind of inform some of our macro comment I would say and just maybe reiterate what we said on last quarters call. We have been seeing a little bit of a shift in linearity in.
In the quarter itself between the months and so I would say that continued in Q in Q3 inventory, we saw softer linearity, leaving the quarter than entering the quarter and then we had historically than we have historically seen in the kind of this quarter linearity trends.
For a quarter.
That's helpful commentary, Thanks, again for taking my questions and congrats on the great results.
Yeah.
Our next question comes from the line of Richie Deloria with RBC. Please proceed with your question.
Oh wonderful. Thanks, so much for taking my questions Alan welcome aboard and I'm very much looking forward to working with you.
Two questions if I, if I may just on the kind of preliminary outlook or framework or whatever you want to call. It for next year really appreciate that color a helpful way of thinking about things I guess just for starters. If we think about low single digit billings growth for next year I'm sure. There's some sort of a.
Cadence there in terms of maybe lower in the first half higher in the second half just given the macro picture.
What do we think about that I mean that that kind of implies that you know calendar year 'twenty for FY 'twenty five we'll be mid single digit growth and I know, it's way too early to start talking guidance for that but maybe more importantly, what would need to be done to bridge that gap from that that baseline that you're talking about based on the billings guidance to eight.
Growth rate that you'd be happy with because I can't imagine you'd be happy with given the market opportunity and everything with mid to high single digits growth. So maybe can you walk through what Oh from an execution and end market opportunity standpoint needs to happen to get that growth rate to where you'd want it to be and then I've got a follow up.
Yeah, I think first of all we set aside macro which obviously weighed heavily on us as we as we looked out to 2024 and you don't want to presume that the economy's necessarily going to get better. So that is embedded in our forecast, but looking beyond that.
I think the key the key levers for us are.
We got to get our digital motion to to work much better and that's a huge focus and investment area for US now we think we can capture more business that way.
But until we can really prove that to ourselves, we're certainly not going to put it in our guidance.
Really I think we have a series of product initiatives rollout over the next two to three quarters.
I think we will dramatically broaden our footprint, but again until we we have a little bit more solidity. There it would be imprudent to include that in even a preliminary outlook.
So I think we have a.
Our international opportunities that other one where we will be doing some significant investing in 2020 for that market is at a much earlier stage of evolution that we have significant headroom. There. So I think theres a number of areas where were.
Where we are.
We hope to see significant upside, obviously I didn't join to run a lower mid single digit revenue company. So.
Pushing very hard to guess different place than we were.
We hope to have a lot of news to report on that over the next few quarters.
Yes that makes sense.
That's right.
Yeah, sorry, I might just add to that.
As our fiscal 'twenty four is calendar 'twenty three rates. So that's it's an outlook. It's not a guide 90 days from now we will give a more specific guide.
So we'll be able to give you more detail there understand what they will what youre talking about in terms of calendar 'twenty three into calendar 'twenty four.
We said, we would expect that first half of next year to be kind of get off to a slower start and thats, partly macro and it's partly the initiatives that Alan was talking about.
We are going to take some time to gain traction and so the scenario where.
I guess calendar 'twenty four it could be better would mean that macro is probably gotten better and then some of the initiatives are starting to take off and you start seeing that in the back half of next year because that can spill into the following year I would just say though.
Our when we gave guidance and we gave outlook and you all have been following the company for quite some time there are opportunities and there are risks and.
And we have I think a balance those things in kind of what we're telling you in the spirit of the 'twenty four is really to provide transparency to what we're currently seeing and but it's still a balancing those opportunities and risks. So I just want to make sure that that you all understand that yeah. I mean, I think what I would just add to that such as <unk>.
Right.
Giving you now is an extrapolation of our current trends. We are we have a lot of levers that we're pulling and we hope to be able to update you on those of course of the next several earnings calls are bullish on the long term prospects of the thinking we have a lot of headroom and are very well positioned.
Alright, fantastic right really really helpful. Both of you. Thank you and then just kind of a quick follow up if you think about the margin not guidance for next year, you're talking about the low end so about 20%.
And I guess.
Given that you also have all these cost savings that you've been working at generating over the past.
Quarter, two quarters, a 9% read I imagine that a lot of the upside that you're getting from those cost savings youre reinvesting in areas. So maybe can you walk us through you know why why would margins not be higher and if it is in fact youre.
You're just reinvesting in other areas what are kind of those top investment priority, that's getting that margin to 20% again in spite of the cost cutting focus and and the 9% rate. Thank you.
Sure I'll talk about the margin and then Alan can you talk about some of the the investments and.
So on the on the margin our long term target margin has been 20%, 25%. So we're expecting to be at the lower end of that.
Into next year would be what we would expect so we would get some uplift from the restructuring that we've done and are in the process of completing.
As you said, we would be reinvesting in the business and a lot of it is around things like international go to market initiatives and R&D in particular and those pieces I think are going to be really important.
Yes, just to add to a city was saying.
I think our go to market motion needs to become more efficient we're going to grow into you know we've made some adjustments we need to grow into the infrastructure that we have and do a lot more on the digital side as I've alluded to.
So that's an area, where I would hope to see our our metrics continue to improve.
I would say.
I feel differently about our R&D investment.
We are likely below many of our SaaS peers in terms of R&D investment rather revenue in and I think.
We have a.
A lot of ideas a lot of opportunity here and I think we have to the extent that we invest sort of beyond baseline that will probably be where the bulk of it goes.
Alright wonderful thank you so much.
Yeah.
And our next question comes from the line of Kirk <unk> with Evercore ISI. Please proceed with your question.
Oh, yeah, thanks, very much Alan maybe following on to your last comment on the go to market have most of those changes.
<unk> put in place I guess to date, obviously, sometimes it's difficult to do that as you're trying to close out the fiscal year or are you waiting to sort of instruments. Some changes perhaps on the direct side as we get into the beginning of next year I was just trying to get a sense on if if there's still some I assume theres always going be some tweaking, but have some of the more fundamental changes been established or is that.
Something that you're still waiting on doing once you close out this fiscal year.
Now we're not we're not planning any any broad efforts risks.
Risk type of structures, along the lines of what we did for the whole company.
Last quarter.
We're going to continue to tweak I mean, I think the market environments dynamic we're going to continue to move resources around as I alluded to.
And individual functions and departments in the go to microphone sales, where I think we'll see some some privatization or or or prioritization.
But I'm not looking to you have to do anything.
At the macro.
Company wide level.
I do expect that we will get.
Difficultly more productive and efficient in our go to market motion.
It's a huge lever for us in addition to the digital side, we've had all hands on deck effort to remove friction internally into.
Just realigning combined functions, we were overly segmented I believe and so there was just a lot of work to.
Get our field operation organization.
In a better state I think Steve shoot.
Our president it feels has done a very nice job pulling that together, bringing in senior leaders and I think we're much better poised to grow with the resources that we have.
Today than we were six months ago.
And some of those initiatives that I alluded to on the self serve side, but obviously bear more fruit in.
In the next few quarters.
That's really helpful. And then so there really quickly you you brought up are you seeing the cash flow discussion to ERP implementation are there any other big systems that need to be sort of upgraded given you guys have scaled so quickly or is that sort of the biggest one that was that was outstanding just trying to get a sense. If that's another area potential spend for you all next year.
Yeah, I mean, we need to continue to invest in our systems and more automation and but I would say ERP has been a.
A multiyear endeavor that started before before I, even joined the company. So it's a big milestone for the company that will enable a lot of other automation to happen and so we'll continue to invest there, but I wouldnt expect another project is large and so as that project and cross functional in the NIM.
Yeah, I agree with that just to add to that I think I don't think theres anything huge talked about from an investment perspective, but just for color. This company. It feels like it has one of every.
<unk> product has been backed by the venture industry in the last 10 years and certainly so we need to dramatically.
Clean that up and get to a much smaller number of anchor tools. In addition to our ERP system. The other big focus this year has been on our Salesforce implementation themselves as a core platform I think we're in much better shape now than we were at the beginning of the year and there's a couple of other areas, where I think we have opportunity to.
To dramatically simplify and consolidate and that'll help everyone's become more productive, but it's not gonna have not gonna be of a magnitude that Cynthia went through with the ERP project.
That's super helpful. Thank you.
And we have reached the end of the question and answer session I will now turn the call back over to Alan <unk> for closing remarks.
Thank you.
Well. Thank you all for joining to hear more about where we're headed I am excited to be on this call with all of you and to be leading this incredible iconic company.
In closing.
We believe we've delivered a solid Q3, and we're focused on delivering an exciting product roadmap and improving the efficiency of our go to market to drive growth and profitability.
My first two months of a firm doctor signs tremendous headroom strong customer relationships and world class talent.
I'd like to thank our employees, our customers and our partners for their warm welcome and the insights dedication they've shared.
Look forward to updating all of you as we make progress. Thank you for joining.
Yeah.
And this concludes today's conference.
Thank you.
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