Earnings Call Transcript - DOCU Q3 2021

Operator, Operator

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

Annie Leschin, Head of Investor Relations

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

Dan Springer, CEO

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

Cynthia Gaylor, CFO

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

Operator, Operator

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

Sterling Auty, Analyst

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

Dan Springer, CEO

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

Sterling Auty, Analyst

Got it. Thank you.

Operator, Operator

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

Stan Zlotsky, Analyst

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

Dan Springer, CEO

Let me give you a sense of the arc we’ve had, Stan, over the last year. If you recall when we finished Q4 last year, the message we had was that there was a fairly significant acceleration in particularly CLM, which was the major additional Agreement Cloud product we had at that time, and we were quite excited to see that coming into the New Year. At the beginning of Q1, we saw that trend continuing. After COVID hit, we saw a significant change. We saw customers coming back to us saying they want to be Agreement Cloud companies long-term, but right now, they’ve got some critical use cases that need signatures, and so we saw dramatic acceleration on the signature side of the business while some deals and transactions on the CLM side slowed. I think we’ve seen the same thing throughout the year. In the last quarter or so, we’ve started to see that coming back. Things like Seal Software and CLM are now returning to the levels we would have expected if it hadn’t been for COVID. CIOs and other business leaders fundamentally had to react upfront, focusing only on critical projects. Remember, they were just like DocuSign having to adapt to a work-from-home setting, unable to work in their offices. Larger and more complex projects that require a systems integrator or some sort of statement of work got pushed out a little bit. Now people are coming back and saying those projects are critical to our future, and so the Agreement Cloud is top of mind with our customers again. I had a call this morning with a very large customer of ours, and they said, “Hey, we are super excited to reaccelerate our plans to roll out CLM,” while they have dramatically increased their signature usage throughout the year. They said, “Now is the time. We are ready to reaccelerate with CLM.” That’s what we are going to see over the next few quarters.

Stan Zlotsky, Analyst

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

Dan Springer, CEO

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

Stan Zlotsky, Analyst

Perfect. Thank you so much.

Operator, Operator

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

Bhavan Suri, Analyst

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

Dan Springer, CEO

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

Cynthia Gaylor, CFO

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

Bhavan Suri, Analyst

Got you. That’s really helpful. And I guess, maybe stepping back a little bit, you touched on AI and Dan you and I talked about this over the years just about the broader opportunity. You explained Seal and some of the ability to re-contract. As you think about the amount of data you have, do you think you got to the point where you start doing even deeper contract analysis? For instance, you’ve got a contract for x number of seats, you may not have realized it but you have exceeded it or you haven’t met it. I’d love to hear how deep you think the AI gets on the use cases because that obviously ends up being a whole analytical TAM and contract TAM that we aren’t including today.

Dan Springer, CEO

Yes. It’s a great way to think about it. We think the first phase of AI is things like the Analyzer product that I described earlier. This now gives our legal and business teams the ability to quickly and efficiently understand where there are outlier clauses or things they should pay particular attention to. The most exciting part of that AI is where you are going with your question. Once we have a CLM enhanced with our AI capabilities, companies can learn about their business and make intelligent insights based on a body of contracts they have. We see certain institutions saying, I want to understand my risk better, by understanding whether I have a whole bunch of contracts relevant to a particular cost. For example, we see this with companies in chemicals, saying oil prices are hugely important to my business. Having a way to look across all contracts to be thoughtful about the impact on my business gives visibility into those risks. This expands the TAM opportunity significantly, which I think is part of our exciting future.

Bhavan Suri, Analyst

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

Operator, Operator

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

Alex Zukin, Analyst

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

Dan Springer, CEO

It’s a really interesting question. When we look at it from a vertical standpoint, some of our strongest verticals include financial services, both banking and insurance, healthcare life sciences, and increasingly government, which has performed incredibly well for us this year. Some of the verticals that weren’t as big for us and you would expect had challenges, included small businesses and travel, hospitality where everything was essentially put on hold. I don’t expect a significant rotation out of our strong industries. Financial services and healthcare life sciences are likely to remain strong for us next year. I think government strength continues into the year as well. Whether there will be some bounce back with some of the struggling verticals, I think the answer is likely. But I don’t know what that cycle time is, whether it’s in the first quarter, second quarter, or maybe a couple quarters after that, I can’t say how that plays out exactly. However, I don’t think it will significantly impact our growth expectations. Regarding eSignature to CLM, we’ve added a significant number of new customers on the direct side of our business, 14,000 this quarter, primarily coming in with eSignature because they need it for critical use cases. These customers are ones we’ll work with next year during renewal discussions to expand with additional use cases for signature and about the DocuSign Agreement Cloud. We think we’ll see a bigger opportunity to maintain strong growth.

Alex Zukin, Analyst

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

Dan Springer, CEO

That’s a super interesting big picture question. When everyone gets newly introduced to DocuSign, it’s exciting to think about the possible places we can take this business. We are a software company. We sell software to companies that use it to run their business. Our customers’ data is not ours to play with. However, we believe there are interesting opportunities where our customers could get comfortable with us in different ways over time regarding monetization. That said, that’s not a priority for us right now. Our focus is on our core business and executing on achieving our revenue goals. The current trajectory is sizable enough given the TAM, and I want to clarify that this isn’t part of our core business today. We are a software company serving customers while they buy software from us. That will be the primary thing we focus on for years to come.

Alex Zukin, Analyst

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

Dan Springer, CEO

Any day now. Any day now.

Operator, Operator

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

Karl Keirstead, Analyst

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

Dan Springer, CEO

Yes, it’s still pretty early in that journey. If you look at our financials, it’s going to be a while before I believe the non-signature part of our business will be meaningful enough to warrant that kind of breakout. When we do acquisitions, like with Spring on the CLM side and Seal, we typically shared what kind of revenue those businesses had, and they are very small relative to our business. The challenge is, initially I thought we’d see that kind of breakout sooner, but the reacceleration of signature that’s occurred this year has made it difficult for businesses focused on CLM or Seal to get attention. We start every conversation with a customer today saying, we want to talk to you about the DocuSign Agreement Cloud. That’s every new customer, and each customer involved in renewals. Most of this year has had customers focused on signature, and many have said, that’s fantastic; I look forward to discussing Agreement Cloud, but I need some signatures today. As I tell our sales people, there is only one answer to that question, which is yes ma’am or yes sir, we’ve got signature for you today. Therefore, we are still at a point where it’s difficult to quantify because it’s so small.

Karl Keirstead, Analyst

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

Cynthia Gaylor, CFO

Yes. That’s right. Thank you for the questions. We’ll be giving guidance for next year on our Q4 call. I think what you’ve got is we will have tough comparisons going into next year, and even in Q4, our Q4 last year was very strong and it was a significant quarter itself. I would expect going into next year, we’ll be looking at the guidance across matters, and as you know, we guide to what we see and we’ll have that conversation next quarter when we talk to you all.

Karl Keirstead, Analyst

Yes. I get it. Thank you both.

Operator, Operator

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

Unidentified Analyst, Analyst

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

Dan Springer, CEO

Yes, I can tell you the deals we have coming in have had a higher focus on signature in the last few quarters. We saw that growing moderately for the rest of the Agreement Cloud up to Q4 of last year and into the beginning of Q1 this year. Signature has just been explosive for all the good reasons we’ve already talked about. In terms of the channel, we’ve invested significantly in the digital channel versus the direct sales channel. It’s still about 15% of our revenue, plus almost 90% of our customers, and I think we’ve seen real strength. Moving forward, we will continue to expand our digital business and acquire customers through that channel, which we view as a super cost-effective way to scale our growth.

Cynthia Gaylor, CFO

Yes. One thing I’d just add is, if you look at the customer growth numbers, whether it’s the total or the direct versus digital, you can really see that strength across the board in our customer base. So, we are seeing strength across customers and companies.

Unidentified Analyst, Analyst

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

Dan Springer, CEO

Yes, I think we’ve been very specific about our M&A strategy, which is to say we are not looking for blockbuster deals in terms of big revenue sources. We’ve been trying to stick to a strategy that meets our customer needs around the DocuSign Agreement Cloud. When we do acquisitions, like the ones we’ve done, they all have similar characteristics, which is someone has a product that we need in our suite, likely not a super mature business yet, but with a fit we are comfortable with and will help us build those services for customers. I think we’ll continue to look for opportunities. The valuations question we already have when we acquire a company, they look at us and they want us to pay as much as the multiple that DocuSign has. I don’t expect that to change based on the Slack deal. They paid a slight premium to the peak multiple that Slack had, but I see that as more of the same rather than fundamentally altering the landscape for valuations.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

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

Patrick Walravens, Analyst

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

Dan Springer, CEO

I’d put it in three buckets, and I’ll do them in priority order for you. The first is integrating the AI capability we purchased with Seal and Analyzer. This will be hugely important to our potential. The second piece is Notary. Many think of it as a smaller thing, but we believe it’s significant. Third, it’s about the macro Opportunity of the Agreement Cloud, stitching together all components, ensuring uptime and service quality that’s consistent with our brand. Additionally, we want to improve our API integrations into one comprehensive platform.

Patrick Walravens, Analyst

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

Operator, Operator

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

Walter Pritchard, Analyst

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

Cynthia Gaylor, CFO

Yes. I think that we hit a record in net retention numbers this quarter at 122%. It’s the second time we’ve been at 120% or greater. I think this was really driven by the expansions in upsells that we saw across the board, as Dan said, led mainly by eSignature, but also by building the opportunity. Our churn has largely been stable. The expansions are really driven by the sales we saw in Q3.

Dan Springer, CEO

Yes. I think your question about the implication going forward indeed has merits. The first implication is just what you said, our customers want to do more with DocuSign. They want to utilize this in various ways. Both within the signature business and as Cynthia described, customers are looking to expand into the Agreement Cloud. We continue to see both expansions and a push to increase our services, which gives us multiple opportunities to enhance our NRR. As we head into next year, we want to give ourselves the space to reassess expectations based on the performance.

Walter Pritchard, Analyst

Got it. And actually another question for you, Cynthia. On OpEx, I mean, I think we are seeing a lot of companies in this environment actually see their OpEx growth significantly tamed by COVID-19. Your OpEx has grown in line with last year, and I’m just wondering where you sort of hit the gap to accelerate that OpEx? I assume you saw similar lack of regime and so forth. How are you thinking about OpEx going forward and the return on the investments that you are making?

Cynthia Gaylor, CFO

Yes, it’s a great question. We are trying to invest for top-line growth, right? Sometimes when you have outperformance on top-line, it’s hard to reinvest at the same rate. We got 6 points of margin improvement year-on-year. The areas we are focusing on to grow the top-line include sales and marketing, primarily for capacity and customer engagement, as well as product innovation across the board. We will make dollar trade-offs to grow top-line before we improve margins. The outperformance we are seeing is driving impressive levels year-on-year.

Walter Pritchard, Analyst

Great. Thank you.

Operator, Operator

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

Taylor McGinnis, Analyst

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

Dan Springer, CEO

Yes. Interestingly, there has not been a lot of variation. So the sizes of lands and pricing of the deals have been remarkably consistent, even if the volumes have been substantial. There has been a small amount of a shift, notably, the direct business has seen strong growth. We have also seen those web upgrades, where we pull them out of digital back into direct sales. My expectation is that the journey customers take won’t be different based on this crop of new customers, and my guess had been that those trends and pathways would remain consistent.

Taylor McGinnis, Analyst

Great. Thanks.

Operator, Operator

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

Koji Ikeda, Analyst

Hey, thanks. Congrats on a great quarter. I wanted to ask about DocuSign’s branding internationally. From our lands in the U.S., DocuSign seems poised to become a verb like Xerox, Uber, or Kleenex. Does DocuSign already have that kind of market awareness and positioning internationally? Or is that still evolving?

Dan Springer, CEO

So it’s a great question. In fact, Forrester noted a few years ago that we already had become a brand, like the ones you mentioned. We did a study recently and found aided awareness is quite strong, but unaided awareness is not as strong as it is in the U.S. The primary difference is the U.S. real estate market where many people got familiar with DocuSign. If I go someplace, the majority of people get stories about how they utilized DocuSign for important life events. In different markets overseas, particularly countries like Germany and Japan where we’ve had less growth, we do not have that awareness yet, but we are working on it. We see that in the future. We will focus on our digital business moving forward to create a broader brand awareness and customer acquisition strategy. While our brand may not be as recognized in some countries, neither are competitors, giving us an opportunity to assume that leadership position globally.

Koji Ikeda, Analyst

Got it. Thank you for taking my questions.

Dan Springer, CEO

Thank you, Koji.

Operator, Operator

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

Dan Springer, CEO

Thank you so much, operator. Hey, thank you for joining us. We are incredibly excited about the business and the performance we have. We look forward to seeing you all in the near future. Cheers.

Operator, Operator

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