Docusign, Inc. Q2 FY2025 Earnings Call

Good afternoon, everyone, and thank you for participating in Docusign's Second Quarter Fiscal Year '25 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. Please note that this call is being recorded and will be available for replay on the Investor Relations section of our website after the call. I will now turn the call over to Heather Harwood, Head of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, and welcome to Docusign's Q2 fiscal 2025 earnings call. Joining me on today's call are Docusign's CEO, Allan Thygesen; and CFO, Blake Grayson. The press release announcing our second quarter fiscal 2025 results was issued earlier today and is posted on our Investor Relations website, as well as the published version of our prepared remarks. Before we begin, let me remind everyone that some of the 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 regarding the pace of product innovation and factors affecting customer demand are based on our best estimates at this time and are therefore 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. In addition, we provide non-GAAP weighted-average share counts and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, a 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, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's earnings press release, which can be found on our website at investor.docusign.com. I'd now like to turn the call over to Allan. Allan?

Thank you, Heather, and good afternoon, everyone. Docusign drove another quarter of improved stability and greater efficiency while introducing the new IAM platform that we believe will be the foundation for future growth. During Q2, revenue was $736 million, up 7% year-over-year for the second consecutive quarter. Dollar net retention was consistent versus Q1 at 99%. Continued improvements in customer usage and utilization further supported stability, which Blake will describe in more detail. Non-GAAP operating margins increased to 32%, an all-time high and significant improvement versus Q2 fiscal '24 at 25%. Free cash flow generation remained strong, approaching $200 million, resulting in a 27% yield for the quarter. This efficiency allowed us to opportunistically allocate capital by repurchasing $200 million worth of shares during Q2. Our strong results reflect continued progress across our three strategic pillars: accelerating product innovation, evolving omnichannel go-to-market capabilities, and improving operating efficiency. Let's turn to product innovation. In Q2, we shipped the first version of our Intelligent Agreement Management, or IAM, platform. This is the most important launch in Docusign's recent history because of the value we believe IAM will create for our customers. IAM addresses the massive $2 trillion in lost economic value each year experienced by organizations when managing agreements. In Q2, IAM launched to small and mid-sized commercial customers in the United States, Canada, and Australia. It's very early days, but the initial results and customer feedback are promising. So far, IAM customer win rates are higher, average deal sizes are larger, and time to close with customers is faster. Customer deal count and bookings are increasing month over month, with August being larger than June and July combined. Overall, preliminary IAM adoption momentum is tracking as planned, and we look forward to the continued rollout to additional segments and geographies throughout the rest of the fiscal year. Customer feedback captures the value IAM is already delivering, with customers focused on strong ease of use and fast time to value. Legal service provider Mass Tort Strategies tells us that with IAM, they anticipate saving thousands annually now that their completed agreements are organized and easily searchable. And midwestern healthcare provider Welia Health said that they were impressed by how quickly they put IAM to use and that, within a few days, they were using Docusign Navigator as the organization's central agreement repository. We're focused on continuously introducing and enhancing IAM's value to more customers. Before the end of this fiscal year, we will make IAM available for departmental use within large enterprise customers, in multiple languages and additional geographies, and for purchase via self-serve channels. In 2025, we will unlock moving from department-level adoption to organization-wide deployments in large enterprises, add more languages, and introduce more features to escape the agreement trap. Our rollout timeline allows us to use customer feedback to refine our product and go-to-market strategies, ensuring we meet customer needs with a long-term, sustainable approach. Let's turn to the second strategic pillar, our omnichannel go-to-market. In Q2, we drove further stabilization in our core business. Overall customer growth remained consistent at 11% year-over-year for the fourth consecutive quarter, while envelopes sent and contract utilization modestly improved compared to last year. Digital and international revenue continued to outpace overall growth and remain large, long-term opportunities. In addition, we are focused on continuing to upgrade and enable our sales, partner, and self-serve strategies to sell IAM. The direct salesforce continued to show improved execution. Direct customer growth remained strong with a 12% year-over-year increase. And large value customers with over $300,000 in ACV saw modest acceleration, benefiting from the impact of our retention efforts. CLM continued to outpace overall revenue growth. Lastly, IAM enablement across our salesforce was a key priority in Q2. In Q3, the remaining teams in our salesforce will complete IAM training and certification, including our enterprise-focused teams and teams outside the initial launch markets. Turning to our other routes to market, this quarter we're providing more context on the partner and self-serve channels where we've increased focus and investment. In the partner channel, we've strengthened our strategic relationships with Microsoft, SAP, and Salesforce. Our Microsoft collaboration now includes dedicated co-selling through the Azure Marketplace and Copilot integrations, driving increased customer volume. We aim to build similar success with SAP, especially with the newly launched CLM-Ariba integration announced at SAP's Sapphire events. Also, we continued to partner deeply with Salesforce, which remains our largest go-to-market partnership with tens of thousands of jointly deployed customers. We'll have more to share about this partnership at their Dreamforce event in a few weeks. Improving our partner and sales channels has led to enterprise customers adopting Docusign across a growing set of use cases. A prime example is Canva, the leading online design and visual communication platform, which has deeply integrated Docusign workflows to support its rapid growth. This quarter, the Microsoft integrations and co-selling agreements led to deeper agreements with global banking and insurance customers, as well as with a Fortune 100 retailer. A leading human capital management provider has integrated eSignature functionality directly into its core product offering, allowing its customers to drive faster onboarding with new employees. We anticipate continued partner-enabled usage evolution as IAM rolls out. Evolving our self-serve capability has also been an important priority. Over the last 12 months, we've invested in building this infrastructure. Digital revenue growth has outpaced overall growth, demonstrating continued positive impact from our focus on e-commerce and execution. Our goal is to continuously improve the ability for customers to discover, try, use, and buy our products digitally, further enabling greater scale and efficiency across our business. Today, new and existing customers worldwide can use our digital platform to more easily move from free trials to paid accounts, upgrade their plans, and expand to additional products such as ID Verification and SMS Delivery, all without engaging a sales rep. We've introduced improved personalization on Docusign.com and integrated new payment options in international markets to improve conversion rates. We expect continued strong e-commerce execution and delivery as we expand our digital growth and prepare for self-service IAM purchasing. We're excited to welcome new Chief Revenue Officer, Paula Hansen, and Chief Technology Officer, Sagnik Nandy, who've both hit the ground running after starting in early August. Paula and Sagnik bring large-scale experience selling and building enterprise-customer solutions, and complete an already strong leadership team. We are excited to continue our transformation journey. IAM represents a massive opportunity to leverage our market leadership and unlock incredible value for customers as the system of record for agreements. We will continue to evolve, remain efficient, and invest for the future. Thank you to our entire team for bringing the IAM vision to life with our customers. We're proud of what we've accomplished, and we're just getting started. With that, let me turn it over to Blake.

Thanks, Allan, and good afternoon, everyone. Our Q2 results continue to show stabilization in our core business. Besides the resiliency demonstrated by a number of key metrics, we continued to focus on balancing efficiency gains with investment in long-term growth. We achieved that balance in Q2 when we began the launch of our new IAM platform to general availability, while producing the highest operating margin in our company's history. With regards to IAM, we've engaged with a portion of customers over the past three months and we're encouraged by early traction and customer feedback. We're in the very early days of both our multi-year transition to IAM and in realizing our aspiration of re-accelerating our long-term growth. I'm excited to partner with our team to execute against this strategy. Q2 total revenue of $736 million and subscription revenue of $717 million, both grew 7% year-over-year. Billings were $725 million, up 2% year-over-year. As mentioned on last quarter's call, the growth rate of Q2 billings year-over-year was impacted by last year's strong on-time renewal performance and the timing impacts of various customer contracts this year. Also, as mentioned previously, we expect Q2 billings growth to be our lowest quarterly growth rate in fiscal year 2025. International revenue represented 28% of total revenue and grew at approximately double the rate of our overall revenue. Our global expansion strategy is an important component of our long-term vision, and we are optimistic about the continued growth opportunities in our international markets. This includes IAM, which will launch in the majority of our direct international markets by the end of this fiscal year. In addition, investments in our PLG motion continue to deliver results, and in Q2, digital revenue grew at more than double the rate of direct revenue. Specifically concerning PLG, we are improving mechanisms to allow self-service plan upgrades, and our mix of billings this quarter was slightly more weighted to digital than in the prior year. Stabilizing trends continued from Q1 into Q2 as we saw year-over-year improvements in usage, utilization, and customer growth. That momentum underscores the resiliency of our business despite continued macro uncertainty. Dollar net retention rate was 99% in Q2, consistent with Q1. We expect that these recent stabilization trends will continue, and we anticipate our dollar net retention rate to remain consistent through the remainder of fiscal year 2025. Usage trends continue to show modest improvement. The volume of envelopes sent increased year-over-year for the third consecutive quarter, while consumption, a measure of utilization, also continued to improve year-over-year, particularly in verticals like healthcare, insurance and technology. We continued to see strong growth and stability in new customer acquisition. In Q2, total customers again grew by 11% year-over-year to approximately 1.6 million. The continued momentum in overall customer growth gives us confidence that our strategy of both self-service and direct sales options is resonating across segments and geographies. The unique scale and breadth of our customer base provides a strong foundation for the measured rollout of the IAM platform. The number of large customers spending over $300,000 annually increased year-over-year and quarter-over-quarter to 1,066 in Q2. Additionally, bookings from customers with total contract value over $1 million continued to grow at a double-digit pace year-over-year. Turning to the financials, our focus on operating efficiency continued to yield strong results this quarter. Non-GAAP gross margin for Q2 was 82.2%, relatively in-line with the prior year. We delivered record-high non-GAAP operating income in Q2 at $237 million, up 40% year-over-year, resulting in a 32.2% operating margin, of which approximately 150 basis points was attributable to one-time items associated with professional fees, which primarily consisted of insurance reimbursements and the release of a litigation reserve. Q2 operating margin was up 750 basis points versus last year and a significant improvement over the 18.0% operating margin generated two years ago. Our improvement over the previous year underscores our ability to grow efficiently while continuing to invest in critical areas like R&D. We do expect operating margin to decline slightly in the second half of the year as we invest to support our IAM launch and continued rollout, although we still expect to exit the year with improving operating margins on a year-over-year basis. We ended Q2 with 6,612 employees versus 6,748 at this time last year, approximately 2% lower, reflecting our disciplined approach to hiring and resource allocation. A measured approach to hiring to support our strategic initiatives, including R&D and PLG, as well as the Lexion acquisition, drove the quarter-over-quarter increase in headcount. In terms of cash flow, Q2 was another strong quarter. We delivered $198 million of free cash flow, a 27% margin, which was in line with Q2 of last year. As expected, our free cash flow yield moderated from Q1 as we compare against the significant working capital improvements from prior quarters. That said, our collections efficiency remains strong, with less than 1% of our accounts receivable over 90 days past due. We expect that the Q3 cash flow yield will decrease versus Q2 due to the timing of compensation payments and investments we're making in the second half of this year. We continue to expect that our fiscal year 2025 free cash flow yield will more closely match our full year non-GAAP operating margin. Our balance sheet showed continued strength, ending the quarter with $1 billion of cash, cash equivalents, and investments. We have no debt on the balance sheet. Because of the stability in our balance sheet and consistency in free cash flow generation, we can continue investing in the business and opportunistically return cash to shareholders. In Q2, we accelerated the pace of our buyback activity and repurchased a record $200 million in share value, effectively redeploying 100% of our quarterly free cash flow generation back to shareholders. While this rate will fluctuate as we pursue an opportunistic strategy balanced against investment initiatives and the operating environment, we believe this activity further demonstrates our commitment to delivering value to shareholders. We also used $39 million in cash to pay taxes due on RSU settlements, reducing the dilutive impact of our equity programs. Non-GAAP diluted EPS for Q2 was $0.97, a $0.25 per share improvement from $0.72 last year. GAAP diluted EPS was $4.26 versus $0.04 last year. Related to our GAAP financials, as discussed last quarter, we released a valuation allowance on certain existing deferred tax assets. This had a GAAP-only financial impact of decreasing our non-cash tax expense by approximately $838 million. Diluted weighted average shares were flat year-over-year at 208 million shares as our repurchase activity was weighted towards the latter portion of Q2. We are pleased with the improvements in both non-GAAP and GAAP profitability, and we are actively managing the impact of dilution and cost of our equity programs. With that, let me turn to guidance. For Q3 '25 and fiscal year '25, we expect: Total revenue of $743 million to $747 million in Q3, or a 6% year-over-year increase at the midpoint. For fiscal year 2025, we expect revenue between $2.940 billion to $2.952 billion, or a 7% year-over-year increase at the midpoint. Of this, we expect subscription revenue of $722 million to $726 million in Q3, or a 6% year-over-year increase at the midpoint, and $2.864 billion to $2.876 billion for fiscal 2025, or a 7% year-over-year increase at the midpoint. For billings, we expect $710 million to $720 million in Q3 and $2.990 billion to $3.030 billion for fiscal 2025. As continually shown in recent quarters and years, billings are heavily impacted by the timing of customer renewals, leading to meaningful variability from period to period. This affects both year-over-year and sequential quarter-over-quarter comparisons, with the impact further amplified by the scale of our book of business. We expect non-GAAP gross margin to be 81.0% to 82.0% for Q3 and for fiscal 2025. We expect non-GAAP operating margin of 28.5% to 29.5% for Q3 and 29.0% to 29.5% for fiscal 2025. We will continue to focus on driving efficiencies while investing in long-term growth areas like product innovation. We are revising our guidance to reflect the anticipated impact of our buyback activities on the non-GAAP fully diluted weighted average shares outstanding. As a result, the range is now 206 million to 211 million for both Q3 and fiscal 2025. In closing, Q2 marked an important step toward our future with the initial launch of our AI-powered IAM platform into general availability while delivering record non-GAAP operating profit and margins. We delivered another solid quarter of execution against our three strategic pillars: accelerating product innovation, enhancing our go-to-market initiatives, and strengthening our financial and operational efficiency. We remain pleased with our overall performance, particularly the progress we've made stabilizing our business, deepening customer relationships, driving profitability, and generating consistent and meaningful free cash flow. As we look ahead, we are excited about the opportunities in front of us, particularly with our IAM platform and the rollout to more customer segments and international regions during the remainder of this fiscal year. We believe the future is bright for Docusign, and we remain committed to delivering value to our customers, shareholders, and employees as we continue executing our long-term vision. That concludes our prepared remarks. With that, operator, let's open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Brent Thill with Jefferies. Please proceed with your question.

Allan, you raised your full year guide to 7% growth, but still guiding billings for 3.5%. I think many are asking, thinking about your growth aspirations over the medium term, and what are the main reasons that are giving you confidence in sustaining that growth? And just for Blake, you mentioned the record margin at 32%. Everyone would kind of love to hear what your ceiling is over the next year to two in terms of where you think you can go versus continuing to invest, and can you drive continued higher margins while driving that revenue growth? Thanks.

I will speak first, and then Blake can chime in. Regarding growth, we are really proud of the progress we have achieved. We have stabilized the current business effectively. Looking at the DNR rates, both past and future, we are in a better position now. Many of the operating metrics we've discussed are trending positively. While there is still room for improvement in our core eSign business, we believe we are on the right track. For short-term growth, international markets and CLM will contribute. In the long term, our primary growth driver will be IAM. It is still in the early stages as we have just launched in the commercial segment in North America and Australia, which are only parts of our business. However, the early signs are promising: we are seeing significantly larger deal sizes, quicker closing times, higher win rates, and increased bookings momentum. August has shown more than double the size compared to June and July, which is very encouraging. That said, it is still early, and we have more customer segments and regions to explore, but we are hopeful that we will see more meaningful results to discuss with you next year and beyond.

And then, I'll just hop in on the operating margin question. So, super proud of the team for this quarter. Once you normalize this a bit, and I referenced this in the prepared remarks, about 150 basis points for one-time items, still producing over 30% operating margins. It's something where as a team, we've made a ton of improvement over the last two years as a company here. And you look at things like sales and marketing expense as a percentage of revenue for us, it was 41%. I think two years ago, it was 30% for this quarter. So, just a lot of improvement, a lot of focus on productivity and efficiency. But to your question about how much more opportunity is there out for us, the thing that's most on my mind, and I think I can speak for the leadership team as well, is that balancing this idea between productivity and growth. And we want to make sure that what we can do is feed this growth engine that we are so excited about in IAM and make sure that we get it launched, obviously, in all these different new regions that are coming out and new customer segments. And so, while I do think there's opportunity for us into the future for continued efficiency and productivity improvements, I think the bigger focus for us right now is focusing on this growth lever, how do we make sure we keep a mindset of productivity, but also don't lose sight of that growth engine, because that's what we're obviously so excited about. And we've made a lot of progress on efficiency and productivity. So, I'm really confident in the team and our abilities there, but it's also that balanced perspective that we're really focused on.

Thank you.

Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question.

Hi. Thanks for taking the questions. And great to hear that win rates are improving, that customer bookings are increasing month over month for IAM. I'm curious what if you could just expand on the early feedback that you've been getting from customers for that solution. And then, why do you think IAM has been able to sell so much quicker in its early stages than what CLM previously did?

I'll handle that. Regarding early customer feedback, the key takeaway is that customers are very excited about the ability to gather all their agreements and gain insights from them almost immediately. The ease of deployment, user-friendliness, and quick time to value are very strong points that customers across various industries and functions appreciate. Our earnings release includes a few quotes highlighting this. Interestingly, even though we targeted the commercial segment, which typically has smaller customers, the average customer actually possesses thousands of agreements in their repositories. This indicates the pain and complexity surrounding agreement management, even for midsize and smaller companies. This realization boosts our confidence. Adoption has been swift once customers sign on, as they don't require much support afterward. We have a well-established product with eSign, serving 1.6 million customers, and our objective with IAM was to create a solution that offers value to all of them and establishes a unique value proposition for the future. The initial signs of progress are quite promising. We are also planning to introduce self-serve options to tap into a larger audience and expand into enterprise departments, along with entering markets beyond the initial three launch areas. There's significant potential for scaling the product's reach. Overall, the atmosphere within the company is optimistic and energetic, and it’s exciting to see things working well.

Okay, very helpful. And then could you just talk about what led to the sales transition during the quarter and if Paula has identified any kind of changes that she wants to make since joining, or if it will be more of a continuation of the changes that you've been making over the last year or two? Thanks.

Let me quickly address that. We are in a moment of transformation. While we have developed a strong product and the initial feedback is quite positive, this is still a transition. We're shifting from selling a single product that is broad and repeatable to something more comprehensive and solution-focused, with a platform element. I believed that finding a leader who could effectively guide this transformation was essential. However, I want to emphasize that our strategy remains unchanged. We will continue to concentrate on our three routes to market. Our direct channel will still be our largest and most crucial. We can discuss partners further, as we mentioned in the earnings release, and there will also be the self-service approach. I believe Paula will significantly enhance and drive the execution of this strategy. She has hit the ground running in her first month, and it certainly does not show that she just started. I also want to address your second question regarding the difference with CLM. Historically, CLM has focused primarily on large enterprise clients who can manage the complexity, custom development, and integration required. While we have a larger customer base than some competitors, it is still considerably smaller in terms of the number of customers compared to signature. This reflects the upfront costs and complexity involved. Additionally, there are constraints regarding configuration flexibility, and the user reach tends to be limited to specialized users like legal teams, sales ops, and purchasing ops. In contrast, IAM can be utilized by every seller, buyer, HR personnel, and recruiter, allowing them to access relevant agreements. The scope is fundamentally different. That being said, our CLM product is still the right choice for enterprises ready for it. It offers significant power and flexibility, with more features than IAM. We will continue to sell and support it for the foreseeable future. Eventually, as we integrate more aspects of IAM with CLM, things will evolve, which is a natural progression in enterprise software. Our CLM product remains a market leader, providing substantial value to customers, and we plan to leverage it moving forward.

Thank you. Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Hi, this is Kylie on for Tyler. My main question is around billings. The revenue guide for the full year was raised, while the billings beat and raise was a bit smaller. Just curious if there were any term changes that caused the revenue to be raised more. And also curious if there are any seasonal changes to guidance relative to what you were messaging last quarter. Thanks.

Blake, why don't you take that one?

Sure. We incorporated the complete increase in billings into our full year guidance. We also accounted for the full increase in revenue and subsequently raised our full year expectations. The main reason for the revenue beat in Q2 was primarily the timing of bookings, which arrived earlier in the quarter than we anticipated, especially with some larger deals. Additionally, we've seen higher usage and consumption, and a few contracts renewed sooner than we had expected in our projections. The adjustments for the back half of the year reflect our analysis of this situation, suggesting that there is some positive momentum relative to our forecast. The increase is not due to seasonal changes or shifts in business dynamics, as billings are quite sensitive to timing. Ultimately, the revenue increase is a result of the Q2 beat, tied to the timing of bookings.

Thank you. Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.

Hi. This is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to follow up on a point in the prepared remarks you made about margins coming down in the second half just for some more IAM investments. I guess I'm just curious, I guess what's really missing at this point? Is it just more enterprise functionality, or could you just provide some more detail on, I guess, where those dollars are going?

If you adjust the Q2 figure by excluding the one-time items, there's a slight decline of about 150 basis points from Q2 to Q3. The IAM investment currently focuses on our North America CBU business, but we expect to expand support significantly for other international regions by the end of this fiscal year. This situation is partly due to timing and reflects our commitment to supporting various international markets and additional customer segments in North America. Despite this, our Q3 forecast for operating margins remains significantly higher than the previous year, and I'm proud of the team's efficiency in achieving that.

Got it. Thank you, Blake. And one quick follow-up, just on the pricing model, how should we think about that for IAM and how it's evolved beyond the kind of historical pricing model? I think in the past, you talked about moving more towards like a seat-based traditional subscription model. Just any update there would be great.

Yes. There's a lot of levers there. So, I mean, first, just to frame it, historically, our sign business has primarily had an envelope-based billing model, basically, number of documents sent, and you pre-bought capacity. That obviously doesn't make sense for IAM more broadly. And so, we're anchoring it around seat-based pricing for different user types, plus adders for, shall we say, capacity related to, for example, the number of documents stored in the repository, as well as a variety of add-on services, advanced AI features, third-party identification, verification, and other value-added features. And I think we're still exploring other ways in which we can best match our pricing to the value delivered. That's what you want in the pricing model. I think we've done a pretty good job out of the gate, but I'm sure we'll be learning more here over the next six to 12 months as we explore different customer segments and geographies, but that's the high level of how it's working today.

Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Hey, this is Arti Vula on for Mark Murphy. Congrats on the quarter and the milestones, and thanks for taking the question. First, you guys talked about rolling the IAM platform to more customer segments and international regions for the remainder of the year. Could you double-click there and just maybe provide a little bit of insight as to which types of customers or regions you're prioritizing in the near term? Thanks.

We serve customers of all sizes, from small law firms to large corporations. We initially focused on the commercial and mid-market segments, with plans to offer a self-service option before the end of the year. This will allow us to reach smaller customers and streamline the buying process for all segments. We will also start targeting enterprise customers, beginning with department-level rollouts. We've received significant interest in this area. Geographically, our primary focus has been the US, with recent launches in Canada and Australia. By this fall, the product will include localized AI support for both Eastern Australia and Canada, as well as the UK, Germany, and France, with broader availability worldwide by year-end. Any DocuSign customer will be able to purchase a version of IAM. Additionally, integrating AI into our agreements is a key value proposition, which requires training models for different languages and legal systems. While English is spoken in the UK, it differs from US English and has distinct legal standards. We're making strong progress in this area and will continue to expand our language and market offerings early next year, as it's crucial to deliver value in our major markets.

Very helpful, and great insight on the regionalization for the AI. Turning to your remarks about hiring behind strategic initiatives, as well as Lexion kind of contributing to headcount growth, could you help us maybe size the contribution from Lexion? Trying to kind of better understand what the, I guess, organic headcount growth looks like? And maybe also where you're hiring that behind? Is that in R&D or sales and marketing? Or where you're kind of prioritizing your dollars? Thanks.

Certainly, I'll address that, Allan. Lexion played a significant role in our quarter-over-quarter headcount growth, contributing around 170 new positions. Most of our growth is concentrated in areas that support our expansion initiatives, such as research and development and product-led growth, among others. We are still hiring across all regions, but we are also being careful and considerate about costs related to different locations and global time zones. As we consider our headcount growth, I recommend you also keep an eye on operational expenses, as there may be some differences there. To reiterate, we are focused on being productive and efficient while we pursue the growth opportunities we see in IAM.

Great. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question.

Oh, great. Thank you, and congratulations. Hey, Allan, can I ask you a big-picture question? What's your perspective on sort of the attempts to regulate AI? And then particularly here in California, you have this Senate bill that's sitting on Newsom's desk about safe and secure innovation for frontier artificial intelligence models. Does that impact you? And sort of bigger-picture thoughts would be really helpful.

We believe it's still early in the AI landscape, and regulating something that is not well-defined is challenging. However, I don't think any of the current proposed regulations, either here or in the EU, will significantly impact our plans. It's important to clarify that. From my perspective as someone in the tech industry, I understand the concerns about the potential misuse of AI. I believe the primary focus should be on adapting existing regulations to AI, such as discrimination or competition laws, rather than creating entirely new regulations. However, I'm not an expert on the 1047 bill, and we will follow the laws of the markets where we operate.

Awesome. All right. Thank you.

Thank you. Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your questions.

Hi, this is Arsenije on for Alex Zukin. Thanks for taking the question. On dollar net retention, that has stayed stable at 99%, and it's expected to stay stable, but why is that not expected to expand as it seems you should have a lot of pandemic renewal cohorts going into the second half of this year? And I guess to help investors gain visibility into expansion from long customers, what has the dollar retention been for customers outside of the pandemic renewal cohort? And then, just a quick follow-up. Thanks.

Sure, I'll address that. To clarify, our dollar net retention remained steady at 99% in Q2, and we anticipate it will stay that way for the rest of the year. Regarding the COVID situation, during our Q3 fiscal '24 earnings call, we mentioned that by the end of fiscal '24, only about 10% of our business will come from contracts established during 2020 and 2021, which reflect the pandemic period. This percentage is expected to decline further in fiscal '25. Currently, we're at a mid-single-digit share for Q2 and expect to drop to a very low single-digit share by the end of FY '25. In terms of the DNR impact, we have mostly absorbed that effect. Our long-term strategies for enhancing the DNR rate involve improving renewals in our core business, where we have seen progress but recognize there’s still potential for further growth. Additionally, we see significant opportunities for expansion with IAM, which allows us to enhance customer value and encourage them to share in that value growth. These are the areas we're particularly enthusiastic about. As for analyzing specific DNR cohorts, we've passed through the majority of our COVID-related comparisons.

Got it. Thank you. And then just to clear up and I guess confirm, last quarter's full year subscription revenue guide included Lexion as the guidance today. Is that correct?

That's correct. It was included in our guide last quarter.

Thank you.

Thank you. Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Thanks for the question. You mentioned higher consumption and envelope volumes and utilization a couple of times. I'm wondering if you're suggesting that you could start to see customers come back to you to expand contracts for more envelopes. And related, just wondering how much of your business now is all-you-can-eat type of enterprise license agreements. And does the higher consumption and utilization have the same impact just given like maybe the changing mix of contracts versus prior periods? Thanks.

Sure. Regarding verticals, we assess our vertical consumption and the number of envelopes sent as indicators of potential growth with our customers over time. However, the experience varies for each customer, making it difficult to establish a specific rate. Overall, consumption has improved significantly year-over-year, and the number of envelopes sent has also increased during that time. As customers engage more with these elements and utilize the product, their enthusiasm for it grows. Concerning expansion opportunities, particularly the all-you-can-eat aspect, that segment is relatively small in our core business, with most customers purchasing generally fixed-rate envelopes. While there are some deals that differ, the majority follows this pattern. This is encouraging for the Integrated Account Management opportunity we have, as it allows customers to focus less on consumption and benefit from added features and a platform, which we believe provides substantial additional value. While it’s not a straightforward decision, there is a clear rationale for customers to consider expanding and transitioning to an IAM model, though this process does take time. We have a $3 billion portfolio with an average contract length of approximately 19 months, so patience is required. Nonetheless, I’m optimistic about the usage and consumption metrics we have observed so far.

That's helpful. And just wondering, do you view the potential for interest rates to move lower as a tailwind for your business, just given the exposure to mortgages and real estate and financial services? Thanks.

I believe many on this call may have a better grasp of how interest rate changes affect companies than I do. However, regarding the mortgage and real estate sectors we've discussed, any factor that boosts customer demand is beneficial for us. Lower interest rates could encourage more people to refinance or purchase homes, which would be advantageous. On the other hand, while our real estate segment, although it has increased in volume, is growing at a slower pace than average, we still see year-over-year growth. So, I'm cautiously optimistic and believe there are opportunities for improvement in our areas if the overall economic conditions become more favorable.

I would just add that many people may associate us with real estate transactions, but this sector has decreased as a percentage of our overall business. Currently, we are highly diversified across various industries. While we would benefit from improvements in real estate, the impact might not be as significant as one might have thought four or five years ago when real estate was our primary focus. At this moment, our broad portfolio means the business is less sensitive to changes in that sector, although we would certainly welcome any positive developments.

Helpful. Thank you.

Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Hey, this is Rich Poland on from Michael Turrin. Thanks for taking my question. So, first one, just, I was wondering if you could tease out some of, like, how meaningful those co-selling arrangements with large ISVs could be, and just kind of how important that is to the partner motion, especially as you scale the IAM business.

Yeah. So, I think in terms of the co-selling with the large ISVs, the Microsofts, it's a piece of the world, I think it's a very meaningful lever, particularly in the large enterprises. If you go in with Microsoft, and they have an existing Mizzou commitment, that can be very helpful. And of course, we're one of the most horizontal ISVs, and so map well to them as an example. I think the partnership with SAP holds great potential on that, and the supply chain optimization piece is something that's really important to enterprises right now. They are very keen to improve the workflows, things like new vendor onboarding and so on are historically very cumbersome, and so I think we have a big opportunity there. But I do want to expand the window on partners. So, those three, Salesforce, SAP, and Microsoft get a lot of focus here. We're looking at sort of the next tier of folks. You can imagine the names there that also get some decent attention. But I think the bigger unlock for us to complement our own sales efforts is really the reseller and system integrators. So, resellers in the markets where we can't reach customers through our direct sales team. So, obviously in geos where we can't realistically do that. But even in markets like the US, Germany, or Japan, where a lot of customers prefer to buy from a reseller, that's a very important channel. And the SIs, look, I'm very proud of how simple we've made a very complex problem of improving agreement workflows. But when you undertake something of that scale and scope, I think there's going to naturally be more opportunities for the SIs, and they all see that. And so, we've had a tremendous amount of inbound interest. Historically, most of our SI work has been focused on CLM, which is a small part of our business. But now, with IAM really being the whole company, if you will, it's much more strategic, much larger in scope. And we have, I think, a huge opportunity to partner better with the Deloitte's, the EY's, the Capgemini's of the world. And there's a lot of that already happening, and I think much more to come. So, that's a big enabler for us.

Thank you. That's very helpful. And then just as a follow-up, in some of these early IAM deals that you're seeing, I know you talked a little bit about seats and just kind of the potential for that to be a little bit more pervasive across an organization. Are you starting to already see some of those wider seat deployments in an organization, maybe like cross-departments? Or are you typically starting with one department inside an organization and then just kind of expanding from there?

Yeah, I'll just clarify, that was for IAM, right? I mean, the companies we're deploying now are smaller, and so it's the commercial segment, and so it does tend to be company-wide in many cases. I think as we start our enterprise deployments, it's more likely to be divisional or departmental, just because the scale and scope and risk and all the systems we'd have to put in to fully support that. So, that's a forecast because we're just about to open the doors to the initial selling to the enterprise segment. So, that would be my guess on how that's going to play out initially. This, by the way, is very familiar to us, right? I mean, that's how eSign rolled out. We went to the Head of Sales and said, 'Hey, would you like to make your sales process more efficient?' And they said, 'Yes, please.' And then we integrated with Salesforce and they deployed it in sales. And then purchasing or HR looked at that and went, 'Hmm, can we do that?' And so, we've been able to cross-sell in some companies. And I think with IAM, we'll have more opportunity to do that. Sorry about that.

Thank you. Our last question comes from the line of Ian Black with Needham & Company. Please proceed with your question.

Hi. Thanks for the question. We had a good partner check on the Lexion acquisition. How important is that functionality to the new IAM platform? And when do you expect the acquisition to be integrated? Thank you.

We are very excited about the Lexion acquisition. We finalized the deal at the end of May, and our intention has always been to primarily acquire their products and team. We have focused heavily on integrating their offerings, and I'm pleased to announce that this month, we will launch two significant features that stem directly from the Lexion acquisition, just four months after closing the deal. A big thank you to both the Lexion team and our team members at DocuSign who are supporting this effort. There's more exciting work on the way, which aligns perfectly with our vision for IAM. This has turned out to be even more successful than I anticipated, and we are delighted to have the Lexion team onboard, bringing a valuable mix of entrepreneurial spirit and innovation that will benefit our roadmap moving forward.

Thank you. Our last question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Hi, this is Bill filling in for Kirk. Thank you for taking my question. Do you think NRR rates have stabilized and are now in a position to improve? Are there still customers adjusting their spending that might put ongoing pressure on those rates? Or do you believe that upselling and cross-selling can now exceed any downward pressure on NRR rates?

Sure. From a DNR perspective, we've seen it stabilize for a few quarters, and we expect this trend to continue for the rest of the year. I'm not providing a forecast for FY '26, but it’s clear that the business has shown resilience. That said, we aim to grow this business at a faster rate than we currently are. This is why we have emphasized IAM and similar initiatives. I’m encouraged by the stabilization trends we've observed, and I believe they will remain steady at least until the end of this year. Our focus is on accelerating the company’s growth, delivering additional value to our customers, and establishing a robust platform in the agreement management space. So far, we are executing well on this strategy, and we’ll see how everything unfolds moving forward.

Yeah. I would just add, look, ultimately, it's our goal to return to double-digit growth, not making a forecast about when exactly that will happen, but imply to that, given that we already are in 1.6 million companies, we're in close to 85% of the Fortune 500 and comparable numbers in other markets, most of our activity is going to be upsell to existing customers. So, assuming we're successful in accelerating growth, the DNR will move up as well. So, that's our goal.

Great. Thanks for taking my questions.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll now turn the call over to Allan for closing comments.

Thank you, operator. Thank you all for joining today's call. In closing, I'm very proud of the progress Docusign continues to make, and I'm really excited for the value we will create for customers through the Intelligent Agreement Management platform. We appreciate your support as we continue to realize our vision.

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