DocuSign, Inc. (DOCU) Earnings Call Transcript & Summary

Great. We're going to go ahead and get started. This is Will Power. I cover cloud software here at Baird. It's my pleasure to introduce our next company, DocuSign, of course, the pioneer and leader in Agreement Cloud and eSignature, in particular. Really pleased to have Cynthia Gaylor, who is Chief Financial Officer; Annie Leschin, who's the Vice President of Investor Relations, is here as well. I'm going to start with a normal fireside chat format. I have a bunch of questions for investors. If you have questions, you can submit them via the portal in front of you, and I will receive those and try to bring those into the conversation as well. So Cynthia, thanks so much for joining us today. I mean you're coming off of a really strong quarter ever, strong year in several years.

But maybe let's just -- let's start with kind of the key drivers coming out of fiscal Q1 and particularly kind of the upside surprises in the quarter, I guess, a. And then b, would just love thoughts on kind of how you're thinking about key strategic initiatives as we kind of move through this year.

Sure. Sure. Thanks for having us, pleased to be here. And we were super pleased with our Q1 results. We benefited from a lot of the macro tailwinds that we've been seeing throughout the course of the year, but particularly by continued customer consumption and customer demand for our products. So you saw us with really strong revenue growth, 58% year-over-year on $469 million of revenues, so continued kind of growth at scale, which we're really pleased to see. And we hit some other records around net new customers, both from a total perspective. And then following the close of the quarter, we also announced that we hit our 1 millionth customers, so really pleased to see that. And then, of course, the net dollar retention rate of 125% was a record for the company, which I think just underscores kind of how customers are using our products.

Yes. So I guess from here, as you think then for the balance of the year, what's the key focus for you in terms of strategic initiatives? I am sure a lot of it is just contributing the same, but what's on the roadmap?

Yes, sure. So I think there's a couple of things. One is, I mean, we're very focused on continuing to grow our top line and making sure we're making the right investments throughout the course of the year. You also saw in Q1, we hit 20% operating margin, which was also a record for the company. And I would say, and the bottom end of our long-term target range, which we're not expected to really sustainably hit for a few more years. So we're looking to invest aggressively in the business and investing for growth in particular, areas like making sure we're building out our sales capacity models and continuing to invest both in sales and marketing. When you look at last year, we -- demand really outstripped our capacity. So we were investing in capacity to kind of meet the demand. And now we're continuing to invest in that sales and marketing capacity to kind of continue to be able to grow at scale. The other key investment area for us is around product innovation, right? If you think about DocuSign in our product, in many ways, it's wonderful in its simplicity and ease of use. But we need to continue to innovate around the scalability, around the security, around all the key differentiators, around the tangential products that fit in with Signature. And so in addition to the top line growth, I think really building out that Agreement Cloud platform that we've been talking about is going to continue to be really important. So that gives you kind of a flavor of a few of the key areas.

Yes. That's great. And I'll come back to some of those other reasons within the Agreement Cloud. I guess as you look at the upside demand in Q1, I mean is there anything more onetime-ish in nature? I mean, how much you kind of characterize the key drivers of that and the sustainability, I guess, of that higher consumption model?

Sure. Yes. So like I said, we did see upside to the number to the top line, in particular, into our revenue number that 90 days ago, when we were talking on the Q4 call and looking into Q1, we didn't necessarily see that much upside. So we were pleased with the upside we saw, but we certainly weren't expecting it, and we wouldn't expect it to continue at that rate. And so some of the trends we saw coming into Q1 and through Q1, we've now baked into our guidance kind of going forward. So we wouldn't expect that type of upside going forward, just to be clear, but we were really pleased because it was really driven by customer consumption. And particularly, early renewals was one of the things we pointed to in terms of, hey, like what drove the incremental upside? And when we think about customer demand, how customers were using the products, there were many customers who had outstripped their capacity and their subscription, and we use that as an opportunity to then talk to them about renewing and expanding into what they've been consuming. And so we saw a little bit more of that in Q1 than we were expecting. But we see some of that every quarter, but I think some of the dynamics around customers who bought conservatively 12 months ago used their capacity faster. We had existing customers who maybe didn't have a event to renew or expand during the year, but then they used their -- up their capacity, and so we use that as an opportunity. And then I would say customers in general last year probably renewed conservatively and then they used more of the products than they maybe had anticipated through the course of the year. And so we saw some of that upside in Q1.

Yes. No, nice to see the multiple drivers there. I mean, I guess, as part of all that, and the billings number was also really strong. And I guess one of the questions I've got is just trying to understand how much might have been pulled forward. What does that mean for the comp in fiscal Q2? I know you've already given some guidance frameworks there. But any broader thoughts on that front?

Yes. I mean, billings, we've been talking about for a while, right? And there is quarter-to-quarter variability and fluctuations quarter-to-quarter. And that's why we really encourage folks to look at the trailing 4 quarters. Because we think that if you're going to look at that metric, it's more indicative of kind of the long-term trend of the company. And the trailing 4-quarter average has been quite consistent and kind of smooths out some of that variability you may see quarter-to-quarter. So we'd encourage you, if you look at the Q2 guide, to look at the trailing 4 quarters, for the Q1 performance, look at the trailing 4 quarters. And if you kind of go back in time, you'll see that it's amazingly consistent, and it kind of smooths out those quarter-to-quarter fluctuations. But I think some of the upside to that number was similar to the dynamic I described around revenue. And then we do have a tougher year-on-year compare, but we gave a really strong guide. And the consumption dynamics that we're seeing with customers give us a lot of confidence just around people's seeing value in the platform and continuing to use the platform going forward.

Yes. I mean we've got a great land-and-expand model. I guess one of the elements that you touched on right at the start was the significant customer growth you saw in the quarter. I mean anything you'd point to in particular as a key driver there? I mean, obviously, you've been investing in sales, and I guess that's part of it. I mean as businesses reopen, are they just -- I mean, are they just that much more actively looking for new solutions, digital transformation? What are the kind of the key underpinnings of that customer growth?

Yes. It's a really good question, and it's probably early to tell, right? I would say when you look at the kind of new customers, it's really, for us, as we're growing, we're just scratching the surface of the market opportunity. If you think about DocuSign as a $50 billion TAM, having a $50 billion TAM, we're the largest player by far. And earlier this year, we kind of crossed over the $1.5 billion of revenue. And so it's a very fragmented market, whether it's across Signature, which is about $25 billion of that market opportunity, or the Agreement Cloud, which is the additional $25 billion, that gets you to the $50 billion number. But with $1.5 billion-ish plus of revenue and being the largest player, there's just so much greenfield opportunity of folks who are still doing either manual processes or using pen and paper and are switching to automation. So we -- our challenge is making sure we're building sales capacity and then reaching those customers around the globe as quickly as we can. And we're in a great spot because we have a first-mover advantage, but you have to kind of continue to build capacity, especially given the scale that we're at and making sure we're continuing to grow at scale. So that's kind of driving kind of the -- building capacity is really driving NewCo but also just the untapped opportunity of moving from pen and paper to something more automated is driving a lot of those net new adds.

Yes. And I guess one of the key questions I get them 3 to 2 is trying to understand the expansion opportunity within your existing customers. Like how penetrated are you, right? You didn't give like -- never suggestions, still got a lot of upside there. I mean how much of the current growth is coming from higher consumption of existing use cases versus adding more use cases, moving into new departments? And is there any way to kind of characterize kind of what you think you're in some of that? I mean, like if you're in a business now for 5 years, it takes a while to build. Are you still like 20% penetrated? Are there any frameworks to put around that?

Yes. So we don't necessarily quantify that publicly, but we do look at it very closely. And even within our largest enterprise customers, we still have a lot of untapped opportunities. And as you noted, we are a land-and-expand model. And customers start out quite small with DocuSign, and then they expand over time. And that's really what's driving. I think the best indicator of that is our net retention rate, right, because that kind of captures that -- those expansion economics, if you will. And so it's a metric we look at quite closely. And then we also look at the cohorts of customers and how they're expanding, and it's been quite consistent through time, including the last 12 months. And so I think as we think about big multinational companies, it could start in 1 department. It could start with 1 use case across the company, but we're not penetrated within even the customers that we have, let alone the customers that we're not yet touching.

Well, that's an interesting point thinking about it, right? So given that really strong customer growth this quarter, is there anything unique about the more recent customers that would suggest they would have a different longer-term profile, maybe either due to vertical or size of a company than once you signed up 4 years ago? Because if not, that would give a lot of credence, right, to the idea, there's significant expansion still.

Yes. We haven't seen necessarily a different trend in the new customers. What I would say is within the existing customers, we have seen consumption trends and kind of a different pattern of consumption in some of the customer bases. I would say from a vertical perspective, we're quite diversified. And then from a geographic perspective, we're in 180 countries given our digital footprint, and then we have 8 or 9 core regions that we focus on from a direct perspective. Then we use that kind of lead gen and the network effect within the digital business to really help us read the tea leaves into some of the trends that you're talking about. But I would say there's not a different, like in the NewCos in particular, there's not kind of a different pattern of either size of buying or verticals of buying. We've had some stronger verticals that kind of ebb and flow. And I would say with the pandemic, we've also had some weaker verticals of maybe industries that have been harder hit that are now coming online. So I think the great thing about DocuSign is just the diversity of the customer set from the very smallest mom-and-pops to the largest enterprises and everything in between, to our vertical focus, but our distribution across verticals, we're not relying on anyone. And then our geographic footprint is quite diverse as well.

Yes. Of course, I'll come back to international. But I mean as I think about general consumption patterns -- and I guess, as you point out, some harder hit industries, where we could see a nice tailwind. I guess, conversely, are there many pieces where you could see headwinds, I guess, as we come out of the pandemic, where maybe you saw increased usage and already perhaps starting to see any kind of moderation? Anything you'd call out there?

Yes. I guess I would say, I mean, we wouldn't expect to see the accelerated demand in the urgent buying that we saw last year during this window, right? Because last year, we had folks who are coming to the platform because they had an urgent need. This was the only way they could do business. I think the good news, though, in that is that once people move to the platform and they see the value, they're not going to go back and move to pen and paper, right? So there's kind of base use cases that you're not going to say, "Hey, I've signed this thing electronically. And now, hey, can you FedEx? Can you print it out? Can you FedEx it to me? Can I put the little sticky notes of like where I need you to sign? And then you have to go to the FedEx and send it back?" People are just not -- once you see the ease of use and the value in it, not to mention kind of the, it's faster, it's more secure, it's more environmentally friendly, it's easier, there's just a high ROI to doing things electronically versus doing it with pen and paper.

Yes. What are you seeing on the government sector, right, whether it's local and state or federal? How do those trends look? And are those -- were those -- are you starting to see those even pick up as we kind of come out of the pandemic?

Yes. So we get a lot of questions on federal, in particular, because we've made a ton of investments there with FedRAMP and IL-4 and kind of all the security pieces required to be able to deploy at the federal level. But we've actually -- so we're in early days of federal. We've made a lot of investments. We think it's a key differentiator for us in terms of the investments and the innovation we've made around that particular vertical, but it's early days. I would say, in the public sector, in particular, we have seen -- it's been one of the stronger sectors over the last year or so. We've made a bunch of investments there. It's highly fragmented, as you're aware, but also that urgent buying need has made it much easier for local and community and state governments to do business, right? And so we definitely see that as a big investment area for us, a continued investment area, but also some positive trends in just terms of the use cases and the usage and kind of that ease-of-use piece that we were talking about earlier.

Yes. Okay. Yes, I guess I wondered if there could even still be pent-up demand on the one hand, it became mission-critical to have a new signature capability. On the other hand, there were a lot of local governments, in particular, that landed funding issues, and the federal government is providing support and help. I mean, I wonder, I mean, could you actually see an acceleration there even with some of the pandemic boost that, that sector might have seen?

Yes. I think I would -- instead of acceleration, I probably would just say we think it's kind of greenfield opportunity, right, because there's the government pieces of public sector, but then there's also things like education. We saw a lot of school districts started doing all of their onboarding and employee onboarding, teacher onboarding by using documents -- or like using DocuSign to get agreements completed and kind of using the platform. So we see that as a big opportunity, partly because it's a fragmented market, but partly because some of those use cases that may have been lower on the priority list became higher on the priority list and now it's just a lot easier. You don't have to print out all these documents, send them to people or have people come in and either assign them or negotiate them or what have you.

Yes. Okay. I want to touch on international. I mean, obviously, it's been a huge source of strength, and it feels like it's still really early, given where it is as a percentage of revenue. So maybe just, I guess, high level, just remind us some of the key drivers perhaps with the Q1 acceleration, what's helping drive the improvement above corporate growth rate that you're seeing there?

Yes. Sure. So we've been investing in international for a while, but we were probably slow to go international because we had such strength in our U.S. business, our North America business. But we've made a lot of investments over the last few years. We talked on the earnings call a little bit about EMEA was particularly strong this past quarter due to a lot of the investments we've made in the past kind of starting to come online. But part of it, for international, is really execution. So if you look at our metrics for the quarter, we grew 84% year-on-year. We hit $100 million of revenue in quarter coming from our international business. So we're really excited by what we're seeing there. We've also made a lot of investments in the localization and kind of the different regulatory pieces internationally. You really need to understand those local markets to get your products turned on and used by folks in these different countries. And so it's something we're really excited about. We think international is the largest growth opportunity for DocuSign and probably the most untapped kind of all of our opportunities. It's 21% of revenue today, and we just think that there's a tremendous opportunity to continue to grow that and we'll continue to invest there.

Yes, I know there's a lot of discussion about common law versus civil law countries. For investors that might be less familiar with that dynamic, can you maybe kind of walk us through where you are in that journey? I mean, it seems like common law countries have been a big source of growth. It feels like you've made a lot of progress in the civil law side. So kind of where are we in that process?

Yes. So I would think -- what I would say is I think we're through a lot of kind of the regulatory common law, civil law pieces and that education process. I think, though, it's an area when you look across the different regulatory issues that you face when you go -- when you're a global company, they're constantly changing and you need to stay kind of on top of them. So we feel like we've made the right investments kind of in each of the regulatory, whether it's common law, civil law or GDPR and those different things that we're in very good stead, but we need to kind of continue to educate, particularly in areas that maybe haven't made as much progress in moving documents from off-line to online, right? And so there's more education, but it's probably more at the company and the people level than at the government and regulatory level.

Right. Well, I think you said you're in 8 major countries, in 8 countries, as opposed to, maybe regions.

Yes.

But where does that go? I mean, I -- I mean, those, I guess, for you principally the bigger countries in Europe, of course, North America. But I mean, is that number going to go to 10 and 15 and 20? I mean it's just a matter of sales success in individual geographies and then realizing there's an opportunity to kind of build on that initial success. Is that how would you think about it?

Yes, I think that's right. And there is an execution and kind of an operational piece and making sure even in the countries we're in, we're just at such low penetration rates, so making sure that we're continuing to execute and grow. And so when you think about what we call our core 7 or 8 regions, it's North America, which, for the most part, is U.S. and Canada. It's U.K. and Ireland is kind of in 1 grouping. France, Germany, Australia and New Zealand is in the category. Brazil, Japan and then most recently, Mexico, which is really to reach more Spanish-speaking LatAm, is kind of the piece around that. We look at Southeast Asia as well as kind of a potential region to do more in. But the great thing is we have this digital channel that really provides lead gen but also provides us a glimpse into -- we're in 180 different countries to figure out like what countries are the next best to prioritize to go direct and continue to build out capacity around the globe.

Yes. I guess, I mean, look, you've called out particular success with EMEA. What does the playbook look like then for APAC? I mean, I guess, Japan, but beyond that, I mean, there are obviously big markets there and obviously opportunities. And that's -- I'd assume that's next. But what was the roadmap there?

Yes. So I mean it's still early days for us in APJ and APAC. We just hired a leader in that region, who's based out of Australia. So we're very excited about him coming onboard and really focusing on the growth areas there. As I mentioned, we think Southeast Asia is a big opportunity. There's other countries where we're not currently direct that we think are big opportunities. There's also kind of our partner reseller channel, which we don't do a lot in around the globe. We have some partnerships, but that's also a growth area and a growth opportunity for us. So we think, again, it's just there's a ton of greenfield space kind of around the globe in each of these regions. So I wouldn't say like, "Hey, we're going to be solely focused here or solely focused there." But we certainly need to prioritize. It's probably one of our biggest challenges around growth is prioritizing the highest bid areas than going and executing against them and executing well.

Yes. So I do have a question here, interesting one. It sounds like you're investing more in marketing sales, while I would have thought that the product would begin to sell itself because it kind of speaks to the DocuSign brand, right, the recognition you have. Why isn't that the case? So maybe just taking a step further, where are the investments being focused? Because it looks to me like you have a lot of brand equity, right, with the help you get in the door anyway.

Yes, for sure. So we are investing a lot in sales and marketing. We're also investing a lot in innovation. We have quite a few differentiators across our products that when you think of eSignature, there's a beauty of DocuSign in the simplicity, but there's a lot of industrial strength that goes behind the product to make it scalable to the largest enterprises. And then there's a lot of innovation around eSignature, but then also around the Agreement Cloud, right? We want DocuSign people to be able to agree anywhere. And when you think about the prepare, the act, the sign and the manage, all the things you can do in an agreement kind of at that highest bit level, there's a lot of investment going into the product innovation. It's funny. I like to say to our sales leader, "Yes, I would think the product would sell itself," and he loves when I say that. But there is a lot of complexity and understanding of the customer use cases, right? And so making sure that we're building out capacity for kind of the untapped nature of the opportunity, and it does start with digital kind of lead gen and getting people in the door, trying the product and then converting those customers. And we talked about this on the earnings call a little bit converting those customers to direct customers, right, and then the digital team and the direct team are arm wrestling over like how do we count the churn in 1 bucket to the upsell in another. So we do think there's a lot of opportunity. We think the sales and marketing engine and building up the capacity is key to getting NewCos in the door, then converting them, monetizing them, making them successful on the platform. So they really see that time to value very quickly. And that's what a lot of our sales and marketing capacity and our customer success investments are really about.

Okay. I also want to make sure we touch on DocuSign CLM, right, looking at the broader Agreement Cloud opportunity. Where are you seeing the most traction? I mean, I know outside of eSignature, you have other components that most of which you've kind of bought into SpringCM or CLM, whatever it might have been. There's still a couple of percent of revenue or a small piece. But where are you -- what are you most encouraged about, I guess, I ask, within the kind of portfolio of products? And where are the biggest growth opportunities there, kind of around eSignature within the Agreement Cloud?

Yes. So I mean when we think about the Agreement Cloud, again, we're in just early days, right? And if you think e-signature is a fragmented market of which we're the largest player, it's even more so the case when you look at the broader Agreement Cloud. And so I get most excited about kind of just our strategy there, how early we are in the market and that we can really help define a market and grow it. And it is, as you noted, a very small percentage of our revenue, but it's quite related to eSignature and the agreement process, right? And we've been talking the last couple of quarters about the anywhere economy, and we think agreements are everywhere and that you should be able to agree anywhere, right? And so being focused on that, particularly from a product innovation perspective and making sure that we're kind of on the cutting edge similar to how we were on eSignature to what you can do within agreement. So things like our smart agreements are going to be really important. And we think customers are very excited to see how that evolves over time, right? We acquired a company a few weeks ago called Clause. That's around making agreements smarter, how do you think about different clauses when you're negotiating agreements or you have big volume of agreements that all have the same things in it but everybody wants to change it a little bit? How do you look at that? How do you look at causes -- not clauses, but terms and agreements when they expire and doing that in a very organized way, kind of in a data mine sort of way in terms of how you store and manage your agreements? There's also a notary we've talked about a little bit, we're in the very early days, but that's quite related to Signature. We look at that as extension of the Signature product. So I'm personally quite excited about Notary. It's not as big of a market opportunity, but nobody likes to go to the Notary. And so it's just a nice product extension and something that can be done much faster, easier and less expensive by doing it online versus having all of the friction involved in that process. The other thing I would just note is on AI. We -- I'm excited about AI because we're hearing from a lot of our customers that, that differentiates some of the other -- differentiates us from some of the other fragmented players in the market around the Agreement Cloud. And so as that product develops on the platform, I'm quite excited to see how we continue to innovate but also build out that product portfolio.

Okay. Well, that's great. We're assuming a lot of opportunities, right, just to capitalize on kind of this platform, right, that you've established there. I do have a question also just on competition. With Adobe Sign, Dropbox, Box, a lot of players making more noise on these headlines. Have you really seen much change in the overall competitive environment? Or is it just in such a big market that all those other players can have success and hasn't impacted you at this point?

Yes. I mean we do look at the competitive landscape quite closely as it relates to the Agreement Cloud but also just in eSignature. But I'd say there hasn't been really a changing dynamics. It's kind of more of the same. Those folks tend to compete more on price. And so we compete -- we look at pricing, but we also are a premium product. And we have a lot more depth to our product and innovation around just the core eSignature. And then I think with the Agreement Cloud and the platform, that's really a game changer in a very fragmented market, which I think is just a nice extension of what we've been doing with customers. So we think we have a lot of differentiation in the market. And we don't worry about any 1 other company, and we're really focused on kind of that broader suite of products and also making sure we're setting our customers up for success.

Yes. Maybe just a last question in here as we kind of get to the end of the time. We haven't had any real financial questions, I guess, per se. But yes, how would you frame kind of the 2-, 3-, 4-year growth outlook for the company? What should investors think about? And likewise, how should we think about kind of the margin expansion opportunity over the next kind of 3, 4 years, just thinking of that longer-term horizon, given what still seems like a big opportunity?

For sure. So I mean this is a -- maybe a nice recap on what we talked about at the beginning of the meeting, which I think is we're really focused on top line growth. We could get to $5 billion of revenue. We've said this publicly on eSignature alone, but we're really focused on building out the long-term opportunity across a really big market, and we're defining really what the Agreement Cloud market will look like. And so we're focused on getting to $10 billion and beyond, and that's why we're making a lot of the investments that you see us making, particularly in the product innovation area around the broader Agreement Cloud. So we'll continue to do that. I think when we think about margin, Q1 is a great example of just showing the durability of our business model and that leverage that we're seeing or that we can see when we see upside to the top line, but we want to continue to invest as quickly -- that upside as quickly as we can back into the business. And we're still targeting that long-term margin of 20% to 25%. But I wouldn't expect that to continue at the rate you saw in Q1 because we wouldn't be doing our jobs if we're not investing as quickly as we can to continue to grow the top line at scale.

Okay. Well, I think for time purposes, we're going to wrap there. But Cynthia, really, thanks so much for joining us, a lot of great insights. Thanks for all the thoughts. And for the investors on, thanks so much for joining, and look forward to catching up with everybody soon. Thanks.

Terrific. Thank you.