Earnings Call Transcript
DOCUSIGN, INC. (DOCU)
Earnings Call Transcript - DOCU Q2 2024
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Second Quarter Fiscal Year '24 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. I will now pass the call over to Heather Harwood, Head of Investor Relations. Please go ahead.
Heather Harwood, Head of Investor Relations
Thank you, operator. Good afternoon and welcome to DocuSign Q2 Fiscal Year 2024 Earnings Call. I'm Heather Harwood, DocuSign's Head of Investor Relations. Joining me on today's call are DocuSign's CEO, Allan Thygesen, and our CFO, Blake Grayson. The press release announcing our second quarter fiscal year 2024 results was issued earlier today and is posted on our Investor Relations website. Now, let me remind everyone that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations regarding the pace of digital transformation 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 billing. 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 Thygesen, CEO
Thanks, Heather, and good afternoon, everyone. We closed out the first half of the year strong by delivering solid second quarter financial results. We continue to drive momentum in our business by making progress against our key initiatives and delivering enhancements to our product portfolio. Exiting the quarter, I feel energized, having recently come off our momentum events where we visited eight cities spanning five continents. We met with thousands of partners and customers who are excited to hear about our dual track plans to improve agreement workflows. In the near-term, we're focused on the agreement management layer. We're taking something that's quite complex for our customers and making it easier and more delightful. Over time, we're building the intelligence layer that will unlock agreement data. We presented our future vision, publicly shared our product roadmap and received tremendous validation after showcasing product demonstrations aligned to these two priorities over the quarter. Let me share some highlights from this quarter's financial results. Q2 total revenue came in at $688 million, up 11% versus the prior year, and Q2 non-GAAP operating margin came in at 25%. While we are pleased with our results, like many others, we are seeing continued macro pressures tempering expansion rates. However, we remain focused on what we can control, executing against our initiatives to drive innovation and operational efficiency, further setting the foundation for growth while navigating an uncertain environment. Now I want to highlight our pace of innovation driven by our delivery of new features and products. The progress we're making demonstrates how we are expanding upon our leadership in eSignature. As I said, we're thinking about our roadmap on two horizons. In the short term, we're looking to ship new features and functionality that differentiate DocuSign and streamline agreement workflows, bringing in new customers and continuing to deliver value to existing customers. To that end, we continue to expand our identity verification portfolio announcing the global launch of Liveness Detection for ID Verification. Liveness Detection technology leverages AI-powered biometric checks to prevent identity spoofing which results in more accurate verification without the signee being present. ID Verification is already helping our customers. Our data shows that it has reduced time to sign by about 60%. Later this year, we expect to expand our functionality with a wallet feature that will enable frequent users to save their profile, driving improved efficiency and convenience. These add-ons will be available for all of our plans, including our standard plan representing an important differentiator for DocuSign's product offering for all customer types. As I've stated in the past, the value of an agreement is in the data and every step of the workflow will benefit when it's automated, intelligent and seamlessly integrated into core businesses. Web Forms is delivering on that vision. During the quarter, we shipped and announced more and increasingly sophisticated capabilities to our Web Forms offering. In July, Web Forms became available on DocuSign FedRAMP moderate environment, which unlocks new possibilities for our federal state and local government customers to digitize their forms. We also soon ship advanced reporting capabilities, enabling users to unlock data from their agreements to uncover actionable insights and drive data-driven decisions. This quarter we also announced that DocuSign Monitor is now available to our CLM customers. Monitor provides a comprehensive and holistic multiproduct view of user activity on one dashboard for both CLM and eSignature ensuring organizations can quickly and easily detect, investigate and respond to suspicious activity before incidents occur. For our customers, it's powerful reassurance. Losing even one high-value agreement can have a significant business impact. We are seeing large marquee organizations across industries, including tech and finance, like DocuSign CLM to transform how they automate their end-to-end agreement processes across their entire enterprise. As an example, we closed one of our largest CLM deals ever. This customer is a leading residential solar company that turned to our CLM solutions to help automate over 1,200 of their agreement templates, leveraging our document generation and workflow management capabilities. CLM helps them automate their agreement process across teams, adding simplicity and security. Our CLM today represents a small contribution to our overall business. We saw solid year-on-year growth, which is a reflection of our leading market position. We are encouraged by the wins and we have just begun to tap into the potential for this market. More broadly, we continue to make meaningful progress towards our vision of smart agreements. Before we discuss our final update, it's worth grounding this portion with a reminder of what's generally true in the market. Individual solutions work, but customers suffer when putting together solutions combining different product categories like CLM, eSignature, workflow management, document storage and so on. Today only the largest enterprises with resources and IT sophistication can link these solutions together and only at a significant expense. This depresses the overall consumption and size of the market. We are on a multi-quarter path to evolve our offerings towards a platform capable of coordinating broader processes at a fraction of current complexity. Our goal is to unlock the market for intelligent agreement management from millions of businesses, automating billions of hours of manual work and improving business outcomes. Today, we are already monetizing AI directly through our CLM plus products and indirectly through its use in our products such as search. Our next step on that journey is with AI labs. With AI labs, we are co-innovating with our customers. We provide a sandbox where customers can share a select subset of agreements and find new features we're testing. Our customers get early access to developing technology and we receive early feedback that we will incorporate into our products. By working with our customers in the development phase, we're further reinforcing the trusted position we've earned over the last 20 years. Next, let me provide an update on the progress we're making with our go-to-market capabilities, balancing scale with efficiency. As we evolve how DocuSign goes to market, integrating our digital direct and partner selling motions to leverage an omnichannel approach. I'd like to provide an update on the progress we're making in our self-serve product led growth channel. The PLG and self-serve capabilities are one of our most important areas of investment. In addition to our continued focus on delivering against our product roadmap, we're improving our customer experience by making DocuSign products much easier to try and buy. With such a diversified customer base, it's critical that we deliver delightful self-service experiences, not just for growth, but also for scale and efficiency. We made good traction over the quarter, noting higher traffic conversion rates of new customers on our website. We've also unlocked expansion opportunities for customers directly within their product experience, resulting in relative strength through our digital channel. We expanded relationships with our partner ecosystem, which is an important part of our omnichannel approach to drive reach and scale. In Q2, we launched a pay-as-you-go offering for our ISV partners, which enables ISVs to embed DocuSign eSignature in their agreement workflows on a consumption basis. Over the course of the next few months, we will have been featured partners in some of the most important technical conferences, most notably at Google Next, Dreamforce, Deutsche Telekom's Digital X, and Microsoft Ignite. One of the key pillars of our omnichannel is strengthening our direct sales productivity. This was the second consecutive quarter of a higher-than-anticipated rate of on-time renewals, which is a positive sign of increasing go-to-market execution. It's contributed favorably to our billings outperformance for the quarter, which Blake will touch on in the financial update. In our international business, expansion remains the largest part of our addressable market, and we are making progress. This past quarter, one of Australia's largest banks expanded their relationship with us. Customers since 2020, they use our solutions to streamline both internal and customer-facing business processes in an effort to remove friction, reduce cost and deliver better experiences. The upside potential in our international business is large. And as I had commented on previously, we met with hundreds of our international customers through DocuSign's Momentum Events. The excitement about our product roadmap was contagious, and we look forward to growing our presence globally. We are shaping the future of the agreement category and building on our global scale and trusted market position. The future of agreements is not about attaching yourself to a legacy document format. As we continue our product evolution by adding intelligence and unlocking the data trapped in agreements, we're increasing productivity, reducing friction and saving our customers' time. This is a fundamental shift in the agreement space. I'm confident in our competitive advantage as DocuSign is the largest player, focused solely on improving the agreement process. Moreover, there's no other company focused on the full end-to-end agreement process for companies of every size from SMBs up to the world's largest enterprises. In closing, I want to thank DocuSign's employees worldwide for their collective power in driving our success. I'm proud of the tremendous job the team has done navigating the dynamic environment. I'd now like to welcome Blake Grayson, who, as you know, joined us in mid-June as our CFO. Blake has proven to be a valuable addition to our team, and I look forward to our continued partnership. Let me turn it over to Blake to review our financial performance.
Blake Grayson, CFO
Thanks, Allan, for the kind words, and good afternoon, everyone. I'm really excited to join my first earnings call as DocuSign's CFO. Over the last few months, I've gained considerable exposure into the workings of our business and the value proposition as we look to transform agreement workflows. First, I'd like to share what led me to join DocuSign. DocuSign has a powerful brand and a scale in our customer base that is rare in the enterprise software space. We deliver high ROI products that enable our customers to complete agreements faster, easier and more securely. The opportunity for our business is quite large. And while I am optimistic about our future, we still have work to do to achieve our goals, particularly in a demand environment where companies are appropriately scrutinizing their investments. With that, let me turn to our Q2 results. For the second quarter, total revenue increased 11% year-over-year to $688 million, and subscription revenue also grew 11% year-over-year to $669 million. Our international revenue growth outpaced our domestic business with 17% year-over-year growth to reach $180 million in the second quarter, representing 26% of our total revenue. When I think about the market opportunity ahead, I'm excited by the greenfield space that exists internationally. It is a largely untapped market and a key pillar of future growth. I look forward to updating you on our progress as we work to increase our footprint globally. Second quarter billings rose 10% year-over-year to $711 million. Similar to last quarter, our Q2 billings outperformance was driven by a higher rate of on-time renewals. It is encouraging to see us maintain the higher level of sales execution we saw in Q1 through the first half of the year. However, given the macro environment and headwinds in some expansion metrics, we continue to expect billings growth deceleration in the back half of the year, which is in line with our previously communicated expectations. We added approximately 37,000 new customers during the quarter, which brings our total customer base to 1.44 million, a 12% increase year-over-year. This includes the addition of approximately 6,000 direct customers to reach a total direct customer base of 226,000, an 18% year-over-year increase. We also saw a 6% year-over-year increase in customers with an annualized contract value exceeding $300,000, with a total of 1,047 customers. Similar to last quarter, the quarter-on-quarter decline in this customer segment was primarily related to customer buying patterns, lower expansion rates and partial churn. However, as we ship innovative features to deepen our product line-up and differentiate our offerings, more customers are recognizing the value of adopting our features and frictionless functionality. This increases product stickiness and we are pleased that over 50% of our direct customers have now adopted five or more features, an increase of nearly 10 points year-over-year. Dollar net retention was 102% for the quarter. We're seeing continued macro pressures resulting in moderated expansion rates. And as we expect customers to continue scrutinizing budgets and optimizing spend, we anticipate the Q3 dollar net retention rate to trend downward. From a vertical perspective, we saw pockets of relative strength within health care, insurance and business services. One of the most significant strengths I've gained insight into is DocuSign's broad and diverse customer base, which enables us to help offset pressures from verticals that are more sensitive to the interest rate environment, such as real estate. Given the large breadth and depth of our installed base and the investments we're making in product innovation, we believe that as the macro environment stabilizes or improves, DocuSign will be well positioned to capture expansion opportunities. Non-GAAP gross margin for the second quarter was 82%, in line with the prior year. Second quarter non-GAAP subscription gross margin was 85%, also in line with the prior year. Q2 non-GAAP operating income reached $170 million, up 51% from the prior year. Non-GAAP operating margin of 25% was up nearly 700 basis points compared to 18% last year. As discussed on last quarter's call, we are executing against our investment plan. Our philosophy on investing is consistent. We'll maintain continued disciplined investments to drive growth in our top line over time. Although we expect to ramp investment in the back half of this year, we still expect to exit the year with operating margins better than they were prior to our restructuring efforts. Q2 non-GAAP EPS was $0.72, an improvement of $0.28 from last year of $0.44. We ended Q2 with 6,748 employees compared to 8,061 the year prior. Second quarter operating cash flow was $211 million, representing a 31% margin and an increase of 75% versus the same quarter a year ago. Free cash flow for the quarter was also up 74% year-over-year coming in at $184 million, representing a 27% margin. As I'm learning more about the business, I am impressed with our ability to consistently generate strong free cash flow. With regards to the balance sheet, we exited Q2 with more than $1.5 billion in cash, cash equivalents and investments. We currently have approximately $725 million in convertible debt that will be maturing over the next few months. Our strong cash position is a reflection of the operating leverage in our business model that provides a strong level of flexibility. And as we think about utilizing this cash, we will do so thoughtfully ensuring our capital is strategically deployed. Related to this, we redeployed excess capital during the quarter and repurchased 583,000 shares for approximately $30 million. We also announced today that we are increasing the size of our share repurchase program to $500 million, up from $200 million as we continue to focus on being opportunistic, reducing dilution and returning excess capital to shareholders as appropriate. In addition to our share repurchase program, during the quarter, we used $40 million to pay taxes due on RSU settlements, reducing the dilutive impact of our equity programs. With that, let me turn to our Q3 and fiscal '24 guidance. To reiterate, while we're pleased with our Q2 financial results, we're also cautious in light of an uncertain macro environment and competitive dynamics. For the third quarter and fiscal year '24, we expect total revenue of $687 million to $691 million in Q3 or a 6% to 7% year-over-year increase and $2.725 billion to $2.737 billion for fiscal '24 or an 8% to 9% year-over-year increase. Of this, we expect subscription revenue of $669 million to $673 million in Q3 or a 7% to 8% year-over-year increase and $2.649 billion to $2.661 billion for fiscal '24 or an 8% to 9% year-over-year increase. For billings, we expect $668 million to $678 million in Q3 or a 1% to 3% growth rate year-over-year and $2.804 billion to $2.824 billion for fiscal '24 or growth of 5% to 6% year-over-year. We expect non-GAAP gross margin to be 81% to 82% for both Q3 and fiscal '24. We expect non-GAAP operating margin to reach 22% to 23% for Q3 and 23% to 24% for fiscal '24. We expect non-GAAP fully diluted weighted average shares outstanding of 207 million to 212 million for both Q3 and fiscal '24. In closing, I want to thank our team for their warm welcome and their commitment to work with our customers in a challenging environment and I look forward to connecting with many of you in the near future. We are focused on executing against the key initiatives that we believe will drive future long-term growth and expansion as well as being mindful of efficiency opportunities that will set us up for profitable, sustainable growth. As Allan mentioned, we are the only company at scale that is solely focused on helping customers improve the agreement process. We look forward to keeping you updated on our progress as we continue to evolve the agreement workflow category and help our customers become more productive and more efficient. That concludes our prepared remarks. With that, operator, let's open up the call for questions.
Operator, Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Mark Murphy with JPMorgan. Please go ahead with your question.
Sonak Kolar, Analyst
Great. This is Sonak Kolar on for Mark Murphy. Thank you for taking the question and congrats on the healthy execution this quarter. Allan, just quickly on the AI front. You discussed a number of the exciting AI product launches you had at the recent Momentum Conference. Are there any specific products you would call out in which you see the greatest incremental monetization or upsell potential longer term, whether that's around ID Verification, agreement summarization or some of the other areas, for example?
Allan Thygesen, CEO
Yes. Look, I think we think AI will impact practically all of our products at every step with the agreement workflow. So I don't know that there's just a single call-out. But maybe to rattle off a couple that I'm most interested in. I certainly think that the broader, should we say, agreement analytics category is poised to be completely revamped with Generative AI. We were an early investor in that category. We saw that coming together with CLM four or five years ago and made a couple of strategic investments and been a leader in that space, but have been held back by fundamental technology. I think now with Generative AI, we can do a substantially better job more seamlessly, lighter weight with less professional services. And so I'm very excited to think about how it transformed the CLM category and enables us to deliver more intelligent agreements. I think you mentioned ID Verification. I agree 100%. Fundamentally, that entire category is AI-enabled. The upload and ingestion of ID recognition of it and then that Liveness Detection where we're detecting who you are and that you are present and matching that to ID, that would simply not be possible without today's AI technology and really takes just dramatically reshapes the ability to trade off risk and convenience. So I think that's a good one. But I really do think that it works across the entire flow. We use it today. When you use DocuSign eSignature today, we automatically recognize your field. That's the AI working detecting what's going on in the agreement.
Sonak Kolar, Analyst
Great. Thank you. And then a quick follow-up for Blake. Any context that you can provide in terms of how the macro environment might have trended for Q2 relative to Q1? Were there any signs of improvement in underlying demand trends or maybe pockets of relative stability? Thank you.
Blake Grayson, CFO
Sure. Thanks for the question. I think that from a macro perspective, overall, it seemed pretty similar, I think, from Q1 into Q2. You've got certain verticals and certain areas that show relative strength, and we talked about those on a couple in the prepared remarks. And you have other verticals that are obviously still under some stress. And so we have to deal with that. I think that on the macro side, the biggest pressure point that I think we deal with is how CFOs, people in my position, are generally scrutinizing investments across the board. And so for us, it's trying to work with them and provide the best value that we can. But nothing I would say stands out from Q2, I think, from Q1, but we're still in, obviously, a bit of an uncertain environment.
Operator, Operator
Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Luv Sodha, Analyst
Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my question and welcome to Blake. I wanted to ask one to Allan. Maybe, Allan, could you talk a little bit about the go-to-market execution? I know you mentioned the focus on product-led growth. But just talk about how it has been with the focus on product-led growth, what has been the approach to attract larger customers? And has it been more challenging? Or is it in line with your expectations?
Allan Thygesen, CEO
Yes. I'd say, first, we remain primarily dependent on our direct sales channel. That is our primary go-to-market. That will be the case for the foreseeable future. And so the execution that you're seeing in the numbers is a result of that. I'm particularly happy with the customers and renewal management team we delivered, as we mentioned, another quarter of strong on-time renewals. Also, a huge emphasis all throughout the pre-sales, sales and post-sales process on adoption of features that make our products more sticky and more valuable to customers. And as Blake alluded to, we saw nice progress there. As we look ahead, it will be critical to continue that transformation of the sales organization, given the expanding breadth of our product offering and the need to pitch at an even higher level. But I'm very bullish on the progress that our direct team is making. I'd be remiss if I didn't also mention I think we made a significant adjustment, as you will recall, in February, with restructuring effort. 95% of that effort was in the field organization. And yet, we, I think, are continuing to be able to execute. So that speaks highly, I think, of the management team's effort there. I'd just add beyond the direct sales execution, as I mentioned, is primary. There are two other points, the digital part where we are seeing really good progress, and that business is growing a little bit faster, and I'm very pleased with the progress there. And then the third leg of the stool is our partner channel, and we are starting to ship features that will enable us to grow that channel so that we can have a really nice omnichannel direct self-serve and partner approach.
Luv Sodha, Analyst
Perfect. Yes, I just wanted to follow up with Blake regarding the net dollar retention. I know you mentioned it might trend down a bit further from the 1% or 2%. Do you have any insight on when we might see some stabilization in that metric?
Blake Grayson, CFO
Yes, sure. So just a reminder, and then it's also for me as I'm learning the business. The DNR, the dollar net retention, is only for our direct customers and only for those with a tenure of at least a year. Our kind of communications on this figure is in line with our previous communications regarding the trends. And as covered in the prepared remarks you heard me say we do expect continued pressure into Q3. In a tough macro environment where companies are scrutinizing investments, it can lead to smaller expansion opportunities. And this is really why the product development focus for us and the roadmap is so important because that's how we can try to provide chances to impact that trend, and that's exclusive of macro forecasts. So for us to impact that number, that's kind of that longer-term product roadmap that we can drive to essentially be able to provide customers the chance and opportunity to do more with us to provide them better ROIs and better productivity opportunities. And we've got a lot of initiatives underway to try and make progress there. But with regard to trying to call any time further out beyond Q3, we're not prepared to talk about that at this time.
Operator, Operator
Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Tyler Radke, Analyst
Yes, thanks for taking my question. I wanted to just get your perspective, Blake, and congrats on the role here. On the international opportunity, you highlighted that as a big opportunity that you saw coming on board. But how are you thinking about the size of that business potentially over time? And any thoughts on potential investments that you can make to better go after that? Thank you.
Blake Grayson, CFO
Sure. I think from just my history, one of the experiences that I bring and just the perspective is the international business and in a previous role at Amazon, I led finance for the international group there. The total addressable market outside of North America is huge and yet it only flexes 25%, 26% of our total revenue. So I think the opportunity for us over the long term there, there's no reason why that shouldn't grow as a percent of the total. I think that you've heard Allan talk about the expansion opportunities. We just opened an office in Munich, Germany. And so we are making investments there, and we are seeing those green shoots of opportunity. So it's a process for us, right? And when we talk about product development, we talk about product development globally. It's not like a North America only kind of endeavor. And so when we do that and we keep a focus on the global nature of this business, I'm cautiously optimistic that we have an opportunity to really expand our footprint there.
Allan Thygesen, CEO
Yes. Maybe I can add a little bit more color there. So on the product side, let's take Germany as an example. We launched the ID Verification for EU qualified last quarter. We are qualified as a trust provider in the EU, and it puts us in a very unique and strong market position. The German market is particularly sensitive to those regulatory issues. One of the things we're launching and we previewed at the Momentum Conference is a wallet capability or essentially, once you locked in once with this IT system, you can auto log in in the future, further reducing the friction added by having more security. That's been the traditional risk trade-off that companies have faced. I think we are very optimistic about our position in the German market. As Blake mentioned, we just booked an office there, and I'm going there again next Sunday. In Japan, we're at an even earlier stage of market development. Just at the end of August, we launched a fully localized CLM, which I believe is the first Western-style CLM introduced in Japan, and there's a lot of interest and appetite for that. I was in Tokyo a few weeks ago. We're very bullish on the opportunity in the Japanese market as well. So beyond the markets where we can invest at that level, we will use our self-serve and partner channels to ensure that we're available essentially everywhere agreements are signed.
Tyler Radke, Analyst
Great. Thanks for the color and a follow-up question just on underlying growth. And certainly, there were some interesting slides in the presentation. But if I look at four-quarter trailing billings growth, it seems like billings growth over the last four quarters has been stabilizing in the low double-digits. You saw subscription growth only decelerate about one point this quarter. Do you feel like the business is kind of stabilizing here? How should we just think about the normalized growth environment as you kind of process the puts and takes in the quarter? Thank you.
Blake Grayson, CFO
Sure, I'll answer that, and Allan can add any details if he’d like. Overall, I'm very pleased with our performance in Q2, but as mentioned in the prepared remarks, we still have areas to improve. We achieved double-digit growth in both billings and revenue year-over-year in Q2. Our customers are increasingly adopting five or more features at an accelerating rate year-over-year. Our total customer base also grew by double digits year-over-year, and we saw solid growth internationally. Additionally, we generated strong free cash flow, with $187 million for the quarter, supported by a substantial foundational customer base. We acknowledge the need to improve retention rates and drive growth, but overall, it was a solid quarter. Looking to the future, the billings number tends to fluctuate each quarter. I appreciate your approach in using the four-quarter trailing number, which is a good perspective. Over Q1 and Q2, we've seen strong results in on-time renewals, and this trend is expected to continue. However, we are facing pressures from lower expansion rates and some macroeconomic uncertainties, which can make the billings number a bit volatile. I believe our full-year guidance for billings is actually stronger than what we provided last quarter. As I contemplate the business, my main focus is on transitioning to a new growth phase. We need to prioritize long-term, continuous product innovation to support future expansion, which will take time. Fortunately, we have a strong core customer base that generates free cash flow, and we are eager to execute on a product roadmap that we believe will create growth opportunities in the long run.
Allan Thygesen, CEO
I think that's well said, Blake. I would just add. I think this is a transformational year for DocuSign where we're making the investments to enable the next phase of growth. We're happy that we're able to sustain the business nicely. But we're not satisfied with that, and we are planning and executing towards further acceleration in the years to come.
Operator, Operator
Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question.
Jake Roberge, Analyst
Hi. Thanks for taking the questions. Has the macro started to impact the top of the funnel at all or are most of the headwinds still related to just that expansion motion? And then how is linear demand throughout the quarter? Have there been noticeable changes on the macro front, especially as we've gone through July and August?
Blake Grayson, CFO
Sure. I'll attempt to address your last question first. Regarding the linearity, it aligns generally with our historical trends. Monthly results can be volatile in this business due to our sales cycle. I would say that the linearity trends are already incorporated in our guidance, so there’s nothing significant to highlight from that perspective. As for the macro component, the expansion aspect is the most critical factor. We have a substantial business base, with over 1.4 million customer accounts, which is likely the most impactful element on the expansion side, and this can be observed in the DNR rate.
Allan Thygesen, CEO
Yes. I think I spot on that. I would simply add that the relative strength in our digital business, I think, reflects that the SMB segment is doing well. And that is new customer acquisition. I think it reinforces the themes that Blake was talking about.
Jake Roberge, Analyst
Helpful. And then Allan, you made quite a bit of organizational changes over the past year with two restructures, a new CFO, Head of Sales and President. Do you feel like the structural changes are behind us at this point? And then when do you think those changes start bearing more fruit for DocuSign just as a broader or just given those changes likely take a few quarters, if not years to play out?
Allan Thygesen, CEO
You're absolutely right. We've made significant efforts over the last 15 to 18 months to bring on a top-notch leadership team with extensive experience, who are also excited about the challenges ahead for DocuSign. I'm very pleased with the talent we've attracted, which reflects the potential within DocuSign's brand and the quality of our company. The individuals we've been able to bring on board, not only since my arrival but also before, are impressive. I believe we now have a well-rounded team, with no open positions in the top two layers reporting to me, which hasn't been the case for a long time. We're also progressing well in filling important leadership roles at the next level. I feel the organization is now better prepared to take full advantage of the opportunities in front of us. This readiness is essential for our product roadmap, go-to-market transformation, and future growth. We needed to establish this foundation before we could make progress on other initiatives.
Operator, Operator
Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.
Brad Sills, Analyst
Great. Thank you so much, and I wanted to ask a question around the international strength you're seeing. Any countries you'd call out there? And as you've been investing in international, are there any regions that we should expect to see perhaps some incremental traction from here?
Blake Grayson, CFO
I'll just comment. Regionally, I wouldn't say there's necessarily one standout versus the rest. But I just think we had general strength outside of North America, which I appreciate because it just goes to the kind of notion about the product and the value offering that we have. How do we expand that larger going further? I think also that as far as new plans and new regions, we'll take that on a case-by-case basis. I think it's the one nice thing for us in this business is the marginal cost to expand is not terribly large with us. For us, it's opening a sales office and the kind of thing, and you want to have the situation laid out appropriately in order to have the right leadership and scale and things like that. But I don't have anything with that individual countries to reference other than the anecdotes that Allan already provided around Asia and Europe.
Allan Thygesen, CEO
But in general, I'd say I think all the international regions, Europe, APAC, LatAm, all grew double-digits.
Blake Grayson, CFO
Yes. It was strong across the world is what I would say for us. Internationally, we're pleased with our international progress regardless of the region.
Allan Thygesen, CEO
Yes.
Brad Sills, Analyst
It's great to hear. Regarding the restructuring of the direct sales organization, do you feel that you have the right team in place? Are the efforts to restructure the existing organization mainly behind you? Do you believe the current organization is set up to execute moving forward? Thank you.
Allan Thygesen, CEO
We don't have any plans for any major restructuring of our sales organizations. We're always making adjustments and continuing to evolve, but there is nothing significant or risky on the horizon.
Operator, Operator
Our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question.
Karl Keirstead, Analyst
Okay, great. Thanks. Maybe a couple for Blake. Blake, if you don't mind unpacking the 3Q billings guide, it obviously implies down $33 million. I know we had that phenomenon two years ago, but it's typically up sequentially. Is this a function of the greater on-time renewals? Anything else that you might flag around that?
Blake Grayson, CFO
Sure. Yes, the guide reflects continued trends that we're seeing in the on-time renewals. The function of the on-time renewals for us is that every customer situation is different. Deals can renew on time, they can be renewed early, or they can be pushed out. So every quarter puts and takes on that. The first half of the year has been strong due to sales execution. There are deals that may normally have slipped out to Q3 that closed in Q2. And so that's a positive. Renewal is obviously well super important for us and really drives that foundational free cash flow generation, it's more of a timing thing than it is for on the growth side. The positive to note for us on the on-time renewals is that we're not relying on discounts or incentives to drive that improvement in that on-time renewals. It's better sales execution. And so the teams were really hard just to stay on top of those things when they come up for renewals because an on-time renewal is just a deal that renews on schedule. So that's super strong. And with regards to the guide, as far as other pressures, that's just the macro pressures we discussed earlier with the DNR like essentially the net retention components and the pressures that we're seeing there.
Karl Keirstead, Analyst
Yes. Okay. Makes sense. And one more, Blake. Your predecessor, it was never a formal guidance, obviously, around operating cash flow. But the kind of soft color was that it might land for this fiscal year, a couple of points below operating margins. Is that still roughly your framework as to where cash flow margins might shake out this year?
Blake Grayson, CFO
I'm not ready to provide specific guidance on cash flow margins. What I aim for is to have the business become a long-term cash generation company that achieves profitable and sustainable growth. We've generated $211 million from cash flow operations and $184 million in free cash flow, which are strong results. These figures may vary each quarter due to timing, but I'm excited about our cash-generating business model.
Operator, Operator
Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.
Josh Baer, Analyst
Great. Thank you for the question. I had one more just to clarify on the topic of on-time renewals. So that was part of what drove billings upside this quarter, but now you're saying that the guidance now reflects sort of the same level of on-time renewals. So is that right that there's kind of been a change in how you're incorporating the idea of on-time renewals into guidance? And now if things stay the same in Q3, you wouldn't see upside to billings?
Blake Grayson, CFO
I'm learning as we go, and I want to clarify this a bit more. On-time renewals play a crucial role, as any renewal that was delayed last year impacts our ability to maintain momentum. It's really about timing. Although we performed strongly in the first half and our execution remains solid, there’s limited room for growth. This situation is more about timing rather than presenting a growth opportunity. That's why you see these results. The guidance reflects this, and we did increase the full-year guidance last quarter, which already accounted for these factors; it’s just the subtlety of how on-time renewals influence the flow.
Josh Baer, Analyst
Okay. Got it. And then one more just on sort of the big picture agreement process and workflows. I was just wondering, are there certain departments or workflows where DocuSign should own that full agreement process versus others where maybe like the basic DocuSign eSignature is integrated into like HR onboarding or some other departmental or workflow? How to think about the two different possibilities there? Thank you.
Allan Thygesen, CEO
Yes. People use DocuSign for various workflows, focusing on areas where we had a strong early presence. In particular, the finance and real estate sectors have shown significant strength. Additionally, all types of B2B sales have been greatly enhanced by DocuSign, and we see a lot of activity there. We're also observing a rise in HR applications, thanks to strong partnerships with Workday and SuccessFactors, among others. Enterprises are increasingly prioritizing procurement management, seeking to automate processes for better efficiency and transparency. This has led to higher adoption rates, especially in the pharma sector, where many use cases center around procurement. We also have a strong partnership with NVIDIA, which leverages DocuSign for both eSignature and Contract Lifecycle Management, particularly in their supply chain operations. Overall, our presence is widespread across major enterprise workflows and nearly all industries. While we initially had strong roots in specific industries for the eSignature movement, our reach is now quite broad. Does that clarify things?
Operator, Operator
Our next question comes from the line of Jackson Ader with MoffettNathanson. Please proceed with your question.
Jackson Ader, Analyst
Great. Thanks for taking our questions, guys. First one on the product set or the feature set. It's much broader and deeper than it was even just a couple of years ago. And I understand, given the macro environment, probably hard to pass or to expect to get all the value you've been putting in the products back from your customers. But I'm curious, how are you making sure that once the macro headwinds subside that you don't put $10 of value into the product and only get $5 back, right, just to make up numbers?
Allan Thygesen, CEO
It's definitely a valid point. Over the past nine months, we have accelerated our pace of innovation and product releases, adding significantly to our core offerings. The major transformation of DocuSign into a comprehensive agreement platform with an intelligence layer is still forthcoming. We previewed some of this at our recent events, and if you haven't seen the Momentum keynotes, they are available on our website and provide a solid overview of our direction. For instance, we're working on orchestration, which will allow customers to dynamically create workflows related to agreements. Additionally, integrating DocuSign with third-party applications will be a major advancement in how agreements are executed. Enterprise Search, which we plan to roll out in Q4, will enable semantic searches across all agreements. For example, if you need to find "force majeure" clauses in your contracts, instead of relying on a large team of lawyers to comb through agreements for months, our AI can quickly interpret and present all relevant agreements. This represents a significant capability we currently do not offer. Up to now, many of our releases have complemented the existing products and strengthened our market leadership position. However, the broader rebranding of DocuSign as the facilitator of agreement workflows and intelligence is still on the horizon. We expect to start delivering on this effort later this year and throughout next year, providing us with substantial growth opportunities from a product standpoint.
Jackson Ader, Analyst
Okay. Great. And then a quick follow-up. Blake, what should like what's the plan or what should we expect for stock-based compensation? I'm surprised to see it up year-over-year just given the trend in headcount?
Blake Grayson, CFO
Sure. So stock-based compensation as a percentage of revenue in Q2 is about 22%. And that's held relatively steady for us. We review that number with our outside compensation, consultants, we're slightly higher than our average peer group. The driver on the year-over-year increase has a lot to do with the new leadership folks that we've brought on to the team. And so you'll see me being one of those people, and you'll see that. It is something we're definitely paying attention to and mindful of, but that's the gap when you're asking about between headcount and cost. That will take time, obviously, but we'll work through that.
Operator, Operator
Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.
Alex Zukin, Analyst
Hi, everyone. Thank you for taking my question, and congratulations on a strong quarter. I have two questions. First, I would like to revisit the topic of net retention as I believe it is very important. To what extent is the net retention dynamic within your control? How much of it is influenced by macroeconomic pressures compared to competition and loss due to consolidation? I'm asking this because you have already launched several interesting new products in the market, such as CLM+, CLM, and the Identity product you mentioned. Can you provide us with some assurance about the minimum level we should expect it not to fall below, or after how many quarters post-cohorts that we should begin seeing it stabilize?
Blake Grayson, CFO
Sure. It's awfully challenging for me to try to look into that crystal ball and tell you on the cohort side. What I would say is I think you've nailed it in your question, it's a combination, right? We have a combination of macro kind of effects that essentially as customers scrutinize their investments and they're trying to save every dollar they can, what do they do? But then, it's also combined with that we have it under our control that if we can execute and provide products that customers want and over time we expand, it gives us that opportunity for expansion. So I think it's a double kind of a component that affects that rate. And so it's part of its under our control and part of it's also the macro environment. But at the end of the day, I feel like if we can execute on that product roadmap over time, it kind of destinies in our hands. Allan will probably maybe add more to that.
Allan Thygesen, CEO
No, I agree. I set with that. And look, we've said that it was going to be a few quarters of downward trend, and then we will see how we do with the product release system, but we certainly want to get it to a healthier level. It's our expectation that we'll be able to do that. So that's as much as we can say at this point.
Alex Zukin, Analyst
Okay. That makes sense. And I guess the other question is, again, it feels like a bit of a tale of kind of two cities, right? To some extent, you've got the double-digit growth, both in billings and in CRPO and subscription revenue. But then to the question Karl asked, your guidance implies billings in the very low single-digit range in the second half. It implies that even subscription revenue growth kind of goes down into the 6% range exiting the year. I appreciate the conservatism we do love it. But if you think about the business itself and that's why that NRR question comes back. The Street has you accelerating in Q1, right? And to some extent, accelerating next year. So just help us level set like that exit rate that you're looking at for Q4, what would be the factors that you would be expecting to kind of have to see for it to kind of get better from there?
Blake Grayson, CFO
Our full year guidance is consistent with or an improvement over the previous quarter. We remain committed to that guidance. As we have mentioned during this call, the strong performance in on-time renewals has contributed to our success in the first half of the year. However, as you pointed out, pressures on DNR expansion rates and macroeconomic uncertainty create some volatility for us. In the long run, I won't specify a timeline, but our focus is on how to reignite growth, especially through product innovation. As a leadership team, over 70% of our time is dedicated to evolving our product roadmap in a way that our customers value and that provides us with opportunities for expansion. This is our primary focus. We believe that if we can successfully execute this roadmap, our results will reflect that.
Allan Thygesen, CEO
I agree with that. The highlight of this quarter was the strong execution, and I want to commend the team for their efforts. It was incredibly gratifying to present our vision and roadmap to customers and partners, and their enthusiastic validation wherever I went reassured us that we are on the right track. We have a positive outlook for the long-term future of DocuSign, and that optimism has grown due to the sharing of the roadmap and the feedback we received. Our goal is to deliver on that. If we achieve that, everything will be just fine. Maybe to close. Thank you, everyone, for joining us today. We're pleased with the results and feedback and we're driving transformation here at DocuSign. We want to balance our product investments with operational efficiency and drive shareholder value. Thank you for joining us.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.