DocuSign, Inc. (DOCU) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Third Quarter Fiscal 2021 Earnings Conference Call. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now pass this call over to Ms. Annie Leschin, Head of Investor Relations. Please go ahead.

Thank you, operator and good afternoon, everyone. Welcome to DocuSign's third quarter fiscal year 2021 earnings conference call. On the call with me today, we have DocuSign’s CEO, Dan Springer; and CFO, Cynthia Gaylor. The press release announcing our third quarter results was issued earlier today and is posted on our Investor Relations website. Before we get started, I’d like to everyone know that we plan to participate virtually in a few events in the upcoming week. The UBS Global TMT Virtual Conference on December 7, the Needham Virtual Growth Conference on January 11, and the Goldman Sachs Technology and Internet Conference on January 12. As other events come up, we will make additional announcements. Now, let me remind everyone that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations around the impact of the COVID-19 pandemic on our business, financial conditions and results of operations are subject to change. Please read and consider the risk factors in our filings with the SEC with the content of this call. Any forward-looking statements are based on our assumptions and expectations to-date, and except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude stock-based compensation expenses, employer payroll tax on employee stock transactions, amortization of acquired intangible assets, amortization of debt discount and issuance costs from our notes, acquisition-related expenses and as applicable, other special items. In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from or substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information and most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's earnings press release, which can again be found on our website at investor.docusign.com. I'd now like to turn the call over to Dan. Dan?

Thanks, Annie. Good afternoon, everyone, and welcome to our third quarter earnings call. It’s hard to believe that we are almost at the end of 2020 and just how challenging the year has been for so many people. Many companies, including DocuSign are still working remotely, collaborating virtually and balancing multiple demand. However, we’ve also seen the critical role that innovation can play at a time like this and how technology can help people adapt in the wake of the pandemic. As COVID-19 has accelerated the digital transformation of key business and agreement processes, DocuSign has become an increasingly essential cloud software platform. The last few quarters of heightened demand have offered a glimpse into the long-term growth opportunity we have. I want to share more on that with you today. So, I’ll focus my comments in three main areas. One, strength of Q3’s results; two, why believe today’s Agreement Cloud customers will grow with us over the long-term; and three, the strength of our product development engine and partner ecosystem. So Q3 was another exceptional quarter for us. We saw results significantly outperform this quarter with billings growth of 63% year over year and revenue growth of 53% year over year leading to record levels of profitability. Our international business also showed substantial strength with revenue up 77% year-over-year, now representing only 20% of total revenue. We landed 73,000 new customers bringing our total to nearly 822,000 worldwide, and our customers expanded their use of DocuSign at the highest levels we’ve seen to date yielding a net revenue retention rate of 122%. These results reflect how the team has executed with excellence amid the ongoing challenges. They also showcased the continued tailwinds for the expansion of eSignature as the first step in the adoption of the Agreement Cloud. Overall, the response to COVID-19 has caused organizations to accelerate their digital transformation efforts by two, three, four years or more. They’ve seen that remote work can be even more productive, and the digital agreement processes are fast becoming business as usual. Let me share more on how our customers are doing that today. One example is an international ecommerce customer. To ensure their business processes could keep pace with the growth driven by the pandemic, they deployed DocuSign CLM in Argentina, Chile, Colombia, Mexico, the UK, and the U.S. By automating contract management for more than 1,500 different agreements with vendors and partners, they are lowering risks, costs, and errors. Another example is one of our large U.S. public school districts. They needed to adapt quickly to help tens of thousands of employees and over 300,000 students to teach and learn remotely. By partnering with DocuSign, they completed Federal funding forms electronically and launched a virtual back-to-school program, and they are now planning hundreds of use cases to support other future needs. One more example is a large U.S. insurance customer. As part of the response to COVID-19, the company expanded into several new eSignature use cases, which drove nearly 100,000 additional transactions over just the past seven months. As I alluded to earlier, the insurer believes this will become business as usual from hereon in . This last point reinforces something that history has taught us at DocuSign. When customers go from paper-based processes to digital agreement processes, they do not go back. We believe that trend will hold when the pandemic subsides, and DocuSign’s value will persist no matter how the future of work unfolds. We are not waiting for the future though, as we continue to innovate across the entire Agreement Cloud suite. In September, we launched an important new product called DocuSign Analyzer. Imagine receiving a new contract from a vendor and having risks automatically flagged like a bad indemnification clause or the absence of a clause you’d normally expect, Analyzer makes this possible. Thanks to the legal AI Technology we acquired with Seal Software earlier this year. It’s a fantastic timesaver for legal teams and their business stakeholders. It can also integrate with DocuSign CLM helping to automatically route work differently depending on analyzer’s output, sending a high-risk contract to a more senior legal approver for example. I am pleased with how quickly we’ve been able to apply Seal’s technology in this new and exciting way. Speaking of acquisitions, we talked last quarter about Liveoak Technologies, and how that would accelerate our efforts with DocuSign Notary. We are on track to deliver the beta version of the product before the end of this fiscal year. This will enable a notary transaction to occur entirely over video with the notary and participants all in different places. It will also complement our existing capacity to support in-person and video conference-based notarization in the U.S. and the witnessing approach commonly used in the UK and EMEA. Our partner ecosystem was another area of strength and growth for Q3. As a reminder, this ecosystem includes ISVs that integrate DocuSign into their own solutions, systems integrators that build practices around the Agreement Cloud, and resellers to drive sales reach for us globally. We continue to see overall traction with our more than 350 ISV integrations, including those announced in Q3 with Slack and with Workplace from Facebook. These follow a familiar pattern for us to make DocuSign available wherever business gets done. And with our recent momentum, we continue to see new partners join our ecosystem at a healthy clip. There is also been increased interest from SIs looking to build out Agreement Cloud practices that attach to their existing Salesforce, Oracle, SAP, and Workday practices thereby embedding DocuSign even deeper into critical front- and back-office business processes. Lastly, our resellers including the likes of Carahsoft, Ingram Micro, and Insight to name just a few are seeing heightened demand for DocuSign too helping to drive sales through that channel. A great proof point is that Salesforce, as part of its revenue cloud business will now resell DocuSign Gen for Salesforce CPQ+, a product that generates agreements for Salesforce. This creates incredible scale and reach, and typically leads to customers looking to DocuSign for broader agreement automation and CLM initiatives. So, to wrap up my comments today, this is the third quarter in a row that we had these significant levels of growth. This acceleration in demand is laying the foundation for future expansion across the Agreement Cloud. And while substantial global, social, and economic challenges undoubtedly remain, we believe we are still just scratching the surface of our long-term opportunity. Before handing it over to Cynthia to walk you through our Q3 results in more detail, I want to share one other great piece of news. Cain Hayes, the CEO of Gateway Health has joined our Board of Directors. I am thrilled to have Cain providing strategic counsel to DocuSign and to me, especially given his track record in financial services and healthcare, two of our largest verticals. So that is from me. Cynthia, over to you.

Great. Thanks, Dan and thank you all for joining us today. As Dan mentioned, our Q3 execution was strong highlighted by our eSignature offering which drove the vast majority of our performance as customers continue to accelerate their digital initiatives. Total revenue increased 53% year-over-year to $283 million, while billings increased 63% year-over-year to $440 million. Subscription revenue increased 54% year-over-year to $367 million. We saw strength across the business from geographies, verticals and customer types to new additions, renewals and upsells. International revenue reached $76 million in the third quarter or 20% of total revenue. Our international business grew over 77% year-over-year reflecting our continued growth across geographies. This quarter we nearly tripled our new and direct customer additions compared to Q3 last year with nearly 73,000 total new customers, of which approximately 14,000 were direct customers. This brings our total installed base to nearly 822,000 customers worldwide, an increase of 46% over last year. We ended the quarter with a 113,000 direct customers, a 64% increase. We saw further expansions in upsells from our existing customer base leading to record dollar net retention of 122% for the quarter. Customers with an annual sign greater than $300,000 grew 35% year-over-year totaling 542 customers. Total non-GAAP gross margins and subscription gross margin for the third quarter were 79% and 84% respectively consistent with the year ago levels. Non-GAAP operating expenses totaled $253 million or 56% of total revenue in the quarter compared with a $180 million or 72% of total revenue in the third quarter of last year. Non-GAAP operating profit was $49 million or 13% operating margin in the quarter compared to $17 million or 7% operating margin in the third quarter of last year. Non-GAAP net income was $46 million in the third quarter, compared with $21 million in the third quarter last year. We ended the quarter with 5,364 employees, an increase of 445 over the same quarter last year. We exited the third quarter with nearly $676 million in cash, cash equivalents, restricted cash and investments. Operating cash flow in the third quarter was $57 million. This compares with negative $2 million in the same quarter a year ago. Free cash flow came in at $38 million for the quarter. This compares with a negative $14 million a year ago. We expect our cash flow to continue to vary quarter-to-quarter due to the seasonality of our billing cycle and expenses. Now on to our guidance. Amidst the ongoing macro uncertainties, we have seen tremendous demand for our products this year as businesses have accelerated their digital initiatives and moved quickly to adapt to the new environment. While we expect that digital first trends continue into the future and drive DocuSign growth at scale, the key growth rates of any given quarter may not be sustained indefinitely. That being said, DocuSign’s value proposition remains strong with our customers began using our products before or after the pandemic began. We don’t see customers going back to pen and paper. For the fourth quarter, and the fiscal year, we anticipate total revenue of $404 million to $408 million in Q4 and $1.426 billion to $1.43 billion for fiscal 2021. Of this, we expect subscription revenue of $384 million to $388 million in Q4 and $1.355 billion to $1.359 billion for fiscal 2021. For billings, we expect $512 million to $522 million in Q4 and $1.7 billion to $1.71 billion for fiscal 2021. We expect non-GAAP gross margin to be 78% to 80% for both Q4 and fiscal 2021. For non-GAAP operating expenses, we expect sales and marketing in the range of 42% to 44% of revenue for Q4 and 44% to 46% for fiscal 2021. R&D in the range of 14% to 16% for Q4 and 13% to 15% for fiscal 2021 and G&A in the range of 9% to 11% for Q4 in fiscal 2021. For Q4, non-GAAP interest and others, we expect $1 million of expense to $1 million of income and for fiscal 2021, we expect $3 million to $5 million of non-GAAP interest and other income. We expect a tax provision of approximately $2 million to $3 million for Q4 and $7 million to $8 million for fiscal 2021. Finally, we expect fully diluted weighted average shares outstanding of 205 million to 210 million for Q4 and 200 million to 205 million for fiscal 2021. In closing, Q3 had strong results and execution across the board and we are off to a solid start in Q4. On a personal note, my first quarter as CFO has been incredible. And I’d like to express my personal gratitude and excitement to be working alongside Dan and the entire DocuSign team. I feel fortunate to have had a front row seat as a board member over the last few years and could not be more impressed and humbled by the team’s dedication focus on our customers, our differentiated product portfolio and remarkable execution in these extraordinary times. Today, I am even more energized by the tremendous long-term opportunity in front of us. Thank you again for joining us today. And now, I’d like to open up the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Sterling Auty with JPMorgan. You may proceed with your question.

Thanks and welcome Cynthia to your first earnings call. Just one question from my side, and it’s one that I get most from investors at the moment, and that is how much of your revenue growth is being impacted by existing customers that are either coming back to buy more envelopes or per seat pricing where they hit that level of reasonable volume and then they have to really kind of come in and either buy envelopes or upsell. So, if you can maybe quantify or characterize how much of that benefit, and when they do buy, what are they buying? So, are they going to a multi-year or just a bigger batch of envelopes, that’d be great? Thank you.

Yes, Sterling, I think the way to think about this is it’s a little bit of all of the above, first off right. And if you think about our model which is a capacity model, so it’s not a – like an overage model where you see in some businesses. So people are buying capacity, and oftentimes it happens just as you articulated people will come back and they say, “you know we’ve used up our capacity and we need to renew,” or sometime before they get to that point they’ve used up the volume level that they’ve sort of contracted with us to use, and they need to sort of true that up early, and we’ll work with them to do an early renewal. And I think what we are seeing right now more than ever is that because people are putting more and more existing customers of their business processes on with DocuSign, they are more rapidly getting to a place where they’ve used up that capacity. They might have planned it as a three-year growth, and at the end of the year and a half or two, they are not at that new level, so they are coming back to us saying we want to renew and up the volume. Some people do buy by seats, as you said. Most people buy by a message capacity when we are talking about our eSignature business, which of course is still the largest part of our business. But even if someone does buy on a seat basis, we have a reasonable use per seat. So in the end and the right way to think about the business is, it is messaging volume. It is the capacity of agreements they are putting through the system, it is what drives that increase in demand which then leads them to up the contract with us. So that’s kind of what’s happening and my sense about it is, it’s really the faster adoption that’s driving this, that’s coming from people putting more and more of their use cases on to DocuSign.

Got it. Thank you.

Our next question comes from the line of Stan Zlotsky with Morgan Stanley. You may proceed with your question.

Perfect. Thank you so much. Wanted to dig in for a second on just the adoption of the broader Agreement Cloud. What are you guys seeing as far as the ability to upsell the entire Agreement Cloud beyond just eSignatures, things like SpringCM Seal into your rapidly growing installed base? And then I have a quick follow-up.

Let me give you a sense of the arc we’ve had, Stan, over the last year. If you recall when we finished Q4 last year, the message we had was there was a fairly significant acceleration in particularly CLM, which was the major additional Agreement Cloud product we had at that time, and we were quite excited to see that coming into the New Year. And at the beginning of Q1, we saw that trend continuing. After COVID sort of hit and half way through our first quarter, we saw a fairly significant change. We saw customers coming back to us saying, yes, long-term, we want to be Agreement Cloud companies. But right now, we’ve got some critical use cases that we need to get out for signature, and so we saw this dramatic acceleration on the signature side of the business and some slowing of deals and some slowing of those transactions of people who are working with us on the CLM side. I think we’ve seen the same thing throughout the year. And in the last quarter or so, though we started to see that coming back. So, things like the Seal Software, things like CLM, those are now businesses that are returning to the levels we would have expected if they hadn’t been for COVID. And we think CIOs and other business leaders fundamentally had a reaction upfront, which was I can only work on my critical projects. Remember, they were just like DocuSign having to go to a work from home setting and they weren’t in their offices. And so, larger and more complex projects that require a systems integrator or at least some sort of statement of work. Those got pushed out a little bit. Now people are coming back and saying those are critical to our future, and so the Agreement Cloud is right back where we want it to be in terms of top of mind with our customers. And I’ll just give you quick example. I had a call this morning with a very large customer of ours, and they said, “Hey, we are super excited to be now reaccelerating our plans to roll out CLM,” while they have been dramatically increasing their signature usage over the course of the year. They said,”Now is the time. We are ready to reaccelerate with CLM.” And I think that’s what we are going to see throughout the next few quarters.

Perfect. That makes lot of sense. And maybe a quick follow-up on international, 77% growth very nice acceleration in that segment of the business and might [ph] now are going to be at the helm of it. What are you guys seeing as far as the dynamics in international and rest of the world versus the U.S.?

Well, I think there is a couple thoughts I have and then Cynthia chime in with your perspectives on what you are seeing. The first piece is, remember it’s a much smaller number. So, we expect international to grow faster coming off a smaller base, but we also expect it to grow faster, because we have more levers there relative to the U.S. business in that we have additional countries that we are not in, and we have countries that we are very early in that we see an opportunity to really accelerate. That’s I think what you saw in this last quarter is that a lot of the execution efforts we’ve been putting in place over the last several quarters have really come out very nicely in this quarter and popping up to 20%, which is a really important milestone for us. So I still see that happen. I think you are going to see more of the same. You are going to see us doing more in our non-focus eight countries to the newer ones that we’ll be entering primarily using digital as an opportunity to get there in the really efficient way and then in the existing core eight, I think you are going to see an opportunity for us to this U.S. and the other seven to really leverage the investments we’ve made in people and processes investing ahead of that big opportunity for both countries that are substantial as already like you might see in a place like the UK or Canada or earlier like Germany and Japan, we see opportunities for both of those. So, I think you are going to see a really exciting opportunity to continue growth there.

Perfect. Thank you so much.

Our next question comes from the line of Bhavan Suri with William Blair. You may proceed with your question.

Thank you. Thanks for taking my question and Cynthia, good to chat and work with you again. It’s a pleasure. I guess, let me touch on something that maybe Stan and Sterling touched on in a different fashion. I think you made it pretty clear and we all get it, no one is going back to pen and paper, but the growth and the acceleration which has been phenomenal. And I guess, do you feel like demand was pulled forward and how should we think? I know you are not giving guidance, but how should we think about next year, if we did see this acceleration pulls forward vertical that may have been slower to adopt accelerating that. How do we sort of handicap or think about that? And then I’ve got a longer term question.

Sure. And might we had Cynthia chat a little bit about sort of the timing particularly in Q3 and how we saw that play out versus Q4, and going forward, before that let me just give you sort of a high-level perspective. They way I would think about it is TAM based. So, I would start off and say, just talk about signature for a second. When we talk about the sort of $25 billion TAM, that was the same number we’ve been using since the IPO and we continue to see that as a really good metric. We are seeing the opportunity. So, as fast as we are penetrating against that TAM, I think it’s growing as fast. We are still in very early inning. And then when we are opening up the rest of the Agreement Cloud TAM, which is in the order of magnitude of almost doubling that, then we think to ourselves, we are actually not even keeping up with the TAM opportunity which is a high-class problem to have. And so, my view on it is that we’ve seen is not so much a pulling forward of demand that therefore now won’t happen in the future. But that when we are looking at the long game of all of that market opportunity to penetrate, we are just executing at a higher rate today. And so we’ve accelerated that growth, not because we are sort of robbing from the future, but we are just getting closer towards that $25 billion TAM opportunity and with our revenue being under a couple billion and us having such a dramatic market share lead has been such a big portion of the total market. It gives you a sense that I think we can continue to grow at very attractive rates well into the future.

Yes. And let me just – I would just add to that. I mean, Q3 was really strong and we saw broad based demand across the customer base, whether within new customers or in new expansions in upsells. And so, as Dan said, when you think about the TAM and that our market penetration, we are really just scratching the surface and the kind of new customer growth that we are seeing really creates the foundation for kind of future expansions in upsells kind of across the platform which we are pretty excited about. That being said, I do want to point out Q3 was exceptionally strong and we do see fairly renewals and expansions and tightening of deals that made some of the metrics in Q3, particularly strong on a relative basis year-on-year. And so, it’s just something to consider kind of as you look to the future.

Got you. Got you. Now that’s really helpful. And I guess, maybe stepping back a little bit, you touched on AI and Dan you and I talked about this over the years just about sort of the broader opportunity. You explained sort of Seal and sort of some of the ability to re-contract. As you think about the amount of data you have, do you think they got to the point where you start doing sort of even deeper contract analysis, the point of you know, hey, you’ve got a contract for x number of seats, you may not realized it but you have actually exceeded it or you haven’t met it. Actually drilling into some of the numerical data in the contracts and then sort of either flagging it and that’s just one example. But love to incent how deep you think the AI ultimately gets on the used cases, because that obviously ends up being a whole analytics TAM and a contract TAM that we aren’t including today.

Yes. It’s a great way to think about it. And I think the way we have traditionally thought about the first phase of AI was things like the Analyzer product that I described earlier. We said this now gives our legal and business teams the ability to very quickly and efficiently understand where there are sort of outlier clauses or things they should pay particular attention to. But I actually think the most exciting part of that AI is where you are going with your question, which is once we have through a CLM that’s enhanced with our AI capabilities, now companies have the ability to really learn about their business and make intelligent insights about their business based on that body of contracts that they have. And one of my favorite examples is that we see certain institutions saying, I want to understand my risk better, by understanding whether or not I have a whole bunch of contracts that are relevant to a particular sort of cost or something as an example we see this with companies in the chemicals industry to say, oil prices are hugely important to my business cause a variety of contracts have had a way to look across all of them and be thoughtful about what the puts and takes on that, so I can understand the risk and implication to my business by a move in that commodity price. So that’s where I think the really exciting piece comes. And I think you are right, I don’t think we’ve sort of looked at that in our existing TAM, because I don’t think anyone has really built that market to help people do that analysis across all their agreements. And so, I think it is a part of our exciting future.

Great. That’s helpful. Thanks guys. Congrats.

Our next question comes from the line of Alex Zukin with RBC. You may proceed with your question.

Hey. Thanks. Cynthia, I like to add my congratulations and Dan, for you as well. I’ve got a kind of two big picture questions. Dan, if you think about, I mean, going back to kind of Sterling’s question around and even Bhavan’s, the biggest question people have is around the durability of growth and you’ve done a great job I think talking about some of the longer duration tailwinds to your business. How should we think around the puts and takes of certain verticals that may have surprisingly strong capacity increases this year that maybe are difficult comps for next year or the opposite verticals that have come back that you expect to actually sustain some of that capacity growth? Or is it as simple as we are starting to see a baton passing from eSignature to CLM that you see sustaining growth next year? And then I’ve got a quick follow-up.

I think it’s a really interesting question. When we look at it from a vertical standpoint first, as we’ve mentioned before, some of our strongest verticals and that would include financial services, both banking and insurance, that include healthcare life sciences, increasingly government is one we’ve had a lot of enthusiasm about this year, as well. They’ve actually performed incredibly well in this time period for us. Some of the verticals that weren’t as big for us that you would expect to have been hurt of course were, we saw that some small businesses, we definitely saw that travel and hospitality that where people had to sort of put on hold virtually everything as they really new to the trench. So, when you think about it going forward, I don’t expect there could be a significant rotation out of our strong industries and the verticals, again, then we talk about financial services, we talk about healthcare life sciences, I think they are going to be very strong for us next year, as well. The government strength we saw this year, I think, we expect to continue into the year as well. Whether there will be some bounce back with some of the things like travel and hospitality that we are hurt, I mean some energy businesses, as well, I think the answer is, probably. But I don’t know what that cycle time is, I don’t know whether in the first quarter or second quarter or maybe it’s a couple quarters post back, I am not sure how that plays out exactly. But I don’t think that will be a significant driver as the second piece you talked about. And so, as Cynthia just alluded to this in her comment, but if you talk about we’ve been adding such a significant number of new customers on the direct side of our business, 14,000 this quarter. It was 10,000 in each of Q1 and Q2. Those are primarily people coming in with eSignature only, because they need it to get those use cases up and running to get a really important priority for their business in this really challenging time. Those are companies that we are going to aggressively be working a year from now to come back and say, hey, we want to talk to you in your renewal discussions around what additional use cases we have for signature. But also, I must tell you little more about the DocuSign Agreement Cloud and how that’s going to transform your business in a way you might not even have thought about when you became a signature customer. So that’s the place where I think we’ll see a bigger opportunity to really maintain substantial growth as Cynthia described.

Perfect. And then, an even bigger picture question if I might. If you think about other platforms, software platforms have taken off during this pandemic, like the Zoom as an example, one of the things we are most excited about there is this notion of becoming having to control power end marketplace. I look at your business where you have a lot of network effects, is there a way to also create or see the marketplace for services where you start powering and even to some extent monetizing and adding value to both sides of the transaction?

Yes. It’s a super – super interesting, as you said, big picture question. So, when everyone gets newly introduced to DocuSign, I’ll put myself in that category. Four years ago, one of the exciting things is thinking about all the possible places you can take this business and some because of the power of the data that was referred to earlier, but also the network effect that you are sort of describing in what could be a marketplace environment. So, let me really clear. We are a software company. We sell software to companies that use it to run their business. If their customers, their customers’ data, we don’t really think about that as information that’s ours to sort of play with. So, that said, we do believe there are probably interesting opportunities where our customers over time could get comfortable with us say, hey, we want to monetize some of what’s happened here in a different way. But I don’t want to give you the sense that that’s like a priority for us today. We look at the core business we had and we look again it has very large TAM. We need to execute for the next several years to achieve our goals of getting to $5 billion of revenue. And then after that, we are going to be talking about $10 billion in revenue. That’s all going to be very achievable based on our current business model. So it’s not that we are not interesting people here with interesting ideas about the expansion opportunities you are describing. I just want to be clear that’s not part of the core business today. We are a software company. We serve our customers when they buy software from us. That will be, I believe the primary thing we do for the years to come.

Awesome. Great to hear, Dan. We’ll hold you to that $10 billion target. Thanks again.

Any day now. Any day now.

Our next question comes from the line of Karl Keirstead with UBS. You may proceed with your question.

Thank you. And maybe one for Dan, one for Cynthia. Dan, if I could go back to the question of the upsell of the broader Agreement Cloud or CLM suite, you gave some good color. But I am wondering if you could quantify it a little bit. For instance, is there any way that you could quantify what portion of new ACV might be from this versus eSignature or the portion of your largest 100 customers that you’ve successfully upsold the broader Agreement Cloud into anything that might more specifically let us know how far along that journey you are as exciting as it is?

Yes, it’s still pretty early in that journey. We are at a position right now where if you look at our financials, it’s going to be a while before I believe the non-signature part of our business will be meaningful enough to sort of warrant that kind of break out. And when we done acquisitions like, what we did with Spring on the CLM side and what we did with Seal, we sort of shared what kind of the revenue was in those businesses. And if you recall, they are very, very small relative to a business that’s passed the $1 billion last year and before long we’ll be hitting $2 billion. So those are just really, really small at this point in time. The challenge is, initially I thought it would be sooner when we be having that conversation, but the reality is, is if this reacceleration of signature that’s occurred this year, I mean, we started off, I’d be really clear, we started every conversation with a customer today saying, we want to talk to you about the DocuSign Agreement Cloud. That’s every new customer, as well as each customer we come into talk about renewals. But we’ve also this year more than ever, and we’ve finished that sort of explanation or articulation of the power of that Agreement Cloud vision. Most of them this year have said, that’s fantastic and I look forward to doing that, but I need some signature today. And as I tell our sales people, there is only one answer to that question, which is, yes ma’am or yes sir, we’ve got signature for you today. And so, I think you are going to see that, that is going to be the reality of the next I would say several quarters, we are still seeing this demand as just so strong on signature. And it’s almost hard for the folks that are CLM focused or Seal focused to sort of get attention to keep up with that rate. So, Cynthia, you can give a perspective on your thoughts on when we’d be in a position to talk about that further. But I just don’t think we can really quantify it yet, because it’s still so small.

Got it. Okay. And maybe this next question is to, Cynthia, and Cynthia, you are probably going to dodge us, I understand. But, one of the issues with DocuSign shares is that you are about to say some very tough comps starting in Q1 next year. So, I am sure you don’t want to give guide on this call, but is there any framework you can provide? Should we think about sort of a return to pre-COVID sequential growth rates as a starting point to model next year? Is there any framework you could provide before maybe giving more formalized guidance, I presume on the next call?

Yes. That’s right. And thank you for the questions. We’ll be giving guidance for next year on our Q4 call. I think what you got though is we will have tough compares going into next year and even in Q4, our Q4 last year was very strong and it was a significant quarter on its own sight. I would expect going into next year, we’ll be looking at kind of the guidance and we’ll be looking across the matters and as you know we guide to what we see and so, we’ll have that conversation next quarter when we chat with you all.

Yes. I get it. Thank you both.

Our next question comes from the line of Scott Berg with Needham and Company. You may proceed with your question.

Well, this is Alex on for Scott. Thanks for taking my question. As you look back over the last two quarters, either the composition of the initial purchase of the channel that the customers are coming to change meaningfully or have deals been coming in similarly to what pre-pandemic compositions were and or was there just a larger quantity – that’s been happening?

Yes, I can tell you, the deals that we have coming in have had a higher focus on signature in the last few quarters and as I mentioned before, we saw that that was growing for these rest of the Agreement Cloud going up to Q4 of last year and into the beginning of Q1 this year and then Signature has just been explosive for all the good reasons we’ve already talked about. And so, as I stated there is an increase in that mix in that direction. But I would say, the rest of the green side that have been holding it just hasn’t been growing its share the way it had been growing substantially, again off of very, very small base, but growing its position there. And then from a standpoint of the channels, we’ve been investing a lot in the digital channel versus the direct sales channel. It’s still about 15% of our revenue, plus almost 90% of our customers and I think that, we’ve seen real strength there. And I think, we are going to continue to see strength and you are going to see us talking in the future about the investments we want to make to move even more and more of our customer in new acquisitions to come through the digital business, which we think is going to be a super cost-effective way for us to scale our growth.

Yes. One thing I would just add to that is, is that you do look at the customer growth numbers, whether it’s the total or the direct versus digital, you can really see that strength kind of across the board up and down the customer base. And so, it really is kind of broad based within that and that we are seeing across customers and companies.

Great. Thank you. And then just one more for me. Given Salesforce acquisition next week, that seems to have a broader implication to valuation with that. How are you thinking about M&A valuations giving your willing appetite for M&A in the past?

Yes, I think, we’ve been very specific about what we’ve tried to do with our M&A strategy, which is to say, we are not looking from a strategy standpoint for sort of blockbuster deals in terms of buy lots of revenue per se. We’ve been trying to stick to our strategy that we think our customers want us to drive which is the DocuSign Agreement Cloud. So, when we do acquisitions, like you think about the three deals we’ve done since I’ve been here, you’ll see they all have very similar characteristics, which is someone has a product, probably not super mature business, but are products that we look at and say, we need to have that functionality in our Agreement Cloud suite and we could build it on our own, but we think that they have some domain expertise. We think that it built a little bit of a business there. They’ve sort of got a market fit that we are – a product market fit that we are comfortable with. And we think it will accelerate our ability to build out those products and services for our customers. I think we’ll probably be looking at doing the same thing. So in terms of the valuation question, I am certain that the issue we already have today when we acquire a company, and they look at us and they go, we love you to buy us at the same multiple that DocuSign has. I don’t think that’s going to change and I’ll start with that position and politely I’ll probably remind them that we’ve achieved some things in our business as they probably haven’t yet in terms of scale, growth and profitability. And therefore we might not – as we have not yet come close to giving some on the same multiple that we have. But I don’t think other deals like Slack deal will fundamentally change the perspective of valuations and just my view on it is, they paid a slight premium to the peak multiple that Slack had. And that to me is sort of more of the same as opposed to sort of earth shattering multiple. But I think it is obviously clear that for entrepreneurs out there with that business is it probably makes them smile.

Thank you. Thanks.

Our next question comes from the line of Patrick Walravens with JMP Group. You may proceed with your question.

Great. Thank you, and congratulations. So, Dan, what is the top priority today for your development organization, like where are you concentrating your R&D dollars? What do you want the solutions to do in the future that it can’t do today?

So, I put it in three buckets, and I’ll do them in priority order for you since you are asking about top, but it’s kind of hard not to think about them all three, Pat, for me. The first one is, this sort of integration of the AI capability that we had – we purchased with Seal and Analyzer is the first example that’s fantastic. But there is a ton more where we take that AI capability and bring it into our overall product suite, so we have a huge focus on integrating that team and integrating that technology, we think it’s going to be as we talked about on earlier questions, hugely important part of building this significant opportunity that we have. Second piece is, Notary. I think we look at this Notary and a lot of people think of it is a - as a smaller thing. We think it can actually be really significant. There is third-party Notary. There is going to be first-party Notary that we are attacking first, but we think that opportunity there is a very specific thing that we are aggressively going after and then we think about that as being part of our sign business, as opposed to really a separate component. But clearly, it’s an additional growth opportunity for us on the sign side. And then the third piece for me is, it really is about this macro opportunity of the Agreement Cloud and making sure we are stitching together all of the pieces that one thing as we buy these other companies sometimes they are small, they don’t have our kind of uptime capability. They don’t have the quality of service that we have and they are not integrated completely to using partners that we sort of jointly sold before. We have APIs, but we haven’t really fully integrated them into a one platform. And so, I think getting that platform, the place where we want it to be will be the third of those important development priority.

That’s helpful. Alright. Great. Thank you.

Our next question comes from the line of Walter Pritchard with Citi. You may proceed with your question.

Hi. Thank you. First question for Cynthia. Just on NRR, I mean, I think, we’ve seen a lot of times when companies add a lot of customers like that, the number start get bigger that the NRR comes down. You’ve actually seen it go the opposite direction. I am just wondering if you can help us understand sort of the puts and takes over the next couple quarters on NRR as we are looking at that number and how it trends.

Yes. So, I think that, as I said, that we hit a record in net retention numbers this quarter at the 122. It’s a second time we’ve been at 120 or greater and I think that was really driven by the expansions in upsells that we saw across the board, as Dan said, led mainly by eSignature, but also kind of building the – opportunity. So, I would say, as you know, our churn has largely been stable in regards to that, but the expansions are really driven by the sales that we saw in Q3.

Yes. And I think your question about the implication going forward, I think the first implication is just what you said is that our customers are saying they want to do more DocuSign. They want to use this in different ways. And I think we continue to see that both within the signature business and Cynthia was describing, but also customers saying they want to expand into that for the Agreement Cloud, which also gives us another way to turbo charge that number. At the same time, I think as we go forward, we are not at this point changing our historic change that we talked about since the time of the IPO of saying that’s going to be kind of in that piece, 112, 113 on the low end and to get up to a 119 or so on the high end. But let’s get through this year, get through Q4 and see if then maybe want to reassess that because there are some puts and takes. There are some adjustments. We do think about the potential for churn. We don’t have this as long as the pandemic is going to last and I have a lot of enthusiasm about a vaccine. But I think that’s going to, in the next quarter or two, have a significant impact on the economy and we do worry about small businesses. So I think we just want to give us another quarter and then if we are going to take a hard look at that, and assess whether the success we’ve had would lead us to increasing our expectation for that range going forward and I agree with you it’s somewhat unusual to see an accelerating rate there. But I think we are somewhat unusual as a company again that we have such a strong market leadership position and such a large TAM that I think is conceivable that we could continue to see that kind of acceleration.

Got it. And then, actually another question for you, Cynthia. On OpEx, I mean, I think we are seeing a lot of companies in this environment actually see the OpEx growth significantly tampered by COVID lack of see me and so forth. Your OpEx has actually grown in line with what it grew last year and I am just wondering where you sort of hit the gap to accelerate that OpEx? I assume you saw the same lack of see me and so forth. And then, how are you thinking about OpEx going forward and return on the investments that you are making?

Yes. It’s a great question. I think what we are trying to invest for top-line growth, right and sometimes when you had outperformance on the top-line, it’s hard to reinvest that in the quarter at the same REIT. We got 6 points of margin improvement year-on-year. The areas that we are really kind of lean heavily into grow the top-line is around sales and marketing, particularly capacity, customer get backs and then product innovation and all the areas that Dan talked about on one of the earlier questions that we’ll make dollar trade-offs to grow top-line before we improve margin. But I think the outperformance that we are seeing is driving to pretty impressive levels year-on-year.

Great. Thank you.

Our next question comes from the line of Taylor McGinnis with Deutsche Bank. You may proceed with your question.

Yes. Hi. Congrats on the quarter and thanks for taking my question. So, you’ve had a record number of underprice in commercial customer adds the last three quarters. So, just as we look ahead into next year and beyond, can you maybe talk about any expectations you have for how you expect those customers to ramp over time? I am curious if you have seen any changes in trends or trends in the size of lands today and how those customers expect to expand usage and maybe similar to one of the previous questions, what does that say about the durability of the net retention levels we’ve seen recently?

Yes. Interesting there has not been a lot of variation on that front. So the sizes of lands, the pricing of the deals what we’ve been doing, they’ve been then amazingly consistent even though the volume as you point out has been more substantial. There has been a small amount of mix shift, I talked about the direct business being very strong for us. But we’ve also seen those web upgrades that we talked about where we call that positive churn. Someone comes to us on the digital business and they get – they start growing with us and we create a direct relationship with them with the sales person being involved. And so, that’s been accelerating and taking a bigger part of our business sort of pulling them out of the digital business if you will. So, it’s nothing I’d point you, Taylor, that sort of seems to me fundamentally different that would give us any reason to expect that the journey, the customers would take in terms of their growth coming from that land and expand would be different. And then, to get to the second part of your question, what would that implication for the retention rate will be, it maybe some – a mass piece that over my head that I am missing. But I would expect it probably then to not have a significant impact on the retention rate if there was nothing different in the nature of those lands. So, but my guess, would be, but I give you a little more thought, I guess, we wouldn’t see any change in that path that customers that average path, customers are taking with us for this new crop of new customers that are coming in even though they are bigger class, I think – we think they would probably perform the same way previous classes had as well.

Great. Thanks.

Our next question comes from the line of Koji Ikeda with Oppenheimer. You may proceed with your question.

Hey, thanks. Congrats on a great quarter. I wanted to ask you a question on DocuSign’s branding and really specifically internationally, from our lands in the U.S., that it sort of seems like DocuSign has a great chance of becoming the next brand to become a verb like your Xerox, as an Ubers and CleanX maybe it already has, but what about internationally? Does DocuSign already have that sort of market awareness and positioning internationally? Or is that still the comp?

Yes. So it’s great question. In fact, Forrester did couple years ago put out a report saying we already had become a brand. I think that same way you talked about like CleanX or Xerox. So, Koji, we are a step ahead. We already got that piece done in the U.S. as you indicated. We just actually recently did a study couple months ago and Rob Giglio, our CMO looked at our brand in a variety of different markets and what we found is that the aided awareness was quite strong. But the unaided awareness was not as strong as it might be and clearly not as is in the U.S. and the fundamental difference is that, in the U.S. recall that we took a very significant position within the real estate space and so many people when buying homes or leasing apartments got familiar with using DocuSign. So it’s at a point that, if I go some places I work at DocuSign the vast, vast majority of the people get what we call Docu love story and they come back and tell, gosh, I was traveling on a vacation, and was able to buy a home or I started a new job and I was able to sign that when I was traveling and all those wonderful stories that you and I talked about that happens with our brand. If you are in different markets overseas, particularly some of the markets where we have had sort of less growth and I’d put sort of the Germanys and Japans as an example if we don’t have that same brand awareness. It’s starting to happen and we are going to be looking in the coming years to invest in different ways to build that greater brand awareness because the real estate market won’t be the same. It’s just very different in the U.S. than it is most other countries. It won’t give us that same vehicle to do it. We are looking at focusing on our digital business and using digital advertising, which of course is customer acquisition-oriented. But we’ll also have a component of brand building for us. So that’s going to be a big part of our marketing plan in the coming year. And I will look forward to at some point during the year, given the opportunity to share with you all what we are seeing in terms of success of those investments. But the last thing I would tell you is, even though we, in some of these countries do not have the same sort of leadership position of our brand, nobody else does either. So when we get to those other markets, there is no other DocuSign of with that same sort of presence in another country. So we haven’t lost that opportunity to take that global leadership position in each of the key international markets where want to be and that’s what we intend to do just that.

Got it. Got it. Super helpful. And just one follow-up question on the government opportunity. I know you guys been talking about your IO4 government datacenter. Could you please remind us is that certified now? And if it is, how do we think about the certified datacenter and your certification. I mean, could 2021 be an inflection year from the government opportunity? I mean, what sort of go to market investments are you making for that government vertical opportunity. Thanks for taking my questions.

Yes. The IO4 is actually built and it’s operational and we’ve actually put volume through it. There is additional an organization called DIFA more than probably everyone know in the Federal government has a final certification requirement that we expect shortly. But we are already working with agencies on that functionality and capability and we are excited about it the same way when we got Fed ramp certification. We continue to put ourselves in a position with the Federal government, and by the way it does trickle down a lot of states really look at that as being important even if they don’t necessarily require the certification, it gives them comfort. So we see that in local and state governments as well. And we think we feel really good about that positioning as the sort of preeminent provider in the agreement space to the agencies. So, from a standpoint – when you said ‘21, I assume you meant calendar ‘21 not fiscal ’21 and we actually think fiscal ’21 this past year has actually been, I don’t think a lot of inflection point, but incredibly strong for us in government and so many agencies now have requirements to do things, particularly around eSignature with a company like DocuSign. So, we expect that to continue to be a strength. I think we are looking at different ways that we can invest in sort of the marketing to be more effective and getting the breadth of our message out to all the different particularly Federal agencies. And I think, well, I think we’ve done good sales execution. I would say that we have an opportunity to a better job on sort of marketing and business development aspects at sort of the top side of that funnel with the various government agencies. And so, we will look at that in fiscal ’22, calendar ’21 to accelerate that to do even more.

Got it. Thank you for taking my questions. Appreciated.

Thank you, Koji.

[Operator Instructions] Our next question comes from the line of Rishi Jaluria with D.A. Davidson. You may proceed with your question.

Hey guys. Thanks for taking my question and nice to see continued acceleration on the business. I just wanted to go back to the ongoing theme of the questions which is thinking about DocuSign in the post-pandemic world, Dan, what I understand we are not going back to pen and paper we are doing things, but you also talked about how customers are accelerating their digital transformation by three to four years. As you think about that post-pandemic world and given all the high expansion rates and everything you are seeing, does that pace of acceleration maybe slow down now that there is less urgency with the remote work or is there enough opportunity in the land that you’ve gotten with the core digital signature product that you can keep up that sort of acceleration with your cross-selling getting people in the CLM. Maybe help us understand how you think about that? Thanks.

Yes. So let me tell what I know and what I don’t know. What I know is what Cynthia just reported to you which we had some that I can say for the last three quarters, the highest rate of billings growth we’ve ever had in our history and didn’t think that what happened this quarter after last quarter and it did given the compare in Q4, as you see the guide, I don’t think we would say we expect that to happen again by any means next quarter. But the growth has been very strong and has been consistent. So the tricky part to your question is in the post-pandemic, I have no idea when that’s coming and anymore than anything other people on this call, my sense is that, it has been accelerant to our business. So there would be some lack of that accelerant in the – occurring in a post-pandemic world. But at the same time I think the second part of your question which is really important is, we are also hitting our stride with the capabilities we have in the rest of the Agreement Cloud. And we’ve also built a lot of sales capacity right as we’ve seen this opportunity and because the TAM is so big, I think the biggest determinant of our ability to grow is our ability to onboard quality people that can build the software that we need and then represent and sell that software into the marketplace so we can then work with that customers success to drive adoption. So, if we can continue to scale our team effectively, I think we can continue to grow at very exciting rates. So I think that’s kind of how I look at it right now. And I do think it’s going to be a little while before we realize what the new normal will be and what we said the last couple of quarters but I still think is what we say it today is that, at some point, the sort of enormity of the tailwind that is there will be less enormous, but it may be substantial that people have said digital transformation is what I need now and they flip the bet and we will continue to see strong growth of that. But my assumption not really having any detailed ability to guess the future is that that growth will be at a higher rate than we were at pre-COVID happening, but probably not at the same growth rate that we’ve seen in the last few quarters where it’s been amazingly heightened. So, I think it will be very strong growth and probably higher than you’ve seen previously. And so when we look at our revenue growth I think you’ll see next quarter when Cynthia pulls together. I think what you will see is an exciting growth future for us and probably from a billing standpoint, slightly below the incredible numbers we’ve put up the last few quarters.

It’s very helpful. Thank you.

One thing I would just add to that is just keep in mind when we get there we will be at considerable scale from where we were this time last year, right. And so, the growth number that we are posting is – aren’t considerably bigger absolute numbers. And so it’s just something to be mindful of it when you go over it.

Got it. Thanks, Dan and Cynthia.

Our next question comes from the line of Michael Turrin with Wells Fargo Securities. You may proceed with your question.

Hey there. Thanks and good afternoon. Just one from me. We’ve spoken with members of your ecosystem who seem particularly excited about the DocuSign insight technology and opportunity in there? Just wondering if there is more you can tell us around that value proposition and how insight maybe fits with some of the overall Agreement Cloud vision? Thank you.

So, you are saying the Insight as a partner.

Yes. The Seal technology being used, not Insight the partner, the DocuSign insight technology which led – where it’s a feel in for the contract and all those?

Yes, absolutely, sorry, I got confused on the partner side. Yes, so, I would say that, we think it’s a significant part and one of the things that’s interesting when you think about our partners, and this happened before we did the CLM acquisition of Spring CM where people previously had said, yes we love DocuSign, customers love DocuSign, but software is pretty good. It’s pretty easy to implement and there is not really an opportunity for us to make enough money in sort of implementing it. Then with Spring, we saw people say, hey, you are getting into a broader base software tool that requires a significantly SOW to be installed and there is real opportunity. And we saw the SI community sort of work with us more aggressively to become partners and we see that happening more so, because of Insight. And I think people realize there is a lot of opportunity to deliver fantastic value for our end joint customers if they are providing services. So, I one of you have heard us talk about is we are actually trying to decrease even though it’s a small – I am talking about 4% of our revenue being services, decreasing that as a percentage going forward not because we are going to reduce the service as we do, but we are just going to move so much more at the growth into the partner ecosystem. So that’s kind of how we look at that. We think it’s going to be a significant piece with a lot of excitement about partners and particularly SIs that want to leverage Insight into the work they do with our joint customers.

Helpful. Thank you.

Our next question comes from the line of Kirk Materne with Evercore ISI. You may proceed with your question.

Thanks. And thanks for squeezing me in. Dan, I was just curious when you think about all the new direct customers that you’ve blended over the last couple quarters. I realize they don’t have necessarily the time to talk about the full sort of – right now with you. But are they at the right level in the organization to have that question that conversation say a year from now meaning, are you landing higher up in your customer organization, so that when they are raising and coming back around and have that discussion there at the level that the kind of business process changes required or really that could help change the entire business that they have the authority frankly to just starting to have those conversations, because you are obviously getting into CLM. It opens up so many interesting sort of avenues from a business process perspective. So, just sort the sum is, are you landing high enough up to start those conversations? Thanks.

Yes, that’s really thoughtful question. So, first off the danger is, I look at my dataset of the customers I’ve spoken with. We got 34,000 new direct customers in the first nine months. I didn’t talk to too many of them myself. But I would tell you from a trend standpoint I haven’t seen something that feels fundamentally different. So I don’t think we are landing higher or landing lower for that matter. I think our enterprise business has done really well. So it’s probably – maybe - might be a little mix shift from that standpoint to growth there in more senior relationships. But I can tell you this that we do not have field personnel that do not start now every conversation with the Agreement Cloud. And as I mentioned earlier, just we don’t let someone go out and even if get in RFP in or someone calls up and just says, give me signature right now, you are going to listen to a DocuSign Agreement Cloud pitch I mean it’s going to talk to you of how you are going to prepare, sign, act on and manage your agreements with DocuSign. And that wouldn’t have been true a year ago. We wouldn’t had that in the field enabled to do that. So we are actually doing that. So, my guess is that, anything that’s probably a slight, slight move towards people who are coming in whether they are more senior or not, but they are coming in with a mindset that this is an Agreement Cloud company and this is where they should be going with us and that’s why I first see is probably the trend moving in the future.

Okay. Thanks and congrats on the results.

Thank you.

Ladies and gentlemen, we have reached the time limit for this question and answer session. I would like to turn this call back over to management for closing remarks.

Thank you so much, operator. Hey, thank you guys for joining us. As Annie said, we are going to be up on the road some opportunity to see you all. We are obviously incredibly excited about the business and the performance we have. And we’ll look forward to seeing you all in the near future. Cheers.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.