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

Welcome, everyone. Thanks for joining us this afternoon, at least this afternoon in most time zones, not quite yet on -- I guess it is on the West Coast now. It's 12:30 out there. Thanks, everyone, for joining the 24th Annual Needham Growth Conference. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here. Today with us, we have DocuSign and the company's CFO, Cynthia Gaylor. Cynthia, thank you for joining us today.

Thanks, Scott. It's great to be here. Thanks for having us.

I guess to get started for the 1 or 2 people on the call that are maybe not familiar with DocuSign, how about a brief overview of the company.

Yes, sure. So we're the Agreement Cloud company, and most of you probably know us from our leading Signature products. The company has been around for about 17 years, and we're growing quickly and at scale. We've doubled the business over the last several years and happy to kind of take the conversation, Scott, from there.

Great. Well, let's start with the A topic if we're talking in newspaper terms, at least. Growth is slowing a little bit as we come off the pandemic here. I guess the company had a little bit of a, if you want to call it, maybe pandemic wall. Third quarter billings growth slowed to 28% year-over-year versus a solid multi-quarter run in the, we'll call it, mid-40s to 60% range, several quarters there. Your first half results made me feel like you are not facing the churn or demand issues that may be like a Zoom or some of the e-commerce vendors were facing. Just using that as an example, at least. Third quarter seemed very sudden with a short time window between when you guided and the quarter's end. I guess what is the core issue driving net new bookings lower than prior expectations?

That's [ a media ] question, Scott. Let me do my best to kind of break it into a couple of different components. So when we take a step back and we kind of look at our year this year, our fiscal year, which ends at the end of January, we'll wind up the year pretty much as we expected kind of coming into the year. I think the big difference that we're seeing is the first half of the year is going to be considerably stronger than what we were anticipating, and the second half won't be as strong as we were thinking through. So let me walk you through that a little bit. As you noted, we were certainly independent of all the things going on around the world. Our business did quite well during the peak of the pandemic. What we were here to really help customers navigate their most urgent business needs during that time period and our top line, our revenue certainly benefited from that. We, as I said, almost doubled the size of our business in a fairly short period of time, helping our customers navigate through those pieces. Coming off the peak of the pandemic, the last 5 or 6 quarters, we've been talking about kind of tapering not so much of demand but of that urgency that we saw kind of at the height of the pandemic, and we've been talking about that tapering. And as I said, the first half of the year turned out a lot stronger because the tapering didn't happen as quickly as we thought and started to -- we started to see more of that tapering demand in Q3, in particular, kind of leading into the second half of the year. But as I noted, for the full year, we'll wind up pretty much in the same place. It's just we're going to wind up with a much stronger first half than second half.

Great. The tapering that you're seeing there, is it impacting maybe new customers or existing customer expansions more?

Yes. So remember, we have a land-and-expand model. New customers tend to land small and then expand over time. When we look at things like our customer cohorts, they're growing at very similar rates in terms of those demand curves that we're seeing. I think the other thing to remember about us is most of the dollars in any given quarter comes from the expansions, right, of the existing codes and customers that we have. The other thing to note is our net new has been quite strong and continue to be quite pleased with those metrics, whether it's net new total or our total numbers on greater than $300,000 in spend with us. So we continue to be quite pleased with those numbers, but most of the dollars in any given quarter are coming from those expansions.

Got it. One bit of housekeeping. Just before I forget, we will take audience Q&A when we're done here. [Operator Instructions] Moving on here. DocuSign sales cycles are quite short compared to most of the companies in my space. I know Dan spoke about this in my call back with him and yourself. Historically, your visibility into bookings has been very, very good. Does this type of sudden change alter how you think about bookings or billings guidance kind of going forward to help maybe mitigate such a change that was maybe unexpected.

Yes. So remember, we're a subscription software company. So our revenue -- we have quite a bit of visibility into our revenue. When we're thinking about things like bookings and billings, we don't guide to bookings, we do guide to billings. And we tend to see more variability quarter-to-quarter and fluctuations in the billings number, which we saw in Q3. However, I would say, when we look at that, our guidance philosophy remains unchanged. We look at all the metrics coming into the quarter. We look at pipeline metrics. We look at customer metrics and customer cohorts. We look at things like bookings and linearity in quarter and within the months of the quarter across all of our metrics as we come up with our guidance. So I would say no, our guidance philosophy hasn't changed. But I would remind you just billings can be more variable quarter-to-quarter, and that's why we encourage folks to look at the 4 quarter trailing averages when looking at billings, in particular.

Okay. Dan has mentioned the need to revert your sales teams to be more order makers versus order takers during the pandemic. And I think we can all appreciate that, right? There is a significant need for your product probably more than expected, obviously, over the last 18 to 24 months or so. But how long should this strategy in sales shift require? Is this something that you can accomplish in a quarter or 2? Or does it maybe take shorter or longer than that expectation?

Yes. And I think the dynamics that we talked about on the earnings call is really around demand generation and demand capture. And so during the peak of the pandemic, we were really capturing demand that was there, the kind of the urgent buying need from the customers and helping customers really navigate their business across the Agreement Cloud in a fairly challenging environment. And we think we did a good job of that. We've been talking about how we're building sales capacity into that across our field, which includes kind of our full go-to-market effort, whether it's sales, marketing success. And during the peak of the pandemic, the demand outstrip the capacity that we had, so we still need to invest in that capacity, given particularly the scale that we're at today, right? You need to continue to do that to grow the top line. I think when we think about kind of -- one investor stated it very well, kind of during the peak of the pandemic, fish were jumping in the boat, right? And that's a different motion. That's a tough motion for reps because you have a lot of fish jumping in the boat. They're slippery. You got to catch them. You've got to do all those things. But it's different than the skill of fishing. And the good news is DocuSign knows that demand generation motion very well. It's the core of what the company was built on. I think the big difference is we've added a lot of reps over the last 18 months. We have only really seen a demand capture motion here at DocuSign. And so really doubling down on that field enablement is one really important measure that we've undertaken now the last several months.

Got you. Helpful. Out in the state of Minnesota, we have like 15,000 lakes. We know a lot about fishing, in case some didn't know that out there. So although I can't fish to save my life, so it's not me.

It takes a different level of patience, right?

And I do not have that. I can 100% agree with that, but that's okay. One of the common theories I have heard is that churn has not really changed, but existing customers, they just have done a better job of understanding what their respective capacity needs are now that they have a handle of their own businesses as they work through the pandemic a little bit. So maybe volume additions, those upsells likely slow a little bit. Do you agree with this view and the implication that net new -- or net revenue retention rates probably normalize more towards historical levels going forward?

Yes. So let me take that in 2 parts. I think one of the pieces that we've been talking about regarding execution. So as we've kind of come off the peak demand levels, and we've seen that start to taper, the one thing we haven't done as well on the execution front is really fill that with new use cases within the existing customer base. So kind of in our traditional model of selling, we'd be talking to customers within verticals or within different geos about all the different things they can be doing with DocuSign. Across Signature is mainly where we're seeing this phenomena. And that wasn't happening as much as much as it should or could be to kind of help fill the tapering that we were seeing, right? So there's kind of the macro piece of tapering off the pandemic and then the micro piece of the execution to kind of fill that tapering. So what -- in the height of the pandemic, what we might have seen is expansion across one use case, just more envelope volume, right, versus within a department or within a company, many use cases that could be using DocuSign and particularly Signature. The other piece of that is kind of the cross-sell and upsell across the broader Agreement Cloud, granted those are smaller dollars, but that's a critical part of the motion going forward as part of our growth. In terms of -- so that's kind of on the tapering demand and filling with use cases from an execution perspective. I think the other piece is on -- to the dollar net retention rate. So we think and we've said our -- we've had very strong dollar net retention. We've had some of the highest rates in the company's history during the pandemic. We would expect our dollar net retention rate in Q4 to be at or towards the high end of our historical range, which had been $1.12 to $1.19 prior to the pandemic, which would be anything in that range would be strong for us. So that's what we would expect in Q4. When we get to kind of into next year, we'll be looking at that number when we get to this time next quarter. It's not a metric that we've tended to guide to. But every quarter, we do try to give color. And that's a question that we get quite often, so we do try to give some context around that particular metric.

Sure. Are you seeing some of the taper kind of -- I don't know, not challenges, but maybe a little -- accelerating quicker than expected internationally? Or is it just here domestically in the U.S.? I asked the question, of course, because international has been such a key focus around your growth over the last 1 year, 1.5 years, and it sounds like you're starting to see some accelerating opportunities there.

Yes. So it's a great question on international. We definitely -- international is one of our biggest investment areas and a big growth area for the company. When you think of -- kind of take a step back and think about our broader market opportunity of a $50 billion market opportunity, about $25 billion of that is Signature to put that in context and $25 billion is across the broader Agreement Cloud. International is the most untapped within that broader market opportunity. But even taking a further step back from that, we are forecasting about $2 billion of revenue for this year across a $50 billion market opportunity. We're the largest by far in the segments that we play, and it's mostly the greenfield space. So we feel like there's a ton of runway. But when we look about -- at international, in particular, that is one of the highlights of the business and also one of the biggest growth areas for us now and kind of going forward.

Got it. Last question on the growth, I promise, is does the changing growth profile maybe change how you invest in the business and/or maybe regions over the next couple of years? It could accelerate -- it could both accelerate to fill a growth void or potentially slow growth investments, depending on your perspective.

Yes. Well -- and there's never too many questions about growth. We're a growth company, and we're focused on top line growth. So no need to apologize on that. I mean we're investing for growth across the business, particularly in go-to-market. International, we touched on as well as product innovation and kind of building out that broader Agreement Cloud. Those are the key areas along with setting customers up for success. So we will trade margin for growth -- top line growth, just given how early we are in the market opportunity, as I just talked about a $50 billion market opportunity, $2 billion of revenue, a lot of runway and mostly greenfield space of moving from, call it, pen and paper to a more automated way. So we feel like the opportunity is tremendous. It's still early days. And in many ways, we're just getting started, right? As I said, we doubled the business in a really short period of time. So we're making sure we're building out that capacity and operationalizing across the board and investing for growth.

Got it. That might be my last growth question. We'll come back to it maybe. Moving on to the platform. The company has been investing aggressively in new functional areas like CLM and the Agreement Cloud, but also Notary. While the acquisitions added may be relatively small revenue streams at least to date, when do you believe these non-e-signature products will start having a greater impact on sales in the operating model?

Yes. So we're really encouraged by the traction we're seeing across the broader Agreement Cloud products. Notary is one of my personal -- I'm a personal fan of Notary because nobody likes to go to the notary even before the pandemic, let alone now. So we think there's a big opportunity across the Agreement Cloud products, whether it's Notary or CLM or some of the analytics that we're doing in AI, we're doing around that. However, I would be remiss not to underscore, we're in the early days there. If -- we feel like within Signature alone, it's still early. And lots of runway within these other product categories on the platform, it's very early days. We're, in many ways, defining a market in what we call the anywhere economy, but also across this Agreement Cloud, we're really creating a new cloud in the broader market. So in terms of dollars, very small contributors. And when you take a step back and think about it, from a Signature perspective, just given the strength of that part of our business and the growth rate at scale, it's going to take some time for the other product categories to catch up.

Got it. On -- I guess you've had both solutions for some time now. What we're hearing from sales cycles teams in terms of -- excuse me, let me back up. I can't read my own writing today, barely, and it's all typed out in Word and that's not -- that's a bad sign. You've had both solutions for some time now. What are you learning from sales cycles or teams in terms of who the right type of customer is to sell them to? Maybe right timing or maybe even the right pain points to sell against?

Across the broader Agreement Cloud?

Yes, the Agreement Cloud or some of the non-eSignature modules in general.

Got it. Got it. Yes. So I mean, the great news is we have 1 million -- over 1 million customers and 1 billion signers. And so DocuSign is well known. Our customers have generated tremendous ROI from our products. And so coming out of kind of those peak demands of the pandemic, which were mainly Signature-focused, customers are more engaged in those strategic discussions around what else they can be doing with DocuSign. So we think the installed base is a great place to start for those products. As you noted, it is a more complex sale and it is a longer sales cycle across things like CLM. However, what we're focused on is really setting up our customers for success. The other thing I would just note is it does require more change management, right, because we're defining a market. Change management within the customers also takes time to really achieve the benefits of the broader platform, so that's a piece that we're focused on as well.

Sure. I know historically, the company has made a couple of what I'd consider to be generally smaller acquisitions with the exception of SpringCM. I guess as you look back, while still early, how have the acquisitions in general performed versus expectations?

Sure. So for the most part, we've done kind of team, talent and tech acquisitions even Spring (sic) [ SpringCM ] in many regards with -- in that category, right? And so what we're doing is we're blending those products into the broader Agreement Cloud platform. And then smack dab in the middle of that, there was a pandemic with an urgent need, particularly around the Signature products. And so that -- the silver lining is on both ends of the spectrum, but we're really focused on integrating those products into a unified platform and then also setting our customers up for success. And I think customers now have more of the mind share capability to talk about those other products. In terms of the acquisitions themselves, though, I wouldn't say there was a disconnect on the expectation relative to performance given it's still pretty early across most of them. But I think we're really excited about being able to accelerate the product road map in those key areas that we think help fill out the broader product platform.

Moving on to TAM a little bit. One of the questions I fielded several times, at least since the third quarter results is on thinking about the TAM, but more -- really more about TAM penetration. I think the questions are coming from the fact that you already have 1 million customers. 1 million is a really big number, last time I checked for an enterprise software company, and that's amazing. But where are we today in terms of how you all think about market penetration? And why is anyone in this post-pandemic environment not using eSignature? Kind of a second part to that question is, how does your penetration compare to maybe competitors in the space?

Yes. So as I mentioned earlier, we think we're in the early innings of the broader space, whether it's the eSignature part of our TAM or the broader Agreement Cloud. And our biggest competition is really off-line, right? And the old way companies have been doing things, which is not automated. So we think there continues to be tremendous opportunity. It's interesting when we're talking with investors, in particular, because we're all in the financial services sector in some way, shape or form. We often do get the question, isn't everybody who should be using DocuSign already using it? And we believe the opposite of that. We believe it's a tremendous market. Even in the U.S., there's over 30 million businesses that we think make up kind of the addressable market there. So we're just scratching the service when you think globally. The other piece, I think, that's underestimated about our business is just our digital channel and kind of that top of funnel activity that gives us broad scope, right? We're in 8 or 9 countries from a direct perspective, but we touch 180 different countries globally. And so the opportunity to kind of land and expand from the smallest mom-and-pops up to the biggest enterprises, we think there's no reason that every company in some way, shape or form shouldn't be using DocuSign products. So penetration, while I understand the question, we don't think the market is saturated or overpenetrated just given the off-line to online phenomena, and so much of the market is untapped with kind of manual processes.

To your point, I, a little bit unexpectedly, had to buy a car in the last month or so. Bought it from a dealership in Phoenix, they had to FedEx me the paperwork to sign, so I can send back to them to complete the transaction.

Yes.

You'd have to do it at this day and age.

It's really amazing. And when we think about just the carbon footprint of that type of transaction and how not only can we grow our customer base and help our customers be more efficient, but just the carbon footprint saving of not only our products, but just the whole FedEx mailing, going to the post office, all of those pieces, the ROI on that is quite high.

I thought it was crazy. But I guess, maybe that's just me. Last question...

I would say it's not crazy. I would say that is a spot on in terms of the opportunity, right, for further automation.

Sure. Last question for me, and then we'll move to audience Q&A. [Operator Instructions] Kind of a completely different, off-the-wall a little bit question at least is in the fall, the company announced DocuSign Ventures. I guess what is the purpose of this fund? And are there any early successes that you can share?

Sure. So we've -- we publicly announced Ventures. However, we've been investing in a venture way for a while now in companies that we think can accelerate the ecosystem that we're in and also broaden our footprint with customers. And so we've -- I don't want to call out a particular company or 2. But I would say we think it's a great way to accelerate the ecosystem, help support our customers and also support companies that we think can broaden kind of the Agreement Cloud pieces of our business.

Got it. All right. Moving to questions from the audience. Let's go with, does DocuSign expect any pricing pressure over the next year competitively such as Box launching e-signatures?

Yes. So I think pricing is something we look at all the time. Dan and I, we do a call with the pricing and packaging team and the strategy team on the competitive landscape before every earnings call. And we haven't really noticed anything -- any notable differences the last several quarters. There will always be kind of scribble signers out there. We think DocuSign and our products are differentiated, not only our leading brand and our customer reach, the high ROI our customers get, but kind of the scalability of that solution from the smallest mom-and-pops up to the largest enterprises, kind of the security, the constant uptime. We've invested a lot kind of in the feature functionality through our product and innovation efforts. So we think we have a lot of differentiation. That being said, there's always some pricing pressure in pockets of the business from scribble signers, and we're not overly concerned about that, but it is something that we watch carefully. And we make sure that we're providing customers kind of that higher ROI and helping them be successful on the platform and drive the volumes that way.

Next question. Are there any nuances like seasonality or timing that impact billings in the second half more than revenue growth?

Yes. So we haven't seen a dramatic shift in seasonality, but I would caveat that with -- we also have never come off of a pandemic and the peak levels that we saw 4 or 5 quarters ago. And so it's something that we're watching very closely, but it would be premature for me to comment that we had a shift in seasonality. What we try to do is every quarter, if there are notable things that are impacting the quarter, we try to point those out and put them into context. So I'll give you an example. In Q1 of this past year, we did see a heightened level of early renewals that both impacted upside to revenue that we weren't anticipating as well as impacted kind of those fluctuations in billings that I was talking about. Similarly, in Q3 of this year, we pointed out like, hey, we've seen fluctuations in billings but also when we look at pipeline, that in-quarter pipeline that's generated in closes in quarter that we don't necessarily see in the beginning of quarter didn't materialize the way we thought it would in Q3. And we do that mainly to provide context, not that, that's the only factor or the leading factor but to provide some complexion on the quarter. So I would say when it comes to seasonality, there's nothing that I would call out specific. However, we definitely saw a first half, second half phenomena this year that we weren't anticipating. Even though for the full year, we'll wind up in pretty much the same spot we thought we would.

Lots of competition questions here. What is a good way to frame the competition from Adobe or Icertis?

So those are 2 very different companies. And one would be more on the signature side and the other would be more on the CLM side. I would say, without getting into the specifics of any one company, what we're focused on is making sure we're developing products to help our customers be successful in the market, right? So from a signature perspective, I don't think there's any company that's invested as much as we have in product innovation across signature. And then as you think about kind of CLM and what other companies are doing, there are different go-to-market motions amongst some of the companies that play in the space without calling out 1 or 2 companies, but it's a really early space. So it's probably too soon to tell in how that will play out. Although we're investing a lot kind of in that product innovation, we have a very large installed base that we think is primed for those products, but it's very early days.

All right. Got it. Next one, how does the fact that a large percentage of your salespeople are recent post-COVID hires impact the ability to fix the use case cross-sell problem?

Yes. So as I noted, we've hired a lot of people during the pandemic to really make sure that our capacity was meeting the demand. And as you grow at the scale that we're at, that's a continual motion. You're always adding capacity, and it's the rate at which you're adding capacity. We think the enablement actions that we've put into place since we started seeing kind of a difference in the tapering is going to really enable the newer reps to understand that -- what we call the DocuSign -- the more traditional DocuSign motion that's really been in place since the company was founded in terms of how we sell, how we talk to customers about use cases, it's really more on our end than the customer end. In terms of if a customer -- I'll give you an example. A customer is using us for HR onboarding, there's probably -- within any company of a certain scale, there's probably 10 or 12 different HR use cases. And so making sure the rep understands what that motion looks like if it's not just, hey, adding more envelopes because you're onboarding more employees. And so we think these are fixable and solvable issues, we just need to put additional focus on it given the changing environment.

Next one is Street is worried about tough comparables for first half. Can you frame that?

Yes, understood. I mean we had a really strong first half of the year, and we will have a set of tougher comps. I think we're focused on running the company and growing the business and making the right investments to grow the top line. But we are facing tougher comps, which to me is more an output than an input. And so we also have to remind ourselves, we've scaled the business quite significantly over the last 18 months, and so we're working off a much bigger base and growth at scale, when you're $2 billion in revenue is different than growth at scale when you're $700 million of revenue. So we try to put that in perspective. But what we're really focused on is growing the company over a long period of time, and we're on a great trajectory to do that and making the right investments to make that come to fruition.

I always think difficult comps are a good thing because that means you did something right for a period of time. And maybe I'm wrong in that. We don't want [ weak comps ] forever, that's not -- that's an equally bad sign.

Yes. Although I think the point is a well-taken point. Because again, when you look at Q3 of last year, the billings growth that we had there, was, in some ways, not rational, right, in terms of just the scale that we were at in that growth rate. It was pretty much unprecedented. So I do think it's good to remind yourself that, yes, we definitely have been doing a lot of bright things, but we're also at a much different scale. And so growth at scale, there's very few companies at our size and scale at the top line, growing at the rates we're growing at. Albeit they're not -- there, they've come off the peak rates that we were growing at this time last year.

Yes. I always think the tough comps are great. The only time we worry is if it's like churn issues, like what Zoom had, not to [ discourage ] Zoom, because I'm not. But the -- given what happened, that was great. But if you have churn issues, it's difficult to call. But if you don't have churn issues, hey, that's a great customer that you're going to have for a longer period. That's awesome. Last question here, and then we'll get everyone moving to the next meetings, at least, is the Glassdoor community from employees has skewed negative recently, specifically around difficult sales quarters. Is that what you're seeing internally? And what can you do to prevent sales churn in this environment?

Yes. So it's a topic we're really focused on. I mean we're really proud of our Glassdoor scores. They tend to be kind of the highest in the industry. I think at any time, comments that could go in and off of the site could be sporadic based on what's going on in the company. So I would say that's not a ubiquitous comment that we've seen. We haven't made any changes to the comp plans per se. But we also, I'm sure, have some reps who are underperforming them. So the comment doesn't surprise me, but what we're really focused on is setting the company and the employees up for success. We think we have competitive programs on the comp side kind of across the board. But particularly when we hit this time of the year and we're thinking into next year, making sure we have the right and appropriate plans to go into next year and kind of drive the type of growth that we'd like to see. So it's a focus area for us, but I'm not sure of the particular comment, although it wouldn't surprise me if there are some comments on there. I just would underscore we haven't changed the plans in any way this year to a meaningful degree. And so I don't think there's something micro in that comment. It's probably more macro just given some of the puts and takes in the business.

Okay. Well, that's what we have time for today. I wanted to thank everyone for joining us. If anyone has any questions or need assistance with anything, please reach out to a Needham representative. Outside of that, Cynthia, thank you so much for your time. Good luck with quarter end. I know you got a couple of weeks left and certainly, good luck with the rest of your meetings today.

Terrific. Thanks, Scott. I appreciate it. Thank you.

Thank you. Bye-bye.