Q2 2020 Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining Docusign second quarter fiscal 2020 earnings conference call.
As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I'll now pass the call over to Anne Leschin head of Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone welcome to Docusign second quarter fiscal 2020 earnings conference call.
On the call today, we have Docusign CEO , Dan Springer and CFO , Mike Sheridan.
A press release announcing our second quarter results was issued earlier today and is posted on our Investor Relations website.
Before we get started I would like to let everyone know that will be we will be participating in the Deutsche Bank conference in Las Vegas on September 10th.
As other events come up we'll make additional announcements.
Now, let me remind everyone that the statements made today include forward looking statements that are based on assumptions, we believe to be reasonable as a good thing and on information currently available to management.
Generally these statements are identified by the use of words, such as expect believe anticipate and other words that you know future that.
Forward looking statements involve known and unknown risks and uncertainties that may cause actual results or performance to be materially different from any other results or performance expressed or implied by such statements.
These risks and uncertainties are described in our press release and in risk factors in our annual report quarterly reports and other filings with the FCC you should not rely upon forward looking statements as predictions of future events.
Except as required by law, we assume no obligation to update these forward looking statements actual results differ materially from those anticipated in such statements.
During this call, we will present, GAAP and non-GAAP financial measures non-GAAP financial measures exclude stock based compensation expenses amortization of acquired intangible asset amortization of debt discount and issuance costs from our note.
And as applicable other special items.
In addition, we provide non-GAAP weighted average share count and non-GAAP information regarding free cash flow than billings.
These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing our performance for information on our non-GAAP financial information the most directly comparable GAAP measures and a quantitative reconciliation of those figures. Please refer to todays press release.
I'd now like to turn the call over to Dan Dan.
Thanks, Denny good afternoon, everyone and thanks for joining our Q2 earnings call today I'm going to cover three sections.
Our high level financial results and how we are driving strong growth.
An update on our agreement cloud vision and how our strength in E signature is the perfect onramp to expanded relationships with our customers.
And finally, how we are rapidly delivering innovative solutions to support the agreement cloud vision.
I'll then pass it over to Mike for a more detailed rundown of our financial.
Together, we believe it will showcase the strength in our existing business and the incredible potential for the future.
So let me start with our results and our commitment to grow.
As part of our overall strategy Docusign has three main growth drivers, which you heard me talk about before.
What.
Our new customers.
To expand usage and use cases within existing customers.
And finally, three introduce innovative solutions to help customers modernize new parts of their systems that agreement.
In this quarter, we saw progress on all three fronts.
We acquired 29000, new customers approximately 4000 of which are direct bringing our total number of paying customers 537000 worldwide.
64000 to both our direct.
With strong customer demand for our products with in the Docusign agreement cloud, we grew our revenues of 41% year over year to $236 million and billings, 47% year over year to $252 million.
The expansion of E signature volumes and use cases was evident in our net dollar retention rate of 113%.
These results reflect solid progress for our second quarter and they support our confidence in and our excitement for the future.
Next I'd like to upgrade on our Green cloud vision.
And our success with new product development there.
Earlier this year, we introduced Docusign agreement.
It is the umbrella for our suite of more than a dozen products and over 350 pre built integrations.
All to help organizations connect and automate the entire agreement process preparing to signing.
Acting on and managing their agreements.
This quarter, we saw particularly strong progress from the CLM product came via our acquisition of Springs yet.
She LM stands for contract lifecycle management term, we will increasingly use as we transition the spring C M product name.
Docusign CLL.
Of course.
We are still doing plenty of deals for our core E signature solution by itself.
And we believe it's 25 billion dollar market opportunity is still largely untapped.
Moreover, we view nearly every E signature win as the basis for future expansion to other agreement cloud products.
We've begun to see multiple examples of how customers are connecting and automating various stages of the agreement process.
While continuing to expand their E signature use cases.
One of the world's largest energy companies is currently using E signature and CLM together for generating negotiating assigning sales agreements.
With their deployment of the agreement cloud.
Integrated with their instances salesforce.
Microsoft Sharepoint and S&P.
They now can complete agreement that used to take days or weeks in as little as two minutes.
The efficiency improvements they've seen with Docusign agreement cloud are saving the company tens of millions of dollars and have the potential to save even more.
Another customer cloud payroll services company not only expanded on their core signature usage as they brought more internal processes into docusign.
But they also extended their implementation to include CLL.
This is a prototype of the cross sell opportunity, which has a cell excite.
And yet another customer.
Consumer credit reporting agency previously had a small E signature footprint from one of their sales team. This quarter. They added a company wide deployment of CLL.
Which in turn May lead to further his signature opportunities throughout their business.
This is a great example of how our land and expand motion can take multiple paths.
No.
I'm pleased to report that we began to see some nice progress in the federal vertical.
This quarter, we partnered with a prominent government agency for very significant deal.
They are currently deploying CLM as the foundational systems for the department to better track document status.
Identified delays in their prophecy.
And provide better transparency throughout the agency.
Also this quarter, we signed a branch of the United States Armed forces, So I'm biased to the partnership.
First they purchase the signature to help streamline the recruiting process.
Now in an effort to further modernize the recruitment and retention system.
They are expanding this use case. The addition of other agreement cloud offerings, which are very closely integrated with their salesforce CRM.
This expanding adoption of E signature and the increasing traction of other products in the agreement cloud continues to drive our business.
We believe Docusign agreement cloud defines an entirely new category of cloud software and complements the marketing sales HR ERP and other cloud categories that already exists.
Connecting them all into the agreement process.
To realize this big vision, we need to create and deliver a number of products that automate and connect the entire agreement process.
Across multiple departments and industry verticals.
Most notably this quarter, we added docusign rooms for mortgage.
A solution that helps mortgage lenders accelerating closing time and improve the borrower experience.
It provides a secure digital workspace for everyone involved in a mortgage.
It's actually flexible enough to support traditional closings fee, a pen and paper as well as drive fully digital closing and hybrid closings as well.
Rooms for mortgage is a great example of Docusign focused on a particular vertical.
In the mortgage industry in cost thousands of dollars for a lender to process mortgage and asset.
One of the reasons is that there are so many ingredients involved from the applications to the title and settlement.
These prophecies today, our manual and costly that's why we think a mortgage specific solution such great opportunity for us.
We can automate and connect the many steps within the profit, making faster less expensive and a better customer experience for all parties.
So to wrap up let me summarize we are seeing strong performance across our core growth drivers E signature expansion.
And increasing adoption other agreement cloud products.
We are positioning Docusign agreement cloud connect must have cloud that underpins, both front office and back office functions.
And we are seeing the market respond well with the public and private sector embracing our vision and our technology.
Together with our core E signature offerings, we believe that this expands our Tam well beyond the original $25 billion projection.
In closing I wanted to mention one last item I'm pleased to share that we recently appointed CHMP fee, our new general counsel to lead and oversee legal affairs and risk management.
John brings more than 20 years of corporate legal and general counsel experience to her role.
Including leading to technology IPO.
They are very excited to have her on board.
Now I'd like to hand, it over to Mike to walk through our financials in greater detail Mike.
Thanks, Dan and good afternoon, everyone first I would like to remind you that are non-GAAP financial results excludes stock based compensation amortization of intangibles amortization of debt discount and employer payroll tax on employee stock transactions. In addition, this quarters results include contributions from spring cm, whereas the comparable quarter a year ago excludes spring C, which was acquired in Q3 of fiscal 19.
We saw substantial topline growth in the second quarter, driven by strong customer demand.
Our total revenue rose, 41% year over year to $236 million with subscription revenues growing 39% to $221 million or North American business was particularly strong. This quarter. In addition international revenues grew 47% year over year to $42 million.
Second quarter billings increased 47% year over year to $252 million on a four quarter Rolling average basis billings grew growth was 36%.
We saw strength in our core you signature solutions as well as good progress in our sales of steel in products to new and existing customers.
As Dan mentioned this quarter. We also saw good progress in our sales into federal agencies.
In Q2, we completed our first federal sales have exceeded $1 billion in HCV and this sale included significant components of both you signature and CLM.
We added a total of approximately 20 29000, new customers this quarter of which 4000 were new direct customers.
This was an increase of 31% and our commercial and enterprise installed base.
This brings our total customer base to 530 537000 with 64000 direct customers worldwide.
In addition to strong new customer growth. We also saw strong growth in upsells into our installed base or dollar net retention increased to 113% and customers with DCB is greater than $300000 grew 50% year over year to a total of 370 comfort customers worldwide.
non-GAAP gross margin for the second quarter was 78% compared to 81% in the same quarter last year.
Subscription gross margin in the quarter was 84% compared with 87% a year ago.
These margin impacts relate primarily to the addition of spring C as well as higher capacity needs of our outsourced data centers in developing regions, where we do not have our own price.
Proprietary data centers.
Total non-GAAP operating expenses for the quarter were $185 million or 78% of total revenue.
Compared with $132 million or 79% of total revenue for the second quarter last year.
These expenses include approximately $6 million related to the or post litigation, which settled in the beginning of Q3.
The significant majority abuse or post expenses, our legal fees with a smaller amount related to the settlement.
The settlement resolved all outstanding disputes with our post so we do not expect any significant expenses related to these matters in Q3 were going forward.
non-GAAP operating loss was less than $1 million in Q2, which includes the $6 million of our post expenses.
This compares to a 4 million dollar non-GAAP operating income or 3% operating margin in Q2 of fiscal 19.
For the first half of fiscal 20, or non-GAAP operating profit was $9.7 million, which includes the impact of $9.2 million of our post legal and settlement expenses.
We ended the quarter with 3489 employees a year over year increase of 35%.
We generated $26 million in operating cash flow compared with $23 million in Q3 Q2 of last year.
Free cash flow came in at $12 million compared to $18 million in the prior year.
As we discussed previously we saw particularly strong collections in Q1 of amounts that would typically be collected in Q2.
For the first half of this year, we generated $72 million of operating cash flow, a 91% increase year over year.
And we generated $42 million or free cash flow, a 56% increase year over year.
In Q3 in the second half we will continue to invest in the data center and real estate projects. We have discussed previously which will reduce second half cash flow below recent trends.
Turning to our guidance for the third quarter and fiscal 2020.
We estimate first that revenue will range between $237 million to $241 million in Q3, and $947 million to $951 million for fiscal 2000.
And billings will range between $260 million to $270 million in Q3.
And 1.063 billion to $1.083 billion for fiscal 2000.
We are maintaining our guidance for gross margin of 78% to 80% for Q3 and the fiscal year.
For operating expenses, we expect sales and marketing in the range of 48% to 50% of revenues in Q3 and fiscal 2000.
R&D in the range of 15% to 17% for Q3 in fiscal 20.
And gene a in the range of 10% to 12% for Q3, and 11% to 13% for fiscal 2000.
For the third quarter, we expect $3 million to $4 million of interest and other non operating income net income, including interest income and expense associated with our convertible debt.
And for fiscal 20, we expect interest in non operating income of $13 million to $16 million.
We expect a tax provision of approximately $1 million to $2 million for the third quarter and $6 million to $8 million for fiscal 2000.
We expect fully diluted weighted average shares outstanding of 185 to 190 million shares for Q3, and 190 to 195 million shares for fiscal 20.
We continue to be on track to spend $60 million to $70 million in capital investments in fiscal 2000.
We expect the majority of our second half spending to occur in Q3, as we ramp up the build out of our Dublin office and the dedicated federal data Center.
In summary, we are very pleased with the progress we have made in the first half of fiscal 2000 towards our strategic and financial goals and we believe we are well positioned to continue our strong execution in the second half of the fiscal year.
With that I'd like to now open it for Tonight.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue 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.
Our first question comes from the line of Sterling Auty with Jpmorgan. Please proceed with your question.
Yes, Thanks, Hi, guys.
So last quarter, you talked about the potential for Elongating sales cycles as customers were valuating CLM and a broader part of the product portfolio are we to take given the strength in the results the guidance and some of the examples that those deals have closed and perhaps your kind of settling into what you think is the new norm around sales cycle timing.
[noise], Hi, Sterling, Yeah, I would tell you it's similar to what we said last quarter that last quarter was the first quarter, where we had CLM offerings available to our sales force to sell so we had some deals slip out in a quarter, where we didn't have any deals slipping into the first quarter. I think if you look at Q2 as we expected some of those Q1 deals.
Moved into Q2, and there were some Q2 deals that moved to Q3 much like we expected. So yeah I think that going forward. We would we would expect that to normalize I would say also that while the more complicated multi product deals will continue to have longer sales cycles. I think we made good progress in the sales teams moving down the learning curve as they get more experience.
All right, Great and then one follow up on the federal opportunity.
Are you in terms of your go to market should we expect that most of the opportunities are going to go through either some sort of prime contractor or other partner or how much of the opportunity can you actually now take direct based on where you are with certifications et cetera.
Yeah, I think we're going to see a combination certainly I think the phenomenon is that there are certain.
Sort of master contractors that have very large overall relationship and they will look even even if we're doing sort of the selling directly to the agency will get pulled into those those larger master agreements, which were perfectly happy to do.
As we mentioned on the call of the sort of two big pieces, we're excited about.
This quarter one of them was more direct and one of them was.
Through it sort of a bundle of master contractor I think there's going to be a mix at this point would be early for us to try to give you a flavor of what that mix would look like other than to say I think we'll see both flavors.
Got it thank you guys.
Okay.
Your next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question.
Thank you to maybe one for Mike Mike One for Dan maybe I'll ask both at the same time, So Mike 27 million dollar billings outperformance is I think your biggest perhaps since since the first quarter when you.
Came public so I just want to press a little bit more on where that outperformance came from.
And then maybe maybe you could answer it in the context of whether it was core E signature really outperformed or the CLM stuff really took off or.
Perhaps and this is maybe what Sterling was getting at was there an unusual catch up in the twoq quarter, where some of the deals that slipped out of Q1 all closed into Q. So this outperformance was was unusual so that was the question for Mike and then for Dan last earnings call you talked a little bit about this new sales structure at least in North America, where you split it between new logos and installed base and perhaps you can give an update on on three months later.
Weather.
Whether that processes is now fine tuned and whether you are looking to make any other sales structure changes. Thanks, so much.
Thanks, Charlie I'll take the the billings question first I guess at the highest level I would reiterate what I talked about in prior quarters, which is billings as we all know is a statistic that is affected by timing differences of timing of orders booked and everything else and so it's not a perfect growth statistic and so I always look at it as a four quarter Rolling average, which was 36%, which for example last quarter, 27% year over year growth isn't terribly going in a 47% might not be as telling this quarter either I think looking at those those trailing averages makes sense for that particular statistic with that said, we had an excellent quarter and the things that we're talking about strong North American performance.
Good growth and CLM, the fed coming online for those all contributed to the to the it the good growth statistics, we saw both in billings and revenue.
And on the net sales structure Karl I think we felt really good as I indicated before that the right answer was to have a split between we call new.
And all basin, we tested at the end of last year with our SMB business and decided it was successful.
And I think the best Telltale sign of why we're pleased with that result, the core goal. There is to make sure. We have enough people focused on generating new codes, which are traditionally a harder sales process and the up sell to the installed base and the fact that you saw the 4000, new direct customers coming on board. That's a great indication to me that it was a very strong quarter and that our efforts in sort of bifurcate in salesforce that way.
Spot on so we're really pleased with that approach okay. Great. Thank you both.
Our next question comes from the line of Rishi Jaluria with da Davidson. Please proceed with your question.
Hi, guys. Thank you so much for taking my questions.
First I just wanted to and go back to billings I I don't mean to harp on it but that that's where you're going to be the bit of the headline after what happened last quarter, and then where we are this quarter until they understand all the moving pieces, but I just want to understand a bit kind of think about this on a rolling four quarter basis like you've alluded to it.
Somewhere in that let's call it mid to upper Thirtys type of growth rate is that the right way to think about what the underlying growth of the business is right now right versus looking at the 27 or 47% of isolation and then alongside that it looks like there wasn't a duration impact right with average contract lengths. Both on a dollar weighted by contract pretty consistent with where they've been the last several quarters, but I just wanted to confirm that none of the uptake or or in billings was caused by something on the duration side.
Yes, So let me answer the second part first on the duration that doesn't have an impact on billings of stable number one but also even a multi year contracts, we still build them annually. So even if we did have a change in duration it wouldn't affect the billings statistic and in terms of how to look at billings is a is a growth indicator, yes, I think you summarized it correctly, which is in any particular quarter.
You can have that particular statistic affected by timing and other things and so we do look at it on a on a rolling basis and you know one quarter's worth a bit lower you know, we don't want that over interpreted in a quarter like this we don't want to 47% over interpret it either I think in fairness looking at it that blend which takes away some of the noise of intra quarter movement.
Of deals that closed in one week versus another.
Those kinds of things the rolling average I think helps to give you a better indication where the core growth is going.
Got it that's helpful. And then just a quick follow up if I may going to subscription gross margin.
I understand you know again lot of moving pieces here, if we kind of focus on on the two of the data Center side, and then spring Seattle, maybe just help us understand going forward a I can we expect to see some optimization of the spring CMR I guess docusign CLM gross margins to come back in line with where were the core E signature offering it.
And then and then B.
On the datacenter side.
Is that something that again, the at least wait on overall subscription gross margins can maybe start to.
Go away over time, that's it thanks.
Yes, So I think if you look at our guidance is 70% is on the low end of the range. So I think that would tell you that I do believe there's opportunities for us to continue to optimize and leverage our investments.
The the spring Cm model did have a lower margin profile I think as we continued to expand our successful CLM, we will get a better leverage out of some of the infrastructure and the data center.
Usage variance that we had some this quarter, while it cost us a bit more money and indications that that we need that capacity for for more usage in our installed base. So it might have a little bit of an unfavorable impact on cost, but it's a it's a pretty positive indicator in terms with our customers doing product.
And I would just add that I think for the growth we see that when we see that progress as Mike described it's a good leading indicator that we're seeing that growth strength going forward.
Okay perfect. That's super helpful. Thank you guys.
Your next question comes from the line of Stan Zlotsky with Morgan Stanley . Please proceed with your question.
Hey, guys. Good afternoon, and thank you for taking my questions and really nice job on in the quarter.
From my end looking at the the dynamic that we saw in Q1, where you had extended selling cycles into existing it's not something that suffering aggressors typically see usually we see new extension extensions of sales cycles into new customers what are the adjustments that you've been making behind the scenes.
To get to get that under control.
On yourselves or within your sales organization and get those cycles back in line.
And how are those how are you thinking about these kind of extensions as we get into the really big second half of the year, especially Q4, and then I have a quick follow up.
Sure. So Stan I think two things one is as Mike indicated earlier in the commentary there are definitely a phenomenon that not all products have that same cycle time, and we do see that and do expect that feel and we'll have a longer cycle time sales in one of the major drivers behind that is there is more of an implementation plan. So you actually have to have a bigger statement of work and again, we love it when we get to use one of our system integrator partners, sometimes we do that work ourselves, but regardless there ends up to be more effort and I think an elongated process than we would have in a traditionally signature. So as Mike said think about that mix over time, you will expect some elongation because of that we don't again, we don't think Thats a bad thing we think it's an opportunity to have larger footprint at our customers, but the second piece to get to the opportunity that we can.
Improve our performance aspect is really around sales enablement and I think the phenomenon for US is when it was very early first couple of quarters of new product at least didnt have the scale of enablement, we needed to have as we look into the second half I think you're spot on that that's a big opportunity for us because we have so much of our business that occurs in the second half.
And we feel we really are accelerating those investments to enable our team to not just be successful with the traditional signature offerings, but also with the broader system of agreement offerings were delivering to the dockside agreement class.
Got it perfect and then.
Follow up.
As you sell these these larger.
And cloud contracts into customers.
Just maybe anecdotally how much bigger are these are these contracts that you sell into these customers or at least what you've seen thus far as the proof points and Mike maybe for you what is that due to net revenue retention.
As we move through the rest of this year and perhaps into next year. That's it for me. Thank you.
So staying on the first piece I think the number of observations. We have are still limited. So I don't know that we can yet give you a sense of here's how we think they'll play out I can tell you. This from the observations we've had with some customer situation, where the CLM opportunity just one or the other components of the agreement cloud and most focused on can be significantly larger and what they would do from an E signature standpoint, but we also have lots of customers that are going to be finished your customers' CLM as an example might not be appropriate for their business, where we think virtually every company on the planet will eventually be using us for signature. So if you think about it that way, it's going to be a lot of difference in them in general I would say CLM opportunities can be bigger.
But it's too early to tell right now and sort of what that.
Average would look like.
And in terms of the <unk> dollar net retention obviously, having.
More products available to the salesforce to up to bring to the installed base is a good thing when it comes to both mitigating churn, but also expanding.
The footprint that we have inside a customer so.
The range that we've seen historically is a 112% to 119% I think is still valid range, but I think that it can certainly be helpful. In moving us up into that range is as we continue to to get success in the installed base.
Okay perfect. Thank you so much.
Your next question comes from the line of Dan as is with Wedbush Securities. Please proceed with your question.
Hi, Thanks, and great quarter.
So can you talk about international in terms of what you're seeing there just changes obviously seems like ramping growth.
Maybe you can just talk about the international trajectory than maybe what you saw this quarter.
Sure, Yes, overall, Dan as you've heard US talk about we believe that we have an opportunity for our international growth overall to outpace.
Our our U.S. growth although.
Had a very strong quarter in the U.S. and that those guys are doing that given their darndest to make it harder for the international team to quote unquote take share. If you will of our overall business I think traditionally and we talked about this a lot as a consistent message, which is the folks that were in a common law countries, where the places that we got.
Most of our initial traction that's places like the UK and Canada and Australia.
And I think we continue to see good strength there in particular, we've now started to see some acceleration in some of the civil our country.
See that in sort of France, Germany, we see that in Brazil.
And we'll see that I think over time in Japan more as well.
So we had some pockets.
That were quite encouraging for us that we're going to continue to achieve what we said from an international growth standpoint.
And again I think it is a broadly across the board that we see those opportunities across both common and civil.
Got you.
And in terms of the product strategy could you maybe talk about your view of organically.
Building on to the footprint versus maybe some acquisitions in terms of what you could see in March just talk on maybe the puts and takes down there thinking about thanks.
Absolutely and so you know if you think about we've laid out with the overall Docusign agreement cloud opportunity, we've been very clear that we want to provide for our customers. The best possible solutions and we have a very strong commitment to having an open platform and I don't think you're going to see.
Anyone who is a more more motivated than we are to continue to build out both our apiay capability as well as the prebuilt integrations and we have just over 350 of them now so again strong commitment to keep it open at the same time part of the reason we got to the construct of the agreement cloud is that our customers were telling us want to have more integrated strongly with the core E signature capability.
Thats why we started if you remember the history looking for folks who are interested in a prepare product. They said it'd be great. If that can be integrated Doc Gen capability right at the dock side.
Going forward as you make the choice versus sort of the build and the buy and the partner I think the answer is all of the above I think we're going to continue to look for opportunities as we did with spring where we saw there was a significant amount of customer demand.
And we felt that there was a skill set sort of a capability that we didnt have that domain expertise strong within docusign. So we could build it ourselves. We just think it makes sense to get there faster through acquisition and Thats, how we look at things today, we see the ability to its very close to what we already have.
Those intrinsic capabilities will probably continue to build and innovate internally and when we see someone is just far ahead of us with that expertise and that domain knowledge and we'll look for the acquisitions that really I think it's going to be the pivot on on how we buy versus partner versus build ourselves.
Awesome. Thanks.
Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Please proceed with your question.
Hi, Thanks for taking my question. This is shankar on behalf of cash.
I have two questions one.
Hey can you add some more color on the strength of your pipeline in the government and.
CLM business do you expect them to kind of accelerate through the year.
How do you see any kind of lumpiness in those.
Listen I, just and you maybe you can even add some color on the signature pipeline.
Sure.
So to your perspective on the pipe and specifically around.
Government.
Look we've been very clear from the beginning that we are hugely excited about what we think is quite frankly, a massive opportunity for us and public sector and at the same time I think we've also tried to be.
Very cautious about understanding that the cycle to sort of realize that opportunity is not going to be the same as we've had in our traditional commercial business and so I think the.
The best way for Us to look at right now as we look at Q2, we're very pleased with these significant deals that we talked about on the call and we believe there will be more deals like that I don't think I would characterize it as as if there is sort of like a floodgate opened up and once we have our first large deal all of the rest of the government agencies are going to come running and at the same time I think it's a very strong proof point that the government agencies will eventually come to Docusign. So that goes back to as we try to think about the Tam a significant portion of what we always thought was the big opportunity not only for signature but for the broader agreement cloud offerings was.
On the federal and continued state local success as we've had in the past that's how we sort of think about it's a really big proof point on the size of the opportunity, but we're not yet making a call that it's going to lead to some acceleration in our business.
In the near term.
Got it got it now one of the things that I.
Took away from the competitions and your confidence in June was that the CLM business one is.
I had a lot of value to customers.
It was kind of hard to find the budget.
For CLM and with the new kind of adventure for lot of the customers can you maybe address how you're addressing that.
You know the dollar the budget question among customers and maybe some color on.
The recent deals close kind of how the sales cycle started and how did you get the customer to kind of move from I don't know what it is for like heck to signing a deal.
Absolutely well I think in CLM, it's actually not too different than it was several years ago with the signature as the pioneer in that space now there was no one that had an E signature specific budget, but if you were a human resources team you are spending money on as an example, sending out offer letters and having people manage that manual process and we came along and said here's what the budget opportunities lets replace that that labor intensive and manual process. It has postage and other physical cost Fedex costs in it with our solution. So we really transferred budget. The came from sort of the offline to the online we see the exact same phenomenon in when we're talking to people at CLS. It's true that a lot of people Didnt have a historic budget for CLM, if they're coming in entering the space now, but they had a way that they manage all those contracts and a lot of it is manual processes and thats the opportunity we come in and show a fantastic ROI by telling them that the money and time there people are spending today on those properties can be dramatic.
We more efficient and provide a better customer experience. So we really substitute their old spend with the news that I think we're seeing the exact same phenomena as I said and CLM as we saw develop with the signature.
Got it thank you congrats on that thanks.
Thanks.
Your next question comes from the line of Pat Walravens with JMP Securities. Please proceed with your question.
Oh, great. Thank you and congratulations.
So you know Dan I think one thing that makes investors nervous about docusign is when they spend too much time talking to the IR people that your competitors and so I think it would be helpful. If you talked a little bit about how your approach to the market is different than.
There will be or dropbox.
Yes, I mean, Joe So Pat My sense is as you know when we talk about the competitive dynamics on the one hand, we are laser focused on what we see other people doing in the in the market space and you are talking mostly about a signature.
Competitive set there, but its exact same thing when we look at the overall agreement cloud we look very closely what other people are doing and at the same time, even though we have that maniacal focus on potential competitive threat. We have been fortunate to have a very strong leadership position in the marketplace not only did we built the core E signature market, but we have maintained a dramatic market share lead and so we really believe that our biggest focus less about being overly concerned about specific actions or tactics that other people are doing and rather focused on going after this giant Tam. That's ahead of us where we have so much of a high ROI opportunity to provide to our customers. So again, when we talk about what products were going to build we actually talked to our customers and say, what's the functionality and capability you need to have a broader relationship with Docusign, which is why we got into the agreement cloud.
Vision that we've talked about in the past. So yes, we just don't see them, having a significant part of our business the impact on our business from those competitive threat. So I don't know exactly what the IR department in those other companies say, but from our standpoint, we are laser focused on the customer side and really not putting too much focus on what the other folks are saying.
Okay, Great and then a quick one is the federal data center done.
No, it's not done yet, but the but were going to completed this fiscal year theres more work to be done in Q3.
Okay, great. Thank you.
And Pat just a clarification make sharing throughout takeaway is make that we're building that separate.
Data center for federal, but we are serving government, including federal customers today, not all not all government business requires a dedicated government infrastructure. So we are in fact, serving them today, but it unlocks additional use cases and opportunities for people that have higher security requirement.
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When I size, one half billings growth, there's an acceleration year over year, while net expansion rate from the first half actually trended down I'm curious if you could just unpack what's driving this.
Are you seeing larger initial deals and the commercial and enterprise space.
I think one piece of it is going to be that in the first half of this year.
We had springs.
And we had CLM as part of our business in the first half of last year, we did not and so Q3 is coming quarter will be the first quarter were CLM will be it will be in both quarters.
So I think Thats one factor I think on the on the dollar net retention it has fluctuated a little bit but it's remained relatively in a.
In the same place so I think some of what you're seeing this year as we've been talking about it starting to see.
Greater contribution just not in the in the former spring business, but actually seeing CLM getting sold by our Salesforce into our accounts is helping seeing the expansion internationally is half is helping things like starting to have success and fit all those things are contributing to that year over year improvement.
Okay. Thanks, and are you able to is to size the revenue and billings contribution from spring cm in the quarter.
No we don't break it out separately, but with and without it was a very strong growth quarter.
Got it Thats helpful. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
But one thank you all for joining US we're pleased with the progress in the quarter and we look forward to seeing you on the road in the weeks ahead. Thanks for joining.
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