DocuSign Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2024

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's 4th Quarter and Full Fiscal Year 2024 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. I will now pass the call over to Roger Martin, Vice President of Finance. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon and welcome to DocuSign's Q4 and fiscal year 2024 earnings call. I'm Roger Martin, DocuSign's Vice President of Finance. Joining me on today's call are DocuSign's CEO, Alan Teegerson and CFO, Blake Grayson. The press release announcing our Q4 fiscal year 2024 results was issued earlier today and is posted on our Investor Relations website.

Speaker 1

Before we begin, let me remind everyone that some of our statements on today's call are forward looking. We believe our assumptions and expectations related to these forward looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations regarding the pace of product innovation and factors affecting customer demand are based on our best estimates at this time and are therefore subject to change. Please read and consider the risk factors in our filings with the SEC together with the content of this call. Any forward looking statements are based on our assumptions and expectations to date and except as required by law, we assume no obligation to update these statements in light of future events or new information.

Speaker 1

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 flow and billings. These non GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's earnings press release, which can be found on our website at investor.

Speaker 1

Docusigns.com. I'd now like to turn the call over to Alan.

Speaker 2

Alan? Thanks, Roger, and good afternoon, everyone. DocuSign's 4th quarter operating results reflect strong progress across the 3 pillars of our strategic vision: accelerating product innovation, improving the reach and effectiveness of our omnichannel go to market initiatives, and strengthening operating and financial efficiency. Before discussing the pillars, I'll briefly highlight Q4's strong business results. Q4 revenue was $712,000,000 up 8% year over year, while full year revenue was $2,800,000,000 up 10% year over year.

Speaker 2

Both outperformed our expectations. Our continued focus on efficiency, while still investing for long term growth drove significantly improved profitability. Q4 non GAAP operating margin rose to 25%, up 1 point versus last year, while full year non GAAP operating margin improved by more than 5 points to 26% from 21% in fiscal 2023. In addition, free cash flow more than doubled in fiscal 2024 to nearly $900,000,000 Similar to Q3, we're encouraged by momentum across the business From solid retention and improving usage with existing customers to strong new customer growth, organizations large and small continue to invest in DocuSign's value proposition. Let's turn to our strategic pillars, starting with continued improvement in our omni channel go to market initiatives.

Speaker 2

In Q4, we were encouraged by improving performance with customers managed by the direct sales force. We substantially increased the amount of business from customers signing and renewing multi year, multimillion dollar contracts with DocuSign, including Fortune 500 Global Leaders in energy, industrials, consumer goods, insurance and several federal and state government agencies. Our partner channel has been instrumental in driving large customer momentum. We continue to deepen relationships with strategic enterprise focused organizations, including SAP, Microsoft and Deloitte. These organizations are helping to accelerate our customers' digital transformation journeys.

Speaker 2

They also represent progress in building a vibrant partner ecosystem to extend DocuSign's reach into new markets and customer segments. To that end, we recently launched global participation in Microsoft Azure's marketplace. We can now co sell our entire suite of products to Microsoft's enterprise customers who can draw on their existing Azure commitments to purchase DocuSign licenses. We're encouraged to already have our first $1,000,000 customer from that channel. These partners and many more help us accelerate our customers' digital transformation journeys.

Speaker 2

We also continue to deliver more efficient customer growth even as we scale. In fiscal 'twenty four, we invested to improve our digital and self serve motions, leading to sustained new customer acquisition growth. In Q4, we surpassed 1,500,000 total customers across our digital and direct channels. Our breadth, scale and customer affinity is unique in the broader SaaS landscape and speaks to the continued large opportunity in front of DocuSign. Across our digital, direct and partner channels, continues to be a strong underlying growth driver.

Speaker 2

In Q4, international revenue grew more than twice as fast as total revenue and now represents more than 27% of the business, up from 25% last year. The international opportunity remains substantial and is one of our key long term growth drivers. Cresol, which is a financial cooperative in Brazil, recently adopted the new WhatsApp integration, adding WhatsApp signing to existing e signature email usage has reduced delays, increased response times and help Crestle generate more revenue and broaden its reach. Much of Credle's credit business is with farmers and the agriculture industry with limited rule connectivity. The DocuSign WhatsApp integration allows Crestle to bridge that connectivity gap and accelerate its credit process from days to hours.

Speaker 2

Let's turn to product innovation. Across all aspects of go to market, product investment is driving customer adoption. WhatsApp integration, I just mentioned, led to significant envelope usage and recent customer wins in Latin America. Over 1,000 customers in UK and Europe have used and now benefit from stronger identity verification products like AI enabled IDB Premier and our recently launched QES compliant identity wallet. The recent free launch of our premium DocuSign monitor created 1500 new accounts just this quarter.

Speaker 2

First Financial Bank, a financial services company headquartered in Indiana is using ID verification, increase the speed of consumer lending and home equity line of credit offerings. This improves security for bank staff, removes manual workflows for underwriters and creates a stronger customer experience. First Financial is expanding ID verification to other use cases like credit cards and online account openings. Looking ahead, as we exited Q4, we have several 100 customers in beta in new platform services that will transform DocuSign into a more powerful solution. We'll have much more to share and we're excited to have you join us virtually to hear about our evolving platform at this year's Momentum Customer Conference in New York on April 11.

Speaker 2

Product momentum is clearly creating value for in its annual worldwide assessment. Also, Gartner and in its annual worldwide assessment. Also, Gartner named DocuSign as a leader in its Magic Quadrant for contract lifecycle management for the 4th year running. To that end, DocuSign CLM customers continue to be at the frontline of embracing a broader agreement management use case. In Q4, DocuSign CLM growth once again significantly outpaced overall revenue.

Speaker 2

This is a positive sign as we see CLM product demand as a precursor to the value we can create across all 1,500,000 DocuSign customers. Today, DocuSign CLM helps users automate and manage complex workflows, and we see the future as taking those capabilities to a broader set of users than CLM reaches today. We're seeing strong adoption of our CLM product among enterprise customers. Just this quarter, a luxury automaker used our CLM to create an elegant sales experience to match its brand value proposition. A multibillion dollar global manufacturer sped up its legal and supply chain operations with a company wide implementation of DocuSign CLM and a global energy company accelerated its sales processes and streamlined procurement with CLM.

Speaker 2

Our 3rd strategic pillar is strengthening DocuSign's operating and financial efficiency. In February, we announced further cost management initiatives, including a reduction in force. This decision streamlined our business and focused investments on initiatives that provide the strongest foundation for long term growth. Blake will share more details on the financial impact and its impact on improving profitability. In fiscal 2025, we will continue focusing on efficiency while investing to reinvigorate long term growth.

Speaker 2

In conclusion, fiscal 2024 was critical to strengthening DocuSign's foundation. We reaccelerated product innovation, invested in our leadership talent and right sized our organization. These are all critical steps to realize the multiyear journey to transform agreement management. And we're just getting started. The opportunity in front of DocuSign remains massive.

Speaker 2

Today's world runs on agreements, but agreement processes haven't changed in the last 100 years. Even with the evolution to digital documents, agreements and how we use their insights remain relics of antiquated paper based systems. Sign a document stored as a flat file preserved, but disconnected from the systems that run your operations. Our sole focus is transforming those systems for our 1,500,000 existing customers to make agreements more valuable for enterprises and SMBs alike. As organizations transition to a digital world, customers turn to DocuSign as the world's most trusted agreement company.

Speaker 2

We are excited for fiscal 2025 and the continued impact we will have on our customers. Thank you to our incredible team for your passion and dedication to our vision and culture. With that, let me turn it over to Blake.

Speaker 3

Thanks, Alan, and good afternoon, everyone. Throughout fiscal 2024, we continue to build a solid foundation on the three pillars of our strategic vision: accelerating product innovation, enhancing our omnichannel go to market initiatives and strengthening our operating and financial efficiency. As a result, in Q4, we delivered strong operating and financial results. Q4's financial performance exceeded the high end of guidance across every metric with material improvements in operating income, operating margin and free cash flow. Total revenue in Q4 increased 8% year over year $712,000,000 and subscription revenue also grew 8% year over year to 696,000,000 dollars Billings of $833,000,000 grew 13% year over year, accelerating from 5% year over year in Q3.

Speaker 3

Q4 represented our highest year over year billings growth performance in over a year. With respect to billings, approximately half of the 8 point acceleration versus Q3 came from solid execution around renewals, especially with large customers. This includes spillovers from the prior quarter and better early renewal strength from contracts that would have otherwise been billed in fiscal year 2025. The remaining half came from a strong close to Q4 and net new growth, which will support the business in future quarters. Similar to Q3 results, we are encouraged by continuing signs of stabilization in the business.

Speaker 3

1st, customer usage continues to improve. Total envelope scent increased moderately year over year. Similar to last quarter, we saw improving year over year usage trends in key verticals with technology, insurance, business services, financial services and healthcare all growing faster than the total business baseline. Also consumption with direct customers, our contract utilization measure increased slightly year over year. 2nd, customer retention is stable with positive large customer momentum.

Speaker 3

Gross retention was flat year over year in Q4 across the direct book of business. As expected, dollar net retention trended downward in Q4 to 98% and we're encouraged that the pace of year over year decline slowed substantially in fiscal year 2024 versus fiscal year 2020 3. We anticipate the moderating trend to continue in fiscal year 2025 and we expect dollar net retention to be flat to down slightly in Q1 2025. While overall net expansion continues to be impacted by software optimization and macro related customer purchasing costing, we are encouraged by large customer spending behavior. The number of customers spending over $300,000 annually rose to $10.60 in Q4, increasing sequentially for the Q2 in a row.

Speaker 3

Also Q4 bookings for customers with total contract value over $1,000,000 increased by more than 50% year over year. 3rd, new customer acquisition volume remained strong in Q4, partly due to improvement in go to market initiatives. DocuSign ended the year with over 1,500,000 customers, up 11% year over year and consistent with growth in Q3. Direct customers grew 15% year over year, also consistent with Q3, bringing total direct customers to 242,000. International revenue, a key long term growth driver, grew at more than double the overall revenue growth rate and is now 27% of total revenue.

Speaker 3

We believe the international growth opportunity remains large. Also, the scale and breadth of our customer base is unique across the software landscape and an asset we can leverage as we expand our product offerings in the future. Turning to our financials, operating and financial efficiency initiatives drove strong performance in fiscal year 2024. Improved execution led to significant expansion in operating margin and a more than doubling of free cash flow versus fiscal year 2020 3. Non GAAP gross margin for the 4th quarter was 82.5 percent in line with the prior year.

Speaker 3

4th quarter non GAAP subscription gross margin was 80 5%, also in line with the prior year. For the full year, non GAAP gross margin was 83%, up slightly from last year. Q4 non GAAP operating income was $178,000,000 up 15% year over year with an operating margin of 25%, improving over 100 basis points year over year. We saw more significant improvement in fiscal year 2024 with a record non GAAP operating income of $711,000,000 up 38% year over year resulting in a 26% operating margin. This is a substantial increase of over 500 basis points versus 21% in fiscal year 2023.

Speaker 3

We will continue to focus on realizing opportunities to achieve greater efficiency as we invest to drive sustainable long term growth. Free cash flow improvement was even stronger in Q4 and fiscal year 2024. In Q4, free cash flow was $249,000,000 and for the full year, we generated $887,000,000 in free cash flow with both periods more than doubling year over year resulting in a 32% free cash flow margin for fiscal year 2024. Greater operating efficiency led to a substantial working capital improvement that drove free cash flow yield above our operating profit margin. Going forward, we anticipate free cash flow margin to more closely approximate non GAAP operating margin.

Speaker 3

In fiscal year 2024, we used a portion of free cash flow to purchase DocuSign shares. We used $146,000,000 towards repurchasing common stock. In addition, we used $144,000,000 to pay taxes due on RSU settlements, reducing the dilutive impact of our equity programs. Non GAAP diluted EPS for Q4 was $0.76 an $0.11 per share improvement from $0.65 last year. Non GAAP diluted EPS for fiscal year 2024 was $2.98 per share, a $0.95 improvement from $2.03 per share last year.

Speaker 3

Fiscal year 2024 also represented DocuSign's 1st full year of producing positive GAAP net income. For the full year, GAAP diluted EPS was $0.36 versus negative $0.49 in the prior year. Going forward, we expect continued improvements in GAAP net income and per share profitability as we work to manage the dilution and cost of our equity programs. We currently expect stock based compensation to be approximately flat year over year in fiscal year 2025 and expect SBC as a percentage of revenue to decline year over year. We ended Q4 with 6,840 employees, a 7% decrease year over year from 7,336 at the end of fiscal year 2023.

Speaker 3

This results from our ongoing focus on investing efficiently in the business and does not reflect the reduction in force announced on February 6th this year. We will continue to optimize our hiring plans to align our sales organization with our digital and partner GTM motions, support long term growth opportunities in R and D and realize efficiencies of scale and G and A. With regard to the balance sheet, during the quarter, we used approximately $690,000,000 of cash to settle our remaining outstanding convertible debt. We currently have no debt on the balance sheet. At the end of fiscal year 2024, we had approximately $1,200,000,000 in cash, cash equivalents and investments.

Speaker 3

This strong financial foundation, including a business model that generates significant free cash flow, supports us future investment and increases our ability to opportunistically return excess capital to shareholders. With that, let me turn to guidance. For Q1 2025 fiscal year 2025, we expect total revenue of $704,000,000 to $708,000,000 in Q1 or a 7% year over year increase at the midpoint. For fiscal year 2025, we expect revenue between $2,915,000,000 to $2,927,000,000 or a 6% year over year increase at the midpoint. Of this, we expect subscription revenue of 686 $1,000,000 to $690,000,000 in Q1 or an 8% year over year increase at the midpoint and $2,843,000,000 dollars to $2,855,000,000 for fiscal 2025 or a 6% year over year increase at the midpoint.

Speaker 3

For billings, we expect $685,000,000 to $695,000,000 in Q1 and $2,970,000,000 to $3,024,000,000 for fiscal 2025. As continually shown in recent quarters and years, billings are heavily impacted by the timing of customer renewals, which can create meaningful variability from period to period. This impacts year over year comparisons and is further amplified by the scale of our book of business. We expect non GAAP gross margin to be 81% to 82% for both Q1 and fiscal 2025. We expect non GAAP operating margin to reach 27% to 28% for Q1 and 26.5 percent to 28 percent for fiscal 2025.

Speaker 3

Our non GAAP operating margin guidance includes the impact from the recently announced restructuring of approximately 400 employees or around 6% of our employee base. While we intend to reinvest a small portion of the restructuring savings into the business, primarily in R and D, the vast majority of savings will drop to the bottom line as reflected in our expected operating margin expansion in fiscal year 2025. We are committed to improving efficiency while still investing in the areas we believe will drive long term growth. We expect non GAAP fully diluted weighted average shares outstanding of 208,000,000 to 213,000,000 for both Q1 and fiscal 2025. In closing, we're pleased to report another quarter of progress against our 3 strategic pillars, accelerating product innovation, enhancing our go to market initiatives and strengthening our financial and operational efficiency.

Speaker 3

Q4 execution was particularly strong as the team delivered accelerating billings growth, double digit customer growth with improving operating margins and record free cash flow generation. While we still have work ahead to reaccelerate our top line growth, I'm proud of this team for its focus on execution as we continue to be the default trusted partner for customers around agreement management. We have over 1,500,000 customers ranging from the largest enterprises in the world to wide scale adoption by small and medium sized businesses that power the global economy. That scale gives us the opportunity to help customers accelerate their business growth, mitigate risk and enable delightful customer experiences. I'm excited about the opportunity ahead of us and look forward to sharing our progress along the way.

Speaker 3

That concludes our prepared remarks. With that operator, let's open up the call for questions.

Operator

Thank you. Thank you. Our first question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Speaker 4

Yes, thanks for taking the question. A couple for Blake just to kick things off. So Blake, I appreciate the comments on unpacking the Q4 billings outperformance. Obviously, the 9.beat versus the guide was pretty impressive.

Speaker 5

As I

Speaker 4

think about the moving pieces on that, could you just help frame the Q1 guide relative to the full year guide on billings? I think the full year would imply you need to grow a little bit faster than you're guiding to on billings in Q1. So curious if some of that's related to the pull forward. And then secondly, how should we think about NRR trends? I think that dipped below 100% at 98%.

Speaker 4

So as you just think about the drivers between expansions and new business for next year, just help us understand the trajectory of that and how that all fits into the guide? Thank you.

Speaker 3

Sure. And thanks for the question. So to address the question on billings, I think it's helpful to kind of cover it in totality. So starting with Q4 and then going into 2025 because the timing does play a big role as you in the as you think about the year over year comps. So just to recap quickly, Q4 really pleased with the execution and the acceleration from Q3.

Speaker 3

And like you heard in the prepared remarks, half of that acceleration was from renewals timing and that includes early renewals from fiscal year 2025. In Q4, our book of renewals had the highest contribution from early renewals for any quarter that we've seen all year long. And that's okay because that's great execution by the team like we're super happy about that. And then the other half was just from strong net new growth. We had a great close to Q4 and so that was a nice job again by the team there.

Speaker 3

Now that timing component impacts fiscal 2025. So with respect to Q1 and this also applies to Q2, there's we've got 2 hard comps to deal with address in this first half of this year. The first is, if you recall, we had really strong on time renewals in the first half of twenty twenty four. That came about because we made some adjustments to our sales incentive plans to improve execution there and we did a really good job with it. When you go back and look at our billings performance in the first half of last year or 2024.

Speaker 3

And then the other card comp is that Q4 component that I just mentioned that leads to some less spillover into Q1. And so those 2 hard comps apply obviously to the full year as well. So you've got to kind of normalize for that a bit. And so just to give some direction too on it, as you think about that on a quarterly basis and you mentioned this about how the full year is a little bit higher in the midpoint guide versus Q1. I expect to see Q2 to decel a bit from Q1, but then reaccelerate into the second half of the year.

Speaker 3

And again, we've got those hard comps that we're dealing with in the first half of this year. And then you see that reacceleration. And then you just use your that fiscal 2025 guide with regards to the magnitude of the quarters. Overall, I'm really pleased with the fiscal 2025 billings guide. It's almost exactly $3,000,000,000 at the midpoint.

Speaker 3

But the timing of these renewals makes the year over year comps pretty noisy. And so one way that you might think about how to think about or try to normalize it is like on a 2 year stack view to normalize for some of those period over period components to kind of normalize for those effects. But I hope that helps just kind of see how you think about billings for Q4 and then relative to the full year. And then to your dollar net retention question, we did trend down as we expected, in line with our expectations into Q4. There's still a tough macro environment out there for us where companies are scrutinizing investments and it just leads to smaller expansion opportunities.

Speaker 3

Now that said, however, I am quite encouraged by the pace of decline in fiscal 2024. It slowed substantially versus fiscal 2023 and we're now expecting that the pace of the client is going to slow even further into fiscal 2025. And you heard in the prepared remarks, we're actually forecasting for Q1 dollar net retention rate to be flat to down slightly from Q4. And part of that is related to the fact that we're coming out of these COVID comps from prior quarters. And you've heard me talk about how the share of our book of business that was written during kind of the pandemic periods is really de minimis now.

Speaker 3

And so I think that's also one of the things where you can see this flattening out. And again, there's a number of encouraging signs for us around renewal rates and consumption. And then we've got hopefully these new product launches releasing into general availability later in the year. And over the long term, we're excited about our ability to impact that.

Operator

Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question.

Speaker 6

Hey, thanks for taking the questions and congrats on the great results. Blake, just to follow-up on that NRR remark. Can you help us understand how much of the downtick in that metric was driven by those remaining COVID era contracts that you just called out in your last answer? And then, Alan, looks like you actually reaccelerated new customer adds this quarter. Do you feel like the 40,000 quarterly adds is the right way to think about the business moving forward?

Speaker 6

Or could that actually continue to ramp as the macro normalizes and some of those new product led growth initiatives take hold?

Speaker 3

Well, I'll just take a stab at the DNR follow-up and then I'll take that one. But we're not breaking out the level of detail and granularity in DNR from COVID. I think it's just an obvious output where we have some pretty strong expansion in those prior quarters. But that said, we are seeing size of stabilization in the business. And so it's I would say it's definitely not all related to COVID.

Speaker 3

I don't want to have anybody walk away with that kind of a thought process or perspective. But I think it's one of these things that we are seeing stabilizing signs on our business and we think we have means and mechanisms that we're going to continue to pursue where we can work to flatten that out that curve and then hopefully improve it over time.

Speaker 2

So the Alan view on the accounts. On the second question related to customer acquisition. Yes, I don't know that we track and measure ourselves that directly on that. But I would just say, we have a healthy customer acquisition funnel. It is there is still white space, particularly internationally in acquiring new customers.

Speaker 2

And we're benefiting from that. And I think getting our fair share although of course, I always like even more. But I'm not prepared to make any forward looking statements about the exact number of acquisitions we'll have on a quarterly basis.

Operator

Our next question comes from the line of Josh Bair with Morgan Stanley. Please proceed with your question.

Speaker 3

Great. Thanks for the question. I want to shift over to margins and profitability. Alan, a question for you, if you could just talk a little bit about the change in investment philosophy from the top. And Blake, just wondering the comments around commitment to improving efficiency, does that translate to continued margin expansion even after FY 2025 as we think about 2026 and beyond?

Speaker 2

Yes. So first on our overall investment and expense philosophy. Look, we want to balance solid operational execution and efficiency today with being able to invest for the medium to long term growth that we think we have in front of us. And so we're balancing that all the time As we looked at taking the action that Blake referred to at the beginning of February, we felt we had a little more room to get just a little leaner and be ready and still not impair our ability to grow as we launch new products and so on. So that's the balance that we're taking.

Speaker 2

We will keep looking for opportunities and it's obviously not all about headcount. We have gotten tremendous efficiency out of the organization on many fronts. That's what produced the strong results that you saw in Q4 really throughout the year and the operating cash flow improvements. So we'll keep looking for those opportunities. But we feel we're right sized for our plan right now.

Speaker 2

And if we start seeing further investment opportunities then we will invest, but we do that on a cautious and informed basis.

Speaker 3

And then just to follow-up on your question on just margins in the future. I just want to point out that I'm really proud of this team for the efficiencies that we've gained this year. I mean, just specifically in fiscal 2023, our sales and marketing expense was 40% of our revenue. In this year, fiscal 2024, it improved to 34%. I expect next year to be in the low 30s.

Speaker 3

And that's not an easy kind of process to go through, but it's important and I'm really proud of the focus of the team to address those gains. I think for us in the future and in the future what I'm talking about is let's talk long term here now without a timeline on it is that we have opportunities to be able to drive further operating leverage with scaling growth. And And one of the things we're focusing pretty hard on as a team is you hear about PLG motions and self-service motions and things like that. And I think over the long term, those opportunities do provide us the opportunity to get even better margins into the future, but no specific timeline or anything around that.

Speaker 2

Yes, that's great. Maybe just as a reminder, to the point that Blake just made about our sales marketing efficiency, The reduction force that we had last February was 95% focused in the sales marketing area. This time around, it was a little bit more balanced, but still over weighted in sales and marketing, reflecting that we felt we had a piece of opportunities throughout the company and we wanted to make sure we captured those. I think at this point, to the extent we make incremental investments, we'll probably be in our D first. But obviously, as we launch new products and if that we start seeing some leverage there, then we'll not hesitate to invest there as well.

Speaker 2

Just want to see that first.

Operator

Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Speaker 7

Thank you, Blake and Alan for taking my questions. This is Love Souda on for Brent Thill. Wanted to maybe ask first to Alan, if you could just tease out like how much it sounds like most of the improvement this quarter was because of better execution versus more macro normalizing. Could you just tease that out and which verticals sort of drove the improvement that you saw? And then for Blake, it sounds like free cash flow was really strong this quarter.

Speaker 7

I guess just talk a little bit more about how you're planning to use that free cash flow specifically for share repurchases?

Speaker 2

Yes. So I'll go first. We really did see strength across the board. So across segments, Blake highlighted that we had progress both on the enterprise side and the SMB side. From a geography perspective, yes, we grew faster internationally, but we did grow everywhere.

Speaker 2

And on the industry side, we did see broad based strength there as well, some recovery, in franchise services and mortgages, but we sell to customers in all industries. I highlighted during the call new significant deals with in manufacturing and energy and health and so on. And There's hardly an industry that doesn't rely on agreements and that therefore doesn't represent an opportunity for us. So there really isn't much there. And an overall macro sentiment, I would say marginally improved from my standpoint.

Speaker 2

We're not projecting anything more than that looking ahead. As always, we base our plan on current macro conditions. But I think there was a little bit of help across the breadth of our business, but we're almost an index just given the breadth of verticals, segments and countries that we have.

Speaker 3

And then to follow-up on the second question about free cash flow and how we'll utilize it. We're in a great spot. We ended the quarter or the year with cash and investments of $1,200,000,000 no debt now on the balance sheet. This last and also and obviously we have a foundational business now that generates considerable amount of free cash flow. We used some of that deployed some of that this year for like you talked about stock buybacks, but we also used it to retire debt.

Speaker 3

There's obviously M and A opportunities for us and we're likely more active than you think we are about looking around at what opportunities are available for us. And then there's we can invest in the business or you have options for dividends, things like that down the road. I would say that with that kind of stabilizing results and the operating efficiency improvements we made, we feel we can increase our ability to opportunistically return capital to shareholders while still investing in the business. And it's just we're committed to increasing the rate with which we return excess capital opportunistically to shareholders and we'll see how that develops out over the year.

Operator

Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.

Speaker 4

Hi, this is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to first ask about the large customer cohort strength that you saw in the quarter. Is that like better volume and consumption trends or is CLM capabilities kind of starting to push some customers over that 300 ks ACV cohort? Then also I was wondering if you could just dig in a little bit more to the R and D investment priorities you mentioned for the coming year?

Speaker 4

Thanks.

Speaker 3

Paul, I'll take the first

Speaker 2

one and I'll take the first one.

Speaker 3

So yes, I would say definitely saw improvement in enterprise customers again, the $300,000 accounts growing sequentially quarter over quarter. I'll say that from a renewal rate perspective, enterprise still has room to improve. But I will say that our renewal rates improved sequentially Q3 to Q4 in the enterprise space more than any other kind of large customer segment that we had, but still room to improve there admittedly. And so we're excited about the opportunities and mostly in R and D, right, that give us those opportunities to provide additional solutions and products to customers. That's all I had, Alan.

Speaker 2

Yes. On the R and D investment front, I'd say, look, we've long felt there was an opportunity to reimagine the agreement journey for companies large and small. And we've had solutions for at various stages of that journey in the past, obviously, most exemplified by our Signature product. In about a month, we will release a broader suite of solutions there and that there's been a significant investment in that effort during the course of the last fiscal year. And that will continue because we feel we have a multiyear roadmap of that equation ahead of us there.

Speaker 2

So that is the biggest investment area. In addition to that, one other area that's getting a meaningful amount of investment is we are moving our platforms to the public cloud, Microsoft Azure. That's underway and that's a significant effort as well from an infrastructure perspective. Those are the 2 things I would highlight.

Operator

Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Speaker 4

Hey, this is Adam Bircher on for Brad. I guess I'd like to start, what are some of the initiatives you are making in terms of like the product led growth or self serve motions? And what changes have you made so far there? And what changes do you still want to make?

Speaker 2

Yes. Let me take that one. So I think during the course of the fiscal year that we just finished here, a lot of our effort was on making the process of buying DocuSign directly from DocuSign on our website and in our products much more seamless. And we made substantial improvements there. So much better flows to allow you to easily upgrade solutions to focus on, but better use of a variety of payment solutions, etcetera.

Speaker 2

I'd say this year that will expand beyond the Corie Signature products to some of the newer products that we'll be launching and to supporting other channels, most notably our direct sales channel. We want to offer those customers the ability to self serve to the greatest extent possible and there'll be significant capabilities added there throughout the year. And also for our partners where we have, I think, opportunities for meaningful improvement and how easy it is to do business with us. And that's another area we're investing in. So this is across every pillar of our go to market.

Speaker 2

And our effort has already borne fruit as you've seen in our digital sales growth and it will really impact across the business I think this year. So very excited about that.

Operator

Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question.

Speaker 4

Hey, thanks for taking my question. This is Austin Cole on for Pat. So last quarter, it seemed like you mentioned that there was kind of an uptick in interest in CLM and now you're saying strong adoption of CLM among enterprise customers. Is there kind of an incremental improvement in tone there? Or can you just talk broadly about just the CLM opportunity and how you guys are situated?

Speaker 4

Thank you.

Speaker 2

Yes. So I do think the CLM market overall is improving and I do think we're executing better in the CLM market. So I think CLM overall, I think more and more companies are realizing that managing your agreements better and getting more value out of them is a very strategic opportunity. It's definitely rising in the priority list. And so CLM, ours and others is an increasingly strategic and solution.

Speaker 2

So we're seeing more RFPs and so on. In terms of our competitive position, I think we're in a very strong position as illustrated in the Gartner survey and other measures of our position in the market. I think we are we have the largest number of accounts and are very well rated by customers for our experience. And we think there's more opportunity there to, should we say, popularize CLM to a broader audience, both within companies that are we're going to adopt it as well as to smaller companies where the weight of the current solutions might not be appropriate. So it's a very positive and strategic opportunity for us.

Speaker 2

And yes, I do would summarize that to say on both fronts, some improvement.

Speaker 3

Yes. And just a follow-up and or maybe to add on to what Alan said. You heard in our prepared remarks, CLM grew faster than the total business. It also accelerated from on a year over year basis from Q3 to Q4. Obviously, it's still a smaller share of our business, but still encouraged by that acceleration for that product.

Operator

Our next question comes from the line of Scott Berg with Needham. Please proceed with your question.

Speaker 8

Hi, this is Rob Morelli on for Scott. Thanks for taking my question. Margin here with non GAAP operating margins expanding 500 basis points. However, G and A was actually up as a percentage of revenue. Two questions here.

Speaker 8

First, why were we not able to drive leverage here throughout the year? And then second, how do we think about spend in 2025 in this slide? Thanks.

Speaker 3

Sure. Let me take a stab at that. So yes, G and A expense, non GAAP G and A was up 14% year on year. There's 2 unique items that are kind of contributing to that. One is, we used to I mean immaterial dollar amounts, but when you look at a relatively small kind of SEC split up bucket, it has a bit of an effect.

Speaker 3

So a couple of $1,000,000 we used to allocate out in the prior year. We're not doing that now, but it's an immaterial kind of dollar amount overall. And then also a little bit higher litigation cost for us this year versus last year. If you exclude those 2, what I'll call unique items, G and A would have grown in the low single digits year over year. So what I would say is, from the efforts we've taken over the past few months and recently, not only do I expect that sales and marketing expense declines year on year as a percentage of revenue, but I also expect to see some efficiencies and improvements in G and A as well.

Speaker 3

So I think we're focused across this business to drive efficiencies where needed and I expect to see that next year. The

Operator

next question comes from the line of George Iwanyc with Oppenheimer. Please proceed with your question.

Speaker 4

Thank you for taking my question. Alan, maybe you could dig in a little bit deeper on the international strength you're seeing. How much of that is being partner led? What are you seeing from your digital initiatives there? And maybe give us some color on the regional breakdown?

Speaker 2

Yes. Our international growth is led more by our direct channel today. I think we have very substantial opportunity on the digital front and on the partner side, which is relatively mature right now, and I think there's a lot of headroom. So, lots of growth opportunity there, but most of the growth today is coming from our direct sales efforts, principally in the larger focused countries. So the top 10 markets outside the U.

Speaker 2

S. That you would expect. As you know, we've been investing in Japan and Germany, but today, UK, Australia, Canada, France are a little larger than both of those. So all of those markets are priorities.

Operator

Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Speaker 3

Hi. Thanks for taking my question. Just a quick one around your LLM training. I know there were some stuff in the media just regarding privacy. Kind of curious, from your perspective, what are internal policies and how are you training those LLMs?

Speaker 3

Thanks.

Speaker 2

Yes, I'll take that one. Yes, I want to be very clear. We do not use any customer data for training any of our AI models without specific contractual consent from customers. End of story. So we have a high trust position with customers.

Speaker 2

They trust us with their most sensitive documents. And we don't want to do anything to violate that trust. There are probably some companies who will be more willing to move aggressively here, but I think we're moving responsibly and cautiously on that. We are with all that said, we are very excited about what AI can bring and our customers are asking us for how can we extract more value from our fleet using more modern AI technology. And so you'll hear a lot more about that in a month at Momentum.

Speaker 2

But to the point about the trust is the starting position. Maybe one other point I'd make is, assuming you give us consent, we then anonymize and aggregate that data, so that there is no opportunity for anyone to extract any confidential issues or data out the agreements.

Operator

Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Speaker 9

Thank you very much and congrats on a nice finish to the year. Thinking back to last quarter, you had mentioned the introduction of some new enterprise licensing when they were implemented. And Blake, did it have any effect on Q4 financial results? For instance, would it change any of the ratios between bookings and billings and recognized revenues or any type of impact to think about from those changes going forward?

Speaker 2

Yes. Yes, we have done a few deals like that and I think it will continue to grow with some of our very largest clients. And as we offer a broader set of products, obviously, an enterprise license also becomes more interesting as you can mix and match across products. But it still remains a very small part of the business. We even some of our very largest customers, some of the contract renewals remain on an envelope basis.

Speaker 3

Yes. And just to add on top of that, it's while we're super excited about the opportunity in very specific cases to consider those, it's not a huge number for us today. It grows, it's continuing to grow. And again, I think and to directly answer your question, no material impact on our results for Q4. But it's also one of these things, I think, in this business, we have a very, very broad and diverse customer base.

Speaker 3

And so there's we don't have single customers that I would say vastly impact us like there might be other companies, which I think is a strength for us. And so, but anyways, just to directly answer your question, no material impact to Q1.

Speaker 2

Yes. I would make one other point. ELA has a very specific connotation of unlimited consumption and being able to combine products across. We have leaned in significantly harder to make sure that we are competitive in large enterprise deals. And we did some very large and very nice renewals with some large customers.

Speaker 2

I think in part as a result of that improved motion. So we have senior people on it. We have a large deal desk. We have all the things that you would expect to make sure that we are as competitive as possible.

Operator

Our next

Speaker 10

Hi, thanks for taking my question. This is Michael Berg on for Michael Turrin. I just wanted to touch on free cash flow. You had a very strong free cash flow generating quarter year. Maybe you could shed some light on what drove that?

Speaker 10

Was it some of the renewal timing you discussed in terms of billings on the quarter? And how can we think about the relationship between operating margin and free cash flow moving forward? Thanks.

Speaker 3

Sure. And so, yes, we did have a very strong quarter year as regards to free cash flow. We had a 32% free cash flow yield for fiscal 2024. And the reason why it's materially higher than our operating margin is, frankly just a working capital tailwind that we had and it's really driven by 2 components. 1 is if you recall about a year ago, we had an ERP implementation that caused a delay in our ability to do some collections.

Speaker 3

So earlier this year, we've got a tailwind from that. But on top of that, we've also improved our collections process, I would say, extremely well, reduced aging. And so kind of, I would say, just really brought some operational efficiency to our working capital that showed that improvement. Now going forward, as you all know, like being able to repeat working capital improvements on top of each other year over year, while we're going to strive to be able to continue to improve and gain efficiencies, it's not something you usually can just get pretty easily. And so that's why in the prepared remarks, you'll find that I would expect longer term to assume a free cash flow yield more closer to that operating margin.

Operator

Our next question comes from our final question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Speaker 5

Hi, this is Arseniy on for Alex Zukin. Congrats on results. With the international strength you have seen this year, I think it has contributed close to 45% of total revenue growth in fiscal 2024. Do you expect this to be an even greater contribution to growth in fiscal 2025? Does this mix stay the same?

Speaker 5

Or as you roll through the drag from the pandemic cohorts early in fiscal 2025, do you think that there is strong renewal expansion domestically if macro stays the same that leads to more U. S. Contribution to top line growth in fiscal 2025? Thank you.

Speaker 3

Yes. Thanks for the question. Well, first off, again, really happy with how our international growth has progressed through the year, growing much faster than the overall business. All of our major regions grew into the double digits in Q4. So the question about whether we think it accelerates more or less, I'm not going to provide any guidance out to that.

Speaker 3

But what I will say is that just to reiterate, the international opportunity for us, I think is quite sizable. Only 27% of our revenue in Q4 came from our international business. And if you think of GDP or something as a proxy, it should be much higher than that. And so I think I'm really excited for that longer term opportunity, but not any place to say, oh, I think it will accelerate faster or slower than any other market.

Speaker 2

Yes. Okay. With that, thank you all for joining and for your support as we continue to build a solid foundation for DocuSign. We are proud of the strong results in Q4 and of the progress that we're making to reinvigorate innovation and add value for our customers, our employees and shareholders. We look forward to what will be a very exciting fiscal 2025.

Speaker 2

Thank you. We'll see you next quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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DocuSign Q4 2024
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