Earnings Call Transcript
DOCUSIGN, INC. (DOCU)
Earnings Call Transcript - DOCU Q1 2026
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's First Quarter Fiscal Year '26 Earnings Conference Call. As a reminder, this conference 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 Matthew Sonefeldt, Head of Investor Relations. Please go ahead.
Matthew Sonefeldt, Head of Investor Relations
Thank you, operator. Good afternoon, and welcome to DocuSign's Q1 Fiscal 2026 Earnings Call. Joining me on today's call are DocuSign's CEO, Allan Thygesen, and CFO, Blake Grayson. The press release announcing our first quarter fiscal 2026 results was issued earlier today and is posted on our Investor Relations website, along with a published version of our prepared remarks. Before we begin, 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 factors affecting customer demand and adoption 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 count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's earnings press release, which can be found on our website at investors.docusign.com. I'd now like to turn the call over to Allan.
Allan C. Thygesen, CEO
Thank you, Matt, and good afternoon, everyone. Q1 2026 was an important quarter in our long-term transformation. At our annual Momentum customer event, we announced an ambitious roadmap for DocuSign Intelligent Agreement Management, or IAM, the world's leading AI-driven agreement platform. We are delivering innovation to customers at the fastest pace in our history. Q1 financial performance was strong. Revenue of $764 million and 8% growth outpaced our expectations from additional IAM customers and self-serve digital revenue contribution. Profitability outperformed with operating margins improving by 1% versus last year to 29.5%, and a strong 30% free cash flow margin drove continued share repurchases and supports our conviction to authorize an additional $1 billion in buybacks. As we transform DocuSign, we continue to make long-term decisions to drive accelerated growth. As discussed last quarter, in Q1, we made several foundational go-to-market changes to realize IAM's potential. Our full year guidance anticipated that these changes would lead to lower early renewal billings in fiscal '26 after Q1. Instead, the impact happened sooner than anticipated, resulting in lower Q1 early renewals. As a result, billings growth ended slightly below our guidance range of 4% year-on-year, an outcome of timing, not demand. Blake will discuss these dynamics and our financials in his remarks. We're proud of the progress made in Q1 across our three strategic pillars. Over 10,000 customers have purchased the DocuSign IAM platform. We have strong product market fit in small and mid-market customers and early promise with enterprise and self-serve organizations. And we continue to make progress evolving our go-to-market to drive efficient long-term growth. Starting with our innovation pillar, the IAM platform has become the fastest-growing offering in DocuSign's history, less than a year after its launch. Customers using IAM have processed tens of millions of agreements and continue to increase their engagement, especially through AI-generated dashboards and search in DocuSign Navigator, our intelligent agreement repository. In Q1, IAM usage increased significantly, thanks to UX improvements that better integrate Navigator with the e-Signature envelope management experience. The demand for IAM highlights the mission-critical nature of agreement management for organizations. In a new Deloitte report, 77% of business leaders cite agreement management as a key driver of outperformance. Attendance at our Momentum conference in April grew by 70% over last year with notable increases in partner attendance and executive-level participation. The New York event kicked off a global series of six additional moments across EMEA, APAC, and Latin America. At Momentum, we shared our robust IAM platform vision and introduced a deep lineup of new AI-powered capabilities across the Create, Commit, and Manage agreement lifecycle. Within Create, Agreement Desk provides powerful workflow management for agreement reviews and approvals, streamlining tedious processes to accelerate deal cycles. AI-Assisted Review compares contract language to a customer's existing standard terms and identifies noncompliant or high-risk language, eliminating the need to review hundreds of contracts. An agreement prep standardizes terms and templates, applying the right language to every agreement to reduce risk. Within Commit, workspaces transform how customers collaborate with contracting counterparties by centralizing all documents, communications, and tasks in a secure hub while protecting sensitive data. CLEAR identity verification will integrate CLEAR's biometric identity network with IAM, making ID verification as simple as snapping a selfie. Within Manage, custom extractions for DocuSign Navigator uses AI to automatically capture the data that matters most to customers, such as organization-specific agreement information or client-specific terms. Instead of spending hours or even days on manual review, customers get instant actionable insights. The obligation management dashboard transforms the company's scattered commitments into intelligence by surfacing renewal dates, payment terms, and other obligations, helping maximize contract value and avoid penalties. These new features enable sales reps to close more business, procurement teams to stay on top of renewal dates and pricing changes, and HR teams to onboard new employees more efficiently. At DocuSign, our own procurement and legal teams have reduced agreement search time by 90% by using IAM. AI-assisted review, workspaces, and obligation management are available today. Most of the other capabilities will be available by August. Launch dates are published on our product roadmap. We also introduced DocuSign Iris, our AI engine purpose-built for agreement management that delivers leading LLM performance at a low cost per inference. Iris leverages DocuSign's unique agreement domain expertise built from millions of workflows and 20 years of contract intelligence. Later in fiscal '26, we will deliver the industry's first purpose-built AI contract agents designed to accelerate workflows, reduce risk, and achieve better outcomes across the entire agreement lifecycle. You can see a demo of our agents in our Momentum keynotes. Within our go-to-market pillar, we continue to drive transformation across three integrated routes, now all selling IAM, direct, self-serve, and partner. In Q1, IAM sales once again exceeded our outlook, and we remain on track for IAM to account for a double-digit percentage of our subscription book of business exiting Q4. Q1 direct customer IAM deal volume exceeded Q4, and we saw another significant increase in the percentage of new customers choosing IAM. International IAM deals were up over 50% from the last quarter, confirming the IAM value proposition resonates with customers worldwide. In fiscal '26, we continue to generate large-scale success with small and mid-market customers while driving initial enterprise conversations and early wins. ServiceTitan, the operating system that powers the trades and a long-time DocuSign customer, is deploying IAM across legal, HR, sales, and procurement using DocuSign Maestro to create time-saving automated workflows and DocuSign Navigator to gain greater insight into its business. As part of our growing strategic go-to-market partnership with Microsoft, we're delivering this IAM solution via the Azure marketplace. IAM is also off to a strong start in self-serve. The launch of self-serve in April resulted in nearly 1,000 new IAM customers within just three weeks, all through organic adoption prior to the release of any marketing campaigns. In Q1, overall digital revenue continued to grow at more than double the rate of overall revenue. We also implemented self-serve account management tools for our direct sales-driven customers, which improves their experience and our go-to-market efficiency. Efficiency gains from our rapidly improving self-service channel enabled us to make broader go-to-market changes in Q1, all with the intention of maximizing IAM's long-term potential. We migrated a meaningful cohort of customers to the self-serve first digital experience, freeing up our sales team to concentrate on higher-value prospects with greater revenue potential. Sales force changes included rolling out new customer size segments, territories, and performance-based compensation. We're using our investment dollars judiciously. And in fiscal '26, we invested in greater sales capacity without expanding our team. Our initial annual guidance expected a lower rate of early renewals in fiscal '26 as reps increasingly focus on IAM expansion potential. We anticipated the impact to take place after Q1, but the reduction in early renewals began sooner than forecasted. This resulted in lower-than-expected early renewal billings in Q1. We take responsibility for not fully anticipating the timing of the shift in our guidance. Stepping back, we're confident these are the right long-term changes to build a more durable growth engine. We're pleased with how quickly teams adjusted as evidenced by strong IAM sales throughout the quarter and fewer early renewals without expansion. We're also encouraged that the fundamentals in the overall core business continued to improve in Q1. Gross retention and dollar net retention improved year-over-year, while envelope sentiment and customer contract utilization grew steadily. Also in Q1, we relaunched our partner program to focus primarily on IAM and enable partners to build business with DocuSign through specializations. At Momentum, we recognized outstanding partners that continue to grow with DocuSign. CDW, a leading multi-brand provider of technology solutions, achieved impressive triple-digit growth with us last year. Through our alliances with Deloitte and SAP, we have expanded our global footprint and recently closed a major opportunity with a Fortune 500 company in the energy sector. At Momentum, we also recognized customers delivering significant business impact on the DocuSign platform. Subaru of America significantly enhanced its operational efficiency and achieved substantial cost savings by digitizing its manual paper-based processes. Primerica reduced agreement processing time by 25% and contract turnaround from 15 days to 1. KPMG cut its average signature process from five days to less than one, increased productivity by 30%, and improved customer satisfaction. In closing, the road ahead is exciting. DocuSign is building on its leadership position to reimagine how organizations manage agreements through IAM. We have strong conviction in our strategy and the long-term business decisions we're making to drive acceleration to double-digit growth. In April, Newsweek named DocuSign the most trustworthy software company in America for the second year in a row. We believe that trust strengthens our ability to help our 1.7 million customers transform how they manage agreements. I want to thank the entire DocuSign team for their dedication and commitment to creating value for our customers. Now I'll turn it over to Blake to discuss our financial results.
Blake Jeffrey Grayson, CFO
Thanks, Allan, and good afternoon, everyone. Our primary goal in fiscal 2026 is to position DocuSign to drive long-term growth acceleration while maintaining efficiency. In Q1, we made continued progress against this goal and delivered solid business results. Highlights included accelerated IAM deal volume as well as continued year-over-year improvements in dollar net retention, customer usage and utilization, and increased efficiency and profitability. While we performed better than our expectations across almost all of our key guidance metrics, including revenue and profit margins, billings came in slightly below our guidance range, driven by the timing of early renewals. In Q1, total revenue was $764 million and subscription revenue was $746 million, both up 8% year-over-year, including a 0.6% year-over-year FX growth headwind. Revenue outperformed our expectations on both the strength of greater digital and IAM contributions as well as from a few smaller nonrecurring items. Billings grew 4% year-over-year to $740 million with no FX impact year-over-year. Billings ended slightly below our guidance range due to lower-than-expected early renewals. Our billing results would have finished near the high end of our guidance range when excluding both the negative impact from early renewals and the positive billings impact relative to our forecast from FX. Billings renewal timing was impacted by the go-to-market changes discussed last quarter, including rolling out new customer size segments, territories, and performance-based compensation. As Allan explained, these changes were foundational and focused on positioning DocuSign to realize accelerated long-term growth. Specific to billings, as described last quarter, our original fiscal 2026 annual billings guidance assumed a 1% year-over-year growth headwind from reduced early renewal volume. While we expected that impact to occur after Q1, the change in incentives led to a reduction in early renewals sooner than originally forecasted. Our sales team is acting as the program was designed. The health of early renewals in Q1 improved materially from the prior year. For example, we reduced the mix of early renewals that were flat or included partial churn by approximately 30% versus last year. Although the timing of early renewals has a negligible impact on revenue and does not reflect the long-term health of the business, we take responsibility for underestimating the potential timing and range of impact from the go-to-market changes. We will take a more conservative approach to forecasting the timing of early renewals for the remainder of fiscal 2026 in light of the go-to-market changes. Apart from the timing impact on billings, we are encouraged that fundamentals continue to improve in Q1. The dollar net retention rate increased slightly to 101%, in line with Q4 and up from 99% in Q1 of 2025. We continue to expect dollar net retention to moderately improve throughout the year based on both gross retention improvement and IAM upsell impact. IAM sales continued to show strong momentum with both IAM deal volume and revenue slightly outpacing our expectations this quarter. IAM's share of total direct deal volume, including upsell deals and new customer deals, increased meaningfully quarter-over-quarter, showing strength versus typical Q4 to Q1 business seasonality. This strength is underscored by passing 10,000 direct IAM customers in Q1, adding nearly 1,000 new IAM self-serve customers within weeks of launching that capability and the strong early ramp in international sales. Through Q1, we are on track for IAM customers to contribute a low double-digit percentage of the subscription book of business exiting Q4. The year-over-year growth in envelopes sent remains consistent with prior quarters and has continued through May. Customer consumption, a measure of contract utilization, increased in our direct business to the highest levels since early fiscal 2022, driven predominantly by increases in North America. We observed year-over-year improvements in consumption rate in nearly every direct customer size segment and major vertical for the first time in over 2 years. In Q1, total customers grew 10% year-over-year, surpassing 1.7 million. Continued strength in customer growth highlights the value of investing in diverse routes to market and geographies. Additionally, we believe that the breadth and scale of our customer base provide a strong foundation for the continued growth of the IAM platform. Large customers spending over $300,000 annually increased by 6% year-over-year to 1,123, down slightly versus Q4 given normal seasonality. We're encouraged that a low single-digit percentage share of the $300,000-plus base has adopted and begun to roll out IAM in their organizations. This will be a multiyear journey that builds on both product and go-to-market evolution. Digital revenue growth also continued its recent strength, benefiting from initiatives that make it easier for self-serve customers to manage and upgrade their accounts. Digital revenue grew at more than double the rate of the overall business in Q1, and we are cautiously optimistic that the launch of IAM should support future digital growth. International revenue in Q1 represented 28% of total revenue and grew 10% year-over-year or approximately 13% after adjusting for FX, which is similar to the prior quarter. Lower-than-expected expansion rates have impacted international growth, especially in EMEA. The IAM rollout, combined with new EMEA sales leadership creates a stronger foundation for future growth potential. For example, international IAM deal volume in Q1 grew over 50% from Q4 when we launched in most of our larger international regions. Turning to the financials. Our focus on operating efficiency initiatives drove strong results in Q1. Non-GAAP gross margin for Q1 was 82.3%, up slightly from the prior year as higher revenue offset the impact of additional cloud migration costs, which were slightly lower than expected due to the timing of migration efforts. As previously discussed, we continue to expect additional expenses associated with our cloud migration to impact gross margins throughout fiscal 2026 before easing in fiscal 2027 and beyond. Non-GAAP operating margin for Q1 was 29.5%, a 100 basis point improvement versus the prior year. The strength year-over-year was driven by higher revenue growth and prudent management of expense growth. We ended Q1 with 6,852 employees. This was up just slightly from the prior quarter and 6% from the prior year due to investing in our team, particularly in R&D, including the acquisition of Lexion. Our hiring approach remains strategic and consistent, ensuring alignment with key initiatives while thoughtfully considering location based on cost and necessary skill sets. Our non-GAAP operating expense growth in sales and marketing and G&A areas were both lower than the total company, while R&D grew faster with continued investment. In Q1, we generated $228 million of free cash flow, a 30% margin. We expect that annual free cash flow margin will approximate non-GAAP operating margin for fiscal 2026. Our balance sheet remains strong with over $1.1 billion in cash, cash equivalents, and investments. We have no debt on the balance sheet. Subsequent to quarter-end, at the end of May, we secured a new $750 million credit revolver to replace our existing revolver agreement, creating additional capital capacity and flexibility. We continue to use our demonstrated strong free cash flow generation to return capital to shareholders. In Q1, we repurchased $183 million of stock through share buybacks, bringing our cumulative buyback over the past 12 months to over $700 million. With the additional $1 billion buyback authorization announced today, we now have up to $1.4 billion in repurchase authorization available for deployment, and we expect to continue opportunistically repurchasing shares as part of our capital allocation strategy. Regarding the cost of our equity programs, our stock compensation expense as a percentage of revenue was 19.1% in Q1, down approximately 100 basis points from the prior year and approximately 40 basis points after excluding the impact of restructuring in Q1 of fiscal 2025. On a 2-year basis, stock compensation expense as a percentage of revenue was down approximately 200 basis points from 21.1% in Q1 of fiscal 2024, excluding the impact of restructuring, reflecting continued focus on using equity compensation efficiently and managing dilution. Non-GAAP diluted EPS for Q1 was $0.90, an $0.08 per share improvement from $0.82 last year. GAAP diluted EPS for Q1 was $0.34 versus $0.16 last year. Diluted weighted shares outstanding for Q1 was 212.8 million, in line with our expectations. Basic shares outstanding for Q1 decreased by $2.6 million year-over-year to 203.3 million total shares, reflecting the anti-dilutive impact of our buyback program. With that, let me turn to guidance. We expect total revenue between $777 million and $781 million in Q2 or a 6% year-over-year increase at the midpoint and between $3.151 billion and $3.163 billion for fiscal 2026, also a 6% year-over-year increase at the midpoint. We expect subscription revenue of $760 million to $764 million in Q2 or a 6% year-over-year increase at the midpoint and $3.083 billion to $3.095 billion for fiscal 2026 or a 6.5% year-over-year increase at the midpoint. We expect billings between $757 million to $767 million in Q2 or a 5% year-over-year growth rate at the midpoint and between $3.285 billion to $3.339 billion for fiscal 2026 or a 6.5% year-over-year growth rate at the midpoint. Our updated top line guidance reflects the following dynamics present in our business and the external environment. For full year revenue, the annual guidance midpoint is increasing by $22 million, reflecting the combination of Q1 strength and an anticipated neutral rather than a negative year-over-year FX impact, partially offset by some headwind from additional bookings prudence for the economic environment. For full year billings, the annual guidance midpoint is declining by $15 million, which includes additional early renewal considerations and some conservatism in our bookings outlook, partially offset by the positive impact from favorable year-over-year FX rates. While we do not see any material macro impact on our Q1 results, we are taking a cautious approach for the remainder of fiscal 2026 given the uncertain economic environment. For early renewals, we are including a more conservative forecast to account for a wider range of potential timing and magnitude impacts. This change has nearly zero impact on our revenue forecast as it is based on the timing of renewal contracts and is not related to customer demand. As shown in recent quarters and years, billings are highly sensitive to customer renewal timing, which can result in meaningful variability from period to period. As we evaluate our updated fiscal 2026 billings guidance, we remain encouraged that we continue to forecast a year-over-year billings acceleration in fiscal 2026 after adjusting for the timing of early renewals and FX. We also expect year-over-year billings growth to increase in the second half of fiscal 2026 versus the first half as IAM deal volume continues to ramp. For profitability, we expect non-GAAP gross margin between 80.5% to 81.5% for Q2 and between 80.7% and 81.7% for fiscal 2026. We expect non-GAAP operating margin between 26.5% to 27.5% for Q2 and 27.8% to 28.8% for fiscal 2026, unchanged for the full year. We included the following two considerations in our non-GAAP profitability guidance. For gross margins, for the full year, we continue to expect approximately 1 percentage point of headwind due to the ongoing cloud data center migration efforts. That headwind was lower in Q1 due to a slight shift in migration timing out to the remainder of fiscal 2026. As previously discussed, we anticipate a larger gross margin impact from migration in fiscal 2026 followed by a gradual easing in fiscal 2027 and beyond. For operating margins for the full year, we continue to expect an approximate 1.5 percentage point operating margin headwind due to the impact of cloud migration, the shift of some roles to cash compensation from equity, and the comp against onetime professional fees from Q2 of 2025. Q2 is our hardest comparison quarter this year. The majority of the difference between Q2 of 2026 and Q2 2025 operating margins can be attributed to the onetime benefits from professional fees, including the insurance reimbursement and litigation reserve release described in the Q2 2025 results, the ongoing cloud migration impact, and the equity to cash compensation changes. Our overall approach to profitability in fiscal 2026 reflects our intent to prioritize IAM investments to drive long-term growth while maintaining similar levels of full year operating margins realized in fiscal 2025, excluding the unique gross margin and operating expense headwinds noted above. We remain encouraged about our longer-term opportunity to improve operating leverage by combining our approach to efficiency with an improved and accelerating outlook for billings growth exiting fiscal 2026. We continue to expect non-GAAP fully diluted weighted average shares outstanding of 210 million to 215 million for both Q2 and fiscal 2026. In closing, in Q1, we continued DocuSign's transformation by delivering significantly increased innovation to customers, driving business momentum through IAM adoption and digital maturity and positioning our go-to-market team for greater long-term contribution. We also maintained our efficiency focus through improved profitability and strengthened our commitment to generate significant cash flow and return capital opportunistically through buybacks. We have strong conviction in our strategy and ability to execute, and we will continue to focus on increasing the value we deliver to customers, employees, and shareholders. Thank you for your support. This concludes our prepared remarks.
Operator, Operator
Our first question comes from the line of Jake Roberge with William Blair.
Jacob Roberge, Analyst
Can you just double-click on the go-to-market transition and what exactly is driving the lower early renewals? And then it sounds like normalized billings growth would have come in at the high end of the range. But if we flash back to Q3 and Q4 of last year, there were some fairly healthy beats to guidance. So can you help us understand that delta and whether there was anything else that impacted the quarter?
Allan C. Thygesen, CEO
Yes. Why don't I take the first part of that, and you can do the second, Blake. So we made some changes at the beginning of the first quarter to our compensation to encourage reps to close deals in-quarter. We felt that was the healthiest dynamic unless there is a customer reason for booking the deal early. We thought that would play out during the course of the year and ended up happening predominantly here in Q1. And so that's what accounts for the early renewals miss relative to our forecast. I think those were the right changes. We want to set our sales reps up to focus on long-term success on building their portfolios with IAM. And we feel that, that's now landed very well. The sales reps are behaving as we expected. And so it's on us to have missed the forecast slightly on that, and that accounts for the early renewals miss. But overall, the business is on a very healthy foundation. I think the IAM progress is very substantial this quarter, and we are maintaining or increasing our revenue outlook. With that, let me go to Blake.
Blake Jeffrey Grayson, CFO
Sure, thanks for the question, Jake. Regarding the normalized Q1 compared to previous quarters, you mentioned Q3 and Q4. For Q1, our business fundamentals continue to be strong. As Allan mentioned, IAM is continuing to ramp up. The direct deal volume for IAM in Q1 was higher than in Q4, which is unusual for us due to seasonality. This figure is direct deals only, not including almost 1,000 new self-service IAM customers we gained, which is excellent. As stated in the prepared remarks, growth in consumption and usage has been consistent and positive year-over-year, which we are very pleased with. Our dollar net retention improved slightly, remaining flat quarter-over-quarter on a non-rounded basis, with a small increase. Both expansion and gross retention were up year-over-year, and we believe there's room for improvement. However, when comparing Q1 to Q3 and Q4, I recommend reviewing the details discussed in those quarters since early renewals served as a tailwind for us during that time. Therefore, when evaluating similar results against those specific quarters, it's important to consider the timing aspect of early renewals.
Allan C. Thygesen, CEO
Yes. Maybe just to complement what Blake just said, if you take both the FX and the early renewals part out and you look at our time series of our billings, we're past the trough last year and have a nice acceleration this year in our outlook. And that's what reflects our confidence in the business and the momentum at IAM.
Jacob Roberge, Analyst
Okay. That's helpful. And then, Allan, I understand the moving pieces around the go-to-market and early renewals. But how do you feel about the broader health of the business? Do you still feel like that IAM upsell opportunity is intact and then that retention and expansion? I understand it might have been a little bit softer than you would have expected this quarter, but should that continue to improve from here? Or is there anything else in the quarter that would give you pause on that trajectory back to double-digit growth?
Allan C. Thygesen, CEO
No, I feel confident about our position. We've shown product market fit in the commercial segment, and we've successfully applied that sales strategy from our domestic operations to our international business. Adoption rates are strong. We highlighted some trends in the prepared remarks. Overall, I'm optimistic about IAM's situation. Our core signed business remains very robust, and we're seeing improvements in DNR and key consumption metrics and contract utilization. This puts us on a solid growth trajectory. There’s a palpable optimism within the company, especially among the sales teams. We made some necessary changes at the start of the year to ensure medium- to long-term growth, which may have caused some initial disruption, but I believe we have moved past that and are observing positive trends as we approach May. Overall, we feel very positive about our current standing.
Operator, Operator
Our next question comes from the line of Tyler Radke with Citi.
Tyler Maverick Radke, Analyst
Can certainly understand the billings dynamic, particularly coming off of Q4. But I guess one of the questions we're getting from other investors is really around your confidence level in the second half. If we take your commentary, it sort of implies a continual ramp in billings growth from this Q1 level. So I guess, can you just give us a sense for what you've assumed in that ramp as it relates to early renewals? And then specifically around maybe the enterprise contribution from go-to-market and IAM, I imagine those are going to be even greater factors as you go into Q3, Q4. But just help us understand why this new guidance that implies an acceleration is derisked in your view?
Allan C. Thygesen, CEO
First of all, we were always assuming an acceleration in the second half, and that remains the case as you observed. In terms of the factors you pointed to, we snapped to a lower level of early renewals here in Q1, and we're expecting that to be maintained throughout the remainder of the year. That feels like a very good assumption based on what we're seeing. In terms of the enterprise stuff, part of the reason that we have a lot of confidence in our forecast looking forward is because we've already demonstrated that we can replicate our commercial motion, and that's the bulk of the forecast. We are counting on a little bit from the enterprise. I think that's well within our grasp. And then a bigger contribution from enterprise out in fiscal '27 and beyond. So there isn't an assumption that we're going to see some dramatic acceleration in our enterprise business in the second half. It's really more just the rolling out and scaling of our commercial business globally that drives that.
Blake Jeffrey Grayson, CFO
I would like to add a comment regarding your question, Tyler, about the renewal assumption. We have provided a bit more flexibility regarding the timing of renewals. It's important to note that this is solely about timing and does not affect revenue or customer demand. Given the current environment, having this extra flexibility is a wise decision, especially since it pertains only to timing and not to the overall health of our revenue profile.
Tyler Maverick Radke, Analyst
Great. For a follow-up question, I appreciate the comments on the consumption trend in May, which seemed to indicate that things are healthy across all verticals. Are you hearing from customers a desire to adjust contracts to align more closely with their actual consumption, considering the macroeconomic and tariff changes occurring frequently? Is this shift in thinking something that you have considered in your guidance?
Allan C. Thygesen, CEO
Yes. No, we haven't seen that. We saw some of that coming off COVID, but that's been played out and is reflected in all the historical numbers at this point. So no, macro really was not a material factor. Maybe there's a few anecdotes here and there, but nothing that we've seen so far. That said, I think all CEOs and CFOs are slightly apprehensive about an environment that just feels more volatile and risky. And so we gave ourselves just a little bit more buffer, as Blake alluded to. But in terms of looking backwards, it was not material in Q1.
Operator, Operator
Our next question comes from the line of Rob Owens with Piper Sandler.
Robbie David Owens, Analyst
As a follow-up on that topic, some of the reduced billings you experienced were due to the uncertain economic environment, which is mainly a timing issue rather than a reflection of the size of deals.
Allan C. Thygesen, CEO
Yes. No, I don't think we've seen anything on the size of deals. I mean you can see, I think we report our customers over $300,000, which were up year-on-year. And we continue to seek help there. That hasn't been an issue. And that's also reflected in some of the consumption stats we hold across customer size segments and industries.
Robbie David Owens, Analyst
Okay. Perfect. And then our understanding as we lean in a little more aggressively this year, which didn't come to fruition in the first quarter. And I understand the commentary around the timing of some of the cloud migration efforts. Anything else at play? And you did talk about increasing sales capacity without expanding the team. Is that something that you're factoring into the calculus here or something that could lend to upside just in terms of repurposing a lot of that existing sales force?
Allan C. Thygesen, CEO
We're not relying on that, but I certainly hope that over time, our sales capacity will lead to increased bookings, billings, and revenue. I want to briefly mention some of the changes we implemented at the start of the year to position ourselves for long-term success. Beyond early renewals, which was a minor aspect of our changes, we aimed for our sales representatives to dedicate more time to engaging deeply and broadly with organizations that present the greatest growth opportunities. We restructured our sales segments and adjusted the portfolios for our sellers, moving a significant number of customers to a self-service first model. This effectively increased capacity without adding headcount, allowing our reps to dive deeper. We also modified our sales compensation model to focus more on annualized metrics and prioritize IAM. Many adjustments were made to prepare for larger, more enterprise-focused sales efforts. It's a long journey for the company, but we've made a start. I'm very satisfied with the initial outcomes and how our sales teams are adapting. We believe these were the right adjustments to help us fully realize the potential of IAM.
Operator, Operator
Our next question comes from the line of Joshua Phillip Baer with Morgan Stanley.
Joshua Phillip Baer, Analyst
I was hoping you could provide some context for how much of the double-digit percentage that will be IAM as a percentage of subscription book of business is coming from upsell and net new customers versus that transition from eSignature. Just any context for how accretive or incremental IAM is on the business?
Allan C. Thygesen, CEO
Why don't you take that one, Blake?
Blake Jeffrey Grayson, CFO
Sure. So we're not disclosing expansion rates like that. Obviously, with the book of business that we have with the size of it, $3 billion plus, we have a huge opportunity to be able to provide extra value to our existing customers. So I think that existing installed base, and that is an upsell from what they're doing today because if you recall, the vast, vast majority of the IAM deals that we're doing are expansions of spend because we're providing additional value to customers. But also, we're finding that new customers also are quite interested in it. And it's becoming a much larger share of our new deals, our new company deals that we're doing. So it's going to come from both of these things, but I think that it's fair to assume that with the size of the installed base that we currently have, the biggest opportunity we have is with customers that we already do business with.
Joshua Phillip Baer, Analyst
Okay. That's helpful. And Blake, you called out some smaller nonrecurring items benefiting revenue. Just was wondering what are those and how big was that?
Blake Jeffrey Grayson, CFO
Yes, sure. So we had a number of what I'll call just smaller items that we just don't feel like we can count on them necessarily as recurring every quarter. They can. We just aren't including that in the guidance. They include things like short-term add-on deals where somebody comes in for a very short period of time for additional capacity, lower sales returns, lower bad debt. Those went almost all in our favor in Q1 in the revenue side. Now they're not massive. They're not a huge portion of it. But when you add them up, they help the quarter. But all good things, all positive elements for us for Q1.
Operator, Operator
Our next question comes from the line of Brad Sills with Bank of America.
Bradley Hartwell Sills, Analyst
Allan, I wanted to ask a question on the go-to-market changes here. I mean with the focus on going deeper and more broadly within accounts now, what are you seeing? I know it's early, but is there anything in the pipeline that you'd point to, to say that the leading indicators are there and you're seeing some of the early results that you might expect out of that?
Allan C. Thygesen, CEO
Yes. We are definitely doing larger and larger IAM deals, and we've had some early successes in the enterprise space. So I feel pretty good about the momentum. But as I said, it is still early. We think in the long run, this has the potential to really materially change how much value we're able to deliver to customers and therefore, how much they're willing to pay us on a recurring basis. So all the signs on the IAM front in terms of both deal velocity and deal value progress in various customer segments and geographies, all are positive so far.
Bradley Hartwell Sills, Analyst
Wonderful. And then one more, if I may, on some of the new features you alluded to with IAM coming in August. Anything that you'd point to in particular that you're excited about? I know you probably don't want to let the cat out of the bag too much, but maybe just some broad strokes on what's coming in August that could perhaps be a catalyst in the IAM business.
Allan C. Thygesen, CEO
We've already announced what's coming in August. At our Momentum event in April, we previewed our roadmap, showcasing the scale of our innovation momentum. When we launched IAM last year, there were three key pieces of new functionality in addition to the updates on existing products. At the Momentum event in April, we made seven announcements of similar significance. Some of these features were available immediately, while others will be rolled out over the next three to four months. While I won't highlight any one feature in particular, I want to mention three briefly. First, we introduced Agreement Desk, a system designed to manage the flow of contracts within an organization. It serves as a hub for managing workflows, replacing the current method that relies on a series of disconnected emails, allowing sales reps and the legal team to see the status of contracts more clearly. This was very well received at our event. Next, we announced Workspaces, a single destination designed for managing multistage financial transactions, such as wealth management sign-ups, real estate deals, or auto purchases. This feature brings together all interactions between companies and outside parties, streamlining the process and improving efficiency. It is particularly beneficial for financial services but can be applied to a variety of other categories. Lastly, we showcased a new AI-centric feature called custom extractions, which allows users to define custom terms of interest and find them across multiple agreements. This innovation offers incredible flexibility in managing contracts and fulfills a long-standing request from companies for a more scalable and user-friendly solution. These are just three examples of our contract innovations at various stages, and there was significant excitement at the event. We look forward to bringing these features to the global market.
Operator, Operator
Our next question comes from the line of Kirk Materne with Evercore ISI.
Kirk Materne, Analyst
Allan, I was wondering, can you expand a little bit on your commentary around your GSI partners. I was just kind of curious whether they could be a source of sort of net new ACV for you this year. I realize it could take a while for them to build up practices. But can you just talk about sort of where you are with them? And what's the hope of them helping pull you into the enterprise perhaps a little bit more and then really helping to be a driver of new pipeline for you all?
Allan C. Thygesen, CEO
Historically, we haven't established a strong relationship with system integrators because our focus has been mostly on our CLM business. The Sign product was so straightforward and easy to implement that there wasn't much demand for the value-added services offered by system integrators. However, with our IAM initiatives, that is changing across all of DocuSign. At the same time, system integrators are already doing significant work in this area, with many having dedicated practices in digital transformation that center around agreements but lacking a solid platform to build on. We are seeing considerable interest from major players in the industry. Currently, we are still developing our ability to partner effectively with these system integrators, but there is a lot of interest on both sides. We recognize how important these partnerships are for unlocking our potential in the enterprise sector. The system integrators are eager to work with us, considering our reputation as a trusted and respected brand that offers a compelling vision in the agreements space. However, we have room for growth to fully leverage what these partnerships can offer, which is a significant focus for both me and Paula. We have recently brought in a strong new leader for our partner organizations, and developing our GSI partnerships is a top priority for us over the next couple of years.
Kirk Materne, Analyst
Okay. Great. And then, Blake, sorry if I missed this, I think you said in your prepared commentary, but the upside on margins this quarter was partially due to some of the duplication of cloud costs going away earlier. Can you just remind me sort of on some of the upside levers on margin this quarter relative to your guide?
Blake Jeffrey Grayson, CFO
Sure. The biggest component that drove operating margin outperformance was the revenue outperformance on the top line, right? We don't have a ton of variable cost in this business so that when we outperform on the top line, we usually have the advantage that it can fall to the bottom line, which it did for us. And that's the majority of the op margin side. On the cloud migration component, we just had a little bit of timing push from Q1 and then out into kind of Q2 and Q3, and you can see that reflected in our guide. That happens from time to time, nothing to concern of or anything like that, but that was the other component of the op margin outperformance.
Operator, Operator
Our next question comes from the line of Brent Thillman with Jefferies.
Brent John Thill, Analyst
Regarding the changes in sales, we've seen significant variations in Q1 over the last couple of decades, and these changes certainly have an impact. Many are curious about whether this adjustment is a major overhaul or just a minor tweak. Do you believe it will take six months or nine months to fully adjust? How do you assess the scale and the timeframe necessary for these changes to settle in?
Allan C. Thygesen, CEO
I feel positive about the recent developments and we're already noticing stabilization and normalization early in Q2. Overall, we aimed to position ourselves for long-term success to enhance our value and opportunities. This approach requires us to face some short-term challenges, which we have demonstrated in the past. You might remember that we had to make tough decisions in the first quarter in previous years, and we're focused on ensuring our long-term viability. I'm pleased with our progress. In terms of adjustments, the commercial segment can adapt quickly, thanks to shorter sales cycles and higher volume. They are achieving results rapidly. The enterprise segment, on the other hand, requires more time to build relationships, but I sense that our team is settling in well and the quality, scale, and pipeline they are developing are improving. We planned to grow our enterprise business throughout the year, so I'm optimistic about that. Although we implemented various changes—what I would describe as a medium-sized adjustment—it was all done with careful consideration. Interestingly, a smaller issue that wasn’t part of our primary strategic focus caused some challenges in our billing process. However, that’s mainly a timing matter and doesn’t affect the long-term health of the business. Overall, I’m confident about the changes we’ve made, how they have integrated, and how they position us for the future.
Brent John Thill, Analyst
Okay. And for Blake, just the number of 300,000-plus customers were down quarter-on-quarter. Is that just seasonal? Or is there anything else to read into that?
Blake Jeffrey Grayson, CFO
Yes. Thanks, Brent. Yes, it's mostly seasonal. You'll see that occur. I think the biggest thing that I tend to look at is just on that year-over-year side growing. And you also heard us and it's a small component today, obviously, but low single-digit share of those larger customers starting to use IAM. Again, while it's a super small chunk of it, I'm excited about the opportunity that we have there over the long term. It's going to take time, but that was exciting for me to see just the very early beginnings of our penetration there.
Operator, Operator
Our next question comes from the line of Patrick Walravens with Citizens JMP.
Patrick D. Walravens, Analyst
Great. Thanks for all the detail on this. I'm going to ask one more, if it's all right. So when did you know that billings would come in below where you had guided?
Allan C. Thygesen, CEO
Why don't I start and then you can jump in. So look, early billings almost definitionally happened very late in the quarter. And so we didn't really have good visibility on it until the last couple of weeks. And so that was not something we had perfectly foreseen or we would obviously have previewed it at the beginning of the quarter because it is such a timing-sensitive thing that comes together in the last couple of weeks or even in the last couple of days. I don't know, Blake, if you want to add to that.
Blake Jeffrey Grayson, CFO
No, I just want to emphasize that the majority of our early renewals consistently occur in the last two weeks of the quarter. This creates volatility, which is why we discuss the timing of these billings based on start and close dates, as it can lead to significant fluctuations in the numbers. I regret that we had projected the timing impact would occur after Q1, but it actually took place in Q1. Everything is proceeding according to our plans, and we are pleased with how it's going. From a forecasting standpoint, I and the leadership team take responsibility for incorrectly anticipating that this would happen later. Ultimately, it's just a timing issue that doesn't impact the health of the business, revenue, or demand. Therefore, from a business perspective, while it's noteworthy, it doesn't affect overall business health, and I'm quite excited about that.
Allan C. Thygesen, CEO
Yes, we saw the right kind of productive changes in our earnings mix, more of them being accretive and so on. And so that's exactly the changes we're looking for. Go ahead. I'm sorry, go ahead.
Patrick D. Walravens, Analyst
And then as a follow-up, if I could ask a little bigger picture. So Allan, what are you seeing competitively? How do you feel about that? And then I'm sure everyone saw that Dan ended up at Ironclad. So maybe if you can comment on if that's a competitor and where it's in, that would be great.
Allan C. Thygesen, CEO
In our legacy markets, I see very little change in the competitive dynamics. The market share and our competitors have been stable, and we may actually be performing slightly better. The CLM space remains quite competitive, with several players in a small category, but we are managing to hold our own despite the competition. As we redefine and enhance our company vision, we are setting the pace. However, as we broaden our ambitions, we are encountering not only existing competitors but also other potential challengers. Overall, we are becoming a thought leader in the agreement space. Right now, I believe our focus should be on execution rather than competition, especially in the more established e-sign category.
Operator, Operator
Our next question comes from the line of Scott Berg with Needham & Company.
Ian Black, Analyst
This is Ian Black on for Scott Berg. Does the release of your new transitional IAM SKU impact your renewals? And how has that SKU affected your go-to-market motion?
Blake Jeffrey Grayson, CFO
I would say that the transitional SKU had no material impact on our results for the quarter. We would have pointed that out if it had. It serves as an option for customers, ensuring they have the right choices available, but it did not affect our results for this quarter.
Ian Black, Analyst
And how has that SKU impacted your guys' go-to-market motion?
Blake Jeffrey Grayson, CFO
It's included in our guidance, but we believe the impact will be relatively small.
Operator, Operator
Our next question comes from the line of Alex Zukin with Wolfe Research.
Arsenije Edward Matovic, Analyst
This is Arsenije on for Alex. I guess just what's holding you guys back from excluding early renewals from that updated guidance given the dynamic in Q1? And can you just walk us through how much early renewals are assumed now versus last year when guidance was initially provided and why it's viewed as conservative? And just a quick follow-up after that.
Blake Jeffrey Grayson, CFO
We do not categorize our renewals as early or late, as there are many ways to consider them. Early renewals are a common aspect of our business and often come with expansions. This is a positive sign because it indicates that customers need more capacity or additional features. I want to clarify that early renewals should not be viewed negatively; in fact, they often mean customers are looking to engage more with our offerings. In our forecasts, we are cautious about the early renewal component due to timing. Additionally, there's an impact from foreign exchange rates, which has both positive and offsetting effects of similar magnitude. The early renewal factor gives us more flexibility regarding timing, but we are also more conservative with bookings because of the current uncertainties in the market. We believe this conservative approach is wise as we move forward.
Arsenije Edward Matovic, Analyst
Got it. That's helpful. And then just looking at IAM pricing today, it seems to have gone up since last quarter without having that lower price point relative to like eSig Business Pro. Is this indicative of you just seeing better adoption than expected and trying to capture more value with this momentum to get better growth?
Allan C. Thygesen, CEO
No. Look, I think we feel we're delivering a lot more value, and we charge a premium, and customers have been willing to pay that across all size segments. So...
Blake Jeffrey Grayson, CFO
And we're adding features along the way.
Allan C. Thygesen, CEO
And the packages are becoming more valuable, and with all that we announced here at the Momentum, there's a lot more there across every segment.
Operator, Operator
Our next question comes from the line of Michael Turrin with Wells Fargo.
Michael James Turrin, Analyst
Blake, there's been a lot of questions on the impact, but you mentioned the health of early renewals in Q1 improved. Can you unpack that piece a bit more? What were you seeing last year? Was that customers renewing smaller in certain instances and as IAM something that you now have in response? Or what else are you doing to continue to improve the health of those renewals going forward?
Blake Jeffrey Grayson, CFO
Thank you for the question. From the changes we made to our go-to-market strategy, we've learned that renewals can vary; they can either expand, remain flat, or occur early with some partial churn. For flat renewals or those with partial churn, we typically prefer to renew them during their natural renewal cycle, often referred to as their on-time contract date. There are various reasons why customers may choose a flat renewal with high capacity or consumption; they may not want to expand but still need to renew. The significant takeaway from the data I shared earlier is that the proportion of flat and partial churn renewals decreased by 30% year-over-year. This indicates that our approach is working as intended, with a shift towards early renewals with expansion rather than those that experience partial churn. We recognize that not every customer will expand their commitment upon renewal, which is why I emphasize that the overall health of our renewals is strengthened by focusing on those flat renewals with expansion, as they are crucial for advancing the business.
Michael James Turrin, Analyst
And just as a small follow-up. We've seen the pros and cons of early renewal impacts on billings. So did you consider ARR as a substitute for billings at all? Or what from your perspective makes billings the right metric to focus us all in on given some of the puts and takes and questions you're feeling here?
Blake Jeffrey Grayson, CFO
Yes. No, it's a great question, and it's something that we talk about a lot. Billings is clearly not ideal because of the impact of timing, right? In this quarter and the past couple of quarters, actually, the way we handle that is we try to be really clear about that. So when it's a tailwind and it provides kind of that extra growth for us, we are trying to be very clear and transparent with folks about that. And I think we did a good job of that in the second half of last year where we had that tailwind, and we're sure to highlight it. It's also part of the reason why we're talking about IAM as a percentage of recurring revenue and book of business and not billings. What I can just say is we're actively thinking about better ways to communicate our business trends and be more thoughtful, but really consider kind of like the long-term evolution of this business, especially with IAM, which is still early. So I would say I recognize it, and so stay tuned on that.
Operator, Operator
Our next question comes from the line of Will Power with Baird.
William Verity Power, Analyst
Okay. Great. Let's switch topics for a moment. You mentioned the strong consumption trends this quarter, with some indicators showing the best performance we've seen in a couple of years. Can you elaborate on the factors driving this and what the outlook for consumption looks like moving forward?
Blake Jeffrey Grayson, CFO
Yes. I mean I'll take a stab at this. I would say it's pretty challenging to disentangle exactly what that means other than the fact that I think higher consumption, higher usage is almost always a good thing for us. With the trickiness in there and disentangling is, do you have people that are potentially running higher to their limit for something that's going on in their business. But almost always, if people are using more of their contracts than they have previously, that's a good thing. And so I think it just bodes well for us. But the timing and the tipping point to move from contract utilization to a new contract is really an independent kind of decision that each customer makes on their own in kind of operating with their own representative from DocuSign. But nothing else more that I've seen within the data. I think the usage trends still continue to look good for us from a year-over-year perspective. We highlighted that's continued in May. It's been very, very consistent for us, I would say, over the past few quarters, which I think has been great. And I believe, based on that data, it bodes well for us.
Allan C. Thygesen, CEO
Yes. I would just add that, look, one of the things I was very pleased to see is that I think Blake called this out in his prepared remarks, I think we hit like a four-year high in contract consumption. So we're really through that full post-COVID cycle and at a pretty healthy point there. And so I think that bodes well for the future. So it makes me at the margin more optimistic.
William Verity Power, Analyst
Yes. Those trends seem positive. My other question is just on gross retention. I think you all indicated you expected that to improve in the second half of the year. I just hope you could provide some additional color as to kind of the key drivers and the confidence level around that.
Blake Jeffrey Grayson, CFO
Yes, we saw an improvement in gross retention year-over-year in Q1, and we anticipate that this trend will continue for the rest of the year. This positive trend has been ongoing for at least the past 18 months, which we find very encouraging. We are engaging more effectively with our customers by addressing deal renewal timings, analyzing their usage, and discussing the different ways they can benefit from our services, including conversations about IAM. This ongoing trend reflects better results for us, and we're excited about it.
Operator, Operator
Our next question comes from the line of Mark Murphy with JPMorgan.
Mark Ronald Murphy, Analyst
Just curious if you can speak to the activity levels that you're seeing from segments of the economy that might be slowing or could slow in the second half due to interest rates or tariffs. And I'm thinking of real estate, construction, manufacturing, the tech industry has had layoffs, consumer goods, et cetera. In understanding that you didn't seem to see any aggregate change or material change in macro. But is there any bifurcation where those industries are slowing and other industries are picking up or just anything you're noticing that looks any different?
Blake Jeffrey Grayson, CFO
Sure. I'll take a stab at this. So I would say the trends have been relatively consistent for us over the last few quarters, like on a usage kind of basis, the same verticals continue to show strength for us, whether that's financial services, health care, insurance, those have been kind of standout ones for us. I would say real estate continues to grow year-over-year, but less than the total, if you will. And that's been pretty consistent as well. So they're still growing. I just think there's room to improve there over time depending on how everything works out, but no massive volatility over the last quarter in any major segment.
Mark Ronald Murphy, Analyst
Okay. And Blake, as a quick follow-up, you had commented that the Q1 billings delta is a function of timing, not demand. Actually, I guess Allan said that. But that being the case, I'm curious why the renewals could have bounce back rather automatically in Q2. In other words, if non-early renewals just become regular old on-time renewals? And then if that happened, why couldn't that produce a slightly better level of Q2 billings growth than what you're guiding to?
Blake Jeffrey Grayson, CFO
Yes, that's a great question, right? Because in general, lower early than a quarter results in higher on-time renewals in future quarters. Not all of our renewals are just one quarter out. Some are one, two, three, or more than four quarters out depending on the customer. So you do have a partial offset from that kind of lower water level on future earlies contribution, which that's going to create hard comps year-over-year as you progress through the year. But the reason why you don't see that necessarily in our full year guidance is because of that we've also included the additional room to operate as we progress through the year. So that's just conservatism for us on the timing aspect and the magnitude of it. It makes sense to do that, especially when the extra conservatism is around timing and it doesn't have a material effect on our revenue forecast, and that's why you don't see that showing back in the guide.
Allan C. Thygesen, CEO
Okay, everyone. Thank you, operator. Thank you to all who joined today's call. In closing, I just want to emphasize how excited we are about the increased pace of innovation at DocuSign, the value we're delivering to customers, and the long-term decision-making we're doing to realize the large IAM opportunity. Thanks to the team for their energy and focus and to our owners for your ongoing support. Thank you.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.