Q3 2025 DocuSign Inc Earnings Call
Speaker Change: Greetings and welcome to the DocuSign Q3 Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker Change: If you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to our host, Heather Harwood, Head of Investor Relations. Thank you, Heather. You may begin.
Heather Harwood: Thank you, Operator. Good afternoon and welcome to DocuSign's Q3 Fiscal 2025 Earnings Call.
Heather Harwood: Joining me on today's call are DocuSign's CEO, Allan Thygesen, and CFO, Blake Grayson. The press release announcing our third quarter fiscal 2025 results was issued earlier today and is posted on our investor relations website, along with a published version of our prepared remarks.
Heather Harwood: Before we begin, let me remind everyone that some of our statements on today's call are forward-looking.
Heather Harwood: 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 product innovation and factors affecting customer demand are based on our best estimates at this time and are therefore subject to change.
Heather Harwood: Please read and consider the risk factors in our filings with the SEC together with the content of this call.
Heather Harwood: During this call, we will present GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share counts and information regarding free cash flows and billing.
Heather Harwood: These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results.
Heather Harwood: We encourage you to consider all measures when analyzing our performance.
Speaker Change: 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.docuSign.com. I'd now like to turn the call over to Allan.
Speaker Change: In Q3, we delivered powerful new innovation for customers, highlighted by new capabilities for the DocuSign Intelligent Agreement Management, or IAM, platform.
Speaker Change: We also continue to drive improved performance and maintain greater efficiency in our core business.
Q3 revenue was $755 million, up 8% year-over-year.
Fundamentals across the core business improved, continuing the recent trends.
Speaker Change: All of that retention increased to 100% in Q3, up from its low of 98% in Q4 fiscal 2024.
Speaker Change: Increases in customer usage and utilization, combined with our ongoing focus on gross retention, drove dollar net retention improvement.
Speaker Change: We also saw sustained momentum in new customer growth at 11% year-over-year to 1.6 million customers.
Speaker Change: In addition, we produce strong profitability with 29.6% non-GAAP operating margins, up from 26.8% in Q3 fiscal 2024, evidence of our commitment to improving efficiency while making the needed investments to re-accelerate growth.
Speaker Change: As we move forward, we've set our sights on delivering transformational value for our customers with the DocuSign IAM platform.
Speaker Change: We recognize that it's early days in the multi-year IM journey, but we believe we've taken strong initial steps on the path towards our aspiration to achieve sustainable, long-term double-digit growth.
Speaker Change: Our Q3 results demonstrate continued progress across our three strategic pillars, accelerating product innovation, strengthening our omni-channel go-to-market capabilities, and increasing operating efficiency.
Speaker Change: Starting with innovation, we enhanced the IAM platform across three fronts.
Speaker Change: Launching several new capabilities, expanding availability to more regions, and enabling department-level deployments for enterprise customers.
Speaker Change: These releases help customers of all sizes cut into the staggering two trillion dollars in global economic value lost each year to inefficient agreement management.
Speaker Change: Within just a few months of closing the Lexion acquisition, we've built Lexion's AI capabilities into the IAM platform, including the ability to surface insights from a more extensive array of agreement types in DocuSign Navigator.
Speaker Change: Navigator is a core capability of the IAM platform, acting as a system of record where customers can import, store, manage, search, and use AI to analyze agreements from multiple sources.
Speaker Change: In Q3, we further enhance Navigator by adding third-party document imports from partners, including Box, Dropbox, Google Drive, and Microsoft OneDrive and SharePoint.
Speaker Change: In addition, we launched an upgraded search experience that includes predictive type-ahead functionality, more filters, and the ability to export results.
Speaker Change: We also expanded the availability of IAM to more geographies. In early October, IAM with DocuSign Maestro, our automated agreement workflow builder, shipped to all regions where DocuSign operates, including North America, Latin America, EMEA, and most countries in APAC.
Speaker Change: Also, just this week, we released new AI features Navigator across five major markets, Australia, Canada, France, Germany, and the UK. In these countries, we've created AI models that meet local regulatory and compliance requirements.
Speaker Change: This measured rollout allows us to fine-tune our product development and go-to-market execution based on customer feedback.
Speaker Change: Part of our evolution into a platform company is supporting a dynamic community of developers, builders, and partners to create new solutions that extend the capabilities of our IAM platform.
Speaker Change: Just two weeks ago, at DocuSign Discover, we showcased IAM integrations with Microsoft, SAP, and Workday and introduced a suite of developer tools, DocuSign for Developers, that our partners will use to build apps powered by the IAM platform.
Partners can share their apps in the DocuSign App Center.
Speaker Change: With DocuSign CLM, we continue to invest in innovation for customers with complex agreement management needs.
Speaker Change: In Q3, we incorporated Lexion's AI-assisted contract review and launched document markup in Microsoft Word documents into CLM, allowing customers to quickly review and edit contracts.
Speaker Change: We also released a powerful new DocuSign connector for SAP Ariba, which speeds up the source-to-pay agreement process for procurement and expands on our SAP partnership.
Speaker Change: For the fifth consecutive year, DocuSign CLM has been named a leader in Gartner's Magic Quadrant for CLM.
Speaker Change: Gardner says DocuSign is in a strong position for influencing the market and securing a place consideration on prospective customers' evaluation shortlists.
Speaker Change: CLM is a powerful application for customers with sophisticated workflows and remains a fast-growing part of our business.
Speaker Change: In short, we've reignited DocuSign's culture of innovation with a robust product roadmap, faster product releases, and a commitment to supporting a thriving developer ecosystem.
Now let's turn to the second strategic pillar, omni-channel go-to-market.
Speaker Change: In Q3, we accelerated the rollout of DocuSign IAM and gained traction with small and mid-sized customers in the United States, Canada, and Australia.
Early sales momentum has outpaced our expectations.
Speaker Change: In Q3, we closed more than 10 times as many IM deals as we did in Q2.
The field volume increasing every month in the quarter.
Speaker Change: 80% of our reps eligible to sell IAM in the initial launch markets have closed three or more deals and nearly 60% have sold six or more.
Speaker Change: Equally encouraging is the strong customer engagement with the IAM platform.
Speaker Change: Time to Live is remarkably quick, slightly faster than eSignature, and we also see customers increasing their usage of IAM applications, particularly Navigator. Each month they are live on the platform.
Speaker Change: The speed and ease of adoption strengthen our ability to market IM to hundreds of thousands of customers through our direct sales force.
Speaker Change: Our customers can seamlessly upgrade to IAM when they renew their contracts and quickly begin to transform how they manage their agreements.
Speaker Change: As an example of customer success, APC Private Funds, which connects wealth management firms with alternative investment opportunities, has slashed its client onboarding time by 70% using Maestro and anticipates reducing onboarding time by 90%.
Speaker Change: Employee engagement platform CaptureFire is using DocuSign IAM for sales and its Salesforce integration to streamline contract creation and create an agreement repository.
Speaker Change: Another top priority has been evolving our self-serve capability. Self-serve investments led to a year-over-year acceleration in digital revenue growth in Q3 versus Q2.
Speaker Change: During the quarter, we improved our upsell capabilities, making it easier for digital customers to upgrade their plans, leading to larger-than-anticipated revenue expansion.
Speaker Change: We also made additional add-on products available online, like multi-channel delivery, including SMS and WhatsApp, as well as ID verification.
Speaker Change: We will continue to improve how customers discover, try, use, and buy our products digitally in even greater scale and efficiency across our business.
Speaker Change: Also, as we begin to deploy IAM at the department level with enterprises, we'll build on the existing use case breadth already deployed by larger customers through our direct and partner channels.
Speaker Change: Cox Automotive, the parent company of AutoTrader and Kelley Blue Book, is executing 55% more contracts per month by deploying DocuSign CLM to streamline workflows, simplify negotiations, and automate reviews of standard contract clauses.
Speaker Change: BLM enables Cox to execute agreements 31% faster, radically accelerating its time-to-revenue.
Speaker Change: IKEA Portugal has reduced new employee onboarding time by managing employee-related contracts usually instead of on paper.
Speaker Change: In addition to e-signature, IKEA Portugal has adopted both DocuSign ID verification for EU qualified and Identity Wallet, enabling them to easily and efficiently use the EU's most secure form of digital signature, the qualified electronic signature.
Speaker Change: And United Airlines has accelerated the onboarding process for new hires from weeks to days by using our integration with ServiceNow and its HR organization.
Speaker Change: In closing, we're pleased with our strong execution as we rapidly innovate the IAM platform.
Speaker Change: I'm excited about the significant opportunity to deliver value for our customers by transforming how the world manages agreements.
Speaker Change: And I'm proud of the way we're strategically investing in the future while maintaining the improvements we've made to overall profitability.
Unknown Speaker
Speaker Change: When I joined Dr. Stein, we had a vision that our position as the world's leading and most trusted electronic signature company created a unique opportunity to help customers address the entire end-to-end agreement process.
Speaker Change: I want to thank the entire DocuSign team for embracing this challenge and bringing so much energy, enthusiasm, and customer focus to this mission.
Speaker Change: DocuSign is gaining momentum in our first steps in a multi-year transformation and we're optimistic about the long-term future ahead.
Speaker Change: With that, I'll turn it over to Blake to further discuss our results.
Thanks, Allan, and good afternoon, everyone.
Blake Grayson: We delivered another strong quarter in Q3. Our business showed improvements as we executed against our three strategic pillars.
Accelerating product innovation, strengthening our omnichannel go-to market capabilities.
and increasing operating efficiency.
In addition to demonstrating and improving core business.
Blake Grayson: During our first full quarter since the late Q2 IAM platform launch, we saw encouraging signs of early traction with growing IAM deal volumes and customer engagement.
Blake Grayson: Q3 total revenue was $755 million and subscription revenue was $735 million, both up 8% year-over-year.
Blake Grayson: Billings were $752 million, up 9% year-over-year. Early renewals drove approximately one-third of the billings outperformance, with the remainder coming from better retention performance, digital growth, and early IAM contributions.
Blake Grayson: As a reminder, quarter-to-quarter billings can fluctuate due to the timing of deals.
Blake Grayson: The dollar net retention rate improved to 100% in Q3, up from 99% in Q2, and up two points from the historical low of 98% in Q4 of fiscal 2024.
Blake Grayson: This represents substantial progress in our focus on stabilizing the core business, and I'm proud of our team's work to improve customer attention.
Blake Grayson: We believe we have a large remaining opportunity to improve retention as we better align our product and go-to-market motions with customer needs. As we look into Q4, we expect dollar net retention to be flat to up slightly.
Blake Grayson: Continued year-over-year improvements in usage, utilization, and customer growth further supported positive business trends in Q3.
Usage trends, once again, showed modest improvements.
Blake Grayson: The volume of envelopes sent increased year-over-year for the fourth consecutive quarter. Also, consumption, a measure of utilization, continued to improve year-over-year, particularly in verticals like insurance, technology, and healthcare.
We continue to see consistent growth in new customer acquisition.
Blake Grayson: In Q3, total customers grew 11% year-over-year to 1.6 million. This continued momentum in customer growth underscores the importance of investing in multiple routes to market across segments and geographies.
Blake Grayson: Moreover, our customer base's unique breadth and scale create a solid foundation for future adoption of the IAM platform.
Blake Grayson: The number of large customers spending over $300,000 annually increased both year-over-year and quarter-over-quarter to 1,075 in Q3.
Blake Grayson: In addition, investments in our self-service motion continue to deliver results, and in Q3, digital revenue growth accelerated from Q2.
Blake Grayson: We continue to invest in PLG programs to improve self-service experiences, such as self-service plan upgrades, which help drive results during the quarter.
Blake Grayson: International revenue represented 28% of total revenue and grew 14% year-over-year.
Blake Grayson: Our global expansion strategy is an important component of our long-term vision, and we are optimistic about the continued growth opportunities in our international markets, especially as the IAM platform becomes available outside of North America.
Speaker Change: As Allan mentioned, we are seeing early signs that customers appreciate the value and opportunity that the IAM platform presents for their businesses.
Speaker Change: Many companies struggle to untap the full value of their extensive agreement inventory, and IAM provides the tools and intelligence to unlock the insights and opportunities in those agreements.
Speaker Change: IM deal volume grew rapidly from Q2 into Q3 as our go-to-market teams have embraced the opportunity with 80% of eligible reps closing at least three IM deals in Q3.
Speaker Change: Beginning in November, we launched IAM in some international small and mid-sized customer segments and are just beginning to embrace departmental opportunities in our enterprise segments as well.
Speaker Change: It will take time to continue ramping IM throughout fiscal year 2026 and driving adoption in the years to come, but early signals have been promising and we are just getting started.
Speaker Change: Turning to the financials, our focus on operating efficiency yielded strong results this quarter.
Speaker Change: Non-GAAP gross margin for Q3 was 82.5%, slightly lower than the prior year's 83.0% due to the impacts of additional cloud migration costs.
Speaker Change: As previously mentioned, gross margins have been impacted this year due to the ongoing cloud infrastructure migration, resulting in some additional expenses associated with this transition.
Speaker Change: We expect a slightly larger gross margin impact in fiscal year 2026 as we complete the bulk of that migration next year before easing in fiscal year 2027 and beyond.
Speaker Change: Non-GAAP operating income for Q3 was $223 million, up 19% year-over-year, resulting in a 29.6% operating margin.
Speaker Change: Q3 operating margin was up nearly 300 basis points versus last year and significantly improved over the 22.8% operating margin from two years ago.
As mentioned during last quarter's earnings call,
Speaker Change: Q3 operating margins declined versus Q2 of fiscal 2025 due to both the approximately 150 basis point margin benefit from one-time items highlighted last quarter and slightly from our investments to support the IM launch and rollout.
Speaker Change: We are pleased with the overall improvement and profitability versus last year and will continue to balance overall efficiency while making critical investments in areas like R&D.
Speaker Change: We ended Q3 with 6,705 employees versus 6,945 last year, down approximately 3%, reflecting our disciplined approach to resource allocation.
Speaker Change: We continue to take a measured approach to hiring to support our strategic initiatives, including R&D, ELG, and the Lexion acquisition. While headcount has increased since Q1 of fiscal 2025, we are thoughtful about how and where we add talent.
Speaker Change: Q3 was another strong quarter for cash flow. We delivered $211 million of free cash flow, a 28% margin. Our free cash flow yield improved from Q2, which was better than expected, driven by increased collections efficiency and higher in-quarter billings.
Speaker Change: For the full fiscal year, we expect that our free cash flow margin will approximately match our full year non-GAAP operating margin.
Speaker Change: Our balance sheet remains strong, closing the quarter with $1.1 billion in cash, cash equivalents and investments. We have no debt on the balance sheet.
Speaker Change: It's financial stability combined with consistent free cash flow generation enables us to invest in the business while also returning capital to shareholders opportunistically.
Speaker Change: In Q3, we repurchased $173 million of stock through share buybacks.
Speaker Change: Effectively redeploying the bulk of our quarterly free cash flow generation back to shareholders. We have $770 million remaining under our current repurchase authorization and we expect to continue to opportunistically repurchase shares as part of our capital allocation strategy.
Speaker Change: During the quarter, we also used $51 million in cash to pay taxes due on RSU settlements, reducing the dilutive impact of our equity programs.
Speaker Change: Regarding the cost of our equity programs, our Q3 stock compensation expense as a percentage of revenue dropped approximately 250 basis points from the prior year.
Speaker Change: We expect to continue to reduce our stock compensation expense as a percentage of revenue in fiscal year 2026, partly as we shift some roles to predominantly cash compensation versus equity.
Speaker Change: Non-GAAP diluted EPS for Q3 was $0.90, an $0.11 per share improvement from $0.79 last year. GAAP diluted EPS was $0.30 versus $0.19 last year. With that, let me turn to guidance.
Speaker Change: Of this, we expect subscription revenue of $741 million to $745 million in Q4, or a 7% year-over-year increase at the midpoint, and $2.885 billion to $2.889 billion for fiscal 2025, or a 7% year-over-year increase at the midpoint.
Speaker Change: For billings, we expect $870 million to $880 million in Q4, or a 5% growth rate year-over-year at the midpoint, and $3.056 billion to $3.066 billion for fiscal 2025, or growth of 5% year-over-year at the midpoint.
Speaker Change: As a reminder, we had a strong Q4 of fiscal 2024 with 13% year-over-year billings growth, partially driven by early renewal strength that creates a hard year-over-year comparison.
Speaker Change: We expect non-GAAP gross margin to be 81.0% to 82.0% for Q4 and 81.9% to 82.1% for fiscal 2025.
Speaker Change: We expect non-GAAP operating margin to reach 27.5% to 28.5% for Q4 and 29.5% to 29.7% for fiscal 2025.
Speaker Change: We expect non-GAAP fully diluted weighted average shares outstanding of $209 million to $214 million for Q4 and $210 million to $212 million for fiscal 2025.
Speaker Change: In closing, in Q3, we made continued progress towards strengthening the IAM platform vision and improving the performance of our core business.
Speaker Change: We also maintained our focus on operating efficiency and produced strong non-GAAP operating profit and free cash flow.
Speaker Change: Looking forward from this foundation, we remain energized by our strategic roadmap as we continue to roll out additional capabilities to the IAM platform, scale more effectively across customer segments and geographies, and deepen relationships with our customers and partners.
Speaker Change: We remain in the early stages of bringing our vision to life, and we believe that consistent execution will drive innovation for our customers, empower our employees, and deliver long-term value to our shareholders.
Speaker Change: That concludes our prepared remarks. With that, Operator, let's open up the call for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Jake Roberge with William Blair. Please proceed.
Speaker Change: Hey, thanks for taking the questions and great to see both Revenue and Billings start to reaccelerate. Can you help us understand how much of that reacceleration is being driven by the stabilization your core versus the momentum that you're starting to see with IAM and then I understand that the tough Billings comp during the fourth quarter but how sustainable do you think that that type of performance is?
Blake Grayson: Yeah. Blake, you want to take that one? Sure. So, thanks for the question. So, on core versus IAM, the predominant driver is the core, and that's just really because of the evolution of IAM, and it's...
So early, so you heard in the prepared remarks
Blake Grayson: You know, really pleased with the Q3 Billings report. Performance earlies was the largest driver. That was about a third of it.
Blake Grayson: In the remaining two-thirds, there were three components to it. Better retention in the core business.
Blake Grayson: and just making continued improvements there. We also saw accelerating growth in digital, such upgrades in usage, and that's also in our core business. And then the third driver, which is the smallest of the three, was the better-than-expected IAM bookings. Now, you know, it's the smallest of the three, but that's just a function of the evolution and the timing of IAM. You know, this is the very first full quarter we've had in IAM launched in a single customer segment in North America. And so it's going to take time for that to evolve, but still really excited about the contribution that, you know, we see hopefully ahead for IAM.
Speaker Change: Yeah, that's helpful. It was obviously great to hear IAM saw the 10x sequential increase in adoption. Do you talk about what's different about IAM versus what you've previously done with CLM and just why that product has been able to sell so much faster than what CLM was previously able to?
Speaker Change: Yeah, I'll take that one. So CLM has been developed for and I think serves the needs of large enterprises, but complex B2B centric and negotiated agreement workflows.
Speaker Change: and it continues to be our lead offering for that particular customer segment.
Speaker Change: But that leaves a very large universe, both of agreement types, so all kinds of business-to-consumer workflows, all kinds of business-to-individual, like employment-related workflows, and even automation of simpler B2B workflows, unaddressed essentially by CLM systems.
Speaker Change: Ceylon Systems has also been historically the province of legal departments and maybe some sales ops or purchasing ops people, but they've not generally been used by a broader set of users. Frontline sellers, frontline...
Speaker Change: C11 is targeted at large companies that can sustain the amount of
Speaker Change: Investment necessary to set it up properly, do all the training and integration and so on.
Speaker Change: With IAM, we can deliver out-of-the-box value to a much broader set of companies.
Speaker Change: as illustrated by the fact that we launched it to the commercial segment. So, you know, companies with maybe, let's say, 52,000 or a few thousand employees, and those, even those companies have, as it turns out, significant agreement pain that really have been unaddressed by
Speaker Change: everyone in the enterprise software space. And so we're seeing very good take up. It's a
Speaker Change: A very productive sales conversation for our sellers, a very quick adoption for the buying organizations, and it kind of grows organically from there inside the companies.
Speaker Change: You know, it's a very encouraging start. It's still early. We are rolling it out now across other markets outside of North America and Australia, and we just started selling it into enterprises for, so to say, departmental level workflows.
Speaker Change: I think it's a great compliment to CLM, but we will continue selling CLM as our enterprise class tool for complex B2B negotiation related workflows. One last thing I would just add is that we are
Speaker Change: The CLM system is benefiting from all the IAM related innovations. So as an example, the integration with all of our e-signature related products has been improved dramatically.
Speaker Change: Navigator which is our intelligent repository is in beta now to be made available to CLM customers and a variety of other IAM features you'll hear more about on future calls will be released immediately or very shortly after for CLM customers as well so they benefit from all the investments and innovation that's happening on IAM.
Speaker Change: Very helpful. Thanks for taking my questions and congrats on the great results.
if
Speaker Change: Thank you. Our next question comes from the line of Tyler Radke with Citi. Please proceed.
Yeah, thanks for taking the question.
26 here.
Yeah.
Speaker Change: Yeah, thanks for that question. Yes, Paula has really hit the ground running. I'm just thrilled with the whole leadership team, with having her on the team and leading our critical sales and partnership organizations.
In terms of our focus, I think...
Speaker Change: If we look just a year out, the bulk of our IOM opportunity comes from the commercial segment, partly because we launched it six months earlier, it's very suitable for that. We have a longer sales cycle enterprise, there's more integration, we have more work to do from both a product go-to-market perspective.
Speaker Change: With that said, we are determined and believe that ultimately the largest opportunity is in the enterprise. And so we want to begin building that. As I mentioned, we'll have
Speaker Change: departmental level deployments Here starting. We just started selling that here now And then I think over the next year we'll build out the the capabilities for end-to-end wall-to-wall tap deployments in the enterprise and so Paul is focused on
Speaker Change: Really the entire go-to-market cycle, everything from our enterprise marketing, to our pre-sales, to our sales and sales enablement, to our post-sales support, and that's not just in terms of DocuSign, that's also in partnership with our system integrative partners and distributors and resellers.
And so it's really across the board. It's not a...
Speaker Change: It's an evolution, I would say, of our model. We obviously have an existing engagement model with enterprises we sell to.
Speaker Change: Most of the large enterprises in the U.S. and abroad, I think more than 85% of the Fortune 500 already use DocuSign. So we start in a good place and have an established
Speaker Change: Landon expand motion, but I think we still have some growing and maturing to do to do the the big platform company-wide Solution cell and and that's one of the reasons why we brought Paul on board to help us grow that capability and take the team
Speaker Change: The entire team is focused on maturing our capabilities to be able to service that opportunity.
Great. And a follow-up.
Speaker Change: For Blake, just as we think about the margin opportunity, you know, it sounds like there are some
Speaker Change: incremental costs here, whether it's, you know, the recent hires investments into IAM.
Speaker Change: and particularly around AI and some of the cash compensation. What are the additional levers that you see for efficiency going forward? And how should we think about margins heading into next year?
Speaker Change: Sure, I'll try to take a stab at this, you know, from a high level, I'm really pleased with the progress we made the last one to two years are
Speaker Change: Operating margin third quarter was up nearly 300 basis points from a year ago. That's up more than double
Speaker Change: from where we were two years ago. I'm happy that we're raising our operating margin guidance for Q4 and we're maintaining that same year-over-year improvement, or actually slightly more in Q4 than we saw in Q3. So I'm
Speaker Change: We're always looking for efficiency and productivity gains, but right now what I'm most excited about as far as long-term operating leverage goes, it's from gains that we can get from accelerating growth.
Speaker Change: And that's where we're really focused on right now. You know, our costs don't need to scale at the same rate as revenue. And so if we can focus on supporting that growth opportunity while maintaining the efficiency gains we made, I think we're really happy with that result. And, you know, to your point, Tyler, you know, we did call it a couple of unique items for FY 26, just for folks to keep in mind that creates some temporary pressure for us.
Speaker Change: You know, we've got those cloud transitions costs, and you can see that if you look at our Q4 guide on a year-over-year basis relative to what we see in the full year. And so, you know, I think that Q4 run rate's probably a good proxy. Now, that should ease for us in fiscal year 27 and beyond. We also have those one-time credits this year. So in the last quarter, Q2, you'll recall, we highlighted those and the adjustments to our compensation structure, you know, for next year. And the magnitude of that is...
It's probably slightly larger than those.
Speaker Change: Q2 one-time credit impacts that I referenced. But, you know, we continue to be really focused on productivity, extracting the efficiencies. And we've shown, you know, we've shown with our actions that when we can drive those without impacting growth or customer experience, we'll do it.
Thank you.
Speaker Change: Thank you. Our next question comes from the line of Brent Till with Jeffries. Please proceed with your question.
Speaker Change: Good afternoon. Allan, I'm curious if you could put your macro hat on over the next nine months and just give us your 40,000 foot view of what you see is happening from your CEO approach. Feels like things are
Speaker Change: Getting a little bit better, but don't want to get too ahead of ourselves. How would you characterize? What you're seeing and what you're planning as we go into next year?
Yeah.
Speaker Change: I would say, you know, first of all, the year that's almost over here, I think we've seen a, you know, marginal improvement in the environment for enterprise technology and enterprise software. We are
Speaker Change: We're practically a macro index, behind your question, because we're so diversified across both sectors and company sizes.
Speaker Change: So I think we get a reasonable read and we get engaged in everything from account openings to new hiring and so on. So everything I'm seeing is that the economy is in the major markets that we participate in and we're obviously overweighted in North America.
Speaker Change: tends to look reasonably positive. We're not projecting any material change to that. If that were to happen, we would benefit from that, but we're not projecting that or expecting it. I'll operate in the company in that manner. So
Speaker Change: That's my overall approach. We're not seeing market, I'd say, discontinuities.
Speaker Change: You know, one thing that I thought was interesting, you know, we've in the past gotten questions around the mortgage market because
Speaker Change: You know, obviously people identified us with mortgages, even though at this point it's really a relatively small part of our business.
Speaker Change: We're seeing a number of mortgage related customers, you know, increasing their, their, their buys capacity so that
Speaker Change: is a positive indication, at least a sentiment, where we're not seeing major volume increases. It's still on par, even a little less than the overall business in terms of envelope volume. But just an interesting commentary on one segment that I know is of interest.
Speaker Change: Does Blake get a little more capital to give to the go-to-market team to make a bigger push into early next year, or are you still being very disciplined on that side?
Speaker Change: You know, I think Blake and I are 100% aligned. We're, we want to, we, we've had some hard-won battles to, to get us to be more operationally efficient. We don't want to give that up. At the same time, we, as, as he said, we, we are focused at this point on, on accelerating growth and unlocking efficiency from that.
Speaker Change: We feel right now that our sales and marketing investment envelope overall is appropriate.
Speaker Change: We may move resources around for segments and so on in light of the opportunity, but we think we can self-fund that, if you will.
Speaker Change: based on where we're sitting now. Obviously, if we start seeing really positive investment from our sales marketing investments, and we feel we have incremental opportunity, we won't hesitate to make those investments. But right now we're holding the line on our envelope, that feels like the right trade-off.
Great, thanks.
Speaker Change: Thank you. Our next question comes from the line of Patrick Walrevens with Citizens JMP. Please proceed.
Speaker Change: Thank you for taking my question. This is Austin Cole, Entrepat. I think that generative AI and documents is kind of – extracting data from documents is kind of a natural marriage. What are some of the use cases that you're seeing with navigators so far, and what kind of –
with regard to the customer engagement with IAM.
Speaker Change: kind of gives you confidence in attacking larger customers with this product. Thank you.
Yeah.
Speaker Change: Yes, we agree that extraction is a very natural use case for for LLMs and and
Speaker Change: We can deliver value very quickly and it applies across a broad range of industries and functions. In terms of specific examples...
I mean, one obvious example is that
You know, we can easily extract.
Speaker Change: things like renewal dates and notice periods and as a result give people alerts or even automate
Speaker Change: Notifications and Workflows based on that information. So if you imagine if you're running sales or procurement, you can be on one side or the other, and you want to see everything that's coming up in the next six months and that's within the 90-day notice period, we can literally give you that in a dashboard. That's tremendously powerful both for frontline sellers or buyers as well as management. So that's an example of a use case that people really like.
Speaker Change: and that is easy to implement, be done with very high reliability, there's very little data, leakage risk, etc. So all of those things are very positive for companies I think of all sizes.
Great, thank you.
Speaker Change: Thank you. Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed.
Great, thank you for the question.
Speaker Change: Yeah, we are continuing to add new customers. I think we've maintained a pretty steady growth rate of net overall customer count in the 10-11% range for several quarters now. There's still headroom in the US. It's predominantly in the S&P space, as you would expect, given what I just said about already having 85% of the Fortune 500 as customers.
Speaker Change: There's even more opportunity internationally, and so we see a lot of additions in markets in Europe, in South America, and in Asia, and we think that that's still a long way to run. And so that's a...
Speaker Change: It's a wonderful way to grow our install base and complement our same store growth, if you will. With that said, I think the bulk of our focus as a company is on growing our install base now with this much broader product set. And the fact that we have a...
Speaker Change: much richer, more valuable offering allows us to leverage the fact that we have this massive install base that's generally very happy with us to offer more value. And I think we've got tremendous headroom to grow based on that. So new customer acquisition is super important.
Speaker Change: Tremendous headroom with with existing customers of all sizes and and it's a huge competitive advantage for us that we have. I think we're at 1.6 million monthly paying customers. That's a highly unusual number for an enterprise software company and so we want to fully leverage that competitive advantage.
Speaker Change: Thanks, Allan. If I could ask one for Blake, just on the Billings Guide.
Speaker Change: Given the early renewals in the year of your comp, the tough comp, and some of the early renewals that helped Q3, I think the Q4 guidance for Billings looks pretty bullish. Just wondering if you've signed any big deals already, like how the quarter is going, is there an assumption for IAM ramping, anything contributing to that, to the Billings guide for Q4? Thank you.
Speaker Change: Sure, you know, I think that obviously part of the guide that we do has to assume some early renewal component, right? It happens for us every quarter. We make an estimate based on that. I would say there's nothing there's no one-time standout component on that but It's just a reflection of the book that we see in the renewals that we're up for this quarter And so, you know our best expectation or estimate of the the rate that we'll be able to to book
Got it. Thank you.
Speaker Change: Our next question comes from the line of Mark Murphy with J.P. Morgan. Please proceed.
Speaker Change: Hi, this is Sona Kolaran from Mark Murphy. Thanks for taking the question and congrats on the results.
Speaker Change: Allan, coming off DocuSign Discover in November, I see that there are a bunch of other additional smaller regional events planned for CLM and IAM. I was just wondering if you could provide us with a sense of the recent customer excitement levels and feedback the team is picking up at some of these events, and perhaps any key focus areas or questions that are coming up with potential customers on IAM before they're willing to commit to that wide-scale rollout.
Transcription by CastingWords
Unknown Speaker .
Speaker Change: Yeah. But just first, as a clarification, we, we announced or introduced IAM at a series of events called DocuSign Momentum, which is really our customer focused event. We did the original launch event in New York in April, and then we've done events on five continents since then, Sao Paulo, London, Munich, Paris, Singapore, Sydney and Tokyo. I think I've been to all of them except for Sao Paulo. So it's...
Speaker Change: I think at every event in every continent, we see that this is a tremendously broad horizontal value proposition that is equally appealing to mid-sized and large companies and pretty universal across industries.
Speaker Change: I don't really see actually a ton of differentiation even across geos. I think the sooner we can get
Speaker Change: that capability in the hands of customers everywhere, the better we will do. So, I think it's a very hostile opportunity. DocuSign Discover, that you just mentioned, was our first event focused on developers.
Speaker Change: But it was fairly monolithic, shall we say. It wasn't a componentized view of all that we offer. We've now really re-architected that and of course it gives access to all of our new capabilities. And so what we announced here was a whole suite of tools and a variety of programs for developers. And I think the feedback.
from that community was really positive.
Speaker Change: Now, look, it's going to take a while for us to become a real platform company. We have a big opportunity to do that, and it would be a huge booster rocket if we can execute that successfully. But we're just in the early stages of executing on that opportunity.
Speaker Change: Maybe lastly, in terms of what else am I hearing from customers as I travel, I do a lot of customer meetings.
Speaker Change: I think that the universality of the I want to understand what's going on with my agreements value proposition is not even better than I expected. I think it's easy to explain.
Speaker Change: people instantly get it. They may not historically have articulated the pain as clearly because they didn't know that it could be solved. If you think about all the
Speaker Change: inefficiency and unpredictability of agreement processes, they've essentially remained unchanged for the last 50 or 100 years. We've digitized agreements, we send them around via email, and maybe we execute them electronically. Other than that, nothing's changed.
Speaker Change: and so our opportunity to really change that is very eye-opening for folks.
Speaker Change: I'm not naive. I think when we get to larger companies, it'll be a higher bar. There'll be more requirements, more systems to integrate with, more parties to convince.
Speaker Change: which is why we're taking this measured view and we started in the mid-market and then we're now going into departmental rollouts. That's a motion that we're very familiar with and then we'll complement that with more of a top-down solution selling motion to the larger companies.
That will be a multi-year journey
but a very exciting one and a very universal one.
Speaker Change: I'm feeling very positive about the early signs that we have in terms of the value proposition and can we explain it, can we sell it, and most importantly, can we see customers adopt it. And all the early signs of that are very positive.
Speaker Change: Great, thank you. That's very helpful. As a quick follow-up for Blake, I see in the past two years it hasn't seemed like Q4 has been a very active period in terms of DocuSign's buyback activity. Is there anything to consider on the capital allocation framework as we approach Q4 of this year?
Transcription by CastingWords
Speaker Change: No, no change at all from a Q4 perspective. I don't we don't look at it like on a quarterly basis. We really just look at it as a
Speaker Change: A function of it, we are generating really strong free cash flow. We have an opportunity to be able to deploy that capital to a number of different areas, right? Stock buybacks, one of them. M&A is another one. Running the business, investing is another one.
Speaker Change: And so that's how we take a look in our framework at it. I don't expect any changes to our strategy, and I'm really excited by the free capital generation that we're producing because it allows us to do, to have the flexibility and the optionality to consider all of those components.
Understood. Thanks again and congrats.
Speaker Change: Thank you. Our next question comes from the line of Michael Turin with Wells Fargo Securities. Please proceed.
Speaker Change: Hi, this is Michael Burr, on to Michael Turin. Thanks for taking our question.
Speaker Change: I just wanted to double click on the improvements in gross retention, what's driving that. Maybe we could get under the hood and explore what you are seeing or what you've done right to drive the improvements there. Is it more, is it macro, is it execution, is it IAM? Just wanna get some more color on that dynamic, thanks.
Speaker Change: I'll take a stab and then Allan, feel free to jump in.
Speaker Change: I've been impressed with the team's focus, honestly, internally around the data accumulation and getting in front of those real opportunities.
taking it down to a rep level.
Speaker Change: deal by deal, getting in front of it, having large renewal conversations, you know, way in front of the actual contract renewal date, I feel like just our upper level of operational execution has improved.
you know
Speaker Change: quite a bit, I would say, over the last six to 12 months. And so super excited about that. Obviously,
Speaker Change: You know, as you start to have conversations with, you know, folks around IAM and things like that, like our ability to have larger average deal sizes, obviously, as a, you know, small contributor to that.
Speaker Change: just because of the evolution and the timing of that. But it's been, I mean, just been super happy with the team's continued focus. And just to be, you know, you see it obviously in our dollar net retention rate going up. We still have room there. I think that, you know, while we're really pleased with where, you know, where we've come from, we still know there's a lot of opportunities still outstanding. So, you know, we're not resting our laurels at all about this and continuing to build out and see how we can have deeper customer relationships.
Speaker Change: build stickier relationships with our customers so we can improve that.
Heather Harwood: I agree with everything Blake just said. I would simply add that
Heather Harwood: I think one of the things that we did well here in the last 12 months I think has contributed to get our improvement.
is just massively improving our coverage and customer success.
Speaker Change: sort of implied by what Blake's saying, but I just want to...
Double click on a little bit. So
Speaker Change: Historically, our customer success efforts focused the very top of the book. That's where you got some additional support and engagement and use case development and so on.
Speaker Change: And we found that we had a big opportunity to do a more scaled model out of lower cost hubs in Brazil and now in Egypt. And that's showing really nice results for more of the torso of the book, if you will. And I think we still have more opportunity there. So on multiple fronts, I think there's been a lot of levers to pull in product and sales, in marketing, in customer success to drive retention. And as Blake said, we're definitely not done with that. We think we can do better and we want to do better.
Speaker Change: Helpful, thank you. And then just a quick follow-up, is there anything notable to point out and any changes in the competitive dynamics that may be aiding the the growth retention dynamics you were just describing?
Unknown Speaker
Speaker Change: You know, I don't actually see the competitive environment changing all that much. It's been fairly stable. It's the same class of competitors. I do think on a go-forward basis,
Speaker Change: The Competitive Dynamics change, you know, so as we've evolved from the signature business to this broader suite of intelligent agreement management products
Speaker Change: the folks that we've historically competed with just in signature I think
Speaker Change: you know, we separate ourselves more, more there. So I think that'll help from a retention and competition perspective over time. But it's just too early, we just launched six months ago. So most of those agreements haven't come up for renewal yet. But I think it's aiding our competitive posture and as it becomes available in more segments and more geos, that'll help us.
Helpful. Thank you.
no
Speaker Change: Thank you. Our next question comes from the line of Alex Zukin with Wolf Research.
Speaker Change: Hi, this is Arseny on for Alex Soukin. How many reps are eligible to sell IM today and was that an easy training or prep cycle given reps having CLM experience and just seeing that early traction in IM is great but we don't want to get ahead of our skis on expectations here given how early it is. Is there any help we can get on guardrails for growth next year? Thanks.
Speaker Change: Sure, yeah, I'll take it with staff. You know, we're not disclosing the number of reps, you know, that we have in a given segment or market. It's just really a function of what I'm...
Speaker Change: What I frankly was, I'll say, positively surprised a bit was how quickly we were able to ramp the number of reps engaged with this platform, because this is a new thing for DocuSign, and how are we going to address it? And we saw a pretty quick ramp in our North America commercial business.
Speaker Change: that we're really excited about. Now, the North America commercial business, I think, as everybody knows, is different than an enterprise, like much larger enterprise.
Speaker Change: and Jonathan Greenblatt. We're going to have to see how that goes. We've just started having conversations with the very first few enterprise customers about departmental opportunities just in the last few weeks. And so it's still very early days for us. And so as much as I'd like to be able to provide real direction about where we think FY26 is going to be, we'll address all that, much more of that, at least on our page.
Speaker Change: March, you know, guidance call, and we do full year guidance next year. But again, it's still early. And so we're just trying to learn and get as much data as possible and make sure we have the right trend lines before we can start, you know, kind of talking about those things.
Speaker Change: Got it. And I guess, can you explain what's driving that early renewal tailwinds that we're seeing that's contributing a bit more to that billings outperformance than we've seen historically? And on fiscal 4Q, I think last year, you called out early renewals contributing about $30 million tailwind and the guidance for this corridor coming up.
Speaker Change: embedding a little bit of early renewals. I guess, is there anything you can give us in terms of what's embedded in that guide, how to think about it into 4Q on that billing dynamic? Thanks.
and the other one.
Speaker Change: Yeah, sure, you know, we don't break out the guide components based on, you know, earlys resettling else. I will say that, you know, earlys happen a little bit stronger. One of the things that makes me okay with that is that the health of those early renewals are still good and actually quite strong and a lot of those earlys come from just that next quarter out, right? And so as we're talking to customers and if their usage is trending up and they want to get in front of those things, that's okay. And so, but it is something for me that we do look at. And along with the health of those earlys, it's okay. It's really more of just a timing thing. [inaudible]
Speaker Change: Thank you. Our last question comes from the line of Ian Black with Needham and Company. Please proceed.
Speaker Change: Thank you for taking my question. Where should we think about NRR normalizing at and how much impact are you still seeing from capacity rationalization?
Thank you.
Speaker Change: You know, we don't, I don't have an idea of where you know, that dollar net retention ends out. I mean, this is a company that saw a big decel from that outside of COVID.
Speaker Change: We saw the historical low in Q4 of last year, and we've made a lot of efforts to first stabilize that, and now we've seen, you know, a couple of quarters of, you know, slight improvement, so really excited about that. I think from a capacity, you know, kind of utilization perspective and such, I don't know, maybe if you're referring to, like, the COVID components or whatever, but, you know, our, the book, and I think we shared this data point, I think, maybe in Q3 of last year, because, you know, a lot of folks were asking about how many of the contracts that you have on your book were written during the COVID period and such, and, you know, we had been largely through all that. I mean, as of today, the number of contracts...
Speaker Change: for the kind of the dollar average that is the dollars that are in our book of business.
Speaker Change: that were in contracts written during calendar years 2020 and 2021. So I'm using that as a proxy for the code. It's under 1% now. And they're going to be by let me they're gone effectively from our business. And so I think we're in a much more stabilized place. I think you can see that in the results that we've shown. And so the trends, I think, like we said, in prepared remarks, and you've heard today is that they're modestly improving, like, you know, year over year, envelope sent increasing for four consecutive quarters.
Speaker Change: Utilization rates for us on capacity have been improving. And so those are all what I would call like leading indicators for us where we get optimistic about the trends and opportunities we have in front of us.
Yep.
Speaker Change: Yeah, so we are encouraged by the stabilization at our core and the early signs. It's still very early, I am going to stress that, but a really solid quarter overall.
Speaker Change: Thank you, operator. Thank you to all of you who joined today's call.
Speaker Change: I am really proud of the progress as we deliver powerful innovation to our customers through the IAM platform and continue to improve our core business fundamentals.
Speaker Change: Thanks to the team for their commitment and to our owners for your support as we realize the long-term vision. Talk to you next time.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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