Q2 2024 DocuSign Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining jockey saw in second quarter of fiscal year 'twenty four earnings conference call.
This time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I will now pass the call over to Heather Harwood head of Investor Relations. Please go ahead.
You operator, good afternoon, and welcome to Darkies signs Q2 fiscal year 'twenty 'twenty four earnings call I'm, sorry, what darkies signs head of Investor Relations.
Joining me on today's call are Darkies signed CEO , Alan <unk> and our CFO like Grace then the press release announcing our second quarter fiscal year 'twenty 'twenty. Four 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 are based on our best estimates at this time and are therefore subject to change.
Read and consider the risk factors in our filings with the SEC together with the content of this call any forward looking statements are based on our assumptions and expectations to date and except as required by law, we assume no obligation to update these statements in light of future events or new information.
During this call we represent GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings.
These non-GAAP measures are not intended to be considered in isolation from 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 those figures. Please refer to today's earnings press release, which can be found on our website at investor Darkies signs dotcom and.
I'd now like to turn the call over to Alan Alan.
Thanks, Heather and good afternoon, everyone.
We closed out the first half of the year strong by delivering solid second quarter financial results. We continued to drive momentum in our business by making progress against our key initiatives and delivering enhancements to our product portfolio.
Exiting the quarter I feel energized, having recently come off our momentum events, where we visited eight cities spanning five continents.
We met with thousands of partners and customers, who are excited to hear about our dual track plans to improve agreement workflows.
In the near term we're focused on the agreement management layer, we're taking something that's quite complex for our customers and making it easier and more delightful.
And over time, we're building the intelligence layer that will unlock agreement data.
We presented our future vision publicly shared our product roadmap and received tremendous validation after showcasing product demonstrations aligned to these two priorities over the quarter.
Let me share some highlights from this quarters financial results Q2 total revenue came in at $688 million up 11% versus prior year and Q2 non-GAAP operating margin came in at 25%.
While we are pleased with our results like many others, we're seeing continued macro pressures tempering expansion rates.
However, we remain focused on what we can control executing against our initiatives to drive innovation and operational efficiency.
Setting the foundation for growth, while navigating an uncertain environment.
Now I want to highlight our pace of innovation driven by our delivery of new features products the.
The progress, we're making demonstrates how we are expanding upon our leadership in E signature.
As I said, we're thinking about our roadmap on two horizons in the short term, we're looking to ship new features and functionality that differentiate darkies sign and streamline agreement workflows, bringing in new customers and continuing to deliver value to existing customers.
To that end continued to expand our identity verification portfolio announcing the global launch of liveliness detection Friday verification.
Liveliness detection technology, Leverages AI powered biometric checks to prevent identity spoofing, which results in more accurate verification without the signed me being present.
I do verification is already helping our customers our data shows that his reduce time to side by about 60%.
Later this year, we expect to expand our functionality with a wallet feature that'll enable frequent users to save their profile driving improved efficiency and convenience.
These add ons will be available for all of our plants, including our standard plan, representing an important differentiator for doctors science product offering for all customer types.
As I stated in the past the value of an agreement is in the data at every step of the workflow will benefit when it's automated intelligent and seamlessly integrated into core business systems.
Web forms is delivering on that vision during the quarter, we shipped and announce more and increasingly sophisticated capabilities to our web forms offering.
July where pumps became available on doctor signs fed ramp mode.
Our it environment, which unlocks new possibilities for our federal state and local government customers to digitize their forums.
We will also soon ship advanced reporting capabilities, enabling users to unlock data from their agreements to uncover actionable insights and drive data driven decisions.
This quarter, we also announced the Darkies signed monitor is now available to our CRM customers.
Monitor it provides a comprehensive and holistic multi product view of user activity on one dashboard for both seal that many signature.
Ensuring organizations can quickly and easily detect investigate and respond to suspicious activity before incidents occur.
For our customers, it's powerful reassurance, losing even one high value agreement can have a significant business impact.
We are seeing large marquee organizations across industries, including second finance select darkies sides seal M to transform how they automate the end to end agreement processes across their entire enterprise.
For example, we closed one of our largest seal M deals ever this quarter it.
As customers as a leading residential.
Residential solar company turned to our CRM solution to help automate over 1200 their agreement templates, leveraging our document generation of workflow management capabilities seal M helps them automate their agreement processes across teams, adding simplicity and security.
Oh I see all of them today represents a small contribution to our overall business. We saw solid year on year growth, which is a reflection of our leading market position.
We are encouraged by the wins and we have just begun to tap into the potential for this market.
More broadly we continue to make meaningful progress towards our vision of smart agreements.
Before we discuss our final update it's worth grabbing this portion with a reminder of what is generally true in the market.
Individual solutions work, but customers suffer when putting together solutions combining different product categories like C. L. M E signature workflow management document storage and so on.
Today, only the largest enterprises with resources and I T. Sophistication can link these solutions together and only at significant expense. This depresses, the overall consumption and size of market.
We are on a multi quarter path to evolve our offerings towards a platform capable of coordinating broader processes at a fraction of current complexity.
Our goal is to unlock the market for intelligent agreement management for millions of businesses automating billions of hours of manual work and improving business outcomes.
Today, we're already monetizing AI directly through our seal M plus product and indirectly through its use in our products such as search.
Our next step on that journey as with AI labs.
But they are labs, we are co innovating with our customers.
Provide a sandbox where customers can fill it can share a select subset of agreements to try new features we're testing.
Our customers get early access to developing technology and we receive early feedback that we will incorporate into our products.
By working with our customers in the development phase, where further reinforcing the trusted position.
Earned over the last 20 years.
Yeah.
Next let me provide an update on the progress, we're making with our go to market capabilities balancing scale with efficiency.
As we evolve how doctor sign goes to market integrating our digital direct and partner selling motions to leverage an omnichannel approach.
To provide an update on the progress we're making our self serve product led growth channel.
The P O G. A self serve capabilities of one of our most important areas of investment. In addition to our continued focus on delivering against our product roadmap, we're improving our customer experience by making darkies signed products much easier to try and buy.
With such a diversified customer base, it's critical that we deliver delightful self service experiences not just for growth, but also for scale and efficiency.
We made good traction over the quarter, noting higher traffic conversion rates of new customers on our website.
So lots of expansion opportunities for customers directly within their product experience, resulting in relative strength through our digital channel.
We expanded relationships with our now our partner ecosystem, which is an important part of our omnichannel approach to drive reach and scale.
Q2, we launched pay as you go offering for our ISP partners.
She naval size vs to embed Darkies sign E signature in their agreement workflows on a consumption basis.
Over the course of the next few months, we will have been featured partners and some of the most important technical conferences, most notably at Google Next Dream Force Deutsche Telekom's Digital X and Microsoft Ignite.
One of the key pillars of our Omnichannel is strengthening our direct sales productivity.
This was the second consecutive quarter of a higher than anticipated rate of on time renewals, which is a positive sign.
Kris and go to market execution.
It's contributed favorably to our billings outperformance for the quarter, which Blake will touch on the financial update.
In our international business expansion remains the largest part of our addressable market, we are making progress.
This past quarter, one of Australia's largest banks.
Spanned at their relationship with us customer since 2020, they use our solutions to streamline both internal and customer facing business processes in an effort to remove friction reduce cost and deliver better experiences.
Outside potential in our international business is large.
And as I had commented on previously we met with hundreds of our international customers through Darkies sides momentum events.
The excitement about our product roadmap was contagious and we look forward to growing our presence globally.
We are shaping the future of the agreement category and building on our global scale and trusted market position.
The future of agreements is not about attaching yourself to a legacy document format.
As we continue our product evolution by adding intelligence and unlocking the data trapped in agreements.
Leasing productivity, reducing friction and saving our customers time.
This is a fundamental shift in the agreement space.
I'm confident in our competitive advantage is talking sign as the largest player focused solely on improving the agreement process.
Moreover, there is no other company focused on the full end to end agreement process for companies of every size.
That's the b's up to the world's largest enterprises.
In closing I want to thank doctor signs employees worldwide for their collective power and driving our success.
I'm proud of the tremendous job the team has done navigating the dynamic environment.
I'd now like to welcome Blake Grayson, who as you know joined US in mid June as our CFO Blake has proven to be valuable addition to our team.
And I look forward to our continued partnership let me turn it over to Blake to review our financial performance.
Yeah.
Thanks, Alan for the kind words and good afternoon, everyone I'm really excited to join my first earnings call as Darkies signs CFO over the last few months I've gained considerable exposure into the workings of our business and value proposition as we look to transform agreement workflows first I'd like to share what led me to join.
Darkies sign.
Dr. <unk> is a powerful brand and our scale and our customer base that is rare in the enterprise software space, we deliver high ROI products that enable our customers to complete agreements faster easier and more securely the.
The opportunity for our business is quite large and while I am optimistic about our future. We still have work to do to achieve our goals, particularly in a demand environment, where companies are appropriately scrutinizing their investments.
With that let me turn to our Q2 results for.
For the second quarter total revenue increased 11% year over year to $688 million and subscription revenue also grew 11% year over year to $669 million.
Our international revenue growth outpaced, our domestic business with 17% year over year growth to reach $180 million in the second quarter, representing 26% of our total revenue.
When I think about the market opportunity ahead I'm excited by the Greenfield space that exists internationally. It is a largely untapped market and a key pillar of future growth.
Look forward to updating you on our progress as we work to increase our footprint globally.
Second quarter billings rose, 10% year over year to $711 million.
Similar to last quarter, our Q2 billings outperformance was driven by a higher rate of on time renewals.
It is encouraging to see us maintain the higher level of sales execution. We saw in Q1 through the first half of the year. However.
However, given the macro environment and headwinds in some expansion metrics. We continue to expect billings growth deceleration in the back half of the year, which is in line with our previously communicated expectations.
We added approximately 37000, new customers during the quarter, which brings our total customer base to 1.44 million% to 12% increase year over year. This includes the addition of approximately 6000 direct customers.
Total direct customer base of 226018% year over year increase.
We also saw a 6% year over year increase in customers with an annualized contract value exceeding $300000 with a total of 1047 customers similar to last quarter the quarter on quarter decline in this customer segment was primarily related to customer buying patterns lower expansion rates and parcel churn.
Uh huh.
However, as we ship innovative features to deepen our product lineup and differentiate our offerings more customers are recognizing the value of adopting our features and frictionless functionality.
This increase was product stickiness and we are pleased that over 50% of our direct customers have now adopted five or more features an increase of nearly 10 points year over year.
Net retention was 102% for the quarter, we're seeing continued macro pressures, resulting in moderated expansion rates and as we expect customers to continue scrutinizing budgets and optimizing spend we anticipate the Q3 dollar net retention rate to trend downward.
From a vertical perspective, we saw pockets of relative strength within health care insurance and business services.
One of the most significant strengths I've gained insight into his darkies signs broad and diverse customer base, which enables us to help offset pressures from verticals that are more sensitive to the interest rate environment, such as real estate.
Given the large breadth and depth of our installed base and the investments we're making in product innovation, we believe that as the macro environment stabilizes or improves darkies signed will be well positioned to capture expansion opportunities non.
non-GAAP gross margin for the second quarter was 82% in line with the prior year second quarter non-GAAP subscription gross margin was 85% also in line with the prior year.
Q2, non-GAAP operating income reached $170 million up 51% from the prior year non-GAAP operating margin of 25% was up nearly 700 basis points compared to 18% last year.
As discussed on last quarters call, we are executing against our investment plan. Our philosophy on vesting is consistent well maintained continued disciplined investments to drive growth in our top line over time.
Although we expect to ramp investment in the back half of this year, we still expect to exit the year with operating margins better than they were prior to our restructuring efforts.
Q2, non-GAAP EPS was 72 cents an improvement of 28 cents from last year, a 44 cents. We ended Q2 with 6748 employees compared to 8061 the year prior.
Second quarter operating cash flow was 211 million, representing a 31% margin and an increase of 75% versus the same quarter a year ago free cash flow for the quarter was also up 74% year over year coming in at 184 million, representing a 27% margin.
As I'm learning more about the business I am impressed with our ability to consistently generate strong free cash flow.
With regards to the balance sheet, we exited Q2 with more than 1.5 billion in cash cash equivalents and investments.
We currently have approximately $725 million in convertible debt that will be maturing over the next few months.
Our strong cash position is a reflection of the operating leverage in our business model that provides a strong level of flexibility.
And as we think about utilizing this cash we will do so thoughtfully, ensuring our capital is strategically deployed.
Related to this we redeployed excess capital during the quarter and repurchased 583000 shares for approximately $30 million. We also announced today that were increasing the size of our share repurchase program to $500 million up from $200 million as we continue to focus on being opportunistic reduce.
<unk> dilution and returning excess capital to shareholders as appropriate.
In addition to our share repurchase program during the quarter, we used 40 million to pay taxes due on our S E settlements, reducing the dilutive impact of our equity programs.
With that let me turn to our Q3 and fiscal 'twenty four guidance to reiterate while we're pleased with our Q2 financial results. We're also cautious in light of an uncertain macro environment and competitive dynamics for the third quarter and fiscal year 'twenty. Four we expect total revenue of 687 to 691 million in Q.
Three or 6% to 7% year over year increase and 2.725 to $2 $73 7 billion for fiscal 'twenty, four or an 8% to 9% year over year increase.
This we expect subscription revenue of $669 million to $673 million in Q3, or a 7% to 8% year over year increase and 2.649 to $2 661 billion for fiscal 'twenty, four or an 8% to 9% year over year increase for.
For billings, we expect $668 million to $678 million in Q3, or a 1% to 3% growth rate year over year, and 2.804 to $2 824 billion for fiscal 'twenty, four or growth of 5% to 6% year over year.
We expect non-GAAP gross margin to be 81% to 82% for both Q3 and fiscal 'twenty four we expect non-GAAP operating margin to reach 22% to 23% for Q3, and 23% to 24% for fiscal 'twenty four we.
We expect non-GAAP fully diluted weighted average shares outstanding of $207 million to $212 million for both Q3 and fiscal 'twenty four.
In closing I want to thank our team for their warm welcome and their commitment to work with our customers in a challenging environment and I look forward to connecting with many of you in the near future. We are focused on executing against the key initiatives that we believe will drive future long term growth and expansion as well as being mindful of efficiency opportunities.
I will set us up for profitable sustainable growth as Alan mentioned, we are the only company at scale that is solely focused on helping customers improve the agreement process.
We look forward to keeping you updated on our progress as we continue to evolve the agreement workflow category and help our customers become more productive and more efficient.
That concludes our prepared remarks with that operator, let's open up the call for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
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In the interest of time, please limit yourself to one question and one follow up so we may get to everyone's questions.
Our first question comes from the line of Mark Murphy with Jpmorgan. Please proceed with your question.
Great. This is cynical or on for Mark Murphy. Thank you for taking my question and congrats on the healthy execution. This quarter, Alan just double clicking on the AI front you discussed a number of exciting product launches you had the recent momentum conference are there any specific products you would call out in which you see the greatest incremental monetization or upsell potential.
Longer term, what does that surround the IV verification agreements amortization or some of the other areas for example.
Yeah.
Yeah look I think we think AI will impact practically all of our products at every step of the agreement workflow. So I don't know that there was a just a one call out but maybe just a.
Couple that I'm most interested in.
Certainly think that the broader shall we say agreement analytics category is poised to be completely revamped with generally a very odd.
You know we were an early investor in that category saw that coming together with seal M.
You know four or five years ago I made a couple of strategic investments have been a leader in that space, but had been held back by a fundamental technology that I think now with generally I, we can do substantially better job more seamlessly lighter weight less professional services. So I'm very excited to think about how it transforms.
The seal M category and enables us to deliver more intelligent agreements I think you mentioned ITV I agree 100%.
You're fundamentally.
Our entire categories AI able to see the.
Upload and ingestion of your I D recognition of it and then that liveliness detection. We're detecting who you are and that you are present and matching that to I D. There would simply not be possible without today's AI technology and really takes.
Mattingly reshaped the ability to trade off risk and convenience. So I think that's a good one.
And then but I really I really do think that it works across the entire flow.
We use them today and scale when you use doctor sign esignature today, we automatically recognize you feel that that's working.
Detecting what's going out in the agreement.
I've got to put them in that order, though.
Great. Thank you and then a quick follow up for Blake any context, you can provide in terms of how the macro inviting environment might have trended for Q2 relative to Q1 was there any signs of improvement in underlying demand trends or maybe pockets of relative stability.
Yeah.
Sure.
So the question I think that from a macro perspective overall it seems pretty similar I think from Q1 into Q2, you've got certain verticals and certain areas that show relative strength. When we talked about those you know calling in a couple of in the prepared remarks and you have other verticals that are obviously still under some stress and so we have to deal with that.
On the macro side the biggest pressure point that I think we deal with is how cfos people in my position are generally scrutinizing investments across the board and so you know for US it's trying to work with them to provide the best value that we can but nothing I would say nothing.
Nothing stands out from Q2, I think from India to Q1, but we're still in obviously a bit of an uncertain environment.
Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Hi, This is love soda on for Brent too. Thank you for taking my question.
And welcome to Blake, one to ask Juan to Al and maybe Alan could you talk a little bit about the go to market execution. I know you mentioned the focus on product led growth.
But you know just talk about how it it has been the focus on product led growth what has been the approach to attract larger customer customers and has it been more challenging or.
Is it in line with your expectations.
Yeah.
I'd say first we are we remain high.
Hi, Merrill Lynch dependent our direct sales channel that is our primary go to market that will be the case for the foreseeable future.
And so the execution that you're seeing in the numbers as a result of that are particularly happy with the customer service and renewal management team who delivered.
As we mentioned another quarter of strong on time renewals.
Also huge emphasis all throughout the pre sales sales post sales process on adoption of features that make our products more sticky and more valuable to customers and as Blake alluded to we saw nice progress there.
As we look ahead it will be critical as we continue the transformation of the sales organization.
Given the expanding breadth of our product offering.
And they need to pitch I don't even at a higher level.
But I'm I'm very bullish on under the progress with our direct team is making.
I'd be remiss if I didn't also mentioned I think we we made a significant adjustment as you will all our call in February .
With his name and restructuring effort, 95% of that effort was in the field organization and yet we are continuing to be able to execute so that speaks highly I think of the management teams effort there.
I would just add beyond the direct sales execution as I mentioned that's primary.
Two other points the digital part where we are seeing really good progress in that business is growing little bit faster and I'm very pleased with the progress there and then the third leg of the stool is our partner channel and we are starting to ship features that will enable us to grow that channel. So that we can have a really nice omnichannel direct self serve.
And.
Good luck.
Perfect.
Please go ahead.
Yeah, just had a quick follow up for Blake I'm just on the net dollar retention.
Like.
Just I know you said it would trend down a little bit further from the one or 2% but.
Any any indication as to when we could potentially see some stabilization in that metric.
Yeah.
Yeah sure. So just a reminder, and then it's also for me as I'm learning the business. The DNR. The dollar net retention is only for our direct customers not only for those of the tenure of at least a year you know.
Our communications on this on this figure it's in line with our previous communications regarding the trends.
And you know as covered in the prepared remarks, you heard me say, we do expect continued pressure into Q3, it's a tough macro environment, where companies are scrutinizing investments. It can lead to a smaller expansion opportunities and this is really why the product development focus for us and the roadmap is set.
Important because that's how we can try to provide chances to impact that trend and that's exclusive of macro forecast. So for us the impact that number or that's kind of that longer term product roadmap that we can drive to essentially be able to provide customers. The chance the opportunity to do more with us to provide them better rois and better productivity.
Opportunities and we've got a lot of initiatives underway to.
Try and make progress there, but with regards to trying to call anytime further out beyond Q3, you know we're not prepared to talk about that at this time.
Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Yes. Thanks for taking my question I wanted to just get your perspective, Blake and congrats on the role here on the international opportunity.
Highlight that as a big.
Opportunity that you saw coming on board, but how are you thinking about the size of that business potentially over time and you know any thoughts on potential investments that you can make to better go after that thank you.
Sure you know I think from just my history, you know one of the experiences that I.
Bring in and just the perspective is the international business.
In a previous role at Amazon and I learned finance for the International group, there and the Tam outside of North America is huge and yet it only flex.
<unk> 25, 26% of our total revenue so I think the opportunity for us over the long term there. There's no reason why that shouldn't grow as a percent of the total I.
I think that you've heard Allen talk about you know the expansion opportunities. We just opened an office in Munich in Germany, and so we are making investments there and we are seeing those green shoots of opportunity. So it's a process for us right and when we when we talk about product development when you're talking about private development globally, it's not like a North America only.
Endeavour and so when we do that and we keep a focus on the global nature of this business I'm cautiously optimistic that we have an opportunity to really expand our footprint there.
Yeah, maybe I can ask a little bit more color there so on auto.
On the product side.
Just take Germany as an example, we are we've launched the I D. Verification for you qualified last quarter. We were qualified for trust provider uses it puts us in a very unique and strong market position in the German market is particularly sensitive to those regulatory issues one.
One of the things, we're launching that we previewed at momentum.
Conference, we ease of wallet capability or essentially 11, you bogged in 11 with this idea of system.
Auto log in and the future further reducing the friction.
Added by having more security and that's been the traditional risk trade off that debt.
Companies have faced so.
Very optimistic about our position in the German market and as Blake mentioned, we just hope that at all or is there I'm going there again.
Monday.
In Japan, we're in an even earlier stage of market development.
At the end of August we launched a fully localized seal M, which I believe is the first well.
Western South seal that are introduced in Japan.
And there's a lot of interest and appetite for that I was Tokyo, a few weeks ago.
We're very bullish on the opportunity in the Japanese market as well so.
Beyond the markets, where we can invest at that level, we will use our self serve and partner channels to ensure that were available essentially everywhere, where our agreements are signed.
Great. Thanks for the color and the follow up question just on underlying growth and certainly there was some interesting and.
Slides and in the presentation, but I look at four quarter trailing billings for a rolling four quarter billings growth.
Seems like billings growth over the last four quarters has been stabilizing in the low double digits you saw subscription growth only D cell about one point this quarter do you feel like the business is.
It's kind of stabilizing here, how should we just think about.
The the normalized.
Gross environment is as you kind of process.
The the puts and takes on the quarter. Thank you.
Sure and I'll take a stab and Alan I'll jump in and I'm sure. If he wants to add any color. So yeah generally really pleased with how Q2 performed but you know like you heard in the prepared remarks, we still have work to do ahead of us.
Double digit billings and revenue growth year over year in Q2 customers are adopting you know five or more features direct customers are adopting fiber more features.
At an increasing pace you know year over year, our total customer count grew double digits year over year International grew well and we also produced really strong free cash flow for the quarter, we generated $187 million.
Pretty castle, although off a pretty large foundational base of customers.
Obviously, we need to work on our retention rates and drive growth, but a decent quarter for us I think with regard to the future. There are puts and takes every quarter with that billings number and I appreciate that you're using the four quarter trailing number I think that's a good way to look at it over Q1 and Q2 when you have that strength in on time renewals right and it's forecasted to continue but.
There is pressure as we've previously mentioned around lower expansion rates and some macro uncertainty and so that billings number can be a little you know a little volatile I would say that the full year guide that we that we just announced for billings is actually a bit stronger than it was after our last quarter. So for me as I think.
About the business and what I'm most focused on is how do we turn the chapter two into a new period of growth we have to be focused on the long term on continuous product innovation that can drive that future expansion and that takes some time, but.
But again this is a we have a very large kind of core fundamental base book of business. That's the free cash flow generator, but you know for us going forward. We're excited to deliver on our product roadmap that we believe over the long term can can deliver.
Both opportunities.
I think that's well said like I was just that I think this is a transformational year for darkies side of it we're making the investments to.
Enable the next phase of growth, we're happy that we're able to sustain the business nicely.
But we're not satisfied with that and we are now.
Planning and executing towards a further acceleration in the years to come.
Our next question comes from the line of Jake <unk> with William Blair. Please proceed with your question.
Hey, Thanks for taking the questions and the macro starting to impact the top of funnel at all or most of the headwinds still related to just that expansion motion and then how is the linearity of demand throughout the quarter have there been any noticeable changes on the macro front, especially as we've gone through July and August .
Yeah.
Sure I'll take a stab let me let me try to address your last question first I think on the linearity. It's generally in line with our historical trends.
Monthly results can be volatile in this business you know just due to our sales cycle. What I would say is that you know the linearity trends. If you will are there already reflected in our guide so nothing material to call out from a linearity perspective, I think on the macro component for us that expansion I think is the biggest part.
Thank you you know as I referred to before we have a very large base of business of over $1 4 million customer accounts and so that I think is on the expansion side. This one is probably the more impactful component you can see that in the DMR right yeah.
I think that's about all that I would simply add that you know that.
Relative strength in our digital business I.
I think reflects the DSV segment is doing well and.
That is new customer acquisition I think reinforces.
The teams that are like us.
I'm talking about.
Helpful and then Alan you made.
Quite a bit of organizational changes over the past year. The two Ras amused, yet, though had a thousand president and you feel like the structural changes are behind us at this point and then when do you think those those changes start bearing more fruit for darkies sign just doesn't provider or just given those changes will likely take a few quarters, if not years to play out.
<unk>.
So you're absolutely correct. We we've made a substantial effort over the last 15 to 18 months to attract a world class leadership team that has deep experience, but it's also hungry for the excitement and the challenge of Science next chapter I'm really happy with who have you been able to attract.
I think it speaks to the opportunity into Darkies times brand and the policy of the company the kinds of folks that we've been able to attract not just after I arrived but also higher.
Do you think we have a relatively full team now.
Both directly reporting to me and in fact in the next couple of layers.
I don't have any.
Open positions.
The top two layers for me and that's not been the case for a long time, So I think where we're really making good progress in filling in some of the key leadership roles in the next the next level.
So I feel that the organization is now more ready and poised to fully capitalize on the on the opportunity ahead of us.
In terms of how that plays it plays into that is that as the IND.
Enabler for and the requirement or the.
Both the product roadmap the TTM transformation and then the growth in the out in the outer years. So.
We didn't do that first we couldnt make progress on the other things.
Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.
Oh, great. Thank you so much in and wanted to ask a question around the international strength are you seeing any any countries you'd call out there.
And you know as you've been investing in international are there any regions that we should expect to see perhaps.
Some incremental traction from here.
Okay.
You know I'll just comment.
Regionally I wouldn't say, there's necessarily one stand out versus the rest, but I. Just think we have general strength outside of North America, which I actually appreciate it because it just goes to the notion about the product and the value offering that we have and so how do we expand that you know larger going further and I think also that is.
Far as like new plans and new regions.
We'll take that on a case by case basis I think it's the one nice thing for US I think in this business is the marginal cost to expand is not terribly large, but with us and so for US. It's opening a sales office you know in the kind of thing and you want to have the you know the situation laid out appropriately in order to have the right leadership and scale and things like that.
But I don't have anything without individual countries to reference other than anecdotes that then Alan already provided around Asia.
Rob.
But in general I'd say.
Yeah, I think all of the international regions, Europe , APAC and Latam all grew at double digits.
Yeah. It was it was strong across the board is what I would say for US internationally, we were pleased.
With our inaugural pockets you know regardless of the region.
Great to hear and then just regards to the restructuring effort and the direct sales organization do you feel like.
You know Alan your I think your comments are that you feel like you've got the right team in place, but are the efforts too.
Restructure the existing organization.
Or is that largely in the past do you feel like Youre kind of setup now such that you're kind of in a place where the planet the organization in place from here can execute thank you.
We don't have any plans for any major restructuring of our sales organizations.
Obviously, you always tuning things and I think where we're continuing to evolve that but nothing nothing major.
I think that would be.
On the scale or or considered like a risk or anything like that.
Our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question. Okay. Great. Thanks, maybe a couple for Blake Blake if you don't mind unpacking. The <unk> Billings guide it obviously implies a down $33 million I I know, we had that phenomenon two years ago, but it is.
Typically up sequentially is this a function of the.
Greater on time renewals anything else that you might to fly around that thank you.
Sure Yeah. The guide reflects you know continued the.
The trends that we're seeing in the on time renewals, which are.
The function of the on time renewals for US is that every customer situations different right deals can renew on time that can be renewed early or they can be pushed out. So every quarter as puts and takes on that first.
First half of year has been strong due to sales execution. There deals that may normally have slipped out of Q3 and they got closed in Q2, and so that's a positive but renewables, obviously well super important for us.
And really drive that foundational free cash flow generation, it's more of a timing thing than it is for on the growth side and I think the positive to note put us on the on time renewals is that we're not relying on discounts or incentives to drive that improvement and not on time renewals, it's better sales execution and so the teams work really hard just to stay on top of those things on it.
Come up for renewals because on on time renewals, just a deal that renews on schedule and so that's super strong and you know with regards to the the guide as far as other pressures you know that's just the the macro pressures we discussed earlier with the DNR like essentially that the net retention components in that and that was the pressures that we're seeing there yeah. Okay makes sense.
And one more Blake your your predecessor, it was never a formal guidance, obviously around operating cash flow, but the kind of the soft color was that it might land for the for this fiscal year quote a couple of points below the.
Operating margins is that is that still roughly your framework as to where our cash flow margins might shake out this year.
Yeah, you know I'm not in a place where I wanted to kind of guide to a specific cash flow margin. So to speak I think for me what I'm looking for the business as a long term.
Cash generation company that drives profitable and sustainable growth I think that you know the fact that we've delivered 100 and I think $211 million of cash from operations 184 million of free cash flow those were pretty healthy yields and you'll see those fluctuate in the quarter based on timing and such but it's.
It's a cash generation generating business and model that.
As a CFO I'm selfishly Super excited about.
Our next question comes from the line of Josh Baer with Morgan Stanley . Please proceed with your question.
Great. Thank you for the question I had one more just to clarify on the topic of on time renewals.
So that was part of what drove billings upside this quarter, but now you're saying that the guidance now reflects sort of the same.
Level of on time renewals. So is that right that there's kind of been a change in how you're incorporating the idea of on time renewals into guidance and now with <unk>.
If things stayed the same in Q3.
You wouldn't see upside.
Upside to billings.
Right. So I'll try to clarify this a bit more and I'm learning. This as we go though the thing with on time renewals is that.
Essentially doing it a long time renewal that maybe in the prior year was pushed out affects your ability to continue that momentum. So it's a timing situation and so with that strength in the first half even though you have <unk>.
Execution that continues it just you kind of run out of room, a little bit on it. So it's really more of a timing situation than a growth opportunity. So that's why you see that in the guidance and again that was a in the previously communicated guidance last quarter and we actually increased the full year guide for this year. So it's all been in there.
The guidance, but it's just that nuance of how long time flows through.
Okay got it.
And then one one more just on sort of the big picture agreement process and workflows.
I was just wondering.
Are there certain departments are workflows, where darkies signed should own that full agreement process versus others, where maybe like the basic darkies sign E signatures is integrated.
Into like in HR, onboarding or some other departmental or workflow.
How how to think about to the two different possibilities there. Thank you.
Yeah.
I would say.
People use darkies sign for all kinds of workflows.
I was going to pick areas, where we've where we had a particularly strong early start for a vote.
Otis perspective, obviously in the finance and real estate here that was very strong.
He then I'd say moved onto all forms of BTB sales were.
Very enabled by Darkies fine and we see that a lot and now we're seeing quite a few HR applications as you alluded to.
So we have strong partnerships, there with workday successfactors, a lot of appointments that and in procurement.
Particularly these days enterprises are very focused on procurement management and automating that process of making it.
More efficient and more transparent.
See more adoption there as well so as an example, a lot of our strength in the pharma space comes from procurement use cases, we have a fantastic relationships pick a different one with Nvidia uses doctor sign both for Esignature and seal M and it's really focused on their supply chain efforts.
No.
I really at this point, it's very broad.
All the major enterprise workflows.
And and many many many industries practically all industries.
But we started in different ways.
We have some interesting stuff that were exporters for the esignature movement. If you will but at this point is pretty broad.
Our next question.
Our next question comes from the line of Jackson Ader with Moffett Nathanson. Please proceed with your question.
Great. Thanks for taking our questions guys.
First one on the product set or the feature set.
It's much broader and deeper than it was even just a couple of years ago and I understand given the macro environment, it's probably hard to pass.
Or do you expect to get all the value you've been putting in the products back from your customers, but I'm curious.
How are you, making sure that 11, the macro headwinds subside that you don't put.
$10 of value into the product and when they get five back right just to make up numbers.
Yeah.
It's certainly a fair push but I would say what we've done here over the last nine months or so is really pick up the pace of.
Innovation and product release.
Adding <unk> to our core products.
I think the the big transformation of Darkies sign into this broader agreement platform.
And the intelligence layer is still ahead of us we previewed some of that at both the vision and some early releases at momentum if you haven't already watched the momentum keynotes film on our website give some really good overview of where we're heading so just as an example of things that I think are to come that make this really a more.
At scale holistic platform things like orchestration, where we are enabling customers to dynamically assemble workflows related to agreements.
Components of every part of the Doctor sensory that every one of our interfaces to third party applications.
Applications.
It isn't going to be incredibly powerful and re architect how agreements get done.
That's an example, I think enterprise search was something that that we will begin to we will we will begin to rollout in Q4 and that is.
You're being able to do that semantically across your entire agreeing base. So to use an example, let's imagine that youre looking for Unfortunately, you are in your contracts today that would be a large team of lawyers spending months combing through all your agreements.
We can deliver that and have the AI.
Dynamically interpret all of a sudden nims in ways in which that might be expressed and give you all the agreements that are.
Relevant to that clarity. That's finished that's really transformational capability that we did not provide today. So I just wanted to say.
Say that to date.
Many of these releases have been complementary to our to the products that we've been shipping for a while and they are great and I think where were giving us.
Even more of a market leadership position.
But the broader repositioning golf Darkies sign as the name.
Enabler and creator of this agreement workflow and agreement intelligence model.
It's still to come and we will begin I think delivering against that later this year and it all throughout next year and so.
I think we have so much runway ahead of us what part of the spectrum.
Okay, Great and then quick follow up like what should like what's the plan or what should we expect for stock based comp I'm surprised to see it.
Up.
Year over year, just given the.
The trend in head count.
Sure So stock based comp as a percentage of revenue in Q2 was about 22% that's held relatively steady for us.
We review that number with our outside compensation consultant were slightly higher than our average peer group the driver on the year over year increase has a lot to do with the new leadership folks that we've brought on to the team and so you'll see me being one of those people and you'll see that and so it is something we're we're definitely paying attention to and mindful of it but that's the.
GAAP when youre asking about between head count and cost and so you know that'll take time, obviously, but we'll work through that.
Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.
Hey, guys.
Thanks for taking the question and congrats on a solid quarter I guess.
For me the first one I wanted to go back to the question around.
Net retention because that I think is really really important to stomach that how much of the net retention dynamic is under your control, meaning how much of it is it macro pressure.
As you know competition and consolidation.
Or.
Rich fair lost effectively and I ask that because to some extent.
Your you've already released a number of really interesting new products are in market seal M plus the lab.
The identity product that you talked about so.
Is there any way to kind of just give us some confidence around like what level to the question earlier, it shouldn't dipped below or like when how many quarters out are the cohorts that you're comping.
Kind of normalize that we could start seeing it at least.
Stable.
Sure. It's awfully challenging for me to try to look into that Crystal ball and tell you on the cohort side, what I would say is I think you've nailed. It in your question that it's a combination right. We have a combination of macro kind of affects that essentially as customer scrutinize, our investments and they're trying to save every dollar of it.
Can what do they do but then it's also combined with that we have it under our control that if we can execute and provide products that customers want and over time, we expand it gives us the opportunity for expansion. So I think that it's a double you know kind of a component that affect that rate and so it's part of it is under our control on the part.
Also as the macro environment, but the other day I feel like we can execute on that product roadmap over time.
You know kind of destiny is in our hands, but Alan maybe up more of that.
I grab some of that and.
Look we have instead of you know that it was kind of.
After a few quarters of downward trend and then we will see how we do it with the with the product believes this in but we certainly want to get.
Get it to a healthier level and it's our expectation that we will be able to do that.
So that's especially we can say at this point.
Okay that makes sense and I guess the other question is.
Again, it feels like a bit of a tale of two cities right to some extent you've got the double digit growth both in billings.
And then C. R P O.
Subscription revenue, but then to the question call us like your guidance implies billings in the very low single digit range in the second half.
It implies that even subscription revenue growth kind of goes down into the 6% range exiting the year and I. Appreciate the conservatism, we do love it but if you think about the business itself and that's why that MLR question comes back.
The Street has you accelerating in Q1 right in and to some extent accelerating next year.
So just help us level set like that exit rate that you're that you're looking at for Q4, what would be the factors that that you would be expecting to kind of have to see for for it to kind of get better from there.
Right. So again I mean, our full year guide is in line or better than it was in the previous four so we're staying in line or better not guidance I think that like we've talked about and referenced a couple of times on the call that the strength in the on time renewals is what has driven that outperformance in the firm.
First half of the year and so and then the pressure like you noted on D&O arent expansion rates and macro uncertainty creates volatility for us.
Frankly, the over the long term and I'm not putting a timeline on that but it's.
How do we really could reaccelerate growth and particularly around the product innovation that we have in front of us and so as a company I would tell you that 70 plus percent of our time as a leadership team is on how do we evolve this product roadmap in a way that customers like appreciate and provides us the opportunity for <unk>.
Expansion and so that's where we're solely focused on we believe that if we can deliver on that roadmap that the results will show themselves.
Agree with that and I would just say.
In my mind, the best thing that happened this quarter, yes.
Yes, I'm proud of the solid execution kudos to the team.
The fact that we were able to present, our vision and roadmap to.
Customers and partners and that they validated sushi ethnically validated that everywhere I went was incredibly gratifying and tells me I think we're on the right path. So.
I I I.
I think we're very bullish on the long temperature from the Doctor sign and I think that bullishness is just oh.
That became more pronounced as a result of the sharing of the roadmap and the feedback that we got so.
That is our goal is to deliver against that and I think if we do that all will be very all will be well.
Maybe they get close thank you everyone joining us today.
We were pleased with the results and feedback and.
Having transformation here docs I'm gonna.
The balance of our product investments with operational efficiency and drive shareholder value. Thank you for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Goodbye.