Earnings Call Transcript
DOCUSIGN, INC. (DOCU)
Earnings Call Transcript - DOCU Q3 2022
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining DocuSign’s Third Quarter Fiscal Year 2022 Earnings Conference Call. This call is being recorded and will be available for replay from the Investor Relations section of the website following the call. I will now pass the call over to Annie Leschin, Head of Investor Relations. Please go ahead.
Annie Leschin, Head of Investor Relations
Thank you, operator. Good afternoon, everyone. Welcome to DocuSign’s third quarter fiscal year ‘22 earnings conference call. On the call today, we have DocuSign’s CEO, Dan Springer; and CFO, Cynthia Gaylor. The press release announcing our third quarter results was issued earlier today and is posted on our Investor Relations website. Before we get started, I’d like to let everyone know that we plan to participate virtually in a few events in the upcoming weeks, the UBS Tech Conference on December 8th; and the Needham Conference on January 10th. As other events come up, we’ll 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. 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, amortization of acquired intangible assets, amortization of debt discount and issuance costs from our notes 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 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 data to most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release, which can be found again on our investor website. Now, I’d like to turn the call over to Dan. Dan?
Dan Springer, CEO
Thanks, Annie. Good afternoon, and welcome to our third quarter earnings call. First, let me share the financial results. In Q3, we continued to see solid performance with our revenue and profitability. Revenue grew 42% year-over-year to $545 million and operating margin reached 22%, exceeding our guidance. International was again a bright spot at 68% year-over-year growth and now 23% of total revenue. However, we fell short of our billings guidance, coming in at 28% year-over-year growth. We expanded our customer base to 1.11 million and we continue to see strong dollar net retention of 121%. The market dynamics that we saw in the third quarter were markedly different from what we experienced in the first half of this year. With the boost from COVID-19 over the past 1.5 years, we experienced exceptionally high growth rates at scale as we captured customer demand at an unprecedented pace. As we moved through Q3 and into the second half of the year, we saw demand slow and the urgency of customers’ buying patterns temper. While we had expected an eventual step-down from the peak levels of growth achieved during the height of the pandemic, the environment shifted more quickly than we anticipated, and these were the primary contributors to our billing results in Q3 and our outlook for Q4. Despite this, it’s clear that we are still in the early days of the $50 billion Agreement Cloud opportunity as digital transformation remains a high priority for organizations worldwide. DocuSign is uniquely positioned to lead and capture eSignature and the broader Agreement Cloud market opportunity, given our strong brand, leading market position and product differentiation. Even as the pandemic subsides and people begin to return to the office, they are not returning to paper. eSignature and the broader Agreement Cloud are clearly here to stay, and DocuSign’s value will persist no matter how the future of work unfolds. To continue to drive growth at scale from new company acquisition to existing customer expansion, we need to ensure our teams are firing on all cylinders. We are doubling down on growth to counter recent trends by aggressively investing in two key strategic areas. First, we are increasing investment in global sales capacity, training and field enablement to speed pipeline generation with new business and to drive expansion within our customer base. We’re globalizing our marketing investments across direct and channel sales to drive brand awareness and qualified sales leads, both domestically and in our expanding international markets. As part of this effort, we are aligning our worldwide sales, marketing and success operations under Chief Operating Officer, Scott Olrich. With this move, Chief Revenue Officer, Loren Alhadeff; and SVP of Customer Success, Lambert Walsh, will now report to Scott. In addition, Mike Sheridan, who has served DocuSign for over six years, first as CFO and most recently leading our international strategy, has moved on from the company as of the end of November. I’d really like to personally thank Mike for all of his many contributions to DocuSign in key roles through critical stages of our development. We all wish Mike well in his retirement. With the substantial growth of these go-to-market organizations in the last 1.5 years, we believe these moves will drive a unified motion towards demand generation, demand capture and our overall growth. The second key strategic area we’re investing in is product innovation, which will continue to be an integral part of our success. I’d like to touch on how we are elevating our innovation efforts across our expanded portfolio of products that make up the DocuSign Agreement Cloud. Last month, we enhanced DocuSign Notary, so administrators can manage the availability of first-party notaries, one more reason we believe that DocuSign Notary will become the tool of choice for real estate, insurance and other financial service providers. A number of financial institutions, including Fidelity, added the service in Q3, but M&T Bank is my personal favorite early success story in the space. M&T Bank has been a customer since 2018, but their DocuSign use cases jumped from about 50 to more than 200, first with the introduction of ID verification and now with notary. That’s an obvious win for us, but the win for M&T Bank is they can now remotely notarize documents in less than 7 minutes. The combination of eSignature, Identity Verification and Notary are game-changers for M&T’s 700 retail branches, and we’re hearing that it’s making a notable impact on their operating costs as well as being a huge plus for their customer experience. Speaking of ID Verification, or IDV for short, last month, we also launched an enhancement that lets customers add SMS re-authentication to IDV envelopes. So after signers pass an initial IDV, they enter a passcode delivered via SMS text to access the envelope, adding an extra layer of security that our customers value, along with added convenience for our customers’ customers. We’ve also made a number of important enhancements to our DocuSign CLM product this quarter, helping organizations automate manual business processes and improve efficiency with every agreement. Just this month, we launched a full set of collaboration tools within the product to give users the ability to comment, tag others and assign tasks all in the CLM UI. On top of those innovations, we continue to make significant enhancements across the entire Agreement Cloud, including new Agreement Actions with Google and Microsoft apps to automate the post-signature tasks; new delegated signing capabilities for our enterprise customers; and new tech to simplify invoicing using our popular product, DocuSign Gen for Salesforce Billing. There’s plenty more ahead to extend our leadership position and guide our customers into the next generation of agreements as our steady drumbeat of innovation continues to set us apart. We are making significant investments in both product and platform innovation as we believe it drives customer success and positions us well for durable growth going forward. On the customer front, I mentioned earlier that we added 59,000 new customers in Q3, and I’d like to share two of them that are particularly relevant to our focus areas. One of our newest global customers, UPS, adopted an enterprise-wide initiative to modernize their entire contracting process with DocuSign CLM. Having previously used an alternative solution, their 9,000-plus person sales organization is now using CLM and eSignature products in conjunction with Salesforce, all integrated into one workflow. The successful deployment has led to a much faster and more efficient process with greater visibility. This is attracting the attention of other business units where we are actively exploring expansion opportunities. I think it illustrates that both eSignature and CLM can be effective on-ramps into enterprise businesses, and both can open the door for deeper cross-departmental adoption rates. Solarity Credit Union in Washington State is a business that prides itself on pushing the boundaries of technology to elevate the customer experience. Solarity first looked at DocuSign to better enable their residential mortgage process with DocuSign Rooms for Mortgage. Next, they began using DocuSign Notary as a standalone offering. Then Solarity became the first DocuSign customer to fully integrate these capabilities to offer a completely digital solution for remote residential mortgage closings. I expect many more stories like Solarity as our customers move to differentiate their own customer experience with seamlessly integrated solutions. We’re also continuing to deepen our relationships and drive innovation across our already thriving partner ecosystem. Building on our collaboration of over a decade, we announced an expansion of our global strategic partnership with Salesforce. Together, we expect to build new joint solutions to automate the contract process, improve the customer experience, drive faster ROI and increase collaboration amongst organizations that use Slack, which is now a part of Salesforce. This expansion reflects the fact that Salesforce and DocuSign have consistently succeeded together as partners which, in turn, has generated opportunities to partner in priority areas such as Slack for Salesforce and CLM for DocuSign. Following our eSignature integration with Microsoft Teams earlier this year, DocuSign is now also an official electronic signature provider in the Microsoft Teams’ Approvals app, adding to our integration across Microsoft Office 365 and Dynamics 365. This latest enhancement allows users to create, manage and share approvals directly from Teams, enabling them to streamline approval requests while keeping up to date on the status of approval. So, to wrap up, we are proactively addressing the rapid change in demand trends that we are seeing as we emerge from the pandemic by investing in the areas most critical to our future growth. Though we’ve adjusted our near-term outlook to reflect the uncertainties of the current environment, we have strong confidence in our vision and strategy. We are convinced that the growth opportunity for DocuSign remains largely untapped. We have products that are loved by our customers and their customers in turn, and technology that is making a difference in the global speed of business as well as the health of our planet. If the last year has shown us anything, it’s just how early in the opportunity we really are. In the coming weeks and months, you will see us focus our efforts and investments to drive growth at scale. While disappointed with my execution on billings this quarter, I’m highly optimistic about our long-term growth, and we remain one of the fastest-growing enterprise cloud companies in history. We will continue to innovate across our platform as we lay the foundation for our future expansion across the entire Agreement Cloud. With that, over to you, Cynthia.
Cynthia Gaylor, CFO
Thanks, Dan, and good afternoon, everyone. After six quarters of accelerated demand, we saw customers shift their buying patterns in the third quarter. Revenue, profitability and cash flow remain strong, while billings and dollar net retention came off their highs, especially in light of the tougher year-over-year comparables. As Dan mentioned, we had expected this to happen more gradually, and we saw a more notable shift in Q3 than anticipated. Total revenue increased 42% year-over-year to $545 million, while subscription revenue grew 44% year-over-year to $529 million. Our international business expanded at a healthy rate, especially in our Asia Pacific region this quarter. In total, international revenue grew 68% year-over-year to $128 million, contributing 23% of total revenue. Billings grew 28% year-over-year to $565 million as we were impacted by the shift in customer buying behavior, accentuated by a particularly strong first half of the year. With that said, we brought on 59,000 new customers, bringing our total customer count to 1.11 million customers worldwide, an increase of 35% compared to a year ago. We also added over 11,000 direct customers, bringing the total to nearly 160,000, an increase of 41% year-over-year. Customers with an annual spend greater than $300,000 grew 45% year-over-year to a total of 785 customers. After an exceptional 1.5 years of customer growth, we continue to add customers at a solid pace. For the sixth quarter in a row, we exceeded the high end of our historical range of dollar net retention, landing at 121% as our existing customers expanded their deployments of our product offerings. Total non-GAAP gross margin for the third quarter was 82% compared with 79% a year ago, while subscription gross margin was 86% compared with 84% a year ago. In Q3, non-GAAP operating margin reached 22% or over $122 million compared with 13% or $49 million in the third quarter of last year. Our Q3 revenue growth continued to outpace our ability to invest at a similar rate in quarter. In addition, the delayed reopening of our offices led to lower-than-expected travel and entertainment expenses. As Dan discussed, we are committed to investing for future growth with a focus on optimizing our go-to-market efforts around demand generation, along with customer success and accelerating our product development and innovation engine. Non-GAAP net income for Q3 was $121 million compared with $46 million in the third quarter of last year. We ended the quarter with 7,056 employees, an increase of 32% over last year. Operating cash flow came in at $105 million or 19% margin due to continued top line outperformance. This compares with $57 million or 15% in the same quarter a year ago. Free cash flow reached $90 million or 17% margin in the quarter compared to $38 million or 10% in the prior year. We exited Q3 with $908 million in cash, cash equivalents, restricted cash and investments. Now, let me turn to guidance. Coming off of the strong growth we experienced in the first half of the year, we’ve done rigorous analysis to understand the current dynamics. As a result, we are maintaining our Q4 subscription revenue guidance and adjusting billings to take into account the risks and opportunities we see in the business. For the fourth quarter and full year fiscal ‘22, guidance is as follows: Total revenue of $557 million to $563 million in Q4 or growth of 29% to 31% year-over-year, and $2.083 billion to $2.089 billion for fiscal ‘22 or growth of 43% to 44% year-over-year. Of this, we expect subscription revenue of $544 million to $550 million in Q4 or growth of 33% to 34% year-over-year, and $2.017 billion to $2.023 billion for fiscal ‘22 or growth of 46% year-over-year. For billings, we expect $647 million to $659 million in Q4 or growth of 21% to 23% year-over-year, and $2.335 billion to $2.347 billion for fiscal ‘22 or growth of 36% year-over-year. We expect non-GAAP gross margin to be 81% to 82% for both Q4 and fiscal ‘22. We expect non-GAAP operating margin to be 17% to 19% for Q4, and 19% to 21% for fiscal ‘22. We expect to see a de minimis amount of interest and other income. We expect a tax provision of approximately $3 million to $4 million for fiscal ‘22. We expect fully diluted weighted shares outstanding of 205 million to 210 million for both Q4 and fiscal ‘22. In closing, DocuSign has become a critical component of organizations’ digital transformations around the globe. While there may be some short-term fluctuations, we remain confident in our long-term growth strategy and steadfast in our commitment to top line growth as our first priority.
Operator, Operator
And our first question comes from Sterling Auty with JP Morgan.
Sterling Auty, Analyst
Yes. Thanks. Hi, guys. So, I’m wondering, at this point, what’s the sense of visibility that you’ve got in the business as you exit this year moving into next year? Because the billings guidance at 21% to 23% would kind of imply a growth rate that was actually slower than what it was pre-pandemic. So, just wondering if this is just kind of like a whiplash effect coming post-pandemic and any sense of what visibility you might have for growth as we exit the year would look like?
Dan Springer, CEO
So, I don’t think we’re going to be providing guidance for next year, as you would probably expect, Sterling. But, let me talk a little bit about sort of the sources of the change and hopefully, that will give you some perspective on how we think about it. As we talked about in the comments upfront, the first half of this year, we actually expected to see more of that impact coming out of the kind of the COVID extra demand we had experienced, and we didn’t. Right? And so, we ended up outperforming in the first half by probably more than we expected. But in the second half, we saw this now come in much more dramatically in terms of that impact of the removal of that tailwind, if you will. And I think there’s sort of two components to it. One, that there is just sort of a change in the buying urgency we’ve seen from customers. And throughout the COVID era, we had a lot of folks who really needed to get things in place, particularly if they had a large part of their employee base working from home and needed to leverage the benefits of the work-from-anywhere solutions that we have at DocuSign. And then, I think the second component to that is there was sort of a change in the nature of some of that buying. And we had realized that as we were an organization that had started to more fulfill demand from our go-to-market and we were doing less of what we had typically done, which was really generating more demand. And think about that land and expand motion we’ve talked to you for years about. And I think that was the piece that executionally we did not forecast for because we would never forecast that we would sort of take our eye off the ball there. And I kind of own that aspect of it, where we realized we were not doing all the other motions we’ve done in the past. And that’s, as you see, part of the reason we’re restructuring ourselves a little bit to make sure we can get back to the mode that has always been a successful part in driving that growth. So, I think you have to look at those as the kinds of core components that describe what has changed. And that’s why if you look for the second half, we will have a slower billings rate than we’ve had traditionally. And I think it’s our expectation that in the future, we want to go back to the old mode and really go after creating that demand and working with our customers that we’ve always done.
Sterling Auty, Analyst
Got it. And then maybe one follow-up. Can you characterize the magnitude and the timing of the investment that you’re going to make in sales, so we can think about what the margin profile impact from that, as well as sales for you guys usually ramps a little bit faster than traditional enterprise software, but trying to gauge when those new sales resources might actually contribute to an improvement in that top-of-funnel lead generation.
Dan Springer, CEO
Yes. My perspective is that the focus isn't on a significant change in our sales investment strategy. It's more about executing well and improving coordination rather than a substantial financial shift. We plan to keep investing to seize growth opportunities, which we've been doing effectively for some time. We've also become more efficient at scale, and our business model remains very appealing. As Cynthia mentioned, we achieved higher profitability this last quarter, potentially more than we anticipated. While we aim to allocate additional resources to boost growth, I don’t see this as a shift that would drastically alter your perspective on our profit and loss over time.
Cynthia Gaylor, CFO
Yes. And I would just add to that, echo Dan’s comments about investment for growth. We’ve been talking about the past few quarters that we wouldn’t expect to maintain these types of operating margin levels, right? We’re kind of at our long-term target margin a lot sooner than we were expecting to be, mainly because of the top line outperformance. So, we’ll continue to invest for growth, and we would expect that margin to continue to come down as we do that. The other piece that I would just mention, as Dan said, the investments that we’re making are not a step function on the sales and marketing side. But one area that we are very focused on is enablement, right? If you think about the number of people and field folks that we have hired over the course of 18 months, they’ve really only seen kind of one type of customer demand, and that’s kind of urgent demand. So one thing that we will be investing in is making sure we’re enabling folks to generate demand in addition to capture the demand that we have.
Operator, Operator
And our next question comes from the line of Bhavan Suri with William Blair.
Bhavan Suri, Analyst
I guess, Dan, just one more to follow up on Sterling’s first question about the billings. I guess maybe it’d be great if you can give some color if there were specific verticals where you might have seen some of this delay or slowdown in purchasing behavior? I guess, just trying to understand given which industries are first on in the transition were those the ones where they might have been a delay or the ones that had a benefit from COVID, financial services, whatever. I’d love to sort of get a little more color on the industry. And then sort of as you look at those industries, it feels like they should have transitioned to a more proactive. We need DocuSign as opposed to having the salespeople service them. It’s sort of the government or the newer verticals that need salespeople. So just help me understand sort of that dynamic too in the industry that might have been driving some of the impact on billings.
Dan Springer, CEO
Yes. Your question reflects the essence of the situation. You are correct in your observations. Last year, we experienced significant outperformance in certain areas compared to our expectations prior to COVID. These areas were traditionally strong for DocuSign, and their growth accelerated. We noticed this trend in financial services, healthcare, life sciences, and some technology sectors, particularly telecom. These were the main drivers for us last year. In the third quarter, we began to witness a shift in demand, which was most pronounced in the opposite direction. This change is understandable when you consider how we have characterized the acceleration in demand over several quarters. It makes sense that this would be where we would see the most significant response in the opposite direction.
Bhavan Suri, Analyst
Yes, that makes sense. For the second part of my question, regarding your sales investments, there are several industries, like real estate, where the value is well understood and typically involves a DocuSign request for mortgages, refinances, and so on. When considering your targeted investments in specific industries, are you focusing on areas with low penetration rates or easy opportunities, or are you investing across all industries due to ongoing demand in areas like real estate, financial services, or account openings?
Dan Springer, CEO
Yes. I mean, we are still underpenetrated in every geography and every vertical. When we look at the kind of the construct that we’re doing about $2 billion of revenue this year and the bulk of that is still signature-centric. And we think about the TAM as being $25 billion. It’s just lightly penetrated. So, I don’t think there’s any sort of sense of oh, in financial services or health care life sciences, we’d be slowing the push there. I think it’s what we need to do is execute effectively, as I described earlier, in those verticals where we already have good footprint, cross-sell opportunities into additional parts of that vertical, like other departments where we haven’t yet penetrated them in certain accounts. So, I don’t think you should think that we’re only going to be aggressively investing in verticals that hadn’t been our traditional strongholds. We think there is a lot and a lot of room to grow in the traditional strongholds as well.
Operator, Operator
And our next question comes from the line of Rishi Jaluria with RBC Capital Markets.
Unidentified Analyst, Analyst
This is Rich calling on for Rishi. I guess, just kind of breaking down the slowdown on the regional side. It looks like in 3Q, international growth held up pretty well. Is there anything from an international versus U.S. perspective you could call out as we kind of move forward and how we should think about it?
Dan Springer, CEO
I will first discuss the historical performance and then we will look ahead. Historically, the situation remains fairly consistent with what I've previously mentioned regarding our sectors. Last year, we exceeded our expectations, especially in the United States, and we also experienced strong international growth, which gained market share. However, we anticipated an even greater share gain due to the significant COVID impact observed in the U.S. When we consider the third quarter and the second half of this year, we expect North America to face the most challenges. The reasons for this are similar to those I explained regarding sectors. Moving forward, despite being more successful—with 77% of our revenue this quarter coming from our home market—we believe there is still substantial room for growth in North America. We will focus on investment and further developing our go-to-market strategy in that region. Meanwhile, our international markets are also developing, albeit at a slower pace. Historically, we have noted that the international market isn't developing fundamentally differently than North America; it's just that we entered these markets later. As a result, we are experiencing higher growth rates internationally. We expect to maintain our strong performance there, and we aim to see our international markets continue to increase their share of our total revenue, which rose to 23% this quarter.
Unidentified Analyst, Analyst
Okay, great. That’s super helpful. And then, I guess, just kind of it looks like there’s going to be some gross margin improvement and factored into the guidance there. And just kind of wanted to maybe dive a little bit deeper on the gross margin side, if there’s anything underlying from a product mix standpoint or anything to call out there?
Cynthia Gaylor, CFO
Yes. I think there’s nothing material. I think the gross margin guide is in line with where we’ve been performing the last few quarters. And so, we would expect that to continue.
Operator, Operator
And our next question comes from the line of Stan Zlotsky with Morgan Stanley.
Stan Zlotsky, Analyst
Can you clarify the commentary regarding the slowdown in demand compared to the investments you plan to make in the sales organization, particularly in sales enablement? I want to understand how confident you are that, if there is a deceleration in demand, doubling down on sales enablement and enhancing the sales organization will effectively address that issue.
Dan Springer, CEO
Yes. I think there are two different aspects to consider. Regarding the three factors we mentioned about the transition from the first half to the second half, we always anticipated a decrease in the exceptionally high COVID-related buying that significantly boosted our growth rates, even as we grew larger. We expected this change. However, the other two factors caught us by surprise. First, while we anticipated a return to normal purchasing behaviors, we didn't realize how well-stocked customers had become with our products. We observed that during this period of heightened demand, customers were purchasing more aggressively than in the past, which was difficult to gauge. Second, the investments you referenced relate to our execution. I am confident in our ability to succeed in a post-COVID or normalized environment because we were successful before the pandemic. As I previously mentioned, the challenge lies in balancing meeting existing demand versus generating new demand through effective customer engagement. We stopped focusing on expanding our relationships as customers concentrated on increasing volume for their current use cases. This is where our execution gap lies. As Cynthia noted, a significant part of our sales team has joined since the pandemic began, given our rapid growth. We haven’t adequately enabled them with the traditional DocuSign land and expand strategy. Therefore, we need to adopt a back-to-the-future mindset and return to the discipline we previously maintained. This is why I feel confident; this is not uncharted territory for us; it is one we know well.
Stan Zlotsky, Analyst
Got it. The current weakness we're discussing is primarily related to the eSignature, which was a significant growth area last year. What insights do you have regarding the broader Agreement Cloud and the progress within the CLM space, including the SpringCM and Seal acquisitions? When can we expect these elements to become impactful enough to help address some of the challenges we are currently facing with eSignature?
Dan Springer, CEO
Yes. Well, so two things. One, it’s a little bit of a complexity as you think about those. And we talked about last year that when the focus of our customer base was you just have to help us get sort of the eSignature use cases up quickly, we became very much a fulfilled demand-oriented company. And we took some focus away from some of the broader Agreement Cloud other offerings because our customers were pulling us. I think that was the right course, right? We are a customer success-oriented company, and we needed to focus on that. So, I think now, we see ourselves, having come out of the sort of the COVID period and coming out of the first half where we see that demand changing, you will see us, I would say, re-accelerate and re-emphasize our focus on the other Agreement Cloud products. And I think that we’re putting a lot of focus on not just the product development, but also the go-to-market there. And I think you’re going to continue to see growth and acceleration. We believe the Agreement Cloud products will take share from signature. And I think at this point, because of the scale of the eSignature business relative, and I don’t just mean our piece where it’s really dramatic, but even in the marketplace, things like CLM or just much smaller developed opportunities today. So, the ability to sort of become meaningful to our financials, it’s going to take a while. But that’s how I think about our focus and why that’s so strategically important to us to build out the overall Agreement Cloud.
Cynthia Gaylor, CFO
Yes. And the one thing I would add to that, as Dan said, eSignature does comprise the vast majority of our revenue, but we also have a really big installed base. And so, one thing that we’re really encouraged by is some of the traction we are seeing with CLM and some of the Agreement Cloud products in customers that have had success with eSignature moving to kind of a more strategic dialogue around the broader Agreement Cloud. So, we continue to see positive traction in that area, even though it will show up in the numbers for a while.
Operator, Operator
And our next question comes from the line of Kirk Materne with Evercore ISI.
Kirk Materne, Analyst
Dan, could you just talk about maybe why this quarter? I mean, is there anything specific about 3Q? I know you had a tougher comp. But is there anything seasonal? I mean, are people taking more vacations? I was just trying to get a sense of why was this quarter that sort of execution wasn’t where you wanted it to be. Was it just sort of pipelines got pulled down in the first half and you were able to reload them, or do you think there is a sort of environmental factor that may be added to some things you guys might have been able to do a little bit better?
Dan Springer, CEO
Kirk, on a personal note, I've spent time trying to understand how external factors contributed to this situation rather than my own performance. Unfortunately, the core reason for the timing of this issue relates back to what we discussed earlier. We expected to see more activity in the first half, but that didn't materialize. There was definitely momentum from the pandemic-driven demand that lasted longer than we anticipated. Reflecting on the guidance Cynthia provided at the start of the year, we actually exceeded our expectations by a significant margin. However, we lack a precise explanation as to why the impact was more pronounced in Q3. We examined various factors, including one-time use cases like PPE loans, but these did not significantly influence the change in demand. Ultimately, we believe the main issue was that demand was strong, and we were focused on meeting that demand. Once that demand began to normalize, we were unprepared and didn’t execute effectively. Although we have a large total addressable market, selling remains essential. We need to understand customer demand, demonstrate how our use cases can deliver strong ROI, and execute accordingly. The real takeaway here is that our field execution did not meet expectations, and we need to acknowledge this and take corrective action. Therefore, we are emphasizing execution as we mentioned at the start of the call.
Kirk Materne, Analyst
I appreciate your honesty. Cynthia, I have a question for you. As you navigate these changes, does anything shift in terms of your long-term investment strategy? Do you potentially slow that down a bit as some of these sales changes align? Is there any adjustment from an investment standpoint in the near term, considering that you are still in the early stages of this opportunity for the long term? Thank you.
Cynthia Gaylor, CFO
Yes, for sure. So, I mean, we’re still investing for long-term growth, and we feel really good about our long-term opportunity, just given how big the market is, our position and brand in the market. And we feel like we’re in the early innings. So, we’ll still continue to invest for growth. I would point out though, our margin has been outperforming because of the top line outperformance, but also it’s really hard to invest in a quarter when you’re seeing that. So, we have some catch-up to do that you’ll continue to see us do as we move forward. The other thing I might just mention is that the shift did happen more quickly than we were anticipating right? We had been expecting kind of a more gradual step down. And I think, given some of the things that Dan was talking about, it did happen more quickly than we were thinking it would.
Operator, Operator
And our next question comes from the line of Alex Zukin with Wolfe Research.
Alex Zukin, Analyst
I will focus on the theme of the call and first examine the slowdown from a geographical perspective. Were there any regions or areas, even domestically, that may have been impacted more than others? Additionally, since this change occurred faster than you expected and it seems it will take a few quarters to fully stabilize, are you considering any significant adjustments to sales leadership, organizational structure, or territory alignment? It appears that given the sales cycles for these larger contracts are at least six to nine months, this could affect you until at least the third quarter of next year. I would like to understand better how long these elements will take to play out.
Dan Springer, CEO
I will address each of those two areas regarding structure, verticals, and geographies. Similar to previous comments, the most challenging aspects for the second half of this year will be those that were significantly strong throughout last year and the first half of this year. Geographically, this primarily pertains to the U.S. In terms of verticals, it covers healthcare, life sciences, financial services, banking, insurance, and somewhat technology and telecom. We see this clearly reflected in the data. Regarding our team and structure at DocuSign, I believe we have the right people to drive the business forward. We did not execute effectively coming out of the pandemic. While I don't want to use this as an excuse, we have never faced anything like this pandemic in my career. We were unsure how to approach it and forecast adequately. We clearly did not forecast as effectively as we could have. However, I wouldn't criticize our team for not anticipating this, as we had nothing comparable to learn from. That said, I have great confidence in our team because we have built an excellent franchise over the last five years, and pre-pandemic, we were experiencing strong growth and strengthening our leadership position. I am highly confident that we will return to that level of execution and quality with our team. We discussed the need to align our overall go-to-market strategy more aggressively and have tasked Scott with that role, which I believe is crucial. We aim to inject urgency, especially in the enterprise sector, where you see those longer sales cycles. This is not as apparent in our SMB or web business, so we expect to see quicker impacts there. I firmly believe we have the right talent and strategy in place. We understand how to run this business effectively, and while we've had a setback, we need to revert to executing the strong DocuSign way.
Alex Zukin, Analyst
Perfect. And then, maybe just a separate topic. Retention, attrition and renewal rates, can we talk about what did you see there? Was there any companies that may be to the point that you were making, they pre-bought a lot of capacity that they may be no longer need as they return to work, or any dynamics there that we should kind of take into account from a comparable perspective as we think about the next few quarters?
Dan Springer, CEO
Customer health is very strong. To clarify, we didn't experience customers leaving DocuSign or anything like that. We have maintained a strong focus on customer success, which has resulted in impressive customer performance, encouraging people to stay and purchase more. However, we weren't as effective in leveraging cross-sell and upsell opportunities. Although we don't publicly share churn numbers, our performance in relation to churn has been quite favorable concerning our goals. Our aim is to reduce churn over time, even as we scale. I would highlight the net retention rate of 121%. Historically, we've been in the range of 114% to 119%, which increased during the pandemic but continues to perform above that historical range. We expect to remain at or near the top of that range in the near future. Overall, customer health remains very strong.
Cynthia Gaylor, CFO
Yes. I would clarify that our historic range is 112% to 119%. Dan is correct; there were customers taking time to consider their purchases, which influenced our performance given the strong results from the first half of the year. However, both the health of the business and the health of our customers remain strong.
Operator, Operator
And our next question comes from the line of Karl Keirstead with UBS.
Karl Keirstead, Analyst
Hey Dan. I think everybody on the call appreciates the contributions that Mike Sheridan made, first as CFO and then heading up International. Do you mind just taking a minute, what were the circumstances under which Mike left DocuSign? Thank you.
Dan Springer, CEO
Yes, for sure. And I wish Mike were here, we’d do it together. Mike had a fantastic role as our CFO. And I sometimes jokingly have said to folks that when we were a private company and said, gee, Dan, you showed up and you really turned around the profitability of this business. And I sort of jokingly say, yes, Mike Sheridan did that. He got here a year before I did. And by the time I got here, I just got to enjoy the results of what the finance team had done. Mike has been absolutely pivotal to the success of the company in that role. When we made the decision 1.5 years or so ago that it was an opportunity for us to think about the future and think about the new leadership we wanted to have for our finance organization, and obviously, we brought Cynthia in at that time, we felt that Mike still had a lot of value because of his knowledge of our business and his strength as a business executive. And we had an opportunity where we thought we could do better at sort of driving the strategy of our International growth. And Mike played an important role in helping us think about that. The International teams, right, didn’t report in directly to Mike. Mike led the international strategy and brought fantastic insight to how we could continue to enhance that growth. And I feel good about that contribution he played to some of those numbers we’ve been talking about for growth. But we always knew this wasn’t a full-time sort of operating role, but it was a bit of transition where we’d have him here for a period of time. We didn’t have an exact timing. We just sort of figured, once we felt good that we had the right teams in place, we’ve really strengthened our leadership in both EMEA as well as APAC and brought in the folks that we think as part of our operating teams will lead us to where we want to go. So, that was how we sort of came to the timing. And I think Mike and I have been something we talked about really over a year now, but in the last several months, it came to the conclusion that now was the time when we were ready and as we got ready for the new year going through the planning cycle, we wanted to have those operating people take full responsibility.
Operator, Operator
And our next question comes from the line of Scott Berg with Needham.
Scott Berg, Analyst
Dan, I wanted to pivot a little bit on the sales side from all the questions, but more towards the channel. I know you had mentioned a couple of different times about taking ownership of some of the execution, and I get a sense that’s more from some of your direct sales. But can you talk about what channel contribution was like in the quarter, and have there been similar changes there as your own direct sales force?
Dan Springer, CEO
Yes, the channel aspect can be complex because it's challenging to determine how much of each sale is influenced by partner involvement compared to direct sales. Most of our sales utilize a hybrid model; we don’t operate a standalone channel business where we simply license the product and let others handle it. Instead, we collaborate extensively with many leading SaaS companies. This leads to a more indirect model. We have highlighted some of the successes with our partners during this call, particularly our strong relationship with Salesforce, which presents significant co-investment opportunities. At Dreamforce, DocuSign was recognized as one of their key partners, and we value their support. Our collaboration with Microsoft is progressing well, particularly with technical improvements in Teams. However, both Satya and I are disappointed with the pace of our joint partnership development. The attention from Satya reflects the potential we see, and now we must improve our execution on both sides. Additionally, our partnership with SAP has proven successful, positively impacting our shared customers. Other SaaS companies like Workday and ServiceNow also present similar opportunities for strong integrations and go-to-market partnerships.
Operator, Operator
Our next question comes from the line of Pat Walravens with JMP Securities.
Pat Walravens, Analyst
Great. Thanks. So, Dan, can I ask two specific questions? The first one is, when you mention customers digesting what they have purchased, I wonder if usage actually decreased. Do you track that?
Dan Springer, CEO
Usage is up. We don’t have any reductions in usage on the platform.
Pat Walravens, Analyst
Okay. And then, my sort of specific second question is, I’m just reading some of the Glassdoor reviews here, which I know you take really seriously. And so, it seems like Q3 was tough on your sales force. Do you need to adjust quotas or compensation plans given what you guys saw happen in Q3?
Dan Springer, CEO
Yes. I don't think so at a macro level. I really believe the key issue with our sales execution was not providing the necessary training that was mentioned earlier, so that the new members of our sales team understand the traditional DocuSign approach, where we engage with our customers to identify cross-sell opportunities and new use cases. This has led to significant success and high retention rates compared to other SaaS sales organizations. This year, there was a tendency for people to focus on meeting existing demand due to its increase, but without finding new value for customers, we still managed to achieve growth. I anticipate that some sales team members may hesitate or lack interest in adapting to new methods, but I believe most will recognize the value of being part of a great company like DocuSign. Our Glassdoor ratings are exceptionally high, and I think they will want to learn and develop as stronger sales professionals. We offer opportunities for personal and professional growth. Therefore, I don't believe the issue lies with how quotas were structured. We've maintained strong consistency in our quotas over the years. They were easier last year and returned to normal this year. If we execute properly with training, we can return to having the majority of our field sales team succeed.
Operator, Operator
And our next question comes from the line of Brad Sills with Bank of America.
Brad Sills, Analyst
I wanted to ask just one on Notary and Analyzer. I know the broader Agreement Cloud seems to be further out, but these solutions seem like they could really help you as you re-pivot back towards that customer success to drive more expansion. Do you feel like you have more in your arsenal of kind of upsell to the customer in the way of product with those two in particular that could perhaps get you back on track with that expand motion?
Dan Springer, CEO
Yes. I believe Notary offers a significant opportunity as you mentioned. I want to emphasize Cynthia's point about the Notary volume needed to drive substantial growth. That would be quite a challenge, as the remote online notary sector was nearly nonexistent until about a year ago. Thus, I see this as a major growth opportunity for us. The activity we are witnessing in the fourth quarter regarding Notary is very strong, with considerable interest. Particularly related to previous questions about the sales organization, our sales team is now excited. They recognize that they have new products to sell, but also realize they need to adapt their approach. It’s not just about upselling eSignature, but also about cross-selling eSignature and introducing new products in the Agreement Cloud. I expect to see significant success in this area.
Brad Sills, Analyst
Great. Thanks for that. And one more, if I may. Just it looks like customer count held in real nicely here. So, it didn’t seem like you had really any impact there. What are you seeing with that cohort of new customers that are coming on? Is there any change in kind of where they’re landing and potential for more upsell down the road with some of these newer customers that you signed this quarter?
Dan Springer, CEO
Yes, I think it’s early to think about cross-sell to the ones that joined this quarter who were just getting them onboarded. But, a couple of thoughts for you on how to think about that aspect of the business. I think new customer adds were strong. And I think we feel that the core motion of signing up new customers is going to continue to be a strength for us. I think that if you think about the gap I described where we weren’t executing as well as we could on the sort of cross-sell type behavior, if you think about the customers that have come in recently, they have also not been effectively cross-sells, right? So, I think that if you think about the different cohorts, we have an opportunity to significantly enhance our performance by going back to those that have joined in the last year. And usually, it does take a few quarters for them to sort of digest, getting onboarded and the first use cases they bring on board. But then usually when you start getting three, four quarters out, it’s an ideal time for us to go back and say, hey, let’s look at the opportunities to expand. So, I’m really excited that both of these customers coming on in Q3, but more importantly, the ones that come on in the last few quarters, we have a significant opportunity there.
Operator, Operator
And ladies and gentlemen, unfortunately, we have run out of time for the question-and-answer session. And I will now turn the call back over to Dan Springer for closing remarks.
Dan Springer, CEO
Thank you. Hey, as we saw in Q3, there will be fluctuations from time to time in our business. We haven’t had one in our almost four years as a public company that’s been in any way notable. But with the leadership position we have with having over $50 billion TAM that we feel is very addressable, I have never been more confident about DocuSign and optimistic about the big growth opportunity we have ahead. I look forward to the opportunity to chat with you all in the coming months. And thank you very much for your support.
Operator, Operator
And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.