Docusign, Inc. Q2 FY2021 Earnings Call

Good afternoon, everyone. Thank you for being here for DocuSign's Second Quarter Fiscal 2021 Earnings Conference Call. This call is being recorded and will be available for replay in the Investor Relations section of the website after we finish. All participants are currently in a listen-only mode. A question-and-answer session will take place after the formal presentation. I will now turn the call over to Annie Leschin, Head of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, everyone. Welcome to DocuSign's second quarter fiscal year 2021 earnings conference call. On the call with me today, we have DocuSign’s CEO, Dan Springer; and CFO, Mike Sheridan. The press release announcing our second quarter results was issued earlier today and is posted on our Investor Relations website. Before we get started, I’d like to let everyone know that we plan to participate virtually in several events in the upcoming week. First, the DA Davidson’s 19th Annual Software Internet Conference on September 9th, the Citi’s 2020 Global Technology Conference on September 10th, the Deutsche Bank Technology Conference on September 14 and Jefferies Virtual Software Conference on September 15. 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 condition and results of operations are subject to change. Please read and consider the risk factors in our filings with the SEC together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to date, and except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude stock-based compensation expenses, employer payroll tax on employees' 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 information and most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release, which can be found on our website at investor.docusign.com. Now, I'd like to turn the call over to Dan.

Thanks, Annie. Good afternoon, everyone, and welcome to our second-quarter earnings call for fiscal 2021. I appreciate everyone joining us today, and I would like to cover four key areas of the business with you. The evolution of COVID-19 and the impact we are seeing on our business, the essential role that eSignature and the Agreement Cloud continue to play in the digital transformation of our customers' businesses around the world, our recent acquisition to accelerate the opportunity in remote online notary, and a few additions to the Board and executive team, including Mike Sheridan's new international leadership role. So let’s start with the evolving dynamics of the pandemic. It would be an understatement to say that we’re all still experiencing significant changes in the way that we work and live as a result of COVID-19. We’re seeing it with our more than 5,000 employees around the world as we don’t expect to return to an office environment until June of next year. As a team, we’re focused on helping each other adapt to these changing circumstances and to balance the myriad demands on our collective time. We’re seeing it with our customers too. I spoke last quarter about how so many of them faced a sudden need to transition to remote work when the pandemic first hit. Today, that need has evolved from an initial crisis response to a business necessity. And because Agreements are central to doing business, the need to agree electronically and remotely has never been stronger. This is causing greater adoption of our offerings, something we believe will persist beyond the crisis, because in our experience, it’s very rare to see anyone go back to paper once they’ve gone digital. The upside of all this is that DocuSign is becoming an increasingly essential Cloud Software Platform for organizations of all types and sizes, a fact that is well reflected in our Q2 results. Billings grew 61% year-over-year to $406 million and revenue grew 45% to $342 million. We added more than 88,000 new customers, bringing our total to nearly three quarters of a million worldwide. For perspective, we acquired more new customers in the first half of this year than we did in all of last year. Our operating margins and cash flows reached record levels while we continued to make key investments to address the heightened demand. As is evident from these numbers, the trends that emerged in the latter half of Q1 have continued throughout Q2. We’ve seen a sustained rise in demand for our core eSignature offering, not only from new customers but also those expanding across use cases, departments, and boardrooms. The interest in transforming other parts of the agreement process is growing too, and that in turn creates pipeline for the rest of the Agreement Cloud suite. Now let me give you some examples of recent customer wins and expansion. One of our largest retail customers runs a network of healthcare clinics within its stores. When COVID-19 hit, the company accelerated plans to provide telehealth services, using DocuSign eSignature to handle consent and other paperwork remotely. This is a great example of COVID-accelerated demand that we see as durable. Now telehealth will remain after COVID-19, but the paperless processes that came with it will likely end up getting implemented for in-person clinic visits too because the electronic way is more efficient and a better experience than paper and clipboards. Another example is from a large financial institution that’s a long-time DocuSign customer. The Company already used eSignature widely, but when COVID-19 hit, it accelerated plans for further rollouts and together we helped activate 11 new lines of business. This illustrates the pattern we’re seeing where established customers are now bringing eSignature to new divisions, departments, and regions. This was going to happen at some point, but it’s just happening faster now. Finally, I have a few examples from an area of the economy I know you are all interested in, the public sector. To date, we have held a strong competitive position for local, state, and federal levels here in the United States. This quarter, we built on that base with a healthy mix of eSignature and multi-product Agreement Cloud deals, including DocuSign CLM, and our identity family of products. We helped a major city deploy a digitized workflow to handle applications for housing assistance, and we enabled the federal agency to capture applications and distribute relief funds to healthcare providers on the front lines of the Coronavirus response. So, in summary, it was an exceptional quarter for customer growth and expansion. Economic headwinds did cause some to request relief, but that was more than offset by increased demand overall. And while DocuSign faces the same economic uncertainty as everyone else, we remain optimistic about our ability to deliver increasing and durable value, no matter where business is conducted. I'd like to move on now to how we're investing in innovation and new Agreement Cloud product offerings. Specifically, I'd like to talk about our acquisition in July of Liveoak Technologies, an Austin-based start-up that was already a close partner of ours. For agreements that would normally require people to be together in person, Liveoak enables the transaction to be done remotely via video conferencing. The company's platform includes several other technologies specific to remote agreements too, such as video identity verification, collaborative form filling, and integration with DocuSign eSignature, and a detailed audit trail. With this acquisition, we will leverage Liveoak’s technology to accelerate the launch of DocuSign Notary, a solution for remote online notarization where signers and the notary public are in different places. DocuSign Notary will do for notarization what eSignature did for signing. It will enable a dramatically better experience for everyone involved from wherever they may be. We believe this is a natural extension of our eSignature business. And once people use remote online notarization, we don't expect them to go back. In fact, when we announced this move, the customer response was very clearly how soon can I get it? And the answer is DocuSign Notary is slated for beta release later this year. The initial version will be for existing customers that already have a notary capability within their organization or what we call first-party notary. And we expect to enable third-party notaries in the near future. Now, before I close out my remarks, I wanted to share a few enhancements to our board and executive team. I'm thrilled to share that Theresa Briggs and James Beer have recently joined our Board of Directors. Theresa is assuming the role of Audit Committee Chair, and she brings a wealth of financial experience from Deloitte as well as fantastic and relevant Board experience at ServiceNow and Snowflake. James has extensive financial experience as CFO at Atlassian today, previously at American Airlines, McKesson, and Symantec, all of which will be invaluable as we continue to scale our business. On the executive team, we have appointed Kamal Hathi as Chief Technology Officer reporting to Tom Casey. In this new role, Kamal will oversee the development and execution of our overall technology roadmap. Given his 20-plus-year run at Microsoft and his recent experience at Trader Interactive, we believe Kamal is the ideal person to build the platform that powers the Agreement Cloud as it continues to scale. I'm also excited to announce that I'm promoting Mike Sheridan to the role of President of International at DocuSign. And that Cynthia Gaylor, a current board member and audit committee chair will be joining as our new CFO. As you've heard me say in almost every call today, international business is a key growth driver for us, with international growth of over 60% this quarter, and its contribution to our overall business is increasing. Since the beginning of this year, Mike has been spearheading our growth initiatives across EMEA. Given the strong results of his efforts there, we are now broadening his scope to drive growth across all international markets. So I couldn't be more pleased for Mike and for DocuSign to be doubling down on international. Of course, we couldn't do this if we didn't have access to a CFO like Cynthia. She brings more than 25 years of finance and capital markets experience with an extensive background in strategy and operations, as well as a deep understanding of enterprise and consumer software. Most recently, she was the CFO of Pivotal Software, prior to which she led corporate development at Twitter and was a Managing Director in the Morgan Stanley technology business. I'm looking forward to working closely with Cynthia in an operating capacity as we continue to drive the business forward. As Mike and I worked through the scope of his new role over the past few months, we also collaborated with Cynthia, so she could hit the ground running. She will continue to partner closely with Mike and myself over the next several months to ensure a strong and seamless transition. So with that, I'd like to welcome Cynthia to the team and to again congratulate Mike on his new role. I'll close this out by saying that the catalysts for further digital transformation remain strong. And we firmly believe DocuSign can continue to deliver value across the entire agreement cycle. Our strong Q2 combined with the momentum we're seeing as we enter Q3 gives us confidence in the business. While the pandemic continues to have an unpredictable effect on the market at large, we will stay nimble and will continue to do everything we can to help our customers, partners, and employees adapt, transform, and move forward. Now, let me turn it over to Mike for a deeper dive on the financials and some comments on his new role.

Thanks, Dan. And good afternoon, everyone. Before I get into my comments on the quarter, I’d like to thank Dan and the board for entrusting me with my new role as President of International. We have great strength in our international operations today; it has achieved impressive growth over the last several years. I look forward to working with this great team to expand upon the success. I also want to welcome and congratulate Cynthia Gaylor as our new CFO. As Dan mentioned, he and I have had the opportunity over the last couple of years to work with Cynthia as a board member. And during that time, she has become very familiar with DocuSign’s financial operations. I am confident that Cynthia will hit the ground running as she joins the team. Turning to our Q2 results, strong sales led by our eSignature solutions were over 61% year-over-year increase in billings to $406 million. This also drove a 45% year-over-year increase in total revenue to $342 million in the second quarter. Subscription revenue increased 47% year-over-year to $324 million. We saw particular strength outside the U.S. as total international revenue grew over 59% year-over-year to $67 million. This quarter, we added over 88,000 new customers, of those over 10,000 were direct customers, an increase of 55% year-over-year. This brings our total customer base to nearly 749,000 worldwide, with over 99,000 direct customers. Strong eSignature expansions and upsells into our existing customer base led to a record dollar net retention rate of 120% in the quarter. Customers with ACVs greater than $300,000 grew 41% year-over-year to a total of 520 customers. Total non-GAAP gross margin for the second quarter was 78%, consistent with a year ago. Subscription gross margin was 83% compared with 84% a year ago. Margins were impacted by our Seal acquisition as well as by investments we made in our data center capacity, particularly for hosted services, to ensure our ability to meet significantly higher transaction volumes. Non-GAAP operating expenses totaled $233 million, or 68% of total revenue in the quarter, compared with $185 million, or 78% of total revenue in Q2 last year. We generated $34 million in non-GAAP operating profit or a 10% operating margin in the quarter. This compares with an operating loss of less than $1 million in the second quarter last year. Non-GAAP net income was $35 million in the second quarter, compared with $2 million in the second quarter of last year. We ended the quarter with 5,008 employees, an increase of 44% over the second quarter of last year, second quarter increased nearly 350% year-over-year to $118 million compared with $26 million in the same quarter a year ago. Free cash flow came in at $100 million in the quarter compared with $12 million a year ago. CapEx increased during the quarter due to leasehold improvements in Brazil, as well as the completion of our federal data center. Now, let me turn to guidance. We anticipate total revenue of $358 million to $362 million in Q3, and $1.384 billion to $1.388 billion for fiscal 2021. Of this total, we expect subscription revenue of $343 million to $347 million in Q3, and $1.315 billion to $1.319 billion for fiscal 2021. For Billings, we expect $380 million to $390 million in Q3, and $1.623 billion to $1.643 billion for fiscal 2021. We expect non-GAAP gross margin to be 78% to 80% for both Q3 and fiscal 2021. For operating expenses, we expect sales and marketing in the range of 46% to 48% of revenues for Q3 and 45% to 47% for fiscal 2021. R&D in the range of 14% to 16% for Q3 and for fiscal 2021. And finally, G&A in the range of 9% to 11% for Q3 and for fiscal 2021. For Non-GAAP interest and other, we expect $1 million of expense to $1 million of income, and for fiscal 2021 we expect $4 million to $6 million of non-GAAP interest and non-operating income. We expect the tax provision of approximately $2 million to $3 million for Q3, and $7 million to $9 million for fiscal 2021. Finally, we expect fully diluted weighted average shares outstanding of 200 to 205 million shares for Q3 and fiscal 2021. Thanks for joining us today, and we will now open the call for Q&A.

Your first question comes from Sterling Auty with JPMorgan. Please proceed with your question.

Yes, thanks. Hi, guys. First, Mike, congratulations on the promotion and running International. If Cynthia's there, congratulations on the new role as CFO. Just on the idea of International Mike, maybe you can give us an update on the status of where the go-to-market, the percentage of revenue coming from International, and what investments are necessary to drive that business going forward?

Yes, thanks Sterling. A couple of things. I would say that if you look at the scale of International today, it's over $200 million in revenue. And the team is executing very well. I just reported a 59% year-over-year increase in revenues. So there's definitely growth already being achieved. If you think about that scale, it's similar to what DocuSign was about five years ago when I joined DocuSign. At that time, DocuSign was also a very rapidly growing organization. So as we've looked at many of the challenges that we needed to deal with at that stage of the total company, are showing themselves in our International region. So much of the work that I'm going to be doing is going to look a lot like the work that we've been working on over the last several years as we scale the whole business. I think what really makes this work is in my role as CFO, I've worked on so many of the very same kinds of issues. I've developed strong relationships with the executive staff in headquarters, as well as the leaders across the globe. So we have a lot of foundation in terms of what the nature of the investments are going to be. I think we're tracking well. I think a lot of what we're seeing is that the structure of our International operations today looks like what they were when we formed them, four or five, six years ago, which is direct line reporting into headquarters, which is appropriate. But I think what I can bring is a greater focus into that area where I can work with the executive members as well as the regional leaders to figure out how they work together across those reporting lines to figure out what are the right in-region investments and structures that can drive that growth further?

Right. And then one quick follow up in terms of the gross margin, specifically subscription gross margin, comments on kind of where we are in the scale. And what we should expect trend-wise from that line going forward?

Yes, so the guidance that I provided shows that they're going to, for the period of time to the end of this fiscal year stay in those high 70s to low 80 range. There was one impact in Q2 that related to our acquisition of Seal, which had an impact on the margin that was slightly dilutive as we anticipated. The other impact on margins right now is that as I mentioned, we have pretty significant increases in our transaction volumes. And so we're continuing to build out our infrastructure, data center infrastructure, and other to ensure that we kind of keep our SLAs tracking as we're consuming those greater transaction volumes. So we're absorbing those into the existing margins, but I think they're going to be stable at that level to the end of the fiscal year.

Great, thank you.

Your next question comes from line of Stan Zlotsky with Morgan Stanley. Please proceed with your question.

Perfect. Thank you so much, and congratulations on a very strong quarter. From my end, the thing that I wanted to dig into is, what are you seeing as far as the pull-through of the rest of the DocuSign suite with your existing installed base of eSignature customers, so things like your SpringCM CLM product, Seal, and then I have a quick follow up.

Yes. So, Stan, I think what we're seeing is sort of what we talked about last quarter, continue the dramatic pull from our customers and prospects for eSignature with a very high enablement time, very quick ROI, and just the need for people to take that first step into the Agreement Cloud. And as most people do enter into Agreement Cloud, it is through eSignature. That's been the headline story. If we look at our growth, it's been more significant in the traditional aspects of our business than any other part. And we're very clear, when we go to our field, we say that you have to when you talk to customers and you talk to prospects, you start off every conversation with DocuSign Agreement Cloud Company, let me tell you how we're going to help you prepare, sign, act on, and manage your agreement. And if that individual says to you, yes, I’d like to buy some eSignature to get started right now, the only appropriate answer is yes sir, or yes ma'am. I'm happy to sell you some eSignature. That's what we're going to continue to do through this period of time. We want to really support what the customers are needing. But at the same time, as I mentioned up front, we're seeing a lot of people saying the concept of the Agreement Cloud is really something they're embracing. And they're saying we'd love to figure out a way to broaden the relationship with DocuSign. We believe that things like DocuSign CLM, which is the with the SpringCM product we've turned it into here, will continue to be strong. We see a lot of demand; we're building a lot of pipe for it. And the customers that we're bringing in right now, 88,000 new customers, many of those will be prospects for CLM in the future. But we believe that the sales cycle there will always be a little bit longer; they're more complex. Usually, there's a services component, right? So it has to be a statement of work calculated and done. A lot of times I think we're seeing CIOs and CFOs at our customers today are saying I want to do that. But right now, I need to get these signature pieces enabled. Let's do that now and as we get later into the year and more settled and settled down in their company is where I think we'll see increased demand and pull-through of those other components.

Perfect. That makes a lot of sense. And maybe one for Mike. Mike, congratulations on the promotion to lead International. And just on the quarter, net revenue retention, obviously very impressive 120% result. How should we think about net revenue retention moving forward versus your more traditional 112 to 119 range? That's it for me. Thank you.

Yes. Thanks, Dan. Yes, we obviously for the last couple of quarters have been at the higher end of that range. Actually, this quarter, we exceeded it a little bit. I'm not going to update a guidance range for it. We will be upgrading that guidance range when we provide guidance for fiscal 2022. But with that said, I think what we've seen in these recent quarters in terms of growth strengthening around $1 net retention and our ability to upsell into our installed base should keep us on the higher half of that range.

Your next question comes from line of Alex Zukin with RBC. Please proceed with your question.

Hey guys, thanks for taking my questions, and congratulations to everyone on the quarter and the promotions. I have two questions, the first one for Dan. Dan, can you discuss the monthly trends and linearity in both the mid-market and enterprise sectors? Do you think we are past the initial momentum and are now seeing more normalized adoption, or are trends still accelerating?

In terms of our forecasting, we analyze how quarters develop throughout the month. Recently, we've observed positive trends with less backend loading in our quarters. This is particularly true for our web and mobile segments, which generally maintain steady performance. In contrast, enterprise typically shows significant backend loading, but we're noticing more consistency there as well. This improvement can be attributed to our enhanced focus on monthly closes rather than solely quarterly ones. Additionally, I believe demand in the marketplace is stronger, leading to more activity throughout the quarter as customers seek to finalize deals. Overall, while there hasn't been a dramatic shift, we're seeing slight improvements that enhance our predictability for the quarter. Michael, if you have a different perspective, please share it, but I think the changes we've observed are minor, contributing to more reliable forecasting.

Got it. And then maybe for Mike, you look at the billings growth of the first half is nothing short of extraordinary. I don't think anybody would kind of speak otherwise around that. The guidance for the second half does look like a pretty different type of growth trajectory. So I guess the obvious question is, is there any pull-in activities that you saw around large enterprise deals in the first half, because I would assume that you're now getting into your big enterprise renewal conversations in the second half and period, and that should actually potentially drive even more large deal conversations and be a net benefit, even more so for net expansion?

Yes, so I would say a couple things out there. I think in Q3 our guidance has billings growth year-over-year well into the 40 percentile. So I do feel like we're off to a good start in Q3, and it's reflected in the guidance we've talked about in the past. There are a lot of variables Dan alluded to in his comments that we're subject to, like everybody else. We're trying to figure them out in real-time. We feel very good about the second half. We guide what we can see; we don't guess. We always aspire for the highest level of growth we can accomplish, but I think the guidance is reasonably balanced and positive.

Your next question comes from line of Rob Owens with Piper Sandler. Please proceed with your question.

Great, good afternoon, everybody. Wanted to drill down a little bit into the acquisitions. And I guess starting with Seal, obviously; you've announced the big improvements to contract analytics and just wanted to know how far down the path you are at this point, how much raw R&D you're going to have to spend moving forward, and when it's going to kind of achieve your vision?

Well, I think when we talked about Seal starting off, I think the answer is there was only two parts to this. And we're still excited about both. One was this sort of intelligent insights, which is, I think, the core agreement analytics products that we've been partnering with CLM when they were a partner before the acquisition. We continue to see that's going to be something that a lot of our customers are going to want to do, and we're very excited about that. The second piece was about integrating the Seal AI technology into our CLM offering. So as you saw, when the Gartner report came out on CLM, we were the only two companies that were in that upper right-hand quadrant, and we feel we had a fantastic entry with DocuSign CLM. Yet, we also felt internally, the place where we had the biggest improvement opportunity was to really integrate agreement analytics into that CLM product. So that is the second big piece. On the first one, Intelligent Insights, I think we're there. It was a product that was fairly close to standalone; there are some things we needed to do to make it DocuSign quality, let's call that, in terms of things like security and reliability, and we're still making investments on that front. But I would say we say that product is pretty much ready for primetime, and our people are now out aggressively selling that into our base. In terms of the integration with CLM, that's something that's still quarters away. We still have a lot of engineering and R&D work to fulfill that promise we have for our CLM product, where it's going very well. I think we're highly confident, but we think that will be early next year before I can really put my hand on my heart and tell you that work is complete, and the DocuSign CLM product has fully integrated advanced agreement analytics functionality, one that will allow us to be significantly stronger than other players in the market.

I guess quickly on the Liveoak acquisition, how much does that increment your TAM? And can you just speak to the broader opportunity there?

Yes, yes. So TAM is actually a really interesting topic within the notary space. We've taken a couple of looks at it; we've looked at other reports. We're basically saying we think this approaches about a billion dollars. So if you look at this, and you think about it in the construct of a $25 billion TAM for eSignature, it's not a dramatic increase. But it's a really nice piece. The bigger side of it for us is so many of our customers have said to us, we really would love to have a notary capability. Particularly for those larger customers that have what we call first-party notary, they already have a notary capability in their business, they really are excited to integrate this into their offering. We see that a lot with the financial institutions who have been pushing us. So as much as anything, this is like a feature enhancement that we think we'll have a nice billion bucks. That's not a bad increment to go after. But it's not like sort of an earth-shattering change in our business. We look at this as a really nice tuck-in that our customers are asking for. And this good piece for us to go after. Then it opens the opportunity to go after the third-party notary space. We have 10 people tend to think about that, the individual notaries that are driving around for people to do real estate transactions, and we would love to then really transform that business as well, as so many customers have come to us and said in the past, that would be a great opportunity for DocuSign to make their lives a little more agreeable.

Great. Thank you very much.

Your next question comes from line of Pat Walravens with JMP Securities. Please proceed with your question.

Oh, great. Thank you. And congratulations, Mike. I love the move from the financial role to the operating role. That's awesome. So here's my question for you, Dan. And I've asked a bunch of CEOs this question this quarter, which is how do you make DocuSign the best place to work when everybody is working from home?

If I had the answer to that, I would definitely be selling it in many different ways. However, the good news is that we have built a strong culture, which is reflected in our high Glassdoor scores and success in Best Places to Work surveys, as well as in our employee engagement surveys. We have created a fantastic culture where people truly believe in our values, and they are excited to work in a place that prioritizes customer success over financial results. Employees take pride in working here, and that hasn’t changed. It has become more challenging to maintain personal connections when our team members are not coming into the office. Each day that passes, a larger percentage of DocuSign employees have never met their colleagues in person. We are approaching 1,000 new joiners since we transitioned to remote work, which will make it increasingly difficult. I believe the solution lies in enhanced communication; we are exploring different communication strategies. While some aspects are more difficult, others have improved. For instance, in the past, we held an event called Discovering DocuSign where new employees would come to Seattle, meet other new joiners, and hear from various executives over a couple of days. Due to my schedule, I couldn't often attend, but now that we host it remotely, I am able to be present every time. This allows every new DocuSign employee to meet me, creating a connection, and many reach out via email afterward. We have established a different kind of connection. Although it's remote, we are exploring creative communication styles and techniques to ensure that we can continue to support our employees in both their work and personal lives. This won't be a short-term challenge; we will need to keep being creative to maintain the strong relationship we have with our employees.

Your next question comes from line of Walter Pritchard with Citi. Please proceed with your question.

Hi. I have a couple of questions regarding your sales and marketing efforts. I've noticed that your spending in this area has been slowing down over the last three quarters, excluding certain expenses like travel and entertainment. What steps are you taking to enhance your sales capacity in the next six months? Additionally, how do you plan to drive sales as we move towards a more normalized situation with COVID?

Yes. A couple of things. I would say capacity, we are continuing to expand our capacity pretty aggressively. As you saw from the hiring statistics that I had mentioned, we're now over 5,000 employees, and year-over-year growth is 44%, a substantial amount of that is in our go-to-market organization, not just on sales capacity, of course marketing capacity as well and customer success capacity. We are endeavoring to stay ahead of the trends that we're seeing. We're working to see the demand data very carefully to try to forecast trends and get ahead of that with capacity across the business. In terms of what we anticipate post-COVID, I don't know that anybody has a great answer for that. It is our view that as we work through these difficult times, there is a greater awareness of the need to digitize the business. We believe that's going to stay even after things return to whatever normal looks like in the future. We do believe that we're entering into a period of a "new normal." It doesn't necessarily mean that the highs of any particular quarter going to sustain forever. But at the same time, we don't see trends that things are going to return to the way they looked and trended pre-COVID. So we're designing the business. We're designing our marketing activities and our sales activities to stay on top of that as possible.

Okay. Thank you.

Your next question comes from line of Koji Ikeda with Oppenheimer. Please proceed with your question.

Okay. Thanks for taking my question. Nice quarter guys. Congrats to Mike on your new role and congrats Cynthia on your new role too. Just one question from me. On the sales process, we're just thinking that now most of the role has been operating in this new pandemic environment for a while. Have your sales conversations changed significantly? Are you thinking customers taking a setback now and looking at how to optimize workflows more strategically, which could result in more platform-type conversations for you? Or maybe even broader adoption across the organization, the starting point for implementing DocuSign?

Yes. Koji, it’s a really interesting question. One thing that's always hard in answering a question around sort of more kind of shifts like that is what's behind? Is it maturation of our business? Is it related to COVID, etcetera? My view is from a COVID standpoint, as the nature of your question is we went through a period of time where people just got very focused six months ago on we need to get things up and going quickly. We need to work in a remote environment. There were certain use cases that we can't run our business and figure them out. So it was not about that naval gazing and deep thought about their processes. It's about getting some of these primarily eSignature workflows in place. While I think there is still some of that for sure, that has definitely calmed down. The number of people that are rushing to us saying, I need to make a quick adjustment to be able to deal with this, they haven't got it done by now, and they've missed that window. We are seeing now as people saying, wow, this is fantastic. There are more places where I could leverage this in my business. We're looking at expansion as we talked about of use cases within our base to more and more places that, as I said before. We only think they would have gotten there eventually. It just accelerated those. We're continuing to see that acceleration of those workflows into DocuSign because they realize how beneficial they are to their business. From the standpoint of that more platform thinking, I don't know that I would say I've seen that increase and I don't know if I say this increase would be due to the COVID. The natural maturation for a lot of folks with us around the Agreement Cloud opportunity is as they start hearing us described this future. They say while I could see you as a more strategic part of my IT infrastructure and my business process infrastructure. I think that's occurring more and more. But I think that's more to do with the fact that we're just getting bigger and having larger relationships with companies as we scale. You look at that number of customers above $300,000 which is just sort of one metric, and it keeps growing substantially. I think that's driving it more than a COVID reaction. But again, it's hard to sort of separate out each of those components. But that would be my view.

Great. Thanks for taking my question. Appreciate it.

Your next question comes from line of Taylor McGinnis with Deutsche Bank. Please proceed with your question.

Yes. Hi. Thanks so much for taking my question. And congrats again on a really strong quarter. So net retention rates have been really strong the last couple quarters. But I believe so far that's largely been driven by eSignature related expansions. So, I'm just curious what kind of levels you think net retention could hit once things like SpringCM or the broader Agreement Cloud start to become larger contributors? Or maybe anything that you can just share on what those deal expansions have looked like so far, when they include those products relative to just eSignature?

Hi, Taylor. Yes, a couple of things. If you look at the scale of our eSignature business compared to the scale of the CLM, and the data analytics or agreements, sorry, agreement analytics businesses, eSignature is dramatically larger. So that statistic is going to largely succeed or not succeed based upon our success in eSignature, our upsells or volume expansions and all of those things. That is not to say that the Agreement Cloud expansions are not important. They are. But that is a much longer-term trajectory before you'll start to see them have a meaningful movement in a broader statistic like that. So as we talked about those businesses and how they're growing and the comments that Dan made, I think those are all critical. But in terms of the near-term quarter-to-quarter impact on something like dollar net retention, eSignature volumes are just going to overwhelm it. So you won't see it in something like that.

Got it. That makes a ton of sense. And then my last question is, I thought the inflection in international growth was really interesting. So just curious if there was any catalysts in the demand environment there that drove that or if you guys made any changes on the go-to-market front? Or if there was anything to call in particular?

I think Mike's involvement in international, Taylor; it's clearly been the driver in the increased growth there. Around the company, we couldn't be more excited that he's off to such a good start. From your sense about the market, I think it's mostly Mike's execution. But for your sense about the market, I don't think we have seen anything different. We have seen different levels of success in different geographies. It was phenomenal for us to be able to say that every single geography that we have was above plan in the quarter. We’re in a bunch of geographies. So that's pretty impressive. I would tell you there's some markets that I was going to point to, one that was particularly strong, I would say LATAM, and our Brazil team crushed it. But if I said to the area where I saw the most improvement, because we've been crushing it there for a while, I'd say was Europe. I think, again, with tongue out of my cheek, I'll say, I do think Mike's leadership in Europe has helped us perform a little better there and execute better. We're so excited for this broader expansion of his role to all of international. But I also do think that we saw some positive demand characteristics across Europe as well. So those are my observations, and Mike, I don't know if you have anything different you're seeing.

Yes. I would add, I think a couple of things. One is going back to the capacity question earlier; we have been building international capacity. As we see some of that capacity get through their ramp, we're starting to see better productivity. That's a contributor. I think the pandemic impact is a global impact; we're seeing that. Remember our international business in terms of scale isn't as large as the overall. So having a higher percentage on a smaller scale is also a factor.

Your next question comes from line of Rishi Jaluria with Research Analysts. Proceed with your question.

Hi, this is Rishi Jaluria from D.A. Davidson. Thanks so much for taking my questions. And congrats to both Mike and Cynthia on your new roles. Wanted to start by talking about the Liveoak acquisition. Maybe just from a technology perspective, I know you can do a video through that. Are there plans to kind of integrate that with other solutions out there, especially in this environment with so many people using tools like Zoom to start, so that it's very natively integrated like you've been doing with the core DocuSign eSignature product for so long? And then alongside on Liveoak, I see on their customer base, a lot of financial services and real estate, so some of your strongest verticals. But do you see other verticals where there's potential to expand the solution into? And then I've got a follow-up.

Sure. I have a few thoughts on that. First, you’ve accurately identified the potential for collaboration through video conferencing. We are committed to maintaining an open system. In fact, I had a discussion with Eric, the CEO of Zoom, and he is very enthusiastic, as are we, about expanding our partnership to include their platform. It has been very successful to integrate it with DocuSign for these types of programs. We think the tools developed by Liveoak are impressive and have mentioned some in my prepared remarks, particularly regarding enhancing collaboration. For example, in financial services, if a large bank like Bank of America is facing branch closures, there’s a need to quickly adapt to remote account openings. We believe that even after COVID, the value of remote options will remain, allowing customers to open accounts without necessarily visiting a branch. The same employee can manage these tasks whether they are at the branch or in a call center, which we see as a significant advantage. We aim to develop this as an internal offering. Notarization is just one aspect of this; we believe it will lay the groundwork for others to build upon it, as you indicated. Besides financial services, we see significant potential in telecommunications and healthcare, particularly in telehealth, where leveraging similar technologies can enhance experiences for users. Overall, while we expect broad applications, financial services will likely be where we initially concentrate our joint efforts.

Great. That's really helpful. And then just kind of a little bit of a financial question. But we've seen contract lengths kind of ticked down a little bit, which is, I think, to be expected in this environment. Just mechanically, how should it be thinking about the potential headwinds that might have on future cash flow? Thanks.

Hi. Yes, there are a couple of points to consider. Regarding cash flow, even with multiyear contracts, we account for that annually. Therefore, we don't expect it to significantly affect cash flow trends. As for contract length, it did decrease slightly to 17 months from 18 months last quarter. In our bookings, we are noticing some delays with small to mid-sized deals, which is impacting us. Additionally, larger enterprises are being more cautious with the length of contracts they are willing to sign amidst the current economic challenges. These changes are not huge, but they are influencing that particular statistic.

Wonderful. Thank you guys.

Your next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Thanks. And congrats on the quarter and on the new roles for Mike and Cynthia. Dan, I wanted to ask a question. Obviously, you guys have signed up a tremendous amount of new customers this year. When you think about those customers renewing, hopefully in a year from now, or maybe even sooner, is there a cadence when if they didn't want to discuss the broader Agreement Cloud that they start thinking about it, meaning, when you think about 12 months from now and you have all these new customers, you just signed up. I'm just kind of curious, historically, what you've seen in terms of the cadence, whether it's been six, nine, 12, 18 months. When you go back into those accounts, is it the same person? Or is your account manager, you really need to navigate the organization to maybe sell a little bit higher when you start talking about the Agreement Cloud? I'm just kind of curious about how that maybe plays out in your mind over the next year or two? Thanks.

Yes, so it's a good question. As you might imagine, the first answer is it depends, right? It depends a lot on the size of the customer and the vertical for sure. But I'll try to give you some again higher-level; we'll call them averages to give you some perspective about it. In general, customers come in and they sign up. There is some process before adoption happens. Is one of the reasons you've heard Mike talk a lot about our investments in customer success, the faster we get people to adopt, they quickly get that strong ROI people get from DocuSign. Then they start looking for more opportunities to grow. What we tend to find is on the smaller customers, they're there within a month. They adopted it and go quickly. However, for some of the larger enterprise customers, it might take several months because they have a program manager that gets involved. So there is a lot of processes that occur. That is probably the biggest determinant of why there's variability in the timeframes. But once people start adopting and driving the success of those first use cases, the next biggest determinant on the timing is how much they bought. So some people had that initial land that was quite small, it was conservative, then before they get to the end of the year, they're coming back and they're buying more if they implement that first project effectively as most do. Some people have said, we want to be aspirational in our first buy. They might be in a situation where they might also do a multiyear contract if it's an enterprise player, but they might do a three-year buy, and they won't be talking to us for two years. So there's a lot of variability depending on how much they bought and how aspirational they were in those initial volumes. And that's a very signature-centric answer. Let me switch gears and talk a little about the rest of the Agreement Cloud. So again, if you're an SMB that came to us on the web, we're not trying to sell you a broader Agreement Cloud story at this point. We have some additional enhancements that we have specifically on the Salesforce ecosystem, as an example, we have a prepare product for Salesforce, which is great, but we're not generally coming back to those people and saying, let's talk to you about CLM because it's a small business. Whereas for larger customers, if they did land with signature, particularly what's happened with COVID, as I talked about earlier, so many of the lands have been signature-centric. We now will be coming back to them six, nine months in saying let's talk about expansion and signature, because that's our land-and-expand model. We will also start reminding them that one of the reasons they went with DocuSign was they were excited about that longer-term vision of the Agreement Cloud. They’ll start to see it starting to play. Across that year, it'll be weighted towards the end of the year. You'll see us in that nine, 12 months from today, with the wins we're bringing in, looking for expansion opportunities in signature for all of them, and signature plus Agreement Cloud expansion for the mid-market and larger customers.

That's very helpful. And if I guess just one other follow up. Obviously, incredible growth this year, you're much bigger company; you're going cash flow at a faster rate. Does that change any of the way you think about M&A or some of the things you might have had five years from now maybe pulling those forward in terms of either it sounds like Mike going international, sounds like you're speeding that process up? Or is there anything I guess from a balance sheet perspective that really changes just given the kind of growth you've had, and frankly, the higher free cash flow that you're now generating?

Yes. Nothing from me that's in a significant way. One of the things we started doing acquisitions two years ago, when we announced SpringCM and sort of the newer DocuSign, or at least within my time here coming up on four years, was saying, hey, guys, we're not going to become some massive acquisition machine. We want to do as smart deals that we can digest effectively. We want to have a very high batting average on successful deals. We've now done our third deal. To be honest, I would have thought we might have been a little bit of a wait before the third deal. The deal was not very large for bringing in the notary capability with Liveoak. But I feel good about the deal sizes we're doing. It's true with our balance sheet, we could probably open ourselves up to much larger deals economically, but we don't really think about it economically. We think about it from a customer success standpoint, what are our customers want, and fulfilling our vision of the Agreement Cloud. One of the things that's tricky is, when you're finding all the companies in the broadly defined Agreement Cloud, there aren't other DocuSigns. There aren't other very large players. I don't think there's a sort of a population of big deals that we would see at this point in time as being in that Agreement Cloud vision. Is it possible over time to continue to grow and expand and become more expansionary than the Agreement Cloud, and then therefore look at maybe more significant-sized deals? I wouldn't rule that out. But as I look into what's visible, I feel really good about the strategy we have right now. The deals we're doing, I think, are high quality. They're on strategy for us. I think if we look out into the possible future deals, they'll probably be more in that ballpark of size because that's just the size of where companies are in the Agreement Cloud landscape. I don’t know, Mike, if you have any different views, but I feel good about where we are right now.

Your next question comes from lines of Kash Rangan with Bank of America Merrill Lynch. Please proceed with your question.

Thank you very much. Congratulations on a superb quarter. You ramped up your Op margins, you ramp up your free cash flows, your sales productivity is, at least from what I can tell, all time high. I'm curious to see if you can expand upon the things that helped sales productivity in the quarter whether you measure through the lens of billings or revenue. And how sustainable are these trends? And finally, does it change your view of the long term operating model to the upside?

Let me discuss the sales productivity aspect. Mike can share his thoughts on whether he's considering changes to our long-term operating model. Kash, I'm not entirely certain, but we'll see. As for my perspective, I want to make it clear that while we've seen success in sales productivity, it has been a secondary goal. Our primary focus has been on growth, and we've communicated our intention to continue investing to achieve that growth. At our current scale, we recognize opportunities for productivity improvements, but it remains secondary to addressing the significant demand. With our scale, these productivity gains tend to come naturally. I believe we haven't drastically altered our approach; however, I've been encouraging the team to consider overlays and complexity as we expand. It's essential to avoid overwhelming complexity that could hinder our ability to execute effectively. I think our emphasis on simplification is having a positive effect. Scale is another factor boosting productivity. Regarding its impact on the long-term model, I would say we anticipated this development. It's aligning with our long-term projections and the plan that Mike developed, but I’ll let him comment if his perspective differs.

No. It just as a reminder, our long-term operating margin model shows 20% to 25% over a roughly four-year timeframe, and I think we're still tracking to that target during that period of time. As we've always said, it's been a period where we anticipate an opportunity for high growth and we're going to continue to invest in all those drivers.

Your next question comes from line of Michael Turrin with Wells Fargo. Please proceed with your question.

Hey, thanks. Good afternoon. Certainly an impressive quarter. So congrats to the team from my end as well. Maybe another one on the execution side; was hoping you could maybe compare and contrast the first half of the year given the bigger surge in demand you're seeing. We all saw a big shift in having to pivot over to remote work on the fly last quarter. Were there things you were able to improve internally here in Q2 as we settle into this new way of working that made the execution even better given the acceleration you're delivering here on some of the key metrics? Thank you.

Again, my point of view is I think we're continuing to execute well. I think it's harder, quite frankly, doing everything in a remote environment. I think it's taxing on our people. It's harder work for all of us. To be blunt about it, I think we mostly like to get back into a situation where we are mostly able to be in the office, I think though, the world has changed a little bit. We probably have in the longer run, highly productive system, where some people are increasing their time out of the office, because we've shown that we can still be productive in that environment. But from an efficiency standpoint, I think we'd actually be now even more efficient if we could be back in the office and have some of those collaboration benefits. From the standpoint of translating to the financial results, again, I don't think there's anything that's played out in these financials that I would say accelerated efficiency because of remote work. I suppose the only thing I would point to as sort of an obvious is that we don't have the T&E expense. That has been somewhat of an improvement. We've actually spent some of those savings on other things, both funding growth, as well as supporting our employees in terms of things like helping them with a DocuSign cares program, helping them set up in a home office in a way that allows them to be productive at home. I don't have anything else that would seem different to me from that standpoint. I don't know if you or Mike want to add.

The only other thing I would mention is we are learning as we go. We see things, for example, like attrition rates that we plan and budget for. We were outperforming those. Our attrition is much better than what was planned. A, because I think people really like working for DocuSign and B, I think in the current environment, people aren't as mobile as they would be during the norm. We're seeing things like our spending related to paid time off; people aren't taking as much paid time off, because of course, they're working from home, and that just doesn't make a lot of sense. There are not a lot of places to travel. So the endpoint is there are a lot of the ins and outs that we're seeing in the model. We see that as we plan for fiscal 2022, and we're obviously entering that phase right now. You're right; there is a lot of learning going on. That's going to allow us to hit the mark in terms of how we should think about spending for the coming year.

Your next question comes from line of Shebly Seyrafi with FBN Securities. Please proceed with your question.

Yes. So thank you very much. So this is quite an impressive report against a more difficult comparison. You accelerated your growth. And the acceleration was broad-based. It was indirect. It was in web. It was international. My question is how much of this acceleration was due to COVID? And how much was due to other factors, like you've mentioned, increased demand seen in Europe?

Yes. I would say, Shebly, of course, we're looking as carefully as we can into the numbers to try to glean that out. I am comfortable saying the following: We came into the year with a fiscal plan. With or without COVID, our performance is exceeding that plan across the globe. Obviously, once you put the pandemic effect and work-from-home effect on top of that, it's generating these much higher growth numbers. But we were exceeding our planned results pre and post.

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Dan Springer for closing remarks.

Thank you very much. I really appreciate you all being here today. It's been a fantastic quarter. We will look forward to seeing you, mostly likely through video in the coming months until we see you next quarter. Just one last comment, I'd like to thank Mike again for his incredible leadership over five years of stewarding the financial ship here. I can't tell you how excited I am to look forward as we build the international business together. Thank you all.

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