Earnings Call
Docusign, Inc. (DOCU)
Earnings Call Transcript - DOCU Q1 2024
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's First Quarter Fiscal Year '24 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. I will now pass the call over to Heather Harwood, Head of Investor Relations. Please go ahead.
Heather Harwood, Head of Investor Relations
Thank you, operator. Good afternoon, and welcome to the DocuSign Q1 fiscal year 2024 earnings call. I'm Heather Harwood, DocuSign's Head of Investor Relations. Joining me on the call today are DocuSign's CEO, Allan Thygesen; and our CFO, Cynthia Gaylor. The press release announcing our first fiscal year 2024 results was issued earlier today and is posted on our Investor Relations website. Now, let me remind everyone that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations regarding the pace of digital transformation and factors affecting customer demand are based on our best estimates at this time and are therefore subject to change. Please read and consider the risk factors in our filings with the SEC together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to date and, except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share counts and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to, our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's earnings press release, which can be found on our website at investor.docusign.com. I'd now like to turn the call over to Allan. Allan?
Allan Thygesen, CEO
Thanks, Heather, and good afternoon, everyone. We're pleased to have delivered a solid start to the fiscal year, reporting financial metrics that exceeded our guidance. We announced new product innovations to enable smarter, easier, trusted agreement workflows. First, some highlights from this quarter's financial results. Q1 total revenue came in at $661 million, up 12% versus the prior year. Q1 non-GAAP operating margin came in at a healthy 27%, driven by our continued focus on profitability and efficiency. We're pleased with the early traction we're making against our objectives. However, we do continue to operate in a challenging macro environment with cautious customer sentiment, evident in moderating expansion rates. Last quarter, I shared our plans to accelerate our product release cycles in fiscal 2024. What you'll see is that our roadmap builds on DocuSign's strength as the world's leading e-signature company while also moving us towards enabling the entire agreement journey with intelligent workflows. We're deepening these capabilities to deliver more strategic value to our customers. With that, let me touch on three new releases that shipped this quarter. First, as mentioned on the Q4 call, DocuSign Web Forms launched in April. In the first few weeks since launch, we're seeing strong traction for Web Forms across verticals, including financial services, real estate, healthcare, and life sciences, leveraging our differentiated approach to streamlining how agreements are generated. Web Forms are simple and powerful for both senders and signers. They're easy to use and customers benefit from the ability to more easily capture and leverage data from their agreements. Next, we made strong progress penetrating and innovating in highly regulated markets. One example is our work in the healthcare vertical, which is undergoing dramatic digital transformation. We're proud that our e-signature product can now seamlessly connect to electronic health records in the U.S. market, including from Epic and Cerner in accordance with industry standards. This will modernize the patient experience and improve efficiency for healthcare companies while also deepening DocuSign's presence within the vertical. And finally, we introduced DocuSign ID Verification Premier, our tier of ID solutions that meet the highest levels of trust, security, and compliance. Our first offering within this tier is ID verification for EU Qualified e-signature. By combining verification of an ID with confirmation of the presence of the person on the ID, it fully replaces face-to-face verifications and a handwritten signature under EU law. We look forward to leveraging this powerful offering as we expand our business in Europe. More broadly, our strategy is to partner closely with leading identity services companies to integrate the best-breed solutions into our platform. Looking ahead, I'd like to share our vision and thinking on generative AI. In brief, we believe AI unlocks the true potential of the intelligent agreement category. We already have a strong track record leveraging sophisticated AI models, having built and shipped solutions based on earlier generations of AI. Generative AI can transform all aspects of agreement workflow, and we are uniquely positioned to capitalize on this opportunity. As an early example, we recently introduced a new limited availability feature Agreement Summarization. This new feature, enabled by our integration with Microsoft's Azure OpenAI service and tuned with our own proprietary agreement model, uses AI to summarize and document critical components, giving signers a clear grasp of the most relevant information within their agreement while respecting data security and privacy. Future launches will include search across customer agreement libraries, extractions from agreements, and proposed language and edits based on customer, industry, and universal best practices. DocuSign is a trusted partner to leading companies across many industries. As the leader in agreement workflows, we can use AI to deliver important value to customers by leveraging the world's largest set of agreement data, our proprietary agreement models, and deep integrations with best-in-class third-party models. We're excited to showcase new products and enhancements on our intelligent agreement roadmap, including significant AI-powered innovations at our user conference Momentum. The event will kick off next week in Santa Clara with virtual and in-person events in eight cities around the globe over the next few months. Turning to our initiatives around our omnichannel go-to-market. We are continuing to drive deep relationships within our partner ecosystem and enhancing our AI capabilities. We were honored to be showcased in the main keynote of Microsoft's Build Conference as one of the first companies using Microsoft Azure OpenAI. This further underscores our growing relationship with Microsoft and the opportunities we're seeing to enhance our AI capabilities. During the quarter, we also joined the SAP Endorsed Apps program. E-signature has been rigorously tested and validated by SAP to ensure that it seamlessly integrates with SAP solutions and meets their high standards for quality and performance. We're pleased with the progress we're seeing across our partner ecosystem, which will continue to drive further adoption of our products globally. Last quarter, I shared how we are investing in product-led growth and self-serve capabilities in order to drive more go-to-market efficiency and deliver a better experience for our customers. This is one of our most important areas of investment as we evolve how DocuSign goes to market and further integrate our digital, direct, and partner selling motions. Our digital business had stronger relative performance in Q1 as we launched several improvements on our website and within our product experience. These changes were designed to grow traffic, improve conversion rates, and drive monetization, and it's just the beginning. Whether it's a small business or a large enterprise, our vision is to make it easy for every type of customer to buy and consume our products in any way they prefer, self-serve, through our direct sales teams, or through a partner. Turning to our go-to-market execution in the first quarter. We're pleased with how our field team navigated the distractions in Q1 as we rebalanced our approach. However, we are seeing more moderate pipeline and cautious customer behavior, coupled with smaller deal sizes and lower volumes. We recognize it's a dynamic competitive environment across multiple categories. We're confident in our premium positioning, especially in complex and high-value use cases. As we've stated, international expansion remains a largely untapped opportunity for us. We're making investments not only with market-specific product innovation like identity verification, but also in stronger local market presence to strengthen our footprint. We recently released funding to further invest in Germany and Japan. And in Japan, we just went live with our first CLM customer this past quarter. Further supporting our focus on the international expansion, I'm pleased to share that Anna Marrs, Group President of Global Commercial Services and Credit & Fraud Risk at American Express, has joined our Board of Directors and as a member of the Audit Committee. She is a fantastic operating executive with deep global experience and will be a great asset to the Board and the leadership team. Finally, I am thrilled with the key hires we've announced to round out our leadership team. Most notably, Blake Grayson will be joining as DocuSign's new CFO next week. Blake's considerable track record and experience in finance leadership roles in category-leading public companies, including Amazon and The Trade Desk, make him a very strong addition to the DocuSign leadership team. I'd also like to take this opportunity to once again thank Cynthia for her tremendous contributions to DocuSign as both a Board member and as our CFO for the last four-and-a-half years. I'm grateful for her partnership and strategic leadership as the company navigated immense change. In closing, we had a solid start to the year with strong financial results, continued traction on the key pillars of our strategic vision to transform agreement workflows and intelligence, and in rounding out our leadership team with high-caliber talent. We look forward to continuing to share progress as we execute against our initiatives this year. Now, let me turn the call over to Cynthia to walk through our financial results and outlook.
Cynthia Gaylor, CFO
Thank you, Allan, and thanks to everyone for joining the call today. We had a solid start to the year, exceeding our top-line and operating margin guidance. We made progress during the quarter against our priority initiatives and demonstrated leverage in our operating model. We remain focused on delivering value for our customers with easy-to-use high ROI products, which in today's macro environment continues to be increasingly important as customers look for ways to drive more efficiency in their businesses. With that, let me turn to our Q1 fiscal '24 results. For the first quarter, total revenue increased 12% year-over-year to $661 million, and subscription revenue grew 12% year-over-year to $639 million. Our international revenue grew 17% year-over-year and reached $168 million for the first quarter, representing 25% of revenue. First quarter billings rose 10% year-over-year to $675 million. As a reminder, billings can fluctuate quarter-to-quarter due to the timing of deals and complexion of renewals. The macro environment continues to create uncertainty for our customers, and we're seeing the impact of smaller deal sizes and lower expansion rates across the business as customers scrutinize budgets. Q1 billings outperformance was driven by a higher rate of on-time renewals. We are encouraged by initial signs of improved sales execution across our installed base. We added approximately 45,000 new customers during the quarter, bringing our total customer base to 1.4 million, a 13% increase year-over-year. This includes the addition of approximately 9,000 direct customers to reach a total direct customer base of 220,000, a 21% year-on-year increase. We also saw a 20% year-over-year increase in customers with an annualized contract value greater than $300,000, reaching a total of 1,063 customers. The slight decline quarter-on-quarter was primarily driven by customer buying patterns, lower expansion rates, and partial churn. Dollar net retention was 105% for the quarter. We continue to see headwinds impacting our expansion rates coupled with muted customer buying patterns in a tough macro environment as budgets remain under scrutiny and customers optimize existing spend. Looking ahead, we expect the Q2 dollar net retention rate to continue to experience downward pressure. From a vertical perspective, we saw pockets of relative strength within insurance and business services, highlighting the importance of our diverse customer base and durability of our model, while we continue to see headwinds across financial services and real estate. Non-GAAP gross margin for the first quarter was 83% compared with 81% a year ago. First quarter subscription gross margin was 85% compared with 84% a year ago. Q1 non-GAAP operating income reached $176 million compared with $102 million last year. We delivered a record non-GAAP operating margin of 27% compared to 17% last year. This year-on-year improvement demonstrates our focus on profitability and the leverage in our business model. We remain committed to investing in a disciplined way to transform broader agreement workflows that will drive our top-line over time. As we move through the year and execute against our operating plan, we expect a quarterly decrease in operating margin. Non-GAAP net income for Q1 was $150 million compared with $77 million in the first quarter of 2023. The fiscal 2024 non-GAAP tax rate remains at 20%. Q1 non-GAAP EPS was $0.72. We ended Q1 with 6,586 employees compared to 7,642 the year prior. Operating cash flow in the first quarter grew 19% year-over-year to a record high of $234 million or a 35% margin. This compares with $196 million or 33% in the same quarter a year ago. Q1 collections were at an all-time high, benefiting from seasonality and enhanced automation and operational efficiency. Operating cash flow includes one-time cash expenses of $20 million in Q1 related to the 2024 restructuring plan we announced in February. Free cash flow for the quarter was $215 million or a 32% margin compared to $175 million or 30% in the prior year, a 23% year-on-year increase. We exited Q1 with more than $1.4 billion in cash, cash equivalents, restricted cash, and investments. Turning to our share repurchase program. We repurchased over 700,000 shares during the quarter for approximately $40 million, which demonstrates our confidence in the durability of our business. As a reminder, we have strong cash flow and an attractive balance sheet that gives us flexibility to optimize our capital structure with a focus on opportunistically returning capital to our shareholders. With that, let me turn to our Q2 and fiscal '24 guidance. While we are pleased with our Q1 financial results, it is still early in the year, and we remain cautious in our outlook, given moderating expansion rates and slowing customer demand, driven by the uncertainty in the current macro environment and continued competition, particularly in more basic e-signature use cases. For the second quarter and fiscal year '24, we anticipate total revenue of $675 million to $679 million in Q2 or growth of 8% to 9% year-over-year, and $2.713 billion to $2.725 billion for fiscal '24 or a growth of 8% year-on-year. Of this, we expect subscription revenue of $658 million to $662 million in Q2 or growth of 9% year-on-year and $2.64 billion to $2.652 billion for fiscal '24 or growth of 8% to 9% year-over-year. For billings, we expect $646 million to $656 million in Q2 or flat to 1% growth year-over-year, and $2.737 billion to $2.757 billion for fiscal '24 or growth of 3% to 4% year-over-year. We expect non-GAAP gross margin to be 81% to 82% for both Q2 and fiscal '24. We expect non-GAAP operating margin to reach 24% to 25% for Q2 and 22% to 24% for fiscal '24. We expect non-GAAP fully diluted weighted average shares outstanding of 207 million to 212 million for both Q2 and fiscal '24. We're pleased with the financial results in Q1, along with the resilience and focus the team has demonstrated as we continue to evolve the business. We maintain a disciplined and focused approach to delivering profitability at scale as we invest for the long term. In closing, I want to thank our amazing team for their commitment to delivering for our customers and partners and driving forward the vision for smarter, easier, and trusted agreements. On a personal note, the last four-and-a-half years has been an incredible adventure, helping the company operationalize tremendous growth at scale while providing a stabilizing force through unprecedented change. I'm looking forward to what comes next and to seeing DocuSign continue to be the innovator of defining how the world agrees. With that, we will open up the call for questions.
Operator, Operator
Thank you. We will now be conducting a question-and-answer session. Our first question comes from Tyler Radke with Citigroup. Please proceed with your question.
Kylie Towbin, Analyst
Hi. This is Kylie Towbin on for Tyler Radke. First off, Cynthia, just wanted to say congratulations and thank you for your time, and you'll be missed. And on that note too with Blake starting next week and the additions of Dmitri and Kurt too, would love to hear about sort of all of their biggest areas of initial focus. Thanks.
Allan Thygesen, CEO
Yes. Blake will take on the CFO responsibilities left by Cynthia. He will be focused on executing our operating plan, identifying opportunities for growth, and implementing our strategic roadmap. Dmitri will lead our product teams and report to Inhi Cho Suh, President of Product & Technology. He brings a strong background from various enterprise software companies and has a proven track record as an innovator in the field. We are excited to have him join us, as product vision and leadership are crucial for our future. Kurt will be in charge of our security organization, which is vital for managing the risks associated with handling sensitive documents and processes. It's essential that we maintain customer trust, and while we've done well so far, Kurt's role will be critical as we enhance our agreement workflows.
Kylie Towbin, Analyst
Great. Thanks. And just one more of maybe for Cynthia. With the 8-point beat on billings this quarter, how did the early renewals trend relative to your expectations? And with the full year raised a little bit less than the beat, is it fair to say that the amount you raised guidance was operational beat and the rest was potentially pulled forward? Thanks.
Cynthia Gaylor, CFO
Yes, thanks, Kylie, and thanks for the kind words. So, I think we were really pleased with the performance in Q1 and particularly on billings. The beat on billings was mainly due to strengths we saw in on-time renewals, which means the team did a great job executing across our installed base. And so, we saw less on the early renewal front, and so that is factored into the guide. So, I would say that's probably the driving force of what we're seeing. When you think about kind of the push-through on the guide, I would say that's really colored by the dynamics we're currently seeing in the business and some of the softness that I talked about in the prepared remarks around expansion rates and some of the other metrics. So, we think the guide is reasonable for what we're seeing, but the Q1 beat was mainly driven by on-time renewals in the installed base.
Operator, Operator
Thank you. Our next question comes from Brad Sills with Bank of America. Please proceed with your question.
Brad Sills, Analyst
Sorry, I think I was on mute. My apologies.
Cynthia Gaylor, CFO
No worries.
Brad Sills, Analyst
Sorry. The question is about Agreement Cloud. I realize it's still early, but what is the main focus there? I see some components, like eNotary and Analyzer, that seem to be well positioned for upselling to the existing base. I'm just curious if that is becoming a more significant area of focus going forward. Thank you.
Allan Thygesen, CEO
Yes. So, we are focused on delivering a full suite of workflow tools across the agreement journey and then an intelligence layer that can assist really at every stage. I think we've shipped components of that in the past, but I think we're really looking to bring all of that together and fully fill out that suite, if you will. We'll do a lot of that work this year. Some of the releases that you saw in Q1 are very much emblematic of that. I'd add to that, I think the biggest change in our roadmap beyond that clear focus and articulation on agreement workflow is really the advent of generative AI. We've been working on AI for several years. As you know, we have products like Insights that leverage earlier generations of AI models. But given the enormous change there, that's a fantastic opportunity to really unlock the category. And so, we're investing very heavily there. We released some new products, and we'll release more next week at Momentum, but I'm sure we'll talk more about AI during the call. So, I'll stop there.
Brad Sills, Analyst
Sounds exciting. Thank you, Allan.
Operator, Operator
Thank you. Our next question comes from Mark Murphy with JPMorgan. Please proceed with your question.
Mark Murphy, Analyst
Thank you very much. Cynthia, could you remind us what causes subscription revenue to decline a bit sequentially in Q1 and then experience some growth in Q2? I recall there was a similar situation last year, but I'm curious if there was anything unusual in Q1, or if this is a seasonal pattern that we can expect in Q1 of next year?
Cynthia Gaylor, CFO
Yes. So, Q1, a good observation, it's mainly due to the number of days. There are fewer days in the quarter in Q1. So, this Q1 had a few less days than other quarters. And so, that's the main factor there. I think the revenue per day is up, but the function of days in the quarter impacts that for this particular Q1.
Mark Murphy, Analyst
Okay. Just as a quick follow-up, how is the behavior if you look closely at the real estate sectors? When considering both residential and commercial, is there any indication that suggests the possibility of stabilization as interest rates become more stable or as equity markets perform better? Is there any indication that might foster a sense of stability or optimism as we approach the second half of the year?
Cynthia Gaylor, CFO
Yes. I mean, it's a good question, and we're certainly not economists. But I would say in general, in our prepared remarks, we covered this, but they are macro. We are seeing kind of customer sentiment across the base. I think, for DocuSign, we have a diversified customer base, which really helps us in up and down markets. I would say real estate and pockets of financial services continue to be softer than some of the other verticals like manufacturing or business services, which were stronger. So, I would just say, I don't know that we can prognosticate what the future holds there, but we do have a diversified customer base that does help insulate our business given the long tail there. But real estate definitely is continuing to show softness along with other sectors or sub-sectors that have interest rates or mortgage exposure in this environment.
Mark Murphy, Analyst
Okay. Thank you. And congrats on the nice execution in Q1.
Cynthia Gaylor, CFO
Thank you.
Operator, Operator
Thank you. Our next question comes from Brent Thill with Jefferies. Please proceed with your question.
Brent Thill, Analyst
Thanks. Allan, just following up on the overall environment, I mean, would you characterize what you're seeing now as pretty consistent with what you saw last quarter? Or if things stabilized, maybe improved a little bit? Just trying to understand the shape of what you've seen quarter-over-quarter.
Allan Thygesen, CEO
I think the macro environment is relatively consistent. And, yes, we, I would say, digging in a little deeper. If you look at it, let's start with segments, maybe slightly better performance in the SMB segment than in the enterprise segment. I think part of that is larger companies just tend to be more immediately sensitive to the business cycle. They also have centralized purchasing departments and other ways of tightening spending in a very directed way. So that subtle change, let's say, maybe slightly more pronounced this quarter than previous quarter. We continue to grow faster internationally than domestically, but I don't think that that's a material change. And from a vertical perspective, as Cynthia mentioned, some strength, but I think those are much the same sectors that we're doing a little better last time and parts of financial services, obviously, a little bit more challenged. But by no means all, by the way. So it's localized, let's say, a real estate and a few other things. So overall, it's a pretty balanced picture. I wouldn't say there were major changes in our environment. We are, of course, hoping to induce more change in the environment for our product roadmap. And we're excited with the new releases that we had, and you'll see a very rapid pace of new releases over the next few quarters. And so, you have to disrupt that beyond the macro.
Brent Thill, Analyst
Great. And just a quick follow-up for Cynthia. 27% margin in the quarter, yet you're guiding 23% for the year. Why such a big step down throughout the year?
Cynthia Gaylor, CFO
Yes. So, I mean, we outperformed margins by quite a bit in Q1. And I think it really does demonstrate what we've been talking about for a while now, which is leveraging our business model. It's amazing when you don't spend money, you can make a lot of money. But that being said, we're focused on profitability, but also executing on the investments in a disciplined way, and I think you kind of saw that in Q1. However, as I mentioned in the prepared remarks, our expectation is to continue to invest as we move through the year. We got a little bit slower start as we kind of evaluated coming into the year to that spend, but we expect to kind of catch up, and so when you get to the end of the year, by quarter, the margin should go down by quarter, which is implied in our guide. But then also the run rate and bow wave going into next year, like, we'll be fully invested against that. So that's our process. But we'll be disciplined. We're still in the long-term target range, and we're raising the year by 1 point relative to where we were 90 days ago. So, we're really pleased with that, but we will invest for the long-term opportunity.
Brent Thill, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Alex Zukin with Wolfe Research. Please proceed with your question.
Alex Zukin, Analyst
Hey, guys. Thanks for taking the question. Congrats on good execution in the quarter. Maybe just the first one, Allan, you kind of teased on wanting to talk a little bit more about AI. So, I'll kind of zoom out a little bit and just ask, if you think about the priority list for the company to reinvigorate the growth engine, stack rank in your mind, like is it new products? Is it AI monetization? Is it the PLV opening up kind of the umbrella? Like, stack rank, if you would, your strategic thought process on how to kind of reaccelerate growth for the business? And then, I've just got a quick follow-up.
Allan Thygesen, CEO
That's a great question. These factors affect us over different timeframes. Overall, I believe that product innovation will be the key driver fueling our medium- to long-term growth. We see significant opportunities for improvement in our self-serve and product-led growth strategies, which are high priorities for enhancing efficiency in the short to medium term. While the impact of AI may be more pronounced in the long run, we are already beginning to roll out new products and plan to share more updates next week. However, in the near to medium term, AI's overall impact on our business is still behind the first two priorities. Yet, for the long-term potential within the agreement workflow category, I see tremendous opportunities for DocuSign. We are uniquely positioned to take advantage of this. Many companies discuss AI, and while commercial AI models exist at the consumer level that enterprises can access, our opportunity is specific to our category and integrates AI at every level. DocuSign has extensive experience in developing agreement-specific models that differ greatly from basic tasks like writing an essay, requiring a much higher level of accuracy. Additionally, we possess the largest dataset of agreements, giving us the ability to help our clients unlock more value from AI models. Lastly, we are intentionally pursuing partnerships with leading cloud vendors to leverage the innovations they offer, including our collaboration with Microsoft and discussions with other players in the industry.
Alex Zukin, Analyst
Super clear answer and very interesting. Maybe just as a follow-up. Cynthia, it's a bit unusual to hear about outperformance on billings driven by in-line renewal trends. We've heard it before on early renewals, but it implies that a year ago, your renewal trends were either below seasonal average or that your guidance was kind of down below target. So maybe can you just help us understand how do you set that plan? And for the rest of the year, are you assuming that renewals come in at the rate they came in, in Q1, or are you assuming a bit worse? Just help us kind of understand that dynamic for the rest of the year.
Cynthia Gaylor, CFO
Yes, thanks for the question. It is a good one, and I agree with you, it is a bit unusual. But I think the dynamic is for software companies, with subscription models, you have a certain level of on-time renewals, early renewals, late renewals, there's spill in and spill over every quarter, and we model it out pretty granularly. And so, I think what we saw in Q1 is the dynamic of two things with on-time renewals, which means renewals that don't fall into the grace period and spill over to the following quarter. So, our rate of renewal is consistent, and so it's really a timing of deals. And those deals for on-time renewals more landed in Q1, which means in Q2, the implication is there's less spillover into Q2. So that is now baked into the guide. We think it's attributable to two things. One is execution by the team that focuses on the installed base, better execution and kind of closing what's in front of them, which is great. And we're really pleased with that. And then, I think the other is, there is a macro dynamic of less early renewals. So, customers are really scrutinizing their budgets. And when you look at kind of things like expansion rates and deal sizes and volumes, those are coming down. And so again, that's all baked into the guidance, but I would look at the outperformance on billings in Q1 at the timing piece. And again, it's baked into our full year guide, and that's why you're seeing kind of partial push through relative to other options there.
Operator, Operator
Thank you. Our next question comes from Shebly Seyrafi with FBN Securities. Please proceed with your question.
Shebly Seyrafi, Analyst
Yes, thank you very much. Allan, can you talk about the potential for the company to become a double-digit revenue growth company again? I note that the guidance for billings this year embeds around 3% to 4% growth, which is less than half of your revenue growth expected this year. So, I think in response to Alex's question, you talked about product innovation, self-service, like near-term growth drivers and AI longer term, it could be the biggest. So, I'm just wondering if things gel with AI in, I don't know, a few years from now, just talk about the potential for the revenue growth to be double digits again.
Allan Thygesen, CEO
Yes. Looking back, 2023 was a transformative year for DocuSign. As mentioned in previous earnings calls, this year is focused on establishing a strong foundation for growth, and we are making significant progress in that area. We are optimistic about our long-term potential and are restructuring the company to achieve that. However, such transformation does not happen quickly, so we are maintaining our guidance for next year as previously stated. All early indicators regarding our initiatives in product innovation, self-service, partner channel growth, and operational efficiency suggest positive contributions ahead. We also see a strong opportunity in AI, which could enhance our existing momentum. We will provide more updates on our targets for next year later in the year.
Shebly Seyrafi, Analyst
As a follow-up, is the product revenue or innovation you mentioned related to the three new releases: Web Forms, highly regulated markets, and ID? Or will there be additional products introduced later this year? Please clarify what you mean by product innovation.
Allan Thygesen, CEO
Yes. I think overall, my goal has been to dramatically improve our pace of innovation and pace of product releases. And so, I think we did a good job of that in Q1, and there's more to come here in Q2. In fact, we'll share some parts of our Q2 releases next week at our user conference. So, I look at that at every quarter, you'll see pretty meaningful new functionality across our vision of delivering agreement workflow. Some of the things that I'm most excited about that we intend to deliver this fiscal year, but a little further out, include things like searching across your repository of agreements. As you can imagine, an incredibly important functionality. No one really delivers that today. I think we're planning to do that before the end of the year. Another example of something more evocative and enabling future growth of the categories, we call orchestration, which basically enables you to pick components of the DocuSign suite and any third-party app that we interface with and combine them in ways that are custom for your organization and workflow. We've had a lot of increase for that over the years. No one has ever delivered that in the agreement space, and we intend to do that. So those are examples of things that are more evocative and could unlock the full potential of the category.
Shebly Seyrafi, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Rob Owens with Piper Sandler. Please proceed with your question.
Rob Owens, Analyst
Great, and thanks for taking my question. I think building on Brent's question a little earlier, I just wanted to better understand the pace of spend as we move throughout the year, because I guess 90 days ago, you had an operating margin that was at the low end, ramping throughout the year, and now, the inverse is happening where you have the high watermark in Q1 and incremental spend. So, just trying to understand, was there a change relative to spend trying to accelerate incremental products or what's going on from that perspective?
Cynthia Gaylor, CFO
Yes. I think in Q1, I mean, again, it's a good observation. I think in Q1, we saw lower spend across categories. So, we just got a slower start to the year. So part of it was across the investment areas and the key priorities and higher net new hiring kind of got off to a slower start. However, we expect that to kind of ramp as we move through the year. So we'd expect Q1 to be the high watermark, Q2 to come down slightly, and then Q3 and Q4 to moderate in the low 20s would be what we would expect. And so the year will come up 1 point, but the overall spend, again, in the run rate and the bow wave will be in line with our expectation coming into the year across the AOP.
Rob Owens, Analyst
And I guess, secondarily, could you talk about pricing and what you're seeing in the more traditional e-signature market throughout the various lenses, I guess, of where you're at in SMB and what enterprise looks like? Thanks.
Allan Thygesen, CEO
Yes. Overall, there's no doubt that the competition has increased compared to three or four years ago, particularly in basic use cases. Consequently, the overall market has softened. However, our win rates remain relatively stable, and we continue to be a clear market leader. I believe others base their pricing on us. We have a strong value proposition with the premium we offer. Customers appreciate the convenience and trust we provide, along with higher signed rates, quicker signing times, and a range of enterprise-grade features, such as integrations, security, and privacy. The pricing environment remains highly competitive, and while we see ourselves as the market leader and strive to ensure we are compensated accordingly, we also aim to avoid losing business unnecessarily. Therefore, we are working on being more agile, particularly in larger enterprise deals where there may be a combination of factors. As we continue to enhance our functionalities, we are optimistic about providing greater value to our clients, which will enable us to expand our overall revenue with both enterprise and mid-market customers.
Rob Owens, Analyst
Great. Thank you very much.
Operator, Operator
Thank you. Our next question comes from Josh Baer with Morgan Stanley. Please proceed with your question.
Josh Baer, Analyst
Thanks for the question and congrats on a good quarter. One for Allan, one for Cynthia. On CLM and Agreement Cloud, it's clear you're in a strong position to really leverage AI, and you talked about some of the ways that you're going to do that to improve your solutions and add more value. I guess I'm wondering how would you gauge customer interest and timing of that interest? Like, does the opportunity get pushed out at all? Are customers needing to reevaluate CLM in the context of AI and take time? Are there enterprise customers that are thinking about doing it in-house? If you could talk about some of that, like the time to realize the value unlock, or are you seeing near-term momentum?
Allan Thygesen, CEO
There are certainly a lot of questions. First, I want to emphasize that there is strong customer interest in the category and its features. We are receiving many inquiries, and our large system integrator partners are making significant investments in their Contract Lifecycle Management practices. The overall demand environment appears to be strong, and we haven't noticed any slowdown or hesitation due to AI. In fact, expectations for what is possible have been raised. However, Contract Lifecycle Management typically leans more towards enterprise use, which means it has a longer time to demonstrate value. This makes it more susceptible to macroeconomic factors and cautious customer behavior, resulting in longer sales cycles. These two dynamics are somewhat at odds with each other. Overall, we believe Contract Lifecycle Management has great potential but hasn't fully delivered on its promise yet. It remains too customized and service-heavy, leading to extended time to value. Our goal is to reimagine the category with a software-first approach that offers quicker value delivery, streamlined workflows across functions, and outstanding out-of-the-box analytics and insights powered by AI. We are collaborating with leading companies in various industries to explore innovative ways their legal departments can operate—be it for risk assessment, compliance, or deriving business value. I particularly appreciate the work we do with pharmaceutical and biotech clients. They utilize Contract Lifecycle Management to swiftly analyze their agreements, enabling them to respond to market changes, improve efficiency, and minimize risk. They leverage our Insights product to uncover rebate opportunities in their supplier contracts. This exemplifies how they extract business value well beyond just managing their agreements more efficiently. Overall, we maintain a positive outlook on the category in the long term, recognizing it needs reimagining, and we are committed to leading that transformation.
Josh Baer, Analyst
Great. Just a real quick one for Cynthia. Professional services revenue, I think, was a record this quarter. Anything to call out for the strength and upside there?
Cynthia Gaylor, CFO
Yes. So, in that professional services and other category, we do still have some on-prem software that's part of the legacy product suite. And so, there was a Q2 deal that fell into Q1. So again, it's really the timing of deals. And so that was an on-prem deal that led to that upside in the PS and another line.
Josh Baer, Analyst
Okay. Thank you, Cynthia. Congrats, and good luck.
Cynthia Gaylor, CFO
Thank you, Josh.
Operator, Operator
Thank you. Our last question comes from Jake Roberge with William Blair. Please proceed with your question.
Jake Roberge, Analyst
Hey, thanks for taking my questions. You talked a lot about the product-led growth initiatives that you started to put in place. But just thinking about the other end of the spectrum with your direct sales motion, now that Steve has been in the seat for a little over a year, are there any new opportunities that he's looking into for that direct motion? I know you talked a little bit about partners international, but you're still kind of in those eight direct field territories internationally. So just curious if there's any updates on the direct side.
Allan Thygesen, CEO
Yes, that remains the majority of our business, and I don't expect that to change for a long time. I believe Steve has assembled a strong team, and they have all adapted well, demonstrating a new level of professionalism and maturity. We are working to enhance their capabilities in all areas. Whether it's our marketing, training efforts, or bundling, we have opportunities to improve as an enterprise sales software company, with Steve guiding us in that direction. This continues to be critically important for the company, and I think we're making good progress. As we release more products, I believe we have a sales channel that is well-prepared to take advantage of that.
Jake Roberge, Analyst
Great. And then just digging a little deeper into generative AI. Opportunity seems pretty interesting with your agreement models and then just the ability to better utilize all the data within your contracts. I'm curious how you're thinking about maybe your monetization plans for the tech. And then, I know it's still early days, but is that something that could start showing up early next year or is that still too early there?
Allan Thygesen, CEO
Yes. As I mentioned earlier, I believe that the impact of our agreement workflow roadmap and product-led growth will take a bit longer to materialize. Regarding monetization, I anticipate that AI features will be included in our baseline products, enhancing their functionality and value, as I indicated before. In some instances, they may also be offered as a separately charged add-on, which we currently do. For example, our Insights product, which is an AI-driven analytics solution for contract lifecycle management, is available both as a stand-alone SKU and as part of a premium bundle. We need to better understand how customers would like to utilize these features and what the key value drivers are before we determine pricing, but we are focused on delivering the most value and capturing value for DocuSign as we establish our pricing strategy.
Jake Roberge, Analyst
Great. Thanks for taking my questions.
Operator, Operator
Thank you. Our next question comes from Michael Turrin with Wells Fargo Securities. Please proceed with your question.
Michael Turrin, Analyst
Hey, thanks. Appreciate you fitting me in. Just one for me, maybe on expansion rates. We're hearing some software companies started to comment around when they'll hit a 12-month period and start to lap some of those impacts. Is there any sense you have at this point in time around where or when the expansion headwinds start to settle, assuming we remain in a similar environment? And our gross retention rates, I know you had a comment last quarter on those, are those still holding consistent here? Just any additional context is helpful. Thanks.
Cynthia Gaylor, CFO
Thanks for the question, Michael. Our dollar net retention rate is at 105%, but we anticipate that it will continue to decline in Q2. The pressure on expansion rates is the main factor impacting our top-line metrics. We expect this trend to persist based on our current observations and projections for Q2. This decline can be linked to shifts in customer buying behaviors and a more cautious approach to budgets due to macroeconomic factors. Our model is based on landing and expanding, and as companies adopt our services, the pace at which they expand is slowing, which is evident in some of our customer metrics this quarter. These factors are driving the changes in our expansion rate. You may notice this trend reflected in our dollar net retention over time, but it is also apparent in some other metrics as we proceed through the quarters.
Michael Turrin, Analyst
And then, gross retention rates, I know you mentioned partial churn. Are gross retention rates consistent still?
Cynthia Gaylor, CFO
We do not disclose gross retention, but when we examine various factors such as expansion rates and churn rates, the expansion rate is primarily influencing the compression we are observing, more so than other elements.
Michael Turrin, Analyst
Thanks, Cynthia. Best of luck to you. Thanks.
Cynthia Gaylor, CFO
Thank you.
Operator, Operator
Thank you. Our next question comes from George Iwanyc with Oppenheimer. Please proceed with your question.
George Iwanyc, Analyst
Thank you for taking my question. Allan, maybe can you expand a little bit on what you're seeing in international markets and how you're leveraging partners and ecosystem expansion there?
Allan Thygesen, CEO
Yes. I mean, overall, I think we're seeing some softness, right, across the business. International is not an exception, but on a relative basis, I think it's a less meaningful factor. It is growing faster than our domestic business. It is the largest part of our addressable market, and we're still only 25% of our revenue. So, we have a huge untapped opportunity. Most of the international markets are at an earlier adoption phase. I think a lot of that is due to regulatory history and cultural habits, but we see that really starting to change now. And so, it's one of the reasons that give us confidence to invest. As I mentioned, we're particularly beyond the major English-speaking markets and a few existing large European markets like France. We're really investing in Japan and Germany to fully capture the opportunity there. Beyond the investment in our direct sales and back-office functions in those markets, self-service and partners, as you alluded to, are key levers. So that includes partnerships with SIs, met several in my international travels, distributors, et cetera, and of course, our self-service capabilities are particularly suitable for reaching a lot of markets where we can't put a lot of resources on the ground. And then, we're investing heavily on the product side. I mentioned the ID verification. We're qualified, trusted service provider in the EU. And we have a dedicated team and a pretty strong in-market customer relations on that front. So, overall, I'm very bullish on international opportunity. And I think the entire company is excited that we're aligned and investing. We are being quite disciplined with which markets we're adding, should we say, direct sales efforts into, and the rest will be partner and self-service enabled.
George Iwanyc, Analyst
Okay. And just a follow-up on, you mentioned the EHR Interoperability in your opening remarks. What are you seeing in healthcare right now?
Allan Thygesen, CEO
I believe this represents one of our significant opportunities from a vertical perspective. We are observing a range of entities, from insurers to hospital networks and groups of doctors, adopting signature and forms-based solutions for patient log-ins and registration disclosures. There remains a lot of easily attainable potential in the early stages of healthcare system digitalization, and we are well-positioned to contribute meaningfully to that progress. We are experiencing a considerable amount of inbound interest, although it is important to note that this sector is highly regulated, which raises the entry requirements. The positive aspect is that we are at the forefront of this market, creating a favorable competitive environment for us.
George Iwanyc, Analyst
Thank you.
Operator, Operator
Thank you. Our last question comes from Jackson Ader with SVB MoffettNathanson. Please proceed with your question.
Kyle Diehl, Analyst
Thank you for the opportunity. This is Kyle Diehl for Jackson. I have a quick question. Cynthia, you might have mentioned it, but as we consider investments in the latter half of the year, are those investments flexible and adjustable, or are they primarily focused on long-term strategies that would affect our operating margins? Thank you.
Cynthia Gaylor, CFO
Yes. I would say, I mean, we evaluate as we move through the year, but the intention right now is to invest into the plan that we had coming into the year. It just got off to a slower start. So I'd expect the expense to be higher in the back half of the year. Again, we're really pleased to be able to increase the margin for the year by 1 point, but the bow wave and the run rate, we would expect to be about the same. But I'm sure the team will evaluate it as we move that pace. There are pieces around headcount as we hire people that will naturally bring down the margin, because that's by far our biggest expense category. But things like T&E and third-party vendor spend, we're always looking at those areas as well.
Allan Thygesen, CEO
Okay.
Operator, Operator
Thank you.
Allan Thygesen, CEO
That was the last question?
Operator, Operator
Yes. I would like to turn the floor back over to Allan for closing comments.
Allan Thygesen, CEO
Thank you, operator. Thank you all for joining today's call. We appreciate your support as we continue to make progress towards our long-term vision for the business. In closing, I think we delivered a solid start to the year, and we remain focused on our execution to deliver value to our customers and our shareholders. I do want to reiterate my enthusiasm for our product roadmap as we are confident that our investment in innovation and talent will be key moving forward. If you want to continue to see some of the progress we're making, I encourage you to watch our one-hour keynote at Momentum Wednesday next week as we share more updates on our visions and our products. I also look forward to sharing more with you throughout the year. Thank you very much.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.