DocuSign Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
September 5, 2024

There are 14 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for joining DocuSign's Second Quarter Fiscal Year 20 25 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. I will now pass the call over to Heather Harwood, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to DocuSign's Q2 fiscal 2025 earnings call. Joining me on today's call are DocuSign's CEO, Alan Tiegasen and CFO, Blake Greyson. The press release announcing our Q2 fiscal 2025 results was issued earlier today and is posted on our Investor Relations website as well as a published version of our prepared remarks. Before we begin, let me remind everyone that some of the statements on today's call are forward looking.

Speaker 1

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. During this call, we will present GAAP and non GAAP financial measures.

Speaker 1

In addition, we provide non GAAP weighted average share counts and information regarding free cash flows and billings. These non GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's earnings press release, which can be found on our website at investor. Docusign.com.

Speaker 1

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

Speaker 2

Thank you, Heather, and good afternoon, everyone. DocuSign drove another quarter of improved stability and greater efficiency, while introducing the new I'm platform that we believe will be the foundation for future growth. During Q2, revenue was $736,000,000 up 7% year over year for the 2nd consecutive quarter. Dollar net retention was consistent versus Q1 at 99%. Continued improvements in customer usage and utilization further supported stability, which Blake will describe in more detail.

Speaker 2

Non GAAP operating margins increased to 32%, an all time high and significant improvement versus Q2 fiscal 2024 at 25%. Free cash flow generation remains strong, approaching $200,000,000 resulting in a 27% yield for the quarter. This efficiency allowed us to opportunistically allocate capital by repurchasing $200,000,000 worth of shares during Q2. Our strong results reflect continued progress across our 3 strategic pillars, accelerating product innovation, evolving omni channel go to market capabilities and improving operating efficiency. Let's turn to product innovation.

Speaker 2

In Q2, we shipped the first version of our Intelligent Agreement Management or IAM platform. This is the most important launch in DocuSign's recent history because of the value we believe IAM will create for our customers. IAM addresses the massive two $1,000,000,000,000 in lost economic value each year experienced by organizations when managing agreements. In Q2, I'm launched to small and midsized commercial customers in the United States, Canada and Australia. It's very early days, but the initial results and customer feedback are promising.

Speaker 2

So far, I'm customer win rates are higher, average deal sizes are larger and time to close with customers is faster. Customer deal count and bookings are increasing month over month with August being larger than June July combined. Overall, preliminary I'm adoption momentum is tracking as planned and we look forward to the continued rollout to additional segments and geographies throughout the rest of the fiscal year. Customer feedback captures the value I'm is already delivering. The customer is focused on strong ease of use and fast time to value.

Speaker 2

Legal service provider, Mass Torque Strategies tells us that with IAM, they anticipate saving 1,000 annually now that their completed agreements are organized and easily searchable. And Midwestern Healthcare provider, Wellia Health said that they were impressed by how quickly they put I'm to use and within a few days they were using DocuSign Navigator as the organization's central agreement repository. We're focused on continuously introducing and enhancing I'm's value to more customers. Before the end of this fiscal year, we will make I'm available for departmental use within large enterprise organizations in multiple languages and additional geographies and for purchase via self-service channels. In 2025, we'll unlock moving from departmental level adoption to organization wide deployments in large enterprises, add more languages and introduce more features to escape the agreement trap.

Speaker 2

Our rollout timeline allows us to use customer feedback to refine our product and go to market strategies ensuring we meet customer needs with a long term sustainable approach. Let's turn to the 2nd strategic pillar, our omni channel go to market. In Q2, we drove further stabilization in our core business. Overall customer growth remained consistent at 11% year over year for the 4th consecutive quarter, while envelope set and contract utilization models improved compared to last year. Digital and international revenue continued to outpace overall growth and remain large long term opportunities.

Speaker 2

In addition, we're focused on continuing to upgrade and enable our sales partner and self serve strategies to sell I'm The direct sales force continued to show improved execution. Direct customer growth remained strong with a 12% year over year increase. And large value customers with over $300,000 in ACV saw a modest acceleration benefiting from the impact of our retention efforts. CLM also continued to outpace overall revenue growth. Lastly, I'm enablement across our sales force was a key priority in Q2.

Speaker 2

In Q3, the remaining teams in our sales force will complete I'm training and certification, including our enterprise focused teams and teams outside the initial launch markets. Turning to our other routes to market. This quarter we're providing more context on the partner and self serve channels where we've increased focus and investment. In the partner channel, we've strengthened our strategic relationship with Microsoft, SAP and Salesforce. Our Microsoft collaboration now includes dedicated co selling to the Azure Marketplace and CoPilot integrations, driving increased customer volume.

Speaker 2

We aim to build similar success with SAP, especially with the newly launched CLM Ariba integration announced at SAP Sapphire events. Also, we continue to partner deeply with Salesforce, which remains our largest go to market partnership with tens of thousands of jointly deployed customers. We'll have more to share about this partnership at their Dreamforce event in a few weeks. Improving our partner and sales channels has led to enterprise customers adopting DocuSign across a growing set of use cases. A prime example is Canva, the leading online design and visual communications platform, which has deeply integrated DocuSign workflows to support its rapid growth.

Speaker 2

This quarter, the Microsoft integrations and co selling agreements led to deeper agreements with global banking and insurance customers as well as with the Fortune 100 retailer. And a leading human capital management provider has integrated e signature functionality directly into its core product offering, allowing its customers to drive faster onboarding with new employees. We anticipate continued partner enabled usage evolution as IAM rolls out. Evolving our self-service capability has also been an important priority. Over the last 12 months, we've invested in building this infrastructure.

Speaker 2

Digital revenue growth has outpaced overall growth, demonstrating continued positive impact from our focus on e commerce and execution. Our goal is to continuously improve the ability for customers to discover, try, use and buy our products digitally, further enabling greater scale and efficiency across our business. Today, new and existing customers worldwide can use our digital platform to more easily move from free trials to paid accounts, upgrade their plans and expand to additional products such as ID verification and SMS delivery, all without engaging a sales rep. We've introduced improved personalization on DocuSign.com and integrated new payment options in international markets to improve conversion rates. We expect continued strong e commerce execution and delivery as we expand our digital growth and prepare for self-service I'm purchasing.

Speaker 2

We're excited to welcome new Chief Revenue Officer, Paula Hansen and Chief Technology Officer, Chaknik Nandy, who both hit the ground running after starting in early August. Paula and Shagnik bring large scale experience selling and building enterprise customer solutions and complete an already strong leadership team. We're excited to continue our transformation journey. IAM represents a massive opportunity to leverage our market leadership and unlock incredible value for our customers as a system of record for agreements. We will continue to evolve, remain efficient and invest for the future.

Speaker 2

Thank you to our entire team for bringing the IAM vision to life with our customers. We're proud of what we've accomplished and we're just getting started. With that, let me turn it over to Blake.

Speaker 3

Thanks, Alan, and good afternoon, everyone. Our Q2 results continue to show stabilization in our core business. Besides the resiliency demonstrated by a number of key metrics, we continue to focus on balancing efficiency gains with investment in long term growth. We achieved that balance in Q2 when we began the launch of our new IAM platform to general availability, while producing the highest operating margin in our company's history. With regards to IAM, we've engaged with a portion of customers over the past 3 months and we're encouraged by early traction and customer feedback.

Speaker 3

We're in the very early days of both our multiyear transition to IAM and in realizing our aspiration of reaccelerating our long term growth. I'm excited to partner with our team to execute against this strategy. Q2 total revenue of $736,000,000 and subscription revenue of $717,000,000 both grew 7% year over year. Billings were $725,000,000 up 2% year over year. As mentioned on last quarter's call, the growth rate of Q2 billings year over year was impacted by last year's strong on time renewal performance and the timing impacts of various customer contracts this year.

Speaker 3

Also, as mentioned previously, we expect Q2 billings growth to be our lowest quarterly growth rate in fiscal year 2025. International revenue represented 28% of total revenue and grew at approximately double the rate of our overall revenue. Our global expansion strategy is an important component of our long term vision and we are optimistic about the continued growth opportunities in our international markets. This includes IAM, which will launch in the majority of our direct international markets by the end of this fiscal year. In addition, investments in our PLG motion continue to deliver results.

Speaker 3

And in Q2, digital revenue grew more than double the rate of direct revenue. Specifically concerning PLG, we are improving mechanisms to allow self-service plan upgrades and our mix of billings this quarter was slightly more weighted to digital than in the prior year. Stabilizing trends continued from Q1 into Q2 as we saw year over year improvements in usage, utilization and customer growth. That momentum underscores the resiliency of our business despite continued macro uncertainty. Dollar net retention rate was 99% in Q2, consistent with Q1.

Speaker 3

We expect that these recent stabilization trends will continue and we anticipate our dollar net retention rate to remain consistent through the remainder of fiscal year 2025. Usage trends continue to show modest improvement. The volume of envelope scent increased year over year for the 3rd consecutive quarter, while consumption, a measure of utilization, also continued to improve year over year, particularly in verticals like healthcare, insurance and technology. We continued to see strong growth and stability in new customer acquisition. In Q2, total customers again grew by 11% year over year to approximately 1,600,000.

Speaker 3

The continued momentum in overall customer growth gives us confidence that our strategy of both self-service and direct sales options is resonating across segments and geographies. The unique scale and breadth of our customer base provides a strong foundation for the measured rollout of the I'm platform. The number of large customers spending over $300,000 annually increased year over year and quarter over quarter to $1066 in Q2. Additionally, bookings from customers with total contract value over $1,000,000 continue to grow at a double digit pace year over year. Turning to the financials.

Speaker 3

Our focus on operating efficiency continued to yield strong results this quarter. Non GAAP gross margin for Q2 was 82.2%, relatively in line with the prior year. We delivered record high non GAAP operating income in Q2 at $237,000,000 up 40% year over year resulting in a 32.2% operating margin, of which approximately 150 basis points was attributable to one time items associated with professional fees, which primarily consisted of insurance reimbursements and the release of a litigation reserve. Q2 operating margin was up 7 50 basis points versus last year and a significant improvement over the 18.0% operating margin generated 2 years ago. Our improvement over the previous year underscores our ability to grow efficiently while continuing to invest in critical areas like R and D.

Speaker 3

We do expect operating margin to decline slightly in the second half of the year as we invest to support our I'm launch and continued rollout. Although we still expect to exit the year with improving operating margins on a year over year basis. We ended Q2 with 6,612 employees versus 6,748 at this time last year, approximately 2% lower, reflecting our disciplined approach to hiring and resource allocation. A measured approach to hiring to support our strategic initiatives, including R and D and PLG as well as the Lexion acquisition drove the quarter over quarter increase in headcount. In terms of cash flow, Q2 was another strong quarter.

Speaker 3

We delivered $198,000,000 of free cash flow, a 27% margin, which was in line with Q2 of last year. As expected, our free cash flow yield moderated from Q1 as we compare against the significant working capital improvements from prior quarters. That said, our collections efficiency remains strong with less than 1% of our accounts receivable over 90 days past due. We expect that the Q3 cash flow yield will decrease versus Q2 due to the timing of cost savings and investments we're making in the second half of this year. We continue to expect that our fiscal year 2025 free cash flow yield will more closely match our full year non GAAP operating margin.

Speaker 3

Our balance sheet showed continued strength ending the quarter with $1,000,000,000 of cash, cash equivalents and investments. We have no debt on the balance sheet. Because of the stability in our balance sheet and consistency in free cash flow generation, we can continue investing in the business and opportunistically return cash to shareholders. In Q2, we accelerated the pace of our buyback activity and repurchased a record $200,000,000 in share value, effectively redeploying 100 percent of our quarterly free cash flow generation back to shareholders. While this rate will fluctuate as we pursue an opportunistic strategy balanced against investment initiatives and the operating environment, we believe this activity further demonstrates our commitment to delivering value to shareholders.

Speaker 3

We also used $39,000,000 in cash to pay taxes due on RSU settlements, reducing the dilutive impact of our equity program. Non GAAP diluted EPS for Q2 was $0.97 a $0.25 per share improvement from $0.72 last year. GAAP diluted EPS was $4.26 versus $0.04 last year. Related to our GAAP financials, as discussed last quarter, we released a valuation allowance on certain existing deferred tax assets. This had a GAAP only financial impact of decreasing our non cash tax expense by approximately $838,000,000 Diluted weighted average shares were flat year over year at 208,000,000 shares as our repurchase activity was weighted towards the latter portion of Q2.

Speaker 3

We are pleased with the improvements in both non GAAP and GAAP profitability and we are actively managing the impact of dilution and cost of our equity programs. With that, let me turn to guidance. For Q3 2025 fiscal year 2025, we expect total revenue of $743,000,000 to $747,000,000 in Q3 or a 6% year over year increase at the midpoint. For fiscal year 2025, we expect revenue between $2,940,000,000 to $2,952,000,000 or a 7% year over year increase at the midpoint. Of this, we expect subscription revenue of $722,000,000 to $726,000,000 in Q3 or a 6% year over year increase at the midpoint and $2,864,000,000 to $2,870,000,000 for fiscal 2025 or a 7% year over year increase at the midpoint.

Speaker 3

For billings, we expect $710,000,000 to $720,000,000 in Q3 and $2,990,000,000 to $3,030,000,000 for fiscal 2025. As continually shown in recent quarters and years, billings are heavily impacted by the timing of customer renewals, leading to meaningful variability from period to period. This affects both year over year and sequential quarter over quarter comparisons with the impact further amplified by the scale of our book of business. We expect non GAAP gross margin to be 81.0 percent to 82.0 percent for Q3 and for fiscal 2025. We expect non GAAP operating margin of 28.5 percent to 29.5 percent for Q3 and 29.0 percent to 29.5 percent for fiscal 2025.

Speaker 3

We will continue to focus on driving efficiencies, while investing in long term growth areas like product innovation. We are revising our guidance to reflect the anticipated impact of our buyback activities on the non GAAP fully diluted weighted average shares outstanding. As a result, the range is now $206,000,000 to 211,000,000 for both Q3 and fiscal 2025. In closing, Q2 marked an important step toward our future with the initial launch of our AI powered IAM platform into general availability, while delivering record non GAAP operating profit and margins. We delivered another solid quarter of execution against our 3 strategic pillars, accelerating product innovation, enhancing our go to market initiatives and strengthening our financial and operational efficiency.

Speaker 3

We remain pleased with our overall performance, particularly the progress we made stabilizing our business, deepening customer relationships, driving profitability and generating consistent and meaningful free cash flow. As we look ahead, we are excited about the opportunities in front of us, particularly with our IAM platform and the rollout to more customer segments and international regions during the remainder of this fiscal year. We believe the future is bright for DocuSign and we remain committed to delivering value to our customers, shareholders and employees as we continue executing our long term vision. That concludes our prepared remarks. With that operator, let's open up the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Speaker 4

Alan, you raised your full year guide to 7% growth, but still guiding billings for 3.5%. I think many are asking thinking about your growth aspirations over the medium term and what are the main reasons that are giving you confidence in sustaining that growth. And just for Blake, you mentioned the record margin at 32%. Everyone would kind of love to hear what your ceiling is over the next year to 2 in terms of where you think you can go versus continuing to invest? And can you drive continued higher margins while driving that revenue growth?

Speaker 4

Thanks.

Speaker 5

Yes. I'll go and then you jump in, Blake. On the growth front, well, first of all, I grew really proud of the progress we've made. I think we've really fully stabilized the current business. You can see the DNO rates both looking backwards and looking ahead.

Speaker 5

We've gotten to a better place. I think a lot of the operating metrics that we shared on the call are trending in the right direction as well. So I think on the core eSign business, we still have obviously room for improvement and we're going to keep working at it. But I think we feel we're in a better place. In terms of accelerating growth, international and CLM will provide some of that in the very short term.

Speaker 5

In long term, the main growth lever for us is I'm It's super early. We just launched to the commercial segment in North America and Australia, obviously, a subset of our business. But the only indicators are quite encouraging, significantly larger deal sizes, faster closes, higher win rates, accelerating bookings momentum, August is more than double the size of June July and it's just really very, very positive. With that said, it's still super early. We've got more customer segments and regions to roll out to.

Speaker 5

But we're certainly hopeful that that will show up in a more meaningful way that we can discuss with you next year and beyond.

Speaker 3

And then I'll just hop in on the operating margin question. So super proud of the team for this quarter. Once you normalize a bit and I referenced this in the prepared remarks about 150 basis points for one time items still producing over 30% operating margins. It's something where as a team, we've made a ton of improvement over the last 2 years as a company here. And you look at things like sales and marketing expense as a percentage of revenue for us was 41%.

Speaker 3

I think 2 years ago, it was 30% for this quarter. So just a lot of improvement, a lot of focus on productivity and efficiency. But to your question about how much more opportunity is there out there for us, the thing that's most on my mind and I think I can speak for the leadership team as well is that balancing this idea between productivity and growth. And we want to make sure that what we can do is feed this growth engine that we are so excited about in I'm and make sure that we get it launched obviously in all these different new regions that are coming out and new customer segments. And so while I do think there's opportunity for us into the future for continued efficiency and productivity improvements, I think the bigger focus for us right now is focusing on this growth lever, How do we make sure we keep a mindset of productivity, but also don't lose sight of that growth engine because that's what we're obviously so excited about.

Speaker 3

And we made a lot of progress on efficiency and productivity. So I'm really confident in the team and our abilities there, but it's also that balanced perspective that we're really focused on.

Speaker 6

Thank you.

Operator

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

Speaker 7

Hi, thanks for taking the questions and great to hear that win rates are improving, the customer bookings are increasing month over month for IAM. I'm curious what the if you could just expand on the early feedback that you've been getting from customers for that solution? And then why do you think IAM has been able to sell so much quicker in its early stages than what CLM previously did?

Speaker 5

Yes. I'll take that one. So in terms of early customer feedback, I think the most important theme is that people are just really thrilled with the ability to collect all of your agreements and get insights from them near instantly. So both the ease of deployment, ease of use and the time to value is really strong. And that resonates with customers really across industries and across functions.

Speaker 5

So there's a couple of quotes in the earnings release around that. A couple of surprising things to make a little bit more color. Even though we launched into the commercial segment, which tends to be smaller, not the smallest, but smaller customers, The average customer has thousands of agreements in their repository. And so that gives you a sense of that there's pain and complexity around agreement management even in midsized and smaller companies. It gives us a lot of confidence.

Speaker 5

We're seeing pretty rapid adoption once people have signed. They don't need a lot of handholding. And then as you know, we have a very ubiquitous product with eSign, 1,600,000 customers. And our goal with I'm was to provide something that could provide value for all of them and really provide a differentiated value proposition going forward. And the early signs are really encouraging on that front.

Speaker 5

And we're still looking ahead to launching self serve to get the long tail and then going into the enterprise initially with departmental adoption and of course in geographies outside the 3 launch markets. And so a lot of headroom in scaling the reach of the product as well. Very but I did say the mood inside the company is one of sort of optimism and energy and hey, this is really working. So it's fun.

Speaker 7

Okay, very helpful. And then could you just talk about what led to the sales transition during the quarter and if Paula has identified any kind of changes that she wants to make since joining or if it will be more of continuation of the changes that you've been making over the last year or 2? But thanks.

Speaker 5

Yes. Let me quickly address that. So look, I think we're in a transformation moment. Notwithstanding that I think we've built a great product and the early indications are really positive. It's still a transformation.

Speaker 5

We're moving from selling a singular product that's horizontal, but has a very repeatable motion to something that's richer, it's more solution oriented, there's more of a platform aspect. And I just thought that finding a leader that I thought could really lead that transformation would be great. Our strategy has not changed I just want to emphasize, we're continuing to focus on our 3 routes to market, our direct channel, which remain the biggest and most important partners, which we talked a little bit more about in the earnings release, we can chat more about and of course, the self serve motion. And I think Paula will be a tremendous accelerant and execution leader for that strategy. And she's really hit the ground running and she's a month in and you would not know it.

Speaker 5

So thrilled to have her. Let me also just quickly, I don't think I answered the second part of your question about the difference with CLM. I think CLM has historically been extremely focused at the top of the house, very large enterprise clients because they were the only ones who could handle the complexity and the custom development, the custom integration that need to happen. I think we have more customers than other vendors, but even there, it's just orders of magnitude smaller than in customer count than Signature. And I think just reflecting of that upfront cost and tax.

Speaker 5

There's also flexibility issues in terms of how easy is it to configure. And then in terms of reach, it tends to be a relatively limited number of highly specialized users, obviously, your legal team and maybe sales ops and purchasing ops. I'm we could deploy seats to every seller, every buyer, every HR person, every recruiter. They can see the agreements that are related to them. So just with the breadth, it's just a totally different thing.

Speaker 5

Now with all that said, our CLM product remains our choice for enterprises that are ready for it. It has a lot of power and flexibility. It definitely has more features than I am. And we will continue to sell and support that for the foreseeable future. At some point in the very long run, we will as we replace more and more of the pieces of I'm with of CLM with the I'm underpinnings, if things will evolve and that's the nature of things in enterprise software.

Speaker 5

But we have a market leading product in CLM and customers will get a lot of value from it and we intend to continue to exploit that.

Operator

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

Speaker 8

Hi, this is Kylie on for Tyler. My main question is around billings. The revenue guide for the full year was raised while the billings beat and raise was a bit smaller. Just curious if there were any term changes that caused the revenue to be raised more? And also curious if there are any seasonal changes to guidance relative to what you were messaging last quarter?

Speaker 8

Thanks.

Speaker 5

Blake, why don't you take that one?

Speaker 3

Sure. So, yes, that's correct. So we flowed through the full beat in billings to our full year guide. We flowed through the full beat in revenue and then raised for the full year as well. And so, the driver of the Q2 revenue beat was really just based on timing of bookings.

Speaker 3

So bookings essentially came in earlier during the quarter than we expected on average, particularly with some larger deals and some anecdotes and you've heard me talk about higher usage and consumption. We had a few deals amongst many others that renewed essentially earlier than we had anticipated in our model. The flow through or the raise into the back half of the year is really a reflection of us scrubbing that kind of dynamic looking at it and saying, oh, there's we have some tailwind there as well relative to our forecast. And so that's the reflection of the raise. It's not really seasonal or a change in business or things like that because as you all know, billings can be pretty sensitive, right, to timing.

Speaker 3

And so those are really the biggest components. But the revenue raise is really reflective of the beat in Q2, which is based on timings of bookings.

Operator

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

Speaker 9

Hi, this is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to follow-up on a point in the prepared remarks you made about margins coming down in the second half just for some more I guess I'm just curious, I guess what's really missing at this point? Is it just more enterprise functionality? Or could you just provide some more detail on I

Speaker 2

guess where those dollars

Speaker 3

are going? Yes, sure. So I think if you normalize the Q2 number after those one time items, we do have a slight decline, I think about 150 basis points or so from Q2 into Q3. The I'm investment component, obviously, we're supporting today primarily in North America CBU business and we'll be supporting a lot more than that by the end of this fiscal year. So it's really just a reflection part of its timing, but it's really just a reflection of making sure that we're supporting all these other international geographies that have yet to launch as well as many other customer segments within North America as well.

Speaker 3

But even with that, our Q3 guide on operating margin is still sizably above year on year. And so, a prop of the team and the efficiency on that.

Speaker 9

Got it. Thank you, Blake. And one quick follow-up, just on the pricing model, how should we think about that for IAM and how it's evolved beyond the kind of historical pricing model? I think in the past you talked about moving more towards like a seat based traditional subscription model. Just any update there would be great.

Speaker 5

Yes. There's a lot of levers there. So, I mean, first just to frame it, historically our signed business has primarily had an envelope based billing model basically number of documents sent and you pre bought capacity. That obviously doesn't make sense for I'm more broadly. And so we're anchoring it around seat based pricing for different user types plus, adders for, shall we say, capacity, related to, for example, the number of documents stored in the repository as well as a variety of add on services, advanced AI features, 3rd party identification, verification and other value added features.

Speaker 5

And I think we're still exploring other ways in which we can best match our pricing to the value delivered. That's what you want in the pricing model. I think we've done a pretty good job out of the gate, but I'm sure we'll be learning more here over the next 6 to 12 months as we explore different customer segments and geographies. But that's the high level of how it's working today.

Operator

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

Speaker 6

Hey, this is Arvind Voo on for Mark Murphy. Congrats on the quarter and the milestones and thanks for taking the question. First, can you talk about rolling the IAM platform to more customer segments in international regions through the remainder of the year? Could you double click there and just maybe provide a little bit of insight as to which types of customers or regions you're prioritizing in the near term? Thanks.

Speaker 2

Yes. So from a customer segment perspective,

Speaker 5

I'm going to oversimplify. We have a we've served customers of all sizes, right, from 2 person law firms to 100,000 employee corporations. We launched to the commercial segment, so the mid market segment stretching down to the upper end of SMB. And then here before the end of the year, we will launch a pure self-service version, so that will our ability to buy I'm purely self-service, so that will allow us to reach all the way down as well as of course remove friction for any customer in any segment. And then we will begin selling to the enterprise segments.

Speaker 5

I think initially it will support mostly departmental level rollouts, so rollout for sales division or for an HR team or whatever. But we think we can get going with something pretty robust and we've had a lot of inbound interest. From a geography perspective, we launched our primary focus was in the U. S. We also launched a version in Canada and Australia.

Speaker 5

Later this fall, the product will become available including all the localized AI for in addition to Australia and Canada, you'll also have the UK and then for Germany and France. And then the product more broadly without the full contract AI will be available worldwide. So by the end of this year, any DocuSign customer will be able to buy a version of I'm maybe just to double click a little on the AI point. So I mentioned how bringing intelligence to the agreements that you have is a key value prop for I'm that rests on using AI to extract the essential terms out of documents and which then means you have to train models for not just for specific languages, but for specific legal systems. So the UK is, yes, it's English, but it's

Speaker 2

a different English and a different legal standard than the U. S. And so you need to

Speaker 5

train those models for each of those markets. We're making very good progress on that and I rattle off the markets that we're serving right off the bat and we will add several more language and market combination in early next year. So but that will be an ongoing project, but important to fully deliver the value in all of our biggest markets.

Speaker 6

Very helpful and great insight on the regionalization for the AI. Turning to your remarks about hiring behind strategic initiatives as well as Lexion kind of contributing to headcount growth. Could you help us maybe size the contribution from Lexion? Just trying to kind of better understand what the, I guess, organic headcount growth looks like and maybe also where you're hiring that behind? Is that in R and D or sales and marketing or where you're kind of prioritizing your dollars?

Speaker 6

Thanks.

Speaker 3

Yes, sure. I'll take a stab at that one, Alan. So Lexan was a pretty fair chunk of our quarter over quarter headcount growth. I think we grew about 170 ahead. Lexan is a fair chunk of that.

Speaker 3

But for the remainder, it is primarily focused in areas across the company that are supporting our growth initiatives. So you can imagine places in R and D and PLG and other areas of the company as well that support those functions but those initiatives are growing. And I would just say relative to headcount as well, for us, we are continuing to hire. We are continuing to hire in all of our regions. Now that said, we're also being very mindful about that.

Speaker 3

We're being mindful of cost per location and global time zones and things like that of that nature. So as we think about headcount growth, I would also encourage you to make sure you pay attention as well on top to OpEx growth because you'll see a little bit of a differentiation there. And again, I would just reinforce that we're very mindful of being productive and efficient as much as possible as we continue to support the growth opportunity that we see in I'm

Speaker 6

Great. Thank you. Appreciate it.

Operator

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

Speaker 10

Great. Thank you and congratulations.

Speaker 11

Hey, Alan, can I ask you a big picture question?

Speaker 3

What's your perspective on sort of the attempts to regulate AI? And then particularly here in California, you have the Senate bill that's sitting on Doosan's desk about safe and secure innovation for Frontier artificial intelligence models. Does that impact you? And sort of bigger picture thoughts would be really helpful. Yes.

Speaker 5

Look, first of all, I'd say, we believe that it's very early with AI and it's hard to regulate something that's not well defined. But I don't believe that any of the currently proposed regulation here or in the EU or elsewhere meaningfully affects our plans. So that's probably most important to get that out of the way. In terms of sort of my observations as a tech industry participant and observer, I do think that there is understandable concern about the potential for AI to be misused in various ways. I do think that I personally believe the first focus should be on adapting existing regulations for AI.

Speaker 5

And so looking for whether it's discrimination provisions, competition provisions, whatever it is, how can we interpret existing laws and clarify how those should apply in an AI context rather than conceiving things completely de novo. But I'm not an expert on the was it 1047 Bill and obviously we will adhere to the laws and markets where we operate.

Speaker 2

Awesome. All right. Thank you.

Operator

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

Speaker 12

Hi, this is Arseniy on for Alex Zukin. Thanks for taking the question. On dollar net retention that has stayed stable at 99% and is expected to stay stable. But why is that not expected to expand as it seems you should have lap pandemic renewal cohorts going into the second half of this year. And I guess to help investors gain visibility into expansion from long customers, what has the dollar retention been for customers outside of the pandemic renewal cohort?

Speaker 12

And then just a quick follow-up. Thanks.

Speaker 3

Yes, sure. I'll take a stab at that. So again, just to reiterate dollar net retention flat in Q2 at 99% and the indication in the prepared remarks that we expect that to stay consistent through the remainder of the year. With regards to the COVID comment, I think gosh, I think it was on our Q3 fiscal 2024 earnings call. I believe we shared the data point that by the end of fiscal 2024, only about 10% of our book of business will be from contracts written during what I call the calendar years 2020 2021.

Speaker 3

It's the proxy for the pandemic and that will continue to decline in fiscal 2025. We're on track for that. Like we're in the mid single digit share for Q2 and we expect to be at the very low single digit share in FY 2025 at the end. So from an impact of DNR perspective, we primarily already flushed through like that impact generally speaking. I think for us the longer term opportunities for us to improve DNR rate going forward rest both with improving renewals in our core business improving those retention rates.

Speaker 3

And we've shown improvements in that to date, but we have more room to go that we can improve on. But then also this opportunity longer term with I'm and that provides us the ability for, I think, real opportunity for expansion with customers based primarily on the value that we provide to them and customers being willing to share in some of that value upside. And so those are the components that I think we're most excited about. But as far as like breaking down cohorts of DNR and such, like we're through the bulk of our COVID comps already.

Speaker 12

Got it. Thank you. And then just to clear up and I guess confirm last quarter's full year subscription revenue guide included Lexion as the guidance today. Is that correct?

Speaker 3

That's correct. It was included in our guidance quarter. Thank you.

Operator

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

Speaker 13

Great. Thanks for the question. You mentioned higher consumption in envelope volumes and utilization a couple of times. And I'm wondering if you're suggesting that you could start to see customers come back to you to expand contracts for more envelopes. And related, just wondering how much of your business now is all you can eat type of enterprise license agreements And does the higher consumption and utilization have the same impact just given like maybe the changing mix of contracts versus prior periods?

Speaker 13

Thanks.

Speaker 3

Sure. So with regards to verticals, yes, I think we look at our vertical consumption and envelope sent as a proxy for the opportunity that we see with our customers for expansion over time. And but for every customer, it's going to be different, right? So it's a little challenging to pick a certain rate. But consumption improved, pretty well, I would say, on a prior year over year basis.

Speaker 3

And then envelope cent also increased for us on a year over year basis. So as customers run through those components and they're using more of the product, they get more excited about it. Now with regards to expansion opportunities and I

Speaker 5

think you asked about the

Speaker 3

all you can eat component, that's pretty small for us in our core business. People are buying generally fixed rate envelopes for the most part. We have certain deals that don't do it that way, but for the most part it is. And so that actually encourages me a little bit for the I'm opportunity that we have because I think it's telling a customer in a way, okay, you don't have to worry as much about the consumption side of this and you get these extra features and a platform essentially that we believe adds so much incremental value for you. It's I don't want to say it's an easy decision, but it's you can really see the line of sight there to why you would want to people expand and convert into an IAM situation.

Speaker 3

And that takes time. With our customers, we've got a $3,000,000,000 book of business with an average contract length of, I think, 19 months. And so that takes time, but I'm encouraged by the usage and the consumption metrics that we've seen to date.

Speaker 13

That's helpful. And just wondering, do you view the potential for interest rates to move lower as a tailwind for your business just given the exposure to mortgages and real estate and financial services? Thanks.

Speaker 3

Yes. I mean, I'll give you my opinion. I think a lot of people on this call probably are better at kind of forecasting interest rate kind of impacts on companies and such like that than me. But yes, I would say that especially specifically to the mortgage environment, the real estate environment you talked about, I think anything that drives higher demand for a customer is good for us. And so if lower interest rates drive more people to either refinance or buy homes and such, I think it's a potential help.

Speaker 3

I mean on the flip side though too for us real estate while envelope sent that vertical is growing slower than average, it's still growing for us year over year. So cautious, optimistic, but if there's we still think there's opportunities in our verticals for improvement, if the macro environment approves for those verticals.

Speaker 5

Yes. I would just add that a lot of people know us from real estate transactions, but it has declined as a percentage of our overall business. And at this point, we're extremely diversified across industries. And so while we would benefit, it might not be as larger a benefit as one might have imagined 4 or 5 years ago when real estate was really the killer. I think at this point, we've got such a broad portfolio that

Speaker 2

it would be nice.

Speaker 5

I'm not saying we wouldn't we would be very happy to take long term risk rates for a variety of reasons, including that. But it's maybe not as sensitive to that as it

Speaker 2

was given our diversification.

Speaker 3

Helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Speaker 11

Hey, this is Rich Pollan on for Michael Turrin. Thanks for taking my question. So first one, just I was wondering if you could tease out some of like how meaningful those co selling arrangements with large ISVs could be and just kind of how important that is to the partner motion, especially as you scale the I'm business?

Speaker 5

Yes. So I think in terms of the co selling with the large ISVs, the Microsofts, piece

Speaker 2

of the world, I think it's a

Speaker 5

very meaningful lever, particularly in the large enterprises. If you go in with Microsoft and they have existing Azure commitment that can be very helpful. And of course, we're one of the most horizontal ISVs and so map well to them as an example. I think the partnership with SAP holds great potential and the supply chain optimization piece is something that's really important to enterprises right now. They are very keen to improve the workflows, things like new vendor onboarding and so on are historically very cumbersome.

Speaker 5

And so I think we have a big opportunity there. But I do want to expand the window on partners. So those 3 Salesforce, ISK and Microsoft get a lot of focus here. We're looking at sort of the next year of folks. You can imagine the names there that also get some decent attention.

Speaker 5

But I think the bigger unlock for us to complement our own sales efforts is really the reseller and system integrators. So resellers in the markets where we can't reach customers through our direct sales team. So obviously in geos where we can't realistically do that. But even in markets like the U. S.

Speaker 5

And Germany or Japan where a lot of customers prefer to buy from a reseller, That's a very important channel. And the SIs, look,

Speaker 3

I'm very

Speaker 5

proud of how simple we've made a very complex problem of improving agreement workflows. But when you undertake something of that scale and scope, I think there's going to naturally be more opportunities for their size and they all see that. And so we've had a tremendous amount of inbound interest. Historically, most of our SI work has been focused on CLM, which is a small part of our business. But now with I'm really being the whole company, if you will, it's much more strategic, much larger in scope.

Speaker 5

And we have, I think, a huge opportunity to partner better with the Deloitte's, the NY's, the PEP Geminis of the world. And there's a lot of that already happening and I think much more to come.

Speaker 2

So that's a big enabler for us.

Speaker 11

Thank you. That's very helpful. And then just as a follow-up, in some of these early I'm deals that you're seeing, I know you talked a little bit about seats and just kind of the potential for that to be a little bit more pervasive across an organization. Are you starting to already see some of those wider seat deployments in an organization, maybe like cross departments? Or are you typically starting with one department inside

Speaker 5

right. I mean, the companies we're deploying right now are smaller and so it's the commercial segment. And so A10 does tend to be company wide in many cases. I think as we start our enterprise deployments, it's more likely to be divisional or departmental just because the scale and scope and risk and all the systems we'd have to put in to fully support that. So that's a forecast because we're just about to open the doors to the initial selling to the enterprise segment.

Speaker 5

So that would be my guess on how that's going to play out initially.

Speaker 11

Thank you.

Speaker 5

Which by the way is very familiar to us, right? And that's how ESAN rolled out. We went to the Head of Sales and said, hey, would you like to make your sales process more efficient? And they said, yes, please. And then we integrated with Salesforce and they deployed it in sales.

Speaker 5

And then purchasing or HR looked at that and went, can we do that? And so we've been able to cross sell in some companies. And I think with I'm we'll have more opportunity to do that.

Speaker 11

Yes, makes a lot of sense.

Operator

Thank you. Our next question comes from the line of Ian Black with Needham and Company. Please proceed with your question.

Speaker 3

Hi, thanks for the question. We had a good partner check on the Lexion acquisition. How important is that functionality to the new IAM platform? And will you expect the acquisition to be integrated? Thank you.

Speaker 2

Yes. Actually,

Speaker 5

I just want to say how thrilled we are with the Lexion acquisition. Look, we closed the deal at the end of May. And look, it was always our intent for this to be principally a product and team acquisition and we put a lot of focus on integrating their products. And I'm proud to say that this month we will shift 2 significant features that are directly enabled by the Lexion acquisition. That's 4 months from when we closed the deal.

Speaker 5

So huge kudos to the Lexion team and to the DocuSign team members that are helping them. And there's more to come. So we've got a couple more things that are I think really exciting. And they are dead center in the vision for IEM. And so I think that was turned out to be even better than I could have expected.

Speaker 5

And we're thrilled to have the team here. They've got an infusion of entrepreneurial energy and innovation that's always welcome. And I think it's going to help our roadmap on a conformed basis.

Operator

Thank you. Our last question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Speaker 10

Hi, this is Bill on for Kirk and thanks for taking my question. Do you feel like NRR rates have stabilized and can start improving from here? And are there customers still trying to right size their spend that could create continued pressure on that front? Or do you feel like you're now at a level where up sell, cross sell can outpace on below pressure on rate and our ROAs?

Speaker 3

Sure. I mean, from a DNR perspective, we've seen it stabilize here for a few quarters in a row and we expect that to continue through the rest of the year. I'm not giving a FY 20 6 kind of DNR forecast or anything like that. But I think what we're showing is that this business has been quite resilient. Now that said, we have aspirations to begin growing this business at a faster clip than we are currently.

Speaker 3

And that's why we talk so much about I'm and things like that, that nature. But so I'm encouraged by the stabilization trends we've seen and that we believe that will hold at least through the end of this year. But obviously, we are focused on how do we accelerate the growth of this company, doing right by our customers, providing them extra value and build a really like durable platform in the agreement management space. And so I think we're executing so far quite well against that going forward and we'll see how that all plays out. Yes.

Speaker 5

I would just add that, look, ultimate is our goal to return to delta to growth, not making a

Speaker 3

forecast about when exactly that will

Speaker 5

happen, but implied in that given that we already are in 1,600,000 companies, we're in close to 85% of the Fortune 500 and comparable numbers in other markets. Most of our activity is going to be upsell to existing customers. So assuming we're successful in accelerating growth, the DNR will move up as well. So that's our goal.

Speaker 10

Great. Thanks for taking my questions.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll now turn the call over to Alan for closing comments.

Speaker 3

Thank you, operator, and thank you

Speaker 5

all for joining today's call. Closing, I'm very proud of the progress DocuSign continues to make, and I'm really excited for the value we will create for customers through the Intelligent Agreement Management platform. We appreciate your support as we continue to realize our vision.

Operator

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

Speaker 1

Goodbye.

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Earnings Conference Call
DocuSign Q2 2025
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