Q3 2024 DocuSign Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for joining talking third quarter fiscal year 'twenty Corp earnings Conference call.
This time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session and that reminder, let's call. It being recorded and will be available for replay from the Investor Relations section of the.
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I will now pass the call over to Heather Wood head of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to doctors find Q3 fiscal year 'twenty 'twenty four earnings call I'm, having a hard one to occupy as head of Investor Relations. Joining me on today's call are docs, who signed CEO, Alan <unk> and our CFO Blake Grayson.
Press release announcing our third quarter fiscal year 'twenty 'twenty four 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 expectation 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 FCC together, what the content of this call any forward looking statements are based on our assumptions and expectations to date and except as required by law, we assume no obligation to update these statements in light of future events or new information.
During this call we will present GAAP and non-GAAP financial measure. In addition, we provide non-GAAP weighted average share count and information regarding free cash flow and billing. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP. Her adult we encourage you to consider all measures.
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> occupying dotcom I'd now like to turn the call over to Alan Alan.
Thanks, Heather and good afternoon, everyone.
She signs third quarter operating results reflect progress on our initiatives to expand beyond esignature into agreement management, and our financial performance underscores our ongoing focus on driving profitability and sustaining healthy free cash flow.
As I reflect on our journey over the last 12 months. The three key pillars of our strategic vision remains the same.
First to accelerate innovation towards a greener management, which we believe will further expand market opportunity second improving the reach and efficiency of our Omnichannel go to market efforts.
Third strengthening our financial operational efficiency.
Now before we discuss each pillar in detail, let me first highlight this quarter's financial results.
Total Q3 revenue came in at $700 million up 9% versus prior year.
We're particularly pleased with the improvement in our overall profitability this quarter against persistent macro headwinds and the latest customer caution.
Specifically, our Q3 non-GAAP operating margin came in at 27%.
400 basis point increase versus prior year, and non-GAAP operating income grew 27% year over year to $187 million.
We also generated record free cash flow in Q3 coming in at $240 million up significantly versus the prior year.
We're focused on strengthening our profitability, while making balanced investments in areas with strong long term growth opportunities.
We're also seeing encouraging signs of business stabilization with improvement in some metrics, notably customers with annualized contract value greater than 300 cat.
Blake will expand on the metrics further in his remarks.
With respect to our first pillar accelerating product innovation, our focus is two fold.
First we continue to improve our core esignature product capability.
In Q3 Doctor sign became the exclusive esignature provider for Microsoft Power page integration, making it easy for website makers to incorporate signatures and forms without code.
Moving to client signing experience and opening the door to building pre and post signature workflows.
In November we also launched a whatsapp integration for esignature.
An internal comparative study, we found that agreements delivered via Whatsapp.
<unk> nearly seven times faster than dose set your email.
Given the ubiquity of Whatsapp globally, it's an important update to bring esignature to markets outside the U S.
In addition, I do see recognize doctor sign as a leader in its 2023 E signature assessment.
Dr. Hussain continues to hold the leadership position that I D. C E signature based on having a complete portfolio of solutions for customers.
And we're seeing existing customers grow and expand their use cases.
Group, which is a Michigan based wealth management firm is using esignature to deliver a fully digital experience sports clients to a proprietary mobile app and is expanding their use of doctors find products with notary.
Identity verification and monitor.
Our API since strike clients. They don't decide the best choice for hips, and they've made doggy signs of standard across their entire organization, which will approximately double their use of our products.
Second we're also investing towards broadening our value proposition beyond esignature I need to agree with management.
In Q3, we shipped embedded agreements that deliver a seamless signing experience directly on our customers' websites and applications.
In addition, we launched Microsoft power automate for the generation of personalized professional looking documents.
We're signing directly Microsoft power automate flows.
We also launched foundational features and functionality to help us expand beyond signature to Widescale Evergreen management piece.
These features deliver customer delight and remove friction all aspects of the agreement process.
We see the success of C. L M. As a proof point that there are broader agreement management use cases to address for customers of all sizes.
<unk> continues to grow well, particularly with North American enterprise customers and for the fourth year in a row. Our CRM solution was recognized as a leader by Gartner and contract lifecycle management.
Noting our strong market understanding product strategy and roadmap vision.
<unk> upcoming generative AI enhancements.
This quarter, we expanded our relationship that began more than five years ago, what we call USA.
The leader in workplace innovation.
So began using doctor sign E signature and this added to the Aladdin as part of its transformation into a digital services company.
Our AI solution will help Rico streamlined and enhanced search and read you have executed customer contracts with actionable insights to better serve its customers.
Thank you to our partners at Spaulding Ridge, who are helping to strengthen our commitment in partnership with FICO.
As we look ahead, we envision serving similar customer needs not addressed by C. O M. B a broader agreement management platform designed for all of our customers in all segments.
We're previewing with select customers now I will have much more to share on our product roadmap and strategic vision and a momentum user conference in April by 'twenty four.
Across both our E signature core and future agreement management.
Products, we believe our investments will lead to even further differentiation in a competitive market.
We're encouraged by steady win rates and excited for the impact we can create for customers.
This past quarter also demonstrated execution against our second pillar.
Proved omnichannel go to market.
Well, we gained traction across our direct sales digital and partner engagement.
Our international business spans all channels is an important part of our addressable market.
It's really an untapped opportunities doctors site expansion.
In Q3, our international revenue grew approximately three times faster than our North American business.
They also subtraction and the adoption of our identity verification solutions, which meet stringent regulatory standards you elsewhere.
And in Q3, we lost a Japanese localized version of our CRM product.
The recently launched Whatsapp integration also highlights our international ambitions.
Our digital channel once again grew at a faster rate than our direct business during the quarter a strong sign that our product like growth initiative continues to drive new customer acquisition and top of funnel activity.
We continue to optimize our site and remove friction from the try and buy journey.
Creating a more personalized experience with a coupon of causation.
We're seeing particular strength in new customer acquisition in our international markets as well as improved conversion rates in the trial to paid license purchase conversion rates.
Yeah.
Our trusted brand and product strength continue to be assets for our direct sales team.
Latin America credit Union, one of the biggest credit unions in the U S has reduced the time it takes to close the credit card application like 30%.
Integrating doctor signs of its proprietary loan origination system.
Latin America has switched the doctor side from a different electronic signature provider in part because of our strong brand reputation inspires cockpits from its members.
That isn't even Latin America to deliberate seamless minimal click experience that aligns with the standards just members expect their financial institution.
An important pillar of our go to market plan and strengthening our partner ecosystem.
Until then we hosted our first ever partner day.
It was fantastic to meet with our system integrators resellers and software vendors from around the world sharing our commitment to growing our business together.
As an example, the IC embed pay as you go initiative, we announced in Q2 is accelerating and driving new customer wins.
Before I pass it to Blake.
Want to address some progress on our third strategic pillar, our company's focus on financial and operational efficiency in.
In the quarter, we delivered record operating margin and free cash flow.
While we continue to invest for long term growth.
We still have a lot of work to do but I am pleased with our progress over the past 12 months I have more confidence than ever and the value we can create for our customers.
Our business and the scale and strength of our customer base. We're.
We're in the early stages of our journey to expand beyond E signature into agree with management.
But there is very concrete customer validation of the market opportunity and meaningful progress towards our goals.
Thank you to the Docs Centene has inspired me with their commitment to this transformation.
With that let me turn it over to Blake.
Thanks, Alan and good afternoon, everyone.
As I approach my six month anniversary Doctor sign I remain excited about the long term opportunity and our team's execution against the three key pillars. We've outlined previously accelerating product innovation enhancing our omnichannel go to market strategy and strengthening our financial and operational efficiency.
We delivered solid results in Q3, demonstrating the stability of our business model in the third quarter total revenue increased 9% year over year to $700 million and subscription revenue grew 9% year over year to $682 million, we continued to drive solid new customer growth during the quarter. Despite the challenging.
Macro and software buying environment, which is evidence of darkey signs of durable value proposition.
In addition, I'm proud of our operational execution highlighted by strong profitability and free cash flow generation.
While we have much work still to do we are making progress.
Third quarter billings rose, 5% year over year to $692 million as expected expansion headwinds continued to impact year over year billings growth. These.
These dynamics are also visible in our dollar net retention, which was 100% and Q3.
Expansion rates continue to be tempered by spending optimization and I T budget scrutiny, we expect dollar net retention to trend downward in Q4.
That said we are encouraged by a few early data points evident in our results this quarter.
First we saw a year over year consumption stabilization or improvement in a number of verticals, including business services technology and insurance financial services by contrast continued to be more impacted.
Although real estate also continued to be pressured by the interest rate environment and improved on a year over year basis for the third quarter in a row with significant opportunity for further improvement.
We're increasingly operating in a post COVID-19 environment and I'm pleased that our weighted average contract duration continues to remain consistent at 18 months.
So by the end of this fiscal year, we expect only around 10% of our book of business to be from contract signed during calendar years, 'twenty, 2020 and 'twenty one.
Darkey signs value proposition was broad based and we benefit long term by doing business with customers across a diverse set of sectors and segments.
Second we are pleased with the early progress we're seeing from our investments in Omnichannel go to market efforts.
Driven by our direct sales efforts. The enterprise segment showed some early potential relative to performance in previous quarters.
The number of customers with annualized contract values greater than $300000 rose slightly to 1051 from 1047 in the prior quarter and was approximately flat year over year. This increase is an improvement after two quarters of sequential declines.
Also our C O M business grew double digits year over year as enterprise customers continue to optimize their esignature spend we are seeing some customers taking advantage of our C. O M product enterprise customer adoption is encouraging because C. O M is the early proving ground for an investment in a broader agreement management use case for our entire.
Customer base.
In addition, within our Omnichannel pillar International revenue grew 18% year over year, reaching $185 million in the third quarter, representing 26% of our total revenue. This was a slight acceleration in year over year growth in the previous quarter.
Most international markets remain an early adoption stage due to regulatory history and cultural habits at the same time. However international represents the largest portion of our Tam and I'm pleased to see continued success of our hybrid go to market strategy.
Related to the investments, we're making in our P. L G and self serve motions digital revenue growth outperformed direct digital remains the primary source for new customer acquisition, and we added approximately 36000, new customers in Q3, bringing the total customer base to 1.4 dollars 7 million up 11% year over year.
<unk>. This includes the addition of approximately 7000 direct customers, bringing the total number of direct customers to 233000% to 15% year over year increase.
Turning to our third strategic pillar, we delivered strong margin expansion and healthy cash flow during Q3, highlighting our focus on operating and financial efficiency.
non-GAAP gross margins for the third quarter was 83% in line with the prior year third quarter non-GAAP subscription gross margin was 86% also in line with the prior year.
Q3, non-GAAP operating income reached a record 187 million, representing a 27% margin up nearly 400 basis points from 23% and 147 million in the prior year.
During the quarter, we increased focus on investment prioritization hiring plans and operating expenses.
There'll be continuing opportunities for greater efficiency, even as we invest to drive long term growth.
Q3, non-GAAP EPS was <unk> 79, a 22 cents per share improvement from 57 last year.
We ended Q3 with 6945 employees compared to 7522, the year prior and up from 6748 in Q2.
We will remain disciplined with our head count investment hiring will continue to focus on opportunities to drive sustainable long term growth like those in R&D.
Operating cash flow for the quarter was 264 million compared with 53 million in the same quarter last year.
While an ERP transition impacted last year's cash flow results I'm proud of the significant free cash flow. We generated this quarter third quarter free cash flow was a record $240 million, representing a 34% margin compared with $36 million or 6% a year ago over.
Over the last 12 months, we've generated over $750 million in free cash flow underscoring the strong fundamentals of this business.
With regards to the balance sheet, we exited Q3 with $1 7 billion in cash cash equivalents and investments. This includes the repayment of 37 million of convertible debt that matured during the quarter.
Our balance sheet remains strong and we have ample liquidity to address the remaining convertible debt of 690 million that matures next month.
Turning to our share repurchase program, we redeployed excess capital during the quarter and repurchased one 8 million shares for approximately $75 million in.
In addition to our share repurchase program during the quarter, we used 36 million to pay taxes due on our S. E settlement, reducing the diluted impact of our equity programs, we remain committed to opportunistically returning capital to our shareholders.
With that let me turn to guidance for.
For the fourth quarter and fiscal year 'twenty four we expect total revenue of $696 million to $700 million in Q4, or a 6% year over year increase at the midpoint and 2.746 to $2 75 zero billion for fiscal 'twenty, four or a 9% year over year increase.
Of this we expect subscription revenue of $6 $79 million to $683 million in Q4, or 6% year over year increase at the midpoint.
And 2.670 to 2.674 billion for fiscal 'twenty, four or a 9% year over year increase for billings, we expect $758 million to $768 million in Q4, or 3% growth rate year over year at the midpoint and $2 83, 5% to $2 84 five.
And for fiscal 'twenty, four or growth of 7% year over year.
We expect non-GAAP gross margin to be 81% to 82% for Q4, and 81, 5% to 82, 5% for fiscal 'twenty four.
We expect non-GAAP operating margin reached 22.5 to 23, 5% for Q4, and 24% to 25% for fiscal 'twenty four.
We expect non-GAAP fully diluted weighted average shares outstanding of $207 million to $212 million for both Q4 and fiscal 'twenty four.
In closing, we're pleased to report a quarter of consistent execution against our three strategic pillars accelerating product innovation enhancing our omni channel go to market strategy and strengthening our financial and operational efficiency, we have a strong foundation with well over 1 million customer relationships and improving product momentum.
We remain focused on creating shareholder value by investing in durable long term growth delivering on our profitability goals and generating sustainable free cash flow. We look forward to keeping you updated on our progress as we focus on helping our customers accelerate their business growth mitigate risk and enable customer experiences there easier.
And more delightful.
That concludes our prepared remarks with that operator, let's open up the call for questions.
Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Thank you. Our first question is from Jack Rowe of Baird.
William Blair. Please proceed with your question.
Hey, Thanks for taking the questions understand enter ours, a trailing metric and I. Appreciate the color that Q4 will see another decline, but are we starting to get visibility in a trough for that metric you're putting those headwinds from the multiyear COVID-19 contract behind you and and maybe the new product investments start layering in more meaningfully next year.
Sure.
Sure I'll take a stab at this and Alan do you want to jump in feel free. So just a quick reminder, dollar net retention or DNR as you know our direct business only.
Greater than one year.
Like you said the trend downwards in line with our previous communications, you know and as covered in our prepared remarks from me we have.
We expect to see continued pressure into Q4, it's a tough macro environment still where companies you know continue to scrutinize investments and leaving the smaller expansion opportunities for us it's a bit of a lagging indicator. So the thing that I'm focused on most of them at the company's focus on is what are the efforts, we're making to stabilize and improve it over the longer term and so.
What we're focused on in.
As you heard in the prepared remarks, we are seeing some very early signs of potential you know I would call. It cautious optimism right like consumption across a number of verticals. We saw sticky feature adoption improved from last quarter on a year over year basis, and that's the percentage of our direct customers using five or more you know kind of.
Incremental features that that when I was at 50.
The 8% in Q3 up from Q2, and I thought it was up about 12 points year over year. So you know.
They're just the early signs of potential optimism, but I think it's too early for us that to put any type of a target or a.
Specific timeline out there, but focusing on those product management efforts and those go to market efforts I think is how we get excited about the future.
Okay helpful. And then just a follow up on those products you were talking about and we think C. L. M becomes a more meaningful part of the business, where it actually start impacting expansion range instead of a N or are just being really driven by esignature consumption seems like we've been talking about the potential for that product suite for a few years, but what do you need to do to.
That product more main stage with customers.
Yeah, why don't I take a crack at that.
So first I'd say that.
If you look if you think about our broader vision seal M is really.
So they're a leading indicator early instantiation of our broader vision for intelligent agree with management. It is very heavily focused on the enterprise and I think we and everyone else abiding seal lab solutions.
Been held back by the required significant services and customization investment that the current generation of seal up products.
No mandate.
And so our opportunity is to make that significantly more lightweight and delightful lowering the bar for companies of all sizes really choose to take advantage of that platform that is a huge part of our focus right. Now we were an early access on some.
Important pieces of that and so over the next few quarters, you will see that you can roll out to a much broader set of customers and seal M. Darkness on any other vendor can address today.
And we think that unlocks opportunity as I said everywhere.
Helpful. Thanks for taking the questions and slowdown on the nice execution.
Thank you.
Thank you. Our next question is from Josh Baer with Morgan Stanley. Please proceed with your question.
Great. Thanks for the question I wanted to dig in on margins and the margin outperformance.
Well I was hoping you could provide a little bit more context on the sources of upside in the quarter and then how to think about the trajectory of investments going forward like the full year Guide was raised just wondering if there's been sort of any changes in the investment philosophy pulling.
Pulling back in any areas or just letting you know.
More of the upside flow through to the bottom line. Thanks.
Sure.
Hate the question so with regards to the outperformance on the on the operating margin. We made a concerted effort you know I would say starting kind of like late September 10, inspect and rationalize investments across the business.
It's really just about increasing focus on what I would call disciplined spending by all while we continue to invest in the you know the areas, where we have longer term growth aspirations. You know during Q3, we prioritize investments and so that includes the rate of hiring the value offering opportunities for organizational efficiency, but then.
Also overall operating expenses with.
I'll focus on leveraging existing resources, where possible, but still being able to invest for longer term growth.
With regards to your question on the trajectory and the investment philosophy.
No. We're all big believers here and a balanced outlook, which is we need to be able to invest to get the long term growth and achieve those aspirations that we have but at the same point in time, we need to be efficient and productive with the assets that we have and so I really am proud of the team for embracing that and so I don't think no investment I would.
Say philosophy changes from our part, but I would just say a little bit maybe kind of more executed and focus on that for us and we were able to show some pretty good performance I think this quarter and I'm really proud of the team for that level of execution.
Thank you.
Just echo if I can.
Echo <unk> point that the entire management team not just Blake is very focused on this balance that he referenced we absolutely want to free up capital and that is a team effort to look everywhere in the company to free up resources, where we can then invest more particularly on the on the product side we.
We did some of that earlier this year as you know, but it's an ongoing continuous effort not just a one time thing and I think that's reflected in the results.
Thank you our next question will come from.
Well with Jefferies. Please proceed with your question.
Hi, This is love soda on for Brent Thill, Thank you Alan and Blake, we're taking my questions.
Maybe first.
Just wanted to ask obviously you.
You're guiding to 7% year over year billings growth.
For fiscal 'twenty four.
Yes, I I know you're not guiding.
Guiding to fiscal 'twenty, five just yet, but how should we think of the growth trajectory for next year, especially as you've come through some kind of crawl walk run on the <unk> side.
Sure so.
I'll take a stab at that.
I'm really proud of the progress we've made in a short period of time and when I say aligning across our business. Both in just operational efficiency, but also accelerating product evolution and innovation.
In Q3, particularly we improved operating margins, we generated significant free cash flow and I think we're evolving our mindset across the company.
As I mentioned earlier on the question that was just asked before in terms of our long term approach, we're going to balance driving durable long term growth with operating efficiency on.
On top of our priority is to make the right strategic investments to drive business momentum and frankly into billings, which as you know I think what you're referring to in the coming years and it doesn't happen overnight, especially in a business of this scale, but we believe we have the right product and go to market focus and you know we've got a good leadership team in place to make that happen.
And you alluded to this but you know given that we're still working through our planning and forecasting process for next year, we will provide our standard formal fiscal year 'twenty five outlook on our Q4 earnings call three months from now, but you know as you think about next year, you know I imagine you'll want to consider the Q4 exit rate trends as you think about next year and the same time, we believe.
There is further opportunity to drive improved efficiency in our existing business and our operating expenses and then also taking into account historical seasonality changes as we go from Q4 to Q1 with fewer days in the quarter and things like that you know just all kind of the basics that you would want to pay attention to but other than that I will provide our full year.
Our fiscal 'twenty five formal guidance in our next quarters call.
Got it and one quick follow up if I may just wanted to ask about you know your philosophy around stock based compensation.
Yeah.
Sure. So I mean, I think the philosophy on stock based comp is generally you want to be able to provide the incentive and the ability to attract and retain the best talent possible to allow us to reach the aspirations for growth that we want to get too I know that I think.
Our stock based comp as a percentage of revenue in the current quarter I think it was 23% I think that was up slightly year over year from 22, I would say that you know that the driver of the increase is really most about the new management team. So it's driven by the executive comp.
Drove that year over year increase not necessarily the other part of the company I think that.
For us its something were slightly above our peer average and so it's something that we are paying attention to but it's a balanced approach again right, we want to be able to attract and retain the right people for the job that we can get into this next chapter of growth for docking fine, but it is something we pay attention to and are looking at.
Yeah.
<unk>.
Yes.
That we discussed that topic with the board and the.
Compensation Committee and we.
We will share our longer term plans, but our goal is like I said is to manage this down over time without fundamentally disrupting our ability to execute it was necessary to attract a new a new management team and <unk>.
To rebalance our employees following.
The stock decline, but I think yes.
We think we're in a more normalized.
Now it should be able to manage to something more towards the benchmarks.
Perfect. Thank you.
Mhm.
Thank you. Our next question is from Brad Sills with Bank of America. Please proceed with your question.
Oh, great. Thank you so much I wanted to ask about a comment Alan you made earlier in the call that I think youre seeing increased conversion and the top of funnel business would love to get some more color on there or do you feel like there is some learning there I know this has been a priority for you since joining the company and building that top of funnel.
So any color on that end of the business and the conversion uptick that you mentioned.
Yeah.
So I think you all know we are we acquire a tremendous number of new customers every quarter and most of those vast majority of those come in via our website and on board themselves and then overtime we grow them.
And as they show.
Potential and opportunity than we engage them with.
Our sales teams and our support and customer success teams.
I would say that our our digital motion has made significant improvements during the course of this year. So for customers that are in essence natively digital.
Improved.
That part of the funnel and not only you can you can buy more things you can upgrade your existing plans all of that stuff is working much better now, we're adding more international currencies a reporter.
So all of those things are helping improve the performance of our digital business. In addition to that we are in process of building out the ability for customers who are currently serviced through our sales teams.
To handle a number of activities themselves without human assistance in that.
That is a very.
Very high leverage both in terms of providing a better offering to our customers and in terms of freeing up our sales teams to work on higher value work.
I think we still have some quarters to go on implementing that and seeing the full benefit of that so all.
The benefits of this self serve P. L G.
Project, continuing to accrue and will accrue.
Into into next year.
But we are we're seeing we're seeing really good progress in that business is growing faster than our direct business.
And in some form in improving on most performance metrics. So that's a very.
We're very happy with cornerstone.
Great to hear thanks al.
If I may.
The net revenue retention dollar based net revenue retention coming down next quarter could you just help unpack that for us a little bit on growth versus expansion is gross kind of holding and this is mostly expansion related I know, it's a backward looking metric, but if you could just help us unpack that a little bit on the growth side. Thank you.
Yeah, Theres not much more I would say level of detail that we're going to disclose publicly about it I think it's just for us that it's a metric that we know if we can deliver on the product innovation and the road map.
And the self service and the PLD motions that we have in front of US we really believe we've got a chance to stabilize that metric and then reverse that trend now for us that's top of mind, obviously is a lagging metric. So there is time that youre going to it's going to take to see that occur but.
I would say there was nothing that nothing that spoke out about Q3 that stood out that I would call it different than the prior quarter or two.
Alright, thanks, so much.
Thank you. Our next question is from Michael <unk> with Wells Fargo Securities. Please proceed with your question.
Hey, great. Thanks, I appreciate you taking the questions Blake I wanted to just spend some more time on the consumption commentary that you provided certainly helpful. I'm just wondering if there's anything else you can tell us in terms of the shape of those improvements how that compares to prior periods and when you're talking about consumption for darkey side is that mainly signature volte.
Are there other attributes of customer profiles, we should be considering as part of that commentary.
Sure. It's a good question. Thanks for asking so when we talk about consumption today, it's primarily around the signature space primarily around if you will.
Envelopes that are used so what is the usage by our customers on a year over year basis. So those vertical that I highlighted that some of the stronger year over year growth in consumption that we've seen over the past quarter or two so I think we're again cautiously optimistic about it and just to be clear too theres still vern.
<unk>.
That are more challenged right I highlighted financial services is one and I also highlight real estate is the other one which probably comes as no surprise to folks who are living this interest rate environment I think.
The thing that makes me I don't know say happier, but you can see a little bit of light there is that.
Real estate has improved on a year over year basis over the past three quarters. So that's good but it's not anywhere near back to near where it was I would say prior to the whole interest rate challenges that we have.
<unk> entered into the passenger or so but I'm. So excited about that but again thats also I think in the prepared remarks, I made a comment about <unk>.
Significant remaining opportunity and so a lot of it I think youre, probably seeing is that as the macro environment.
Returns to more normalcy in certain verticals than we believe we are a beneficiary of that and I think that's relevant because we have such a broad base set of verticals and such a diverse customer base as well so it's.
It's something that you know when things improve we think we're a beneficiary of that and your guess is probably as good or better than minor when that happens.
I don't know if any of us had.
Go ahead.
And that one maybe not.
That add to our Blake said.
I think consumption, we think of consumption as a imperfect but important.
Leaving and predictive indicator of renewal and so that's why we track it closely and we're talking about it and machine modestly encouraging signs there.
Ink consumption trends relative to the commitments customers who've made maybe one other comment on that as we are also coming to the end of the Covid.
I have a few quarters left of of Covid has been covered renewals, but but it is already significantly down and wait and in our business and so that's coming to an end.
Which is positive.
That's all Super helpful. And then maybe one more on just the leading indicators side appreciating it's noisy but.
If we look at billings this quarter, it's down sequentially last quarter, you talked about.
It wasn't early renewals. It was just kind of the timing of renewals, having some improvement. So did that maybe help Q2 relative to Q3 or just help us kind of square the seasonal trends and what can drive the volatility from quarter to quarter on that metric. Thank you.
Yeah, you bet. So right you know Q3 billings growth of 5% relative to Q2 of 10% year over year. So really pleased with the Q3 and we came in above our expectations on that but the detail like you youre asking about from Q2 to Q3, it's really driven I would say by three primary areas.
The first is we have a hard comp in Q3, if you look back at our historical results I think our Q3 billings growth in fiscal 'twenty three was up 17 around 17% year over year and that was the highest in fiscal 'twenty three and that was driven by a year ago, we had a pretty strong early renewals kind of momentum that debt.
That grew that billings number in Q2, the prior year now we're still doing well this year.
With regard to Sterling Knowles is just a hard call they were having to deal with the second item is what you talked about which is that on time renewal impact.
Yes.
As I discussed in our last call and my predecessor discussed on the call before that the benefit that we've had in our higher on time renewals in the first half of 'twenty four it just do you have a smaller impact as you go through the year in the second half and so it's really primarily a timing issue and so we're still doing actually really quite well on on time renewal execution of the.
The team is doing a great job with it it's just a smaller impact on year over year growth as we progressed through the year and then the final the third thing that impacts that billings number frankly, they're just lower expansion rates right I mean.
Budget scrutiny and you know people that are sitting in my seat are asking the right questions, which is how do I do more with less where are the places that I can manage cost well, it's I mean I'm doing it here frankly is in my role as an operational CFO.
That along with macro impacts overall billings growth and it's evident in those DNR rates, but you know as Alan mentioned and I've mentioned already like we are seeing the consumption trends that you saw.
Saw some marginal improvement quarter over quarter and it's still early for US we got to see that you know hopefully hold here for the next few quarters, but.
You know things are also improving but that's just really the dynamics of.
The T cell in a year over year growth between Q2 and Q.
I appreciate the details thank you.
Thank you. Our next question is from Tyler Radke with Citi. Please proceed with your question.
Yes, thanks for taking the question I'm not sure. If this is.
Who this is for but I guess as we think about the product set for next year.
Obviously, theres a lot of organic investments, you're making on the Jennie O side can you just talk about how you expect that the product set and you know available products and Upsells to evolve next year and with the launch of some of these generative AI services, how does that kind of change.
The philosophy around so kind of offering in an envelope base signature product rather than something more subscription.
Base, that's not tied to envelope. Thank you.
Yeah, there's several points in there.
First I'd, just say seal and business is growing faster than our signature business and I expect as we launch this product.
Intelligent agreement management platform to a broader set of customers that.
That pattern of that broader category growing faster will will continue.
Second point, you made about the envelope versus subscription basis, we are in fact.
Already experimenting with.
Shall we say unlimited envelope.
Billing models for a variety of customers so for very large customers.
We entered into some enterprise license agreements and those have been I think quite helpful.
One very large bank that we did one with <unk>.
After they signed that agreement they proceeded to remove.
A competing solution for some of their workflows.
We have that opportunity across some of our very large customers and then in the commercial segment Midmarket and SMB segment, where we're now.
Competing more directly with some of our lower priced competitors, who have offered unlimited envelope packages and not surprisingly if you give people a competitive unlimited envelope from doctor sign versus say lesser branded less well featured.
Product and I think she was doctor sign and so we're seeing really really positive results and.
To the point, where I expect that we will continue to broaden that rollout. So overall I I.
I'm feeling quite good about our.
Evolution in our response to competition on multiple fronts.
As well as the broadening of our product roadmap that you alluded to in the first part of your question.
Okay, Great and Blake, maybe a question for you on free cash flow, so very very strong here in the quarter relative to consensus expectations.
How should we be thinking about just free cash flow for the full year was there any one time items in that in that number and as you as you think about next year with what seems to be kind of a increased operational discipline.
Should we be thinking about free cash flow margins are expanding kind of consistently with our with operating margin expansion just any way to think about that medium term framework. Thank you.
Sure. So yeah, you know really happy with the $240 million of free cash flow that was generated this quarter. It's a combination.
Ongoing strong operating results, but we also did have some working capital improvements that impacted that number when you look at the cash flow statement and youre going to see there the changes in operating assets and liabilities and we've really had a strong improvement on the collection side.
And so that's great.
So that drives it and I've said this in the prepared remarks.
Comparing to prior year can be a little tricky because of the ERP transition that happened prior years. So we had a more muted free cash flow generation number but.
Regardless of that really excited about the free cash flow now to your question on the yield it was really strong it was 34% and you know while I'm a big fan of the working capital tailwind and I'm really proud of the team for the discipline and the improvements there that can be something thats challenging right to pile onto every year going forward.
Theres always some good working capital improvements you can make but I think that if you think about this business in the long term, it's probably fair to assume that your free cash flow yield trends a lot closer to your operating margin yield so as long as you make operating margin improvements you should be able to capture most of that write down to the free cash flow line.
But then also in this business the beauty of this business from a free cash flow perspective is that if you can drive operating margin improvement and you can drive reaccelerate it billings growth because of the way our working capital works their free cash flow generation can really accelerate and so like news is a metro over a much longer term period I'm talking about but it is the power of this model.
Which is super exciting and so I do think though like I mean, I think in the span of time, you would think free cash flow yield should trend closer to your operating margin.
We've been we've done better than that in free cash flow pretty significantly better than that in free cash flow this quarter, but it's mostly on the back of those working capital improvements are mostly but a large chunk of it and so you have to be cautious about extending that youre going to expand on those every quarter.
Great. Thank you.
Thank you. Our next question is from Karl Keirstead with UBS. Please proceed with your question.
Okay, Great I'd love to go back to the comment when you were describing the puts and takes on the vertical side. When you mentioned that fins felt a little bit more pressured or impacted just curious was that a comment about the more rate sensitive mortgage related transactions or was that a broader comment on fins and I'm wondering if your fourth quarter.
Our guidance reflects any anticipation of the fins vertical stabilizing thank you.
Yeah, maybe I'll just start and then like you can add.
Okay, I think in terms of the mix impact of financial services I think that's mostly behind us, but we have experienced that over the last several years, but both on the mortgage side and financial services industry and we saw some.
The smaller banks for example that she spent froze with all the turmoil in the spring.
Some of the very largest banks have also had particularly aggressive.
Cost management efforts, but I'd say overall, we've seen some some modest recovery, it's still growing a little slower than the business overall, but but trending better.
And we'll see what happens with interest rates our current forecast.
Assumes that macro conditions could you just continue as they are.
Recognize there's optimism they may get better we'd love that but we don't want to do that in our guidance, yes, and just to follow up My General philosophy is I don't make macro forecast as a team because just like I think we joked about earlier on the call. That's a hard business to get into and so we forecast of what we see and so if things were to.
Change one way or the other we would then have to speak to that variance.
Thank you. Our next question is from Patrick Wall Ravens.
Please proceed with your question.
Oh, great and thank you and congratulations on the the business training here, it's great to see so Alec how is doctor signs relationship. These days with sales force historically I know it's been.
Really strong the reason I ask is your Dream force.
This year, they had a session on salesforce contracts and they sort of laid out the road maps are salesforce contracts, where they have.
AI functionality coming in the spring and then obligation management in the summer and then redlining.
Year after that so I'm just wondering.
How are things with Salesforce.
You know I think our relationship with Salesforce as strong as ever we renewed our strategic partnership.
This summer.
Just over there meeting with one of those things yesterday, it's a very healthy relationship at every level.
And.
We have probably more we have certainly have more sales force enabled business that with any other software partner and that includes other very large software companies. So salesforce has been trading partner and they remain that on the seal M side, yes. They certainly have a contracts often coming out that they had previously.
After that vertical products and now they're generalizing it somewhat.
I think that the challenges that the market is moving to a horizontal model by which I mean.
Two thirds almost of all the seal M rfps that we see.
Our four cross functional contract managed in other words, a single centralized contact management system across let's say procurement front of the house HR et cetera.
And that'll just be be hard for salesforce or other even very large companies that are focused on one particular workflow or another.
And so I expect that we will continue to collaborate very closely with salesforce on both the signature side and the seal M side.
And I'm not I'm not.
Too worried about about the salesforce contracts piece, but.
Number one on estimates salesforce, they're a fantastic company and partner.
That's super helpful. Thank you.
Yes.
Thank you. Our next question comes from Kirk <unk> with Evercore ISI. Please proceed with your question.
Yeah. Thanks, very much Alan I was hoping you just double click a little bit on the international opportunity you called it out in the prepared remarks.
Is that largely yes, or PLT led right now or are you thinking about sort of bringing more direct sales into play over in certain geographies can you just give us some sense of how you how you view that opportunity given your obviously less penetrated outside the U S. Thanks.
Yes.
It's actually a full omnichannel thing and it's very market context specific so.
First of all we have a substantial amount of direct sales.
Teams deployed in some of the major international markets.
U K, France, Germany.
Australia and.
<unk>, Canada, obviously, Brazil meaningful size team, there as well and a spattering of folks in other markets.
So historically that was our principal go to market model.
We're now really balancing that cross direct investment, where we can put enough wood behind the arrow and there's enough return.
On that investment and then a combination of a digital motion.
We can obviously serve 180 countries that way and then our partner motion in countries, where we are with.
When it makes sense to lead with that so you took a smaller developing market, let's say it wouldn't make sense for us to put up to X fuel sales team on the ground, but we wouldn't be able to fully exploit the opportunities strictly through additional in the motion and so I think we have tremendous opportunity on both of those are both of those fronts and we are seeing growth both in our digital channel.
Those were international is growing faster than domestic and in our direct channels, but its growing faster than domestic so.
We'll continue on that just to return to a theme from prior calls as.
As we looked at prioritization that where we really got to put additional investment both from a direct sales standpoint, but also in all of the supporting functions that are necessary to really have an effective go to market motion.
Prioritized investing in Germany, and Japan.
Which were markets that.
Well, we had some level of direct sales investment, but we hadn't invested invest aggressively in marketing and back office functions like legal and finance.
Oren product.
And so that has been a priority since the spring and we're making really good progress in both of those markets you.
You mentioned last time, we open it up some unit you have enough Tokyo.
Launched localized products for several of those are those markets.
You mentioned, the Japanese seal them product.
Shift here a couple of months ago.
A lot of the identity verification stuff in one.
More stuff coming here shortly in that room.
Very targeted EU in general in Germany in particular.
And so.
We are investing aggressively I would say.
And a direct sales motion and maybe our top 10 markets globally, and then in a combination of partner and digital.
Throughout our other markets, where we can there'll be some very long tail countries, where we can always start with the digital.
Promotions.
That's how we approach it.
Perfect. Thank you very much.
But.
Thank you our next question is.
From Mark Murphy with Jpmorgan. Please proceed with your question.
Great.
Thanks for taking the question.
Alan.
And any changes you may be seeing in the competitive dynamics for the esignature market, particularly towards the lower end market you've called out in the past.
Just curious since it's obvious answers okay.
Rich or helping with the retention and competitive wins, particularly with particularly within those users of basic esignature use cases.
Yeah.
Yeah.
I think the dynamic is as I've described in previous quarters, I don't see a material change.
So.
With larger clients.
May see local competitors in certain international markets of Adobe and some of them.
And then the smaller clue.
It's a smattering of a variety of names that are maybe less familiar.
And I think we are I'm not seeing any change in our win rates in competitive deals.
And I'm cautiously optimistic with some of the initiatives that I referenced earlier in terms of our new pricing and packaging.
That we are responding pretty effectively both ends of the market and then lastly, I just mentioned at the very low end, if you will where it's really being embedded in workflows.
Dramatically upgraded our solutions for Isps to embed Doctor sign and we've adopted a more more flexible billing model can be referred to as pay as you go.
And that saw some very nice accelerated growth.
Since the launch in Q2.
On multiple fronts I'm, feeling like we're doing pretty well.
And Oh, I'm, not seeing a material change in the competitive dynamic.
Thank you there are no further questions at this time.
Like to hand, the floor back over to Alan Johnson for closing comments.
Thank you. Thank you operator, thank you all for joining today's call. So this quarter Donkey sign was especially effective in making progress.
On our product initiatives, while balancing those investments with operational efficiency.
So we are continuing to build on our considerable scale as we expand beyond exceeded sure.
<unk> intelligent agreement management. Thank you for your time and look forward to seeing all of you next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Goodbye.