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

Awesome. Let's go ahead and get started. My name is Chris Quintero. I am a software analyst at Morgan Stanley. And stepping in here with my colleague, Josh Baer, who can now make the conference this year. But I'm really excited to be joined by Blake Grayson, the CFO of Docusign. Blake, thanks for being here.

Thanks for having me.

Blake, maybe to start, tell us a little bit about yourself, your journey to Docusign, how that fits within the overall company management transformation that's been going on over the past 3 years? What drew you to Docusign? And where are we in terms of the long-term potential of the company?

Sure. So I've been at Docusign for about 2.5 years. Prior to that, I was the CFO at an advertising technology company called the Trade Desk based in Southern California in the U.S. for about 3.5 years. And then prior to that, I spent the bulk of my career at Amazon over a decade. Primary roles there were I ran finance in AWS in the cloud computing business, marketplace, North American consumer -- consumables and then international were the kind of areas for me. Essentially, what brought me to Docusign was there's very few, I think, opportunities or times in your career as a CFO where a company that is so well liked by its customers, generally speaking, that had fallen on some hard times and needed to kind of regroup coming out of COVID. And we had a new CEO get hired. So my boss, Allan Thygesen, hired me. And I would say 75% of the leadership team had been kind of swapped out, I would say, over the first 1.5 years that I was there. And so we're on a journey to transform this company, frankly, which is we're essentially so well known around the world, mostly for our e-signature capabilities. But now taking that a step further and really providing customers the ability to manage their agreements, both in how they prepare them, how they commit to them, like the signature component, but then also how they manage them after the fact. And so we're on this journey. I'm really excited about it. And it's something that I think Docusign is a natural fit in order to kind of add value to.

Yes. And I want to follow up on that. You're talking about agreement management, your IEM solution is a really big key focus for investors right now. So -- maybe for those who are new to the product, the suite, the solution, can you describe what it is? How is it different from your core eSignature business? And what gives you that confidence that this can become a bigger mix of your overall revenue?

Sure, sure. So eSignature is really a moment in time for an agreement life cycle, right? It's super critical. It's a very important part when you commit to an agreement with another party. But that agreement life cycle spans such a longer period of time. It can go from when you're just preparing that agreement and how do you build the language in it that is appropriate. And then you commit to it, but then you got to manage it. And there's so much trapped or locked value in those agreements, whether it's not things around pricing tiers and obligations that you may have to make or legal language or insights around what your customers are doing that, frankly, is a new category opportunity. It's a natural fit within Docusign because we have such a large relationship already with customers around their agreements. So Docusign is nearly 1.8 million customers. We have around 275,000 direct sales relationship customers on top of digital customers that we have. We have the largest corpus of agreements of any company in the world. And these customers, they're generally -- well, they're our customers already, and we can talk to them and say, "Hey, how about unlocking that agreement, the value in your agreements and all the inefficiencies that are in there. And I have anecdotes in my own personal career that resonate with me. And it's a very -- I would say, one of these use cases for AI for us, which is very tangible. Like I think people really can understand like, okay, I can summarize agreements. And the average customer using IAM today has like around 5,000 agreements, and these are like commercial and small medium businesses. We have customers that have hundreds of thousands or millions of agreements with them. And so the scale that Docusign, I think, also has is a super kind of like valuable positioning for us as well as we kind of really try to help our customers unlock the value from those agreements.

Yes. Let's talk a little bit more about that data and the scale that you all have. You talked about having some data advantages on the last earnings call. Can you talk about the 15% precision that you've talked about, 150 million agreement data points? And how does that really speak to your advantages with AI embedding that within IAM?

Yes. So the 150 million agreements, we have 150 million consented agreements that are already in the IAM platform. That's growing rapidly. I think just in the month of October, we added 20 million right? So you can kind of think about that on a relative basis. That provides us a very large advantage with regards to the ability to train models on some of those agreements, ability to improve precision recall. And so what the 15 percentage point improvement that you heard Allan talk about on the earnings call refers to is that we essentially try to benchmark and say, okay, if we do prompts and queries using public data, right, public contract data, and we compare that to the public data along with our own private kind of consented corpus of agreements, it's about a 15-point -- percentage point recall improvement. And for anybody who's tried to use AI and things like recall improvement in precision, it's critical. It's -- I don't know about all of you in the room, but if you go to ChatGPT and you go to these LLMs and use them, they're partially accurate, like they're getting better all the time, but a 15-point improvement is super valuable, and it provides actually, I think, even more to the kind of trust component that our customers get from using Docusign, and we can combine that level of precision recall on top of the LLMs and the public data that's out there.

And I assume like that increased precision is also helping drive the go-to-market traction you're having with IAM so far. You shared that you crossed over 25,000 customers. That's up from 10,000 in April. So -- and that's quite significant given IAM only launched mid last year. So talk to us a bit about where that growth is coming from? Where is the success coming from?

Yes. So the initial ramp for our IAM customers are primarily in the commercial and small and medium business segment. It's early days for us still in enterprise. We actually had some great wins, and we've talked about some of those on earnings calls and such. But it's essentially customers recognizing, I think, that the -- if you want to call it the bundle, the opportunity to be able to capture both eSignature and Agreement Management together because just so folks in the room know, most of our IAM packages come with eSignature. It's not like a separate packager. It's really a platform view. And the reason for that is probably pretty obvious that you can imagine if a customer is using IAM with you and eSignature, they're inclined to put more eSignature volume through, which creates a larger repository for their contracts into their like Navigator, what's what we refer to as the repository. And so it's a flywheel effect for us. And so that's actually been really exciting to see. I think that customers are recognizing that value. And it's super basic just from things like how do I track the obligations that are coming due for me. I have anecdotes of my own career where an auto renewal on a lease was missed by a team, and so you're paying that price beyond a period of time you'd like to, right? What's that obligation? You can imagine real estate leases on which ones are coming up, which ones have auto renewals that I should be aware of. We also have ability to do custom extractions for industries or for companies that have maybe very specific language and they want to train the model for their specific use cases to make sure they're pulling the right information we offer that as well. And so it's been super exciting to have the traction that we're getting. We still have a long way to go. I mean, like I said, we have a very large customer count. And the nice thing about it is we're signing up new customers than I am, but a lot of it is also our installed base, where it's a customer recognizing that, oh, I think I actually get some value out of this agreement management component. And so exciting to see people use that and start to adopt it.

Yes. Let's talk about the evolution of IAM. So you mentioned initially started with kind of more small and medium-sized businesses. That's kind of where you got the initial traction. Now you're trying to move more into the enterprise side of things. What do you have to change or augment on the go-to-market and the product side to really make that successful upmarket?

Yes. So it was a very conscious decision that we launched when we first launched IAM to focus on the commercial space. We have product market fit. We knew we had the product that would provide value to customers. We also recognize that enterprises are more demanding, right, for that. So over time, we've been able to improve those releases. We still have work to do, but we've done a lot. Things that are really exciting, you can imagine like things like access controls or like, oh, roles-based provisioning. So you have an access to certain agreements and I have access to others because there are some things that are very confidential, right, in the company. How do you do that? Around FedRAMP Moderate and these things like for security that you have to be able to get to in certain cases. Also with features and developments like, okay, I want to be able to sort my contracts by line of business and how do I do that? Things like custom extractions, I already talked about that earlier. And just those kind of nuances, which were an enterprise customer become more and more valuable. And one thing I'm really excited about is I would say that we've built a muscle now at Docusign that a few years ago, and it's not really a criticism of like the prior management team, but they were so focused on accepting demand, just high volume coming through the pandemic. The product kind of innovation, I would say, was a secondary kind of consideration. And I think one thing I'm really proud of the team is that we now have a road map that is just continuously doing releases. You hear about it from us on our earnings call. We talk about it now at our big momentum customer events for people on releases we're doing. We do focus groups with our customers. We do use cases for our employees. And so I think that continuous development is what will give us the ability to move further and further up into larger and larger companies.

Got it. In terms of the breakout between new and existing customers that are adopting IAM, how would you break out that opportunity amongst both? And are there any differences you're seeing in terms of how these customers behave?

So I would say customers that -- the one thing we have seen is that customers who use IAM actually use eSignature more, and that's probably not terribly surprising, but it's nice to be able to see that usage flywheel spin for us. We're signing up new customers for IAM. We're predominantly targeting our existing right, at the moment. Now we still bring in a fair amount of new customers, but it's one of these things where we have this asset already today in our portfolio of customers. It's very natural for us to already have that relationship with them and start to introduce them to this concept of IAM. And then we have -- you have to have a little bit deeper discussions with them, right? And also, too, how do you do this across enterprise, right? It's not just -- we don't just focus on like, say, one area. It's not just IAM for sales, or it's for HR or the finance or it's for legal and procurement and all these opportunities across the business. And I really do believe that for larger companies, the real power of IAM comes from the breadth of that opportunity across the company because if you're somebody in my seat, I don't want to say it's not worth anything if I can't have my whole company, but it's so much more valuable if I feel like, oh, my whole corpus of agreements is in here, where is my repository of assets? I mean if I ask people, do I do this for -- not fun, but it's like, okay, if I ask people in the room, where are the agreements in your company stored? If I said I was going to ask, I think a lot of people would say, well, there's SharePoint sites I have, there's maybe Box folders that we might have. There's e-mails that we might have. I probably could e-mail the legal department. And then do I know if I have the -- like if you're like me, I may have an e-mailed copy, but it's version 12. And I don't know if it's necessarily the final one that I approved. And so being able to have that repository of actually complete agreements, which, by and large, we have a lot of those, right, or most of those already for our customers, and it's a very fast onboarding cycle for our customers to be able to light up IAM because we can ingest those documents essentially into IAM, I would say it could be in a matter of hours and for the biggest customers, matter of days, right, for us to do it. And so that's a unique situation because we already have those documents, the company doesn't have to worry nearly as much about trying to find all the other third-party documents, but we'll ingest those two. Like we'll have APIs that will connect all the services if they want.

Yes. No, it definitely sounds like you're super excited about the IAM opportunity. How do you think about the competitive landscape, though? You all kind of branded this as kind of a new category. Clearly, there's been a lot of competition on the eSignature side, but you are the market leader. So how do you think about the IAM competition side of things?

Yes. I would say it is a new category. I would say most of the competition you see out there are much smaller companies that I would say have highly specialized vertical kind of landscape, like they only do maybe very specific legal tech, right, and stuff. And I think those will always exist out there. I think the difference for Docusign is the scale and the breadth of the opportunity and the application across so many different industries. And the usability for it, I think, as well, which applies to it. So now that said, we're horizontal in the fact that we can go across the whole company. But we also -- like I also said, we have features and functionalities meant for specific use cases. But I would say, I think we're arguably one of the only ones that have that kind of scale. And I think there's not a lot of large companies out there other than us that do this. And I think the scale that we have, the trust that we have with our customers as well provides us an advantage because the information and contracts that companies have, you could argue some of their most valuable information. And so I think we've already got those contracts, right? We've been working with customers for decades. And so it's, I think, a position of trust that we've earned, we take very seriously, but I think it's also an advantage for us into the future.

Yes. So scale, trust and the horizontal nature across multiple different.

Yes, I think so. I think it's just the breadth of that exposure, and I think the usability I would also say is super important.

Got it. How do we think about OpenAI, large language models? Where do they kind of fit within the competitive landscape for Docusign? Are you partnering with any of these model vendors? How are you kind of integrating some of that technology into your product portfolio?

Yes. I actually think of the LLMs very much more as partners than as competitors. I think we're either integrated or within the process of integrating with all of them, right? So it's OpenAI, it's Gemini, it's Copilot, it's Claude, it's those kinds of things. I think that we'll meet customers where they want to go with this and how they want to use it. But again, I think the benefit of the added precision that we have on our platform on top of those large language models is super important and super valuable for us and for the customer. And so we'll see how this all evolves. But I think it's only goodness. I like the fact that there are so many different models out there because we leverage them all, right? And so -- and then we try to benchmark, okay, when we take our data on top of theirs, what does it look like? And so I'm excited about the opportunity and companies are going to figure out their way about how they want to manage those. But most importantly, also, we integrate with like, I think, about 1,000 different third-party kind of software companies out of the box. So the Salesforces of the world, right, and all these things like ServiceNow and Snowflake. And so it provides an ability for companies that have sophisticated kind of data streams to be able to sync up immediately. And that's an incremental value that we have that you don't get just like from a large language model.

Yes. So it seems like you're pursuing a multimodal strategy, partnering with all these different models and maybe choosing the right model depending on which one can best answer.

That's right. We're not in this game to pick a horse that we think wins. It's really about who's got the best value and the best opportunity. We'll leverage it. And then customers, they want to be able to choose too, and we want to be able to partner with our customers to give them what they want. And so I think that provides an advantage that our platform then becomes even more valuable.

Got it. Switching gears a bit. I want to touch on the core eSignature business. It's not a hypergrowth space right now, but what gives you the confidence to maintain durable growth there, maintain market share? What are some of the drivers you're really excited about there?

Yes. So one of the things that's been great to see like our usage and utilization rates have been pretty quite consistent, growing on a year-over-year basis. And so for folks like usage, you can think of that as number of envelopes sent. Utilization is like the percentage of your contract, if you will, that you consume. And so the higher the percentage that you consume, in general, that's a leading indicator for us to say, oh, this person could actually need more supply, like they need more envelopes or not. I would say that also from a company perspective, I think one of the muscles we've built over the last, call it, 18, 24 months is that coming through COVID, the company was really focused on just accepting the demand that came in. It was massive and they scaled. They scaled primarily with humans, right? How do you do that? I think for us into the future for eSignature, it's also about what data do we have to actually gain on retention, right? So how do we maintain and then expand that spend over time? We've vastly improved the amount of data available to our -- like our customer success reps, essentially be able to flag to them early enough about, okay, this customer is coming up for renewal, here's their usage. Here are the use cases that they're using it for. This is what their intentions were when they signed up, what discussions have you had? And so we're making those gains over time, and we've improved things a bit. We've got a lot more work we can do and a lot more room for improvement. But I think eSignature for us is a business that we've stabilized for sure, and it's actually improved a bit. I mean I think our dollar net retention hit a low about 18, 24 months ago of around 98%. We're up to about 102% on that. That is largely on retention gains because IAM is just still too small in the business for us to provide the expansion component. That said, we know we have a lot of remaining opportunity. We're really excited about that.

Yes. You and Allan have both talked about the kind of North Star being kind of high single or double-digit type of growth. You're at high single digit today. How do you get to that double digits? What are the kind of parts of the equation that you need to really, really drive upon to get there?

Yes. And it's interesting you bring in the question because I do -- we do a global town hall for our whole company once a month. And after earnings season, I get to like one of the presenters, right, to talk about, hey, here's how we went. This kind of stuff, that kind of stuff. And so double-digit long-term growth is absolutely an aspiration of ours. And what we talked about yesterday was there's two main drivers of that. One is gross new ACV, like say, annual contract value, and that comes from expansion. So that will come from IAM and from eSignature expansion. And so how do we work with our go-to-market teams to provide those opportunities for that. And the other is retention, right? So less -- lower churn, higher retention, either way you want to call it. And we have still an area of opportunity. We've made strides, which is great, but we still have so much room to go. And if we can fire on both of those components, we have the opportunity to accelerate our long-term growth into the double digits. And so a lot of investors would like, okay, well, when does that happen or we don't -- we're not providing a time line on that. But that's the calculus that goes into it. I think that for us, we need both of those, right, in order to do it. And I think then it becomes a durable long-term growth because for me, too, one of the things I look for is we use this term durable a lot, but it's something that we feel like we can maintain in time, and we can do so with operating leverage. And I think that if we can start to spin this flywheel faster, this business doesn't have a ton of marginal cost to it. Like we have sales comp comes, maybe a little bit of hosting expense and stuff like that. But a lot of that growth opportunity, I think, has an opportunity to drop down to the bottom line.

Yes. Let's talk about the bottom line efficiencies. You all -- since the new management team came in, have made some really good progress on the margin front. So what are some of those efficiencies you all have been really focused on? And as you think about the go forward, what are some of the operating leverage investment priorities you're making?

Yes. So I would say, yes, we've made a bunch of hard choices of the company. I think like in fiscal 2023, our non-GAAP operating margins were around 20%. Now they're closer to 30%, right? And so we did a bunch of resourcing, like hard decisions we had to make around that, but also just becoming more efficient with how we spend our money. And so -- but at the same time, doing that, we've also were investing in IAM because this whole concept of IAM was really just like on a piece of paper a couple of years ago. And so we had to invest in that while we were making these efficiency gains. So I'm super proud of the team for that. I think for the future for us, that top wheel, like in my career, what I found is it's a lot harder to find those opportunities to spin growth than it is to manage costs, right? You can always manage costs and you can do that. But if you want to make sure you provide enough fuel to the business to be able to get that growth, and if you can, it's so much more powerful from an operating leverage perspective. And so we're in this balanced state, I think, right now, which is where, okay, we like the efficiencies we've gotten. But we're going to try to maintain those, right, as we've done this year, our margins at around 30%. And I think our margins around 30% this year and we guide are relatively flat year-over-year, but we also had some additional pressures on some efficiency gains, right, that we're going after like we're in the middle of a cloud migration. That costs some money. We shift some employees from equity to cash to help address dilution and stock-based comp. And so there are certain things that kind of hit your kind of P&L margins for the right reasons. And so we've been able to actually offset those, which has been great. I think for the future for us, this opportunity to spin the flywheel and accelerate growth, I do think has an opportunity to actually drop down and actually provide a bunch of operating leverage. And then over time, you get also more productive. And so we have other productivity initiatives as well. Like one of the things we've been doing is we've shifted some accounts from direct sales reps to self-service, right? And over time, that should help provide productivity improvements. At the moment, we're using that capacity to help sell IAM, right? And so it's like, okay, how do you balance those resources in order to be efficient and productive, but make sure you feed the business enough to give you that opportunity for growth. And so that's where we are today.

And how are you leveraging AI? I assume you all are key users of your own software, too. But how do you think about that as well as third-party vendors that you're also leveraging?

Yes. So I would say over the last year, we've had a bunch of initiatives in the company essentially embrace AI and the tools and where we're going to get the gains. It's a question that we're in the middle of our planning process for this next year. That's a question we're asking every single peer, me included in this and how are you leveraging it. My own team uses it right now in that examples in like billings and collections. So when customers, we send them an invoice, our bank account information is on the invoice, they write back asking us for the bank account information, right? Well, now we use AI essentially to scrape that question and immediately reply back automatically, so I don't have to have humans doing manual like those kind of we're going to sort of frees up the billings and collection teams to help address maybe the more -- you have more questions around, oh, my cost centers are different, like kind of like the normal stuff you deal with in business. And so across the company, we're embracing it, whether it's through engineering or HR and our IT functions and sales, also about like how is the rep get prepped for going to a customer meeting and be able to seek out, okay, what's this customer doing? What are they using? What's the health of their account? How do they create a summary? And that's been pretty cool to see our teams utilize that.

Yes. Maybe before I open it up to the audience, capital allocation. You all have returned about 75% of free cash flow to date. How do you think about buybacks and M&A as well because you also acquired a company called Lexion and integrated that pretty well. So how do you think about the trade-offs there?

Yes. So I think that we definitely have -- I think we've proven it that we show that when we have excess capital, we want to be able to redeploy that back to investors. So we think right now, the buyback is really a key opportunity for us. Now that said, we did do an acquisition. We do look for them. We have a very high bar. We want to be super judicious about how we think about those kinds of things. On the buyback front, you referenced like the 75%, that's about the free cash flow for the buyback. On top of that, we also essentially front the taxes due for like when RSUs vest for employees. So you can think of that almost as like a synthetic buyback. So we're not issuing shares to cover those taxes. We're actually kind of retiring them before they get issued. And so that takes up even more of our free cash flow, and you can see that on our cash flow statements. But I'm really proud of -- well, first, I'm really proud of the improvement in the free cash flow we've generated in the company. I think just year-over-year in Q3, I think we generated 25% more free cash flow than we did in the prior year, it was $263 million. We did about a buyback, I think, of about $215 million, but then we also did RSUs on top, the synthetic point that I commented about. So it's a balance. I mean we have like we have about $1 billion on the balance sheet. We have no debt. We have a revolver that we could use as well. So we think about this as how do we create the flexibility and the optionality. But I think through our actions we've shown, we're actually quite cognizant about returning that excess capital to shareholders. And we believe that if we can spin the flywheel in this company and we can get that growth up and then it provides some operating leverage, we think that's a good investment for that cash.

Got it. Any questions from the audience here?

I am understanding the point of solution that eSignature provides, but how are you selling the IAM into the C-suite? How are you pushing this across the enterprise?

Yes. It's a great question. And actually, and I've been in a few of these discussions, it resonates actually with the C-suite quite a bit because you can look at somebody in my seat and say, "Hey, Blake, if you want to look at or whoever the CFO, you want to look at all your agreements, how many of your agreements provide -- it's a very specific question, but like unlimited legal liability if you have a breach of a contract, right? So custom language, companies can't tell you that, right, today. Like -- and it's -- for me, I'm really excited about those kinds of questions because we're now just putting it in for IAM for sales in our own organization for that. And so then also looking at a company and saying, how do you know what your pricing is from the same vendor across different regions, right? So like I worked at Amazon, the largest companies in the world do not just give you one contract. There were like 80 contracts, right? And they purposely make it fragmented and hard for you to do that. And I ran into multiple situations in my career where I couldn't even really figure it out, right? And so being able to have those discussions of the C-suite and say, this is the value that you can provide is super helpful. I also think that one of the things that Allan and Paula -- so Paula Hansen is, our Chief Revenue Officer, is using our own C-suite as sales opportunities. And this is new for me because I worked at Amazon, it was not -- our customers were consumers, right? And my prior company, I didn't do that. But I have relationships with CFOs of some very large companies, and I go have a coffee with them, and I talk to them about the opportunity. And by and large, most of them are very open to it. I think also one of the advantages we have is we don't stack super high on the SaaS spend for a company. Like in my previous company, Docusign wasn't even the top 10 SaaS companies like for the amount of cost. And so if you can provide incremental value, and it comes at an incremental cost, but it's not so large, right? It creates a better opportunity. But it's actually -- I mean, I don't want to make it sound too easy, but you meet with the C-suite, you talk to the CTO about all your vendor contracts that you have or how do you manage them, they don't have a solution for that today. I mean one anecdote is Allan will talk about this, and he went to one of the top 10 banks in the world, and they were very excited because they had an Excel spreadsheet with like 10 columns, and they could track their 80,000 contracts. And it's like, okay, we can do better than that, right? Like this is for us. And so we're having those discussions with that company in particular. But it's a longer cycle for sure, to do that, but it's been resonating.

One last one.

You mentioned that Docusign has been around for like a couple of decades. So there's tech that's been there for a couple of decades. You're replatforming. Now with this IAM, which sounds very exciting in terms of opportunity, where are you as far as the product, the technology being at a point where it's not patchy and it's like everything is sort of -- can actually sort of grow and you can demonstrate it and it's not sort of...

Yes. I think one of the great things about IAM is we built it up from scratch with this kind of new management team and new leadership team. And so the legacy components can be sometimes more tricky, right? You're fixing the plane as you fly it, that kind of thing. Whereas from an IAM perspective, it was how will we architect this into something that we think will get bigger over time and will scale and how do we do that? So that's actually been great. And also on the data telemetry that we have, like the amount of data that we get out of IAM is much, much bigger because we've been able to build it, right? And say like, okay, how do we track adoption? How do we track usage? How do we track somebody who's done searches? How do we look and say, how many seats are using? How often do they come back? How do we look at them on a vintage basis, there's all this kind of stuff. And so there's more work like we will continuously evolve the platform. And I think we should because our customers will demand that value, right? If we're going to charge incremental value to them, we have to make sure we keep providing that. And so -- but I'm excited about that because that, I think, over time provides a stickier -- it should provide a stickier relationship with our customers, and they'll think about it far more than just a signature moment, right? But it's more of a platform and say, this is something that's critical to how I run my business, right? And so that's the idea.

Awesome. I think we will end it there. Thanks so much, Blake.

Yes. Appreciate it. Thanks so much.