Earnings Call Transcript
Docusign, Inc. (DOCU)
Earnings Call Transcript - DOCU Q2 2022
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining the DocuSign Second Quarter Fiscal Year '22 earnings conference call. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I will now pass the call over to Annie Leschin, Head of Investor Relations. Please, go ahead.
Annie Leschin, Head of Investor Relations
Thank you, Operator. Good afternoon, everyone. Welcome to DocuSign Second Quarter Fiscal Year '22 Earnings Conference Call. On the call today, we have DocuSign CEO, Dan Springer, and CFO, Cynthia Gaylor. The press release announcing our second-quarter results was issued earlier today and is posted on our Investor Relations website. Before we get started, I'd like everyone to know that we plan to participate virtually in a few upcoming events. These include Wolfe Inaugural TMT Conference on September 8th, 2021; Global Technology Conference on September 13; Piper Sandler's Global Technology Conference on September 13th; and Jefferies Software Conference on September 14th. You can find more information about these events in the Press Release section on our Investor Relations website. As other events come up, we'll make additional announcements. Now, let me remind everyone that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to the 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 effect of the evolving COVID-19 pandemic on our business, including the potential effects of the pandemic on our customers' businesses, and the pace of digital transformation are based on our best estimates at this time and are therefore subject to change. These readings consider the risk factors in our filings with the SEC, together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to date. And except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude stock-based compensation expense, employer payroll tax on employee stock transactions, amortization of acquired intangible assets, amortization of debt discount, and issuance costs from our notes. Acquisition-related expenses, fair-value adjustments to strategic investments, impairment of lease-related assets, and, as applicable, other special items. In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billing. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's press release, which can be found, again on our website at investor.docusign.com. Now I would like to turn the call over to Dan.
Dan Springer, CEO
Good afternoon, everyone. And welcome to our second-quarter earnings call for fiscal 2022. Today, I'd like to focus my comments on three key areas. Our strong Q2 results, how companies are increasingly digitizing their agreement processes, and how we're cementing DocuSign as a critical pillar of the anywhere economy. Jumping straight into our second-quarter financials, DocuSign's strong performance continued as we delivered a balance of growth and profitability at scale. Revenue grew 50% year-over-year to $512 million, and billings grew 47% year-over-year to $595 million. Our international business continued its strong growth, up 71% year-over-year. We expanded our customer base beyond the 1 million mark, including the addition of 13,000 new direct customers and some very significant CLM wins with large customers. Finally, we continue to see a strong expansion and upsell motion for eSignature and the broader Agreement Cloud suite, driving our dollar net retention of 124%. Overall, I am proud of how our team has continued to stay in front of the evolving COVID business environment. We are helping organizations of all sizes to leverage the power of the Agreement Cloud to digitize the foundation of doing business, the agreement process. Not only does the customer see DocuSign as a vital part of their response to COVID, but many have also seen a better way of doing business from anywhere. And we believe that will become their new normal. One of our customers, Stacy Johansen, who's the President of Downeast Insurance, told us that when COVID hit and they had to close their physical doors, DocuSign saved them. In other words, and I quote, "If it weren't for the ability to get an electronic signature, we wouldn't have written half of the new business we did last year." Having succeeded beyond expectations by fully embracing digital tools, Downeast resolved to do business this way from here on. Another example is one of Canada's largest automotive dealers. In response to COVID, the company adopted DocuSign eSignature and DocuSign Payments to support remote sales and service. The program was so successful, it spawned a larger initiative to offer digital transactions across their entire dealer network. As one company executive put it, DocuSign has become part of facilitating the full breadth of remote experiences. These are just a few examples of what we're seeing again and again. Being able to do business and operate from anywhere is what people now expect. Plus, it saves time, money, and trees. To cement DocuSign's position as a critical pillar of the anywhere economy, we are executing on three core themes as a business. The first is to stay focused on customer success. We're helping our customers and partners to shift their perspective from reactive to proactive, enacting enterprise-wide programs to automate and digitize their end-to-end agreement processes. Let me highlight just a couple of examples. One of our largest U.S. state government customers saw a substantial increase in the thousands of employees accessing their systems remotely. We were able to scale our eSignature solution to allow the HR and administration teams to handle the increased load. In addition, the agency rolled out DocuSign CLM to simplify three complex workflows, resulting in 97% of all contracts being completed in significantly less time. And we're not only helping state agencies; today DocuSign serves the majority of the cabinet agencies in the U.S. federal sector. In the private sector, one of the world's largest media and entertainment companies has been a longstanding DocuSign user and has digitized over 400 paper-based workflows with us, growing adoption by 100% year-over-year. Now, the company has deployed in multiple use cases and has seen a multi-million-dollar return on its investment in the DocuSign Agreement Cloud. The second theme is giving our customers an agreement cloud platform they can grow into. That means offering the most comprehensive set of applications and integrations available for the agreement process. They can start with eSignature, and then expand into other areas like Contract Lifecycle Management and into specialized solutions in verticals like mortgage and life sciences. With every DocuSign Agreement Cloud release, we keep adding to our capabilities and differentiating our platform. Let me note some of our latest highlights. For eSignature, we debuted new ID verification capabilities that allow both automatic and manual identity review by senders. It's now also possible for an identity check to be done once and then remain valid until the envelope is complete, dramatically improving the experience for sender and signer alike. We've improved the embedding and management of our Clickwrap solution. One of our largest retail customers recently completed more than 1 million transactions using DocuSign Click. We introduced a new integration and add-in for Splunk, bringing the security insights provided by DocuSign Monitor into one of the most popular enterprise monitoring tools. We continue to grow the number of notarized transactions completed on our platform. Today, DocuSign Notary supports remote online notaries in 18 U.S. states, with more coming in the future. Turning to CLM, two key areas stand out for me. The first is our continued build-out of buy-side CLM capabilities. We have released obligation management, which is huge, and a connector for our key partner Ariba. This adds to other buy-side connectors shipped earlier this year. The second CLM highlight is our enhancement of AI-based search and reporting capabilities within the offering, which we call CLM+. It features automatic contract term extraction and allows for searching of agreements not only by keywords but also by AI-driven concepts such as renewal dates within the next 90 days to save a huge amount of time and manual effort. And then, there's the trust and security enhancement for the DocuSign platform. We continue to bring enhanced security features to our product suite with solutions like DocuSign Monitor, which I mentioned earlier. We are also deepening our trust and security relationship with our customers. For example, we recently held a number of trust and security summits. And we're collaborating closely across our customer base in trust and security topics, where there is tremendous demand. Together, these advancements in our products move us closer to a unified platform of record for agreements and agreement processes. Finally, the third theme is our international business. This remains a highlight for us as our teams outside the U.S. contributed more revenue in Q2 than in any other quarter to date. The key drivers for EMEA, LATAM, and APJ mirror those that we've seen here in the U.S. By way of example, one of Europe's fastest-growing enterprise-focused startups, Celonis, saw a dramatic increase in the volume of contracts that needed to be generated, reviewed, and processed, a workflow that had been largely manual today. By implementing DocuSign's CLM, the company addressed these inefficiencies, saving the legal team countless hours and delivering contracts 80% faster than before. Further expansion is already planned into the procurement and HR teams. And APJ, one of our largest financial services customers, the Commonwealth Bank of Australia, expanded its number of use cases and saw a substantial increase in transaction volumes. One team saw a 175% increase in the documents processed through DocuSign. Another noted a 17-day faster time to revenue. Customers are now embarking on an automation project to further integrate and streamline the experience up and downstream. As these examples indicate, we're pleased with how our international business is accelerating, driven by the same factors of speed, cost efficiency, and user experience that have propelled us domestically. Before I hand it over to Cynthia to walk through the financials, I want to mention another factor that has always been central to DocuSign, our environmental impact. Our eSignature solution alone has replaced billions of pieces of paper, along with a significant amount of the waste, water, carbon, and wood that are required to make and transport paper. In addition, to help fight global warming, DocuSign has also committed to achieving carbon neutrality by 2022. As part of this effort, we have launched an ESG portion of our website and have organized a multi-functional team to coordinate our overall sustainability strategy. We will continue to help our customers realize their ESG goals while we work to be a positive example in the running of our own business. I'm incredibly pleased with DocuSign's performance in the second quarter. Our team has continued to deliver across the board and has done so with a real focus on customer and partner success. I look forward to talking to you in the Q&A shortly. For now, over to Cynthia.
Cynthia Gaylor, CFO
Thanks, Dan, and good afternoon, everyone. Q2 was another solid quarter as we outperformed on both the top and bottom lines. We crossed the $0.5 billion mark in revenue for the first time this quarter. And once again, we demonstrated our ability to balance growth and profitability with solid operating results and strong cash flow. Total revenue increased 50% year-over-year to $512 million. Subscription revenue grew 52% year-over-year to $493 million thanks to strong customer demand and early renewals, driven by accelerated consumption from our expanding customer base. Our international business had another outstanding performance with strength across the board led by EMEA. In total, our international revenue grew 71% year-over-year to almost $114 million, representing a record 22% of total revenue. Billings grew 47% year-over-year to $595 million as we continue to see strong early renewals and expansions of existing customers. Total customers crossed the 1 million mark with more than 65,000 new customers added in the quarter. This brought our total customer count in Q2 to 1,053,000 worldwide, an increase of 41% compared to a year ago. We added 13,000 direct customers, bringing the total to 148,000, an increase of 50% year-over-year. We also saw customers with an annual spend greater than $300,000 grow 37% year-over-year to a total of 714 customers. For the fifth quarter in a row, dollar net retention exceeded the high end of our historical range, coming in at 124%. The total non-GAAP gross margin for the second quarter was 82% compared with 78% a year ago, while subscription gross margin was 85% compared with 83% a year ago. Our strong revenue growth again outpaced spending this quarter. Non-GAAP operating margin was 19%, or nearly $100 million compared with 10% or $34 million in the second quarter of last year. Investing for top-line growth remains a high priority for us in the second half of the year, including increasing sales capacity and marketing programs, innovating our products, and scaling our back-office systems and processes. We see the tight talent market as an opportunity to up-level and develop our people internally while adding complementary skills as we drive the next phase of growth. Non-GAAP net income for Q2 was $98 million compared with $35 million in the second quarter of last year. We ended the quarter with 6,551 employees, an increase of 31% over last year. Our cash flow remained robust in Q2. Operating cash flow came in at $178 million, or a 35% margin, due to continued top-line outperformance. This compares with $118 million or 35% in the same quarter a year ago. Free cash flow reached $162 million or 32% margin in the quarter compared to $100 million or 29% in the prior year. We exited Q2 with $887 million in cash, cash equivalents, restricted cash, and investments. Now let me turn to guidance. Clearly, the last year and a half have been exceptional in nearly every way for DocuSign. In the last six quarters, we have scaled our business nearly two-fold, more than doubled our operating profitability, nearly doubled our customer accounts, and reached our highest dollar net retention levels yet. Anyway, you look at it, this is impressive growth at scale. Halfway through fiscal 2022, we have seen customers renewing earlier in the year as they've used more envelopes and their purchases catch up with consumption levels. While we do not expect to maintain the peak levels of growth seen at the height of the pandemic, our value proposition is strong, regardless of whether people go back to the office; we don't see them going back to pen and paper. Turning to the numbers, for the third quarter and fiscal year '22, we anticipate total revenue of $526 million to $532 million in Q3, or growth of 37% to 39% year-over-year, and $2.078 billion to $2.088 billion for fiscal '22, for growth of 43% to 44% year-over-year. Of this, we expect subscription revenue of $505 million to $511 million in Q3 or growth of 38% to 39% year-over-year, and $1.995 to $2.005 billion for fiscal '22 or growth of 44% to 45% year-over-year. For billings, we expect $585 million to $597 million in Q3 or growth of 33% to 36% year-over-year and $2.409 billion to $2.429 billion for fiscal '22 or growth of 40% to 41% year-over-year. We expect the non-GAAP gross margin to be 79% to 81% for both Q3 and fiscal '22. We expect the non-GAAP operating margin to be 17% to 19% for Q3 and 16% to 18% for fiscal '22. We expect to see a de minimis amount of interest and other income, and we expect a tax provision of approximately $6 million to $9 million for fiscal '22. We expect fully diluted weighted average shares outstanding of 205 to 210 million for both Q3 and fiscal '22. In closing, we ended the first half of the year in a strong financial position. We are focused on investing for future growth, scaling our business, and cementing DocuSign as a critical pillar of the anywhere economy. We would like to thank our customers and especially our DocuSign team for their partnership and hard work in helping us deliver another successful quarter. We look forward to continuing to execute in the second half of the year. Thanks again for joining us today. We will now open up the call for Q&A.
Operator, Operator
Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question comes from Bhavani Suri with William Blair. Please proceed with your question.
Bhavani Suri, Analyst
Thank you. Can you guys hear me, okay?
Dan Springer, CEO
Yeah, hear you fine.
Bhavani Suri, Analyst
Great job on a solid quarter, especially regarding the NDR number. That was impressive. It's uncommon to see a company at scale improving, as NDR typically trends downward, so congratulations on that. I have a significant, fundamental question that goes beyond the current quarter or even the year; it concerns data. We've discussed this quite a bit. As you consider the long term, you've mentioned how you utilize the vast amounts of contract data available to you. You talked about remote loading and various other topics, but I would like you to elaborate—not just for the next quarter or 12 months, but looking forward 24 to 36 months, or even 3 to 5 years. How do you plan to monetize that data? How does this data contribute to customer retention and also to the monetization of the platform? I would appreciate it if you could walk me through that process. Thank you.
Dan Springer, CEO
Yeah, it's a really interesting topic. And when we think a lot about it, let me break it into two pieces: what I think we will do and what I think we won't do. And particularly in that timeframe you just described. What we are going to do is leveraging the existing data and the reporting and analytics tools we have, as well as the increasing focus on artificial intelligence to go deeper to leverage that data to help our customers run their business better. And I gave an example in the prepared remarks about how folks have been able to learn more about their business and be able to search against their agreements that they've done in the past to understand how they can quickly find information to again, help them to improve the performance of what they do. We think we have a huge investment opportunity there, which we're going to aggressively invest in. Seal Software was a great example of an acquisition we did to enhance, in this case, our artificial intelligence engineering skillset. I think you're going to see us doing a lot more in the data science world to make our products more able to help customers run their business better. The second thing is, we can mine that information to help us drive more customer success, so we can take a look at how people are using our products, how they're not using our products, which use cases they're not availing themselves of, when they have incomplete segments of agreements because certain parts of the company might not be as responsive as others and help them really pinpoint and run their business better and help them figure out ways to grow more with DocuSign because of that. So that's probably a couple of flavors I think we're excited about. One of the things a lot of people ask about is would we be able to figure out a way to leverage all the agreements across our different customers to offer different kinds of services to people. We're super-sensitive about that. At this point in time, we are a B2B software company. Our job is to serve our customers. Taking their data for some other purpose is not on our roadmap in any way. I agree that there's a lucrative-sounding opportunity there. But at this point, when we talk to our customers, they say they'd like to use their data themselves, thank you very much, and like you to make the good living you do off helping us be successful with our business, not sort of extract that information to use in another way. I will tell you the one exception to that is when you think about the way we train our models, particularly around things like artificial intelligence. The fact that we have lots of customers, over a million customers now, we had 13,000 new direct customers alone in this last quarter, we're going to get more and more people using our model that is going to allow us to do better learning on those models, which will, of course, be a benefit across all of our customer set. But for the specific data, we're not going to take our customer's data and use it for other purposes.
Bhavani Suri, Analyst
I think it's useful to clarify. While the questions might be similar, it's important to avoid sharing one customer's data with another, particularly among competitors. My question is focused on how we can monetize this data. Other companies have had data for years and often discuss how to benchmark and sell insights back to their clients. I'm curious about how artificial intelligence contributes to customer loyalty and monetization. It's an interesting topic, and while not an immediate concern, how should we view DocuSign's potential for revenue and earnings growth in this area over time?
Dan Springer, CEO
Yeah. Well, I think there are a couple of things. And going off again, at first, what we are going to do, the first bucket I talked about, let me give you a couple of examples of how we have seen that play out. But to be clear, the bulk of it is not about us monetizing that data for back to those customers, but just allowing them to be more effective. We just have a really strong point of view here that if we drive customer success, and they get an increase in the quality of the ROI, they get it's only good for our business. It should drive further adoption of the core business we have. Now, one of the benefits that allow us to expand our footprint very, I think, related to your question is once someone realizes that they should have all of their agreements in our repository and service CLM solution at DocuSign, that means they're going to go out to all the other parts of the company that haven't yet adopted eSignature as an example. We really want to consolidate and get all that information into one repository. And we believe that is the way we win with data, by showing people that when they integrate across their Agreement Cloud with DocuSign, the information we can extract across their agreements can help them across their business understand how to operate more effectively and efficiently. That's where the payout comes to them, and then in turn, it comes to us because they grow with us. And that's really the core of how we think about it as opposed to a new set of offerings where we might leverage that data to effectively sell back to them.
Bhavani Suri, Analyst
I appreciate that. Congrats and thanks to you for the candor, I really appreciate that. Very nice job. Thank you.
Operator, Operator
Thank you. Our next question comes from Sterling Auty from JP Morgan. Proceed with your question.
Sterling Auty, Analyst
Yeah, thanks. Hi, guys. I just have one question as well. And it's really regarding one of Cynthia's comments about not having sustainable growth at the peak levels of the pandemic, which no one expects. But this week, in particular, we've seen a number of high-growth companies highlighted by Zoom starting to show that post-pandemic deceleration. And my question is how investors should think about the pace of moderation in your growth as we move forward, especially in light of the high growth that you're showing on the international front.
Cynthia Gaylor, CFO
Sure, thanks for the question, Sterling. We've been discussing this over the past several quarters. We do not expect our growth to sustain the peak levels we experienced during the height of the pandemic. That doesn't mean we won't continue to see very strong growth. We had a robust first half of the year and are guiding for a strong second half as well. One of the advantages of our subscription-based model is that growth tends to be gradual. We did see peak growth during the pandemic, and we expect that trend to continue. Overall, there is nothing significantly different in what we're experiencing now compared to what we reported before regarding our growth rate.
Sterling Auty, Analyst
Understood. Thank you.
Operator, Operator
Thank you. Our next question comes from Brad Sills with Bank of America. Please proceed with your question.
Brad Sills, Analyst
Great. Thanks, guys, and congratulations on a real nice quarter. I wanted to ask about the Agreement Cloud. Obviously, you've seen some early traction there. Congratulations on that. I know there's a lot of hard work on the product side and you cited some of the deliverables there. My question is, where are customers starting here? Is it typically with insights or Analyzer? They're already running eSignature or is this CLM that they typically start with that repository for terms and conditions and then they go into Analyzer? What does the typical path look like for the entry in the Agreement Cloud? Thank you.
Dan Springer, CEO
Yeah, absolutely. Brad, the first answer is as you implied in your question, but let me make sure I'm absolutely clear about it. The tip of the spear for us is the e-Signature. So, the vast, vast, vast majority of our customers start with Signature and for the simple reason that until you figure out a way to digitize your agreements and capture them in an online fashion, it's really hard to do the remaining aspects of the Agreement Cloud, right? You don't have a digital agreement. So clearly, signatures where people start. What we're seeing is a second move tends to be to CLM and it's the construct of once they start thinking about that repository that you referred to in your question, that's where we really see the opportunity for them to start thinking about a full-feature Agreement Cloud that they want to build out across their own system of agreement. So CLM is where we see the next move and that's where we see ourselves, as you heard me mention in the prepared remarks, where we see a lot of traction right now. And one of the things to keep in mind is last year when we had the surge in eSignature demand that Cynthia was just referring to, at that peak of COVID, we had our customers really pushing us to go signature, signature, signature. Of course, that was natural for us, because that's what brought us to this dance, right? But we said we had to sort of slow down some of our focus on the other parts of the Agreement Cloud just to meet customer demand because we are, at our core, a customer success company, and the DocuSign employees rallied to meet that surge in demand. Now this year we're starting to see the opportunity to go back to where we were really two years ago and say now let's focus on CLM as that next big opportunity to really expand people into the Agreement Cloud. And we think that will be the foundation for most companies, in how they really build out the rest of the Agreement Cloud beyond signature.
Brad Sills, Analyst
That's great, Dan, and thanks so much. And maybe just a follow-up on that. What is the effort involved to go from eSignature to CLM? What does the implementation cycle look like given that this is a repository, there's data resides in here? Is there an SI partner community that you've developed here to help with that work, or is it more seamless? Maybe it's just not that complicated to go from eSignature to CLM? Thank you so much.
Dan Springer, CEO
Well, as you'd guess, we're working hard to make it as seamless as possible. But let me be absolutely clear that the construct of someone becoming an eSignature customer is very different than becoming a CLM customer. And we've done a fantastic job in our core signature product to build an amazingly easy-to-use service. One of the things that's indicative of that, if you look at the fact that we have over 900,000 customers that have come to us through the web and they never have to talk to anyone at DocuSign if they didn't want to. We're wonderful people to talk to, I hope you understand, but they don't have to. They can sign up online, and start using our award-winning software. So, when you get to CLM, you are going to probably have a statement of work. We'd love it when we get to use one of our SI partners. We do have a fantastic professional services team, but that goal, that organization of train the trainers. And over time, we really want to see that the SI ecosystem really blossoms to the point that it's a smaller and smaller part of what we do. Now, less than 5% of our revenue services, so it's not like it's something that's become a big part of our business. But we really feel the right way to be as ubiquitous as we can is to build a strong network there. And then we believe for the vast majority of customers, they will leverage whether it's our preserve or if they have a really strong IT team internally and they have available resources, which is fairly unusual. If they have that they can do it themselves but the hope for the outcome is it'll be the SI network, and we're really excited about the progress. We've been building a super-strong ecosystem there, and that's the focus for us in the years to come.
Operator, Operator
Thank you. Our next question comes from Scott Berg with Needham. Please proceed with your question.
John Godin, Analyst
Hey, guys. This is John Godin on behalf of Scott Berg. I appreciate you taking my question. Are you guys seeing anything different as far as trends go over this past quarter as far as the mix of growth, coming from higher consumption levels of existing use cases versus adding additional use cases or moving across the different departments?
Dan Springer, CEO
So, in terms of if we're doing anything different, we're, of course, responsive to our customers. And so while we do have a fantastic customer success organization that's out there suggesting to our customers where their most likely next applications might be and what use cases might make more sense for them, the answer is again; we respond to the needs of their business from a customer standpoint. I think we're seeing growth across both. We are seeing a lot of people expanding the volumes. I gave some examples in my opening remarks of customers who said, we have a use case, it's working well with DocuSign and we want to do more of that. Commonwealth Bank is a good example of that. But we also have seen fantastic examples of people expanding the number of use cases. Remember our Land and Expand model is really based upon the fact that we get in, we deliver fantastic ROI to one group in the company for an initial use case that we land with, and then expand across not only more use cases but also more departments and other divisions within that company. I would say from the standpoint there, there's nothing different than I've noticed in the last year and prior years in terms of that mix. I think at the very peak of COVID, we probably saw an increase in more use cases, that sort of expansion of more things people were doing, over volumes. So, they just realized there were critical parts of their business they needed to address in the anywhere economy they hadn't done. Today, I think we're probably back to the normal mix of what's increasing the volumes of existing use cases and what's increasing new use cases.
John Godin, Analyst
Great. Thank you, guys.
Operator, Operator
Thank you. Our next question comes from Karl Keirstead with UBS. Please proceed with your question.
Karl Keirstead, Analyst
Thank you, and congrats on the nice numbers. Cynthia, I'd love it if you could talk a little bit about your margin outlook for the second half. Despite raising your total revenue guide by 50 million, you left your operating margin target of 16 to 18 impact and that would require a step-down in the fourth quarter. So maybe you could talk a little bit about what assumptions are driving your second half margin outlook. Thank you.
Cynthia Gaylor, CFO
Yeah, thank you for the question. So, in terms of margin, we've been performing at the low end of our long-term target margin. And as we said last quarter, we're really looking to make sure we are investing for growth just given the large market opportunity we have and the traction we're seeing in the business. So, we'll continue to do that, particularly building sales capacity, in our marketing programs and in our product development teams. We will continue to do that through the back half of the year. Also, remember, as we look into next year, we do look to hire in Q4 and for folks to start in Q4, that will build capacity going into next year and so Q4 tends to have more expense built into it than some of the other quarters. So, that's driving those assumptions. I'd also just remind you from a margin perspective, some of the top-line outperformance seen in the first half certainly shows operating leverage in our business model, right? But we are looking to invest for growth over the long term, and that's what's built into the assumption in the second half in terms of the margin.
Karl Keirstead, Analyst
Got it. Okay. And then maybe a follow-up again for you, Cynthia. You mentioned that you had another quarter of good early renewal and expansions. When you look into the guidance you provided for the second half, what are you embedding in terms of a continuation of those early renewal and expansion trends that you saw in Q1 and Q2? Are you expecting that to moderate in the second half?
Cynthia Gaylor, CFO
So, the way I would describe it, I think, and we talked about this a lot on last quarter. In Q1, we did see a strong early renewal. I would say that has continued to moderate and was baked into the guidance. As we came into Q2 and similar assumptions are baked into the guidance as we moved to the second half of the year. But we wouldn't expect to have those peak levels that we were talking about last quarter and the quarter before. But we always will have some early renewals, which are a good thing because it shows customers are using the product and consuming at higher levels. But we wouldn't expect those peak levels, so our expectation on that is consistent with the guide and it's baked in how we're looking at our consumption trends and then the revenue trends of that.
Karl Keirstead, Analyst
Got it. That's very clear. Thanks, and congrats again.
Cynthia Gaylor, CFO
Thank you.
Operator, Operator
Thank you. Our next question comes from Rob Owens with Piper Sandler.
Rob Owens, Analyst
Great. Thanks for taking my question. Was hoping to drill down a little bit on the international front and the success that you're seeing. I think it is about a year ago where you announced a new President of International and obviously, we've seen acceleration over the last year, so maybe help us understand where you're seeing success and what the second half is going to look like over the next year. Thanks.
Dan Springer, CEO
We are very pleased with our international performance overall. Achieving growth rates in the 70s indicates strong success across the board. Our best results this quarter came from EMEA, our largest market outside of North America, but performance was also strong in APJ and LATAM. Looking ahead, we anticipate more of the same success. We've emphasized a focused approach in eight key countries, and we plan to expand this to possibly nine or ten countries where we establish a physical presence. Although we sell to over 180 countries online, our dedicated teams on the ground in these core countries will be significant. Europe represents an exciting opportunity for us, and we are making substantial investments in our international branding, as our recognition outside the U.S. is not as strong. We are also focusing on building sales capacity internationally, something Cynthia mentioned, and we are very optimistic about the potential there. It's important to note that despite hitting a record high in growth this quarter, only 22% of our revenue is generated from our home market, which highlights substantial growth potential internationally.
Rob Owens, Analyst
Thanks, Dan.
Operator, Operator
As a reminder, we ask participants to limit themselves to one question. Our next question is from Pat Walravens with JMP. Please proceed with your question.
Rob Owens, Analyst
Oh, great. Thank you. Let me add my congratulations. And I'm assuming that reminder was for me. So, yes.
Pat Walravens, Analyst
All right. Hey, Dan, we'll stick on international. I think the core countries are North America, Australia, the UK, France, Germany, Japan, Brazil, and Mexico. And so, the largest economies that are not on that list would be China, India, Italy, and the Middle East, Africa. So, I'd love to hear your thoughts on any of those.
Dan Springer, CEO
The situation in China is very complex. We see significant opportunities there, given it's the second-largest economy and has the largest population, which will likely remain the case for at least another decade before India narrows the gap. However, the complexities and risks associated with that market are substantial. We do not plan any immediate expansion in China, although many of our customers are requesting more options for operating there. While it's possible to conduct business in China, navigating its complexities is something we need to address, but I wouldn't expect major short-term developments. In contrast, we've already begun exploring opportunities in India, which we believe represents a significant area for growth and investment in the coming years. Regarding our European strategy, we view Italy and Spain similarly in terms of opportunity. Over the next year, we anticipate further expansion efforts in these larger European markets. The Netherlands also falls into this category. As for North America, we are actively hiring in Mexico, which includes all three main countries in the region. Lastly, regarding the Middle East, we support that area from our Dublin hub for EMEA. However, we have not seen strong demand signals from either our commercial team in Dublin or our online business that would indicate rapid growth in the Middle East, especially compared to the opportunities in Italy, Spain, and the Netherlands, which we expect to prioritize.
Pat Walravens, Analyst
Great, thank you.
Dan Springer, CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from Kirk Materne with Evercore ISI. Please proceed with your question.
Kirk Materne, Analyst
Thanks very much and congrats on the quarter. Cynthia, I was wondering if you just talk about the net retention rate as we start to lap the peak demand periods from last year. Just talk about how you feel about the ability to stay up at these rates. And I was also wondering if the rest of the Agreement Cloud, whether it's SIRAM Analytics, is starting to influence that at all? My guess is not yet but I just want you to just comment on that as well. Thanks.
Cynthia Gaylor, CFO
We are quite pleased with the 124% this quarter, following a high of 125% last quarter. We expect to maintain our historical ranges in the latter half of the year. This metric reflects our commitment to customer success and helps our customers grow their usage of DocuSign across our products. While I agree that our non-eSignature offerings contribute somewhat to that figure, they are not the primary driver. As Dan mentioned, eSignature remains our core focus and is central to that metric.
Kirk Materne, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Tyler Radke with Citigroup. Please proceed with your question.
Tyler Radke, Analyst
Hi. Good afternoon. Thanks for taking my question. I wanted to ask you about the new customer additions. Clearly, that number has remained pretty healthy this year despite the big numbers that you put up last year. I guess if you could just help us understand, are the use cases that you're landing these customers a lot different than what you saw last year, I guess. In some ways, investors might ask why would a customer not have signed up for DocuSign last year and are signing up now, are there kind of new regulatory hurdles that they've been able to get over. Just any color you could provide just kind of the impetus for new customer strength now compared to last year. Thank you.
Dan Springer, CEO
I don't see any significant differences in the use cases. We observe that people are starting out similarly within their respective sectors. To address the frequent question about why some new customer accounts have not already adopted DocuSign, consider two key factors: the total addressable market and the number of companies, which are closely related. The signature market is valued at $25 billion and is growing, and when you include the rest of the Agreement Cloud, that figure nearly doubles. We are pleased to have surpassed a million customers, but in the U.S. alone, there are around 25 million businesses. Considering the global market, the potential is much larger. We are still in the early stages of market penetration. It's common to encounter companies in financial services that do not yet use DocuSign, but many other sectors remain largely untapped. We believe that eventually, every company can and should utilize DocuSign. We anticipate adding many new customers each quarter for years to come.
Tyler Radke, 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 my question. So, Dan, maybe just for you, I want to go back to Sterling's question because I think it's an important one. I think we're all trying to understand the magnitude of deceleration, and if we take a look at the metrics, I just want to hear from you maybe a little bit more color about the pipeline, about retention rates, particularly in the SMB category. And if we look at the guidance, the guidance for billings does look incrementally more conservative than you've had in the past few quarters. So, I just want to understand, is that cautiousness a sign of something that you're seeing in business or how would you qualify it?
Dan Springer, CEO
Sure. I think the guidance is quite strong. If you consider our historical performance, the company has seen significant growth. Given that we were half the size before the pandemic and have now doubled, we’re still looking at a solid guide, especially regarding revenue and billings. As for the marketplace, we are optimistic about the demand we’re experiencing, and we’re pleased with our new customer additions and revenue growth. If someone had asked me a couple of years ago about having five numbers in front of our revenue growth rate, I would have been very positive about it. I don’t believe there’s a significant slowdown in the business. However, as Cynthia mentioned, the peak of COVID acted as a major boost for us, and maintaining that level of growth long-term would be challenging. Nonetheless, I expect us to keep achieving strong growth rates. Regarding your question about retention, we are not noticing any meaningful changes in churn rates, and customers seldom leave us. While there may be some dollar churn due to customer success and adoption issues, our net retention rate of 124% indicates that we are exceeding those gaps through upselling and growth. Our success teams are effectively driving substantial growth within our existing customer base. Additionally, we continue to acquire a significant number of new customers each quarter. Therefore, I wouldn’t interpret these financial results as a sign of any considerable slowdown in the business; the numbers remain strong. Cynthia, do you have anything to add on the guidance related to Alex's question?
Cynthia Gaylor, CFO
That was a very thorough response. I want to emphasize that for the latter part of the year, our guiding philosophy has remained steady since the company went public, and we provide guidance based on what we can observe. As Dan mentioned, we experienced a robust first half, and we are raising our guidance for the second half based on significant growth over the past 12 to 18 months. We are optimistic about the business and the growth rates in our guidance. However, we only guide based on what we can see and do not speculate beyond that.
Alex Zukin, Analyst
Understood. Thank you, everyone. I would like to follow up. Is it possible to get the RPO metric so that we can have a gauge of the bookings?
Cynthia Gaylor, CFO
Yes. That will be available to the public, but we don’t use RPO due to the duration of our contracts and how it’s calculated. We don’t believe it’s an indicative number, but when you see it, it will be quite strong, and the year-on-year growth rate for that metric is also robust.
Alex Zukin, Analyst
Perfect. Thank you, guys.
Operator, Operator
Thank you. Our next question comes from Rishi Jaluria with RBC. Please proceed with your question.
Rishi Jaluria, Analyst
Thank you for the update. It's great to see the continued momentum. I have a question regarding services. According to your guidance, you anticipate a slight acceleration in professional services in the second half of the year compared to the first half. Is this increase primarily driven by more CLM, which would require additional services? I understand that your services mix will still be low, as it has always been, but you're expecting this uptick. Could you clarify the assumptions behind your expectations for the professional services line? Thank you.
Dan Springer, CEO
Yeah, just to your point. It's not one of the areas we spend a lot of time thinking about because it is such a small portion of our business. But let me tell you this in terms of thinking about services as you think about the comments earlier. We would love to have less and less of the services that are provided to our customers on our P&L provided by our team. We are a partner-first company. We want to invest in building out an SI network that does the vast, vast, vast majority of all the services work for our customers. One is we think that's what they do, and what we do is build fantastic software. So, we like the idea that for the specialization that we have. So, if you do see from time to time, any positive movement in services relative to our overall software, it's probably going to be indicative of what you mentioned. If our mix moved more to other parts of the Agreement Cloud, like CLM, where there is going to be more services, there's going to be more statements of work required for implementation. That would be the thing that would drive more services for us. But again, our hope is that over time, we continue to take any of that incremental service opportunity and move that into the SI partner network that we've built. That could create a fantastic opportunity for them to reinvest into the DocuSign Agreement Cloud as a core platform that they want to sell.
Rishi Jaluria, Analyst
Wonderful. Thank you so much.
Operator, Operator
Thank you. Our next question comes from Michael Turin with Wells Fargo Securities. Please proceed with your question.
Michael Turin, Analyst
Hey there. Thanks. Good afternoon. Cynthia, going back to the early renewal commentary, is there anything you can provide just remind us how much visibility you have into those underlying dynamics as they're playing through in your customer base? And does that renewal conversation insert an opportunity at all to just engage more broadly? I'm assuming it does across the Agreement Cloud. And if so, are you changing gearing, have you changed gearing just as part of the investment spend to just help take advantage of that conversation? Thank you.
Cynthia Gaylor, CFO
It's a great question. When we think about our customers and the economics of expansion, we've observed that they sometimes utilize more than what they’ve purchased, and we don’t charge them for those overages. We see this as an opportunity to reconnect with the customer, discuss their product usage, and explore ways they could use it more effectively. This is a time for them to renew or expand their engagement with us, both in terms of eSignature and the broader Agreement Cloud. You described the dynamics accurately. A few quarters ago, we experienced high incentives for early renewals during the pandemic, but we don’t anticipate reaching those peak levels again. However, we maintain visibility into customer consumption and how they utilize the product throughout their contract lifecycle. We also note that customers may develop new use cases, which allows us to reengage with them about what more we can offer while ensuring their contract terms align with their consumption levels.
Michael Turin, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our last question comes from Shelby Seyrafi with FBN Securities. Please proceed with your question.
Shelby Seyrafi, Analyst
Yes. Thank you very much. Can you elaborate on the increased investments you're going to have in the second half, especially in Q4? And to be clear, are you implicitly guiding for the non-GAAP operating margin to decline in Q4 from Q3 because of the increased investments?
Cynthia Gaylor, CFO
We provide a range of guidance on the operating margin, which is influenced by our revenue performance and the investments we are making. The key point is that we are focused on investing for growth, especially in our sales and marketing teams to drive revenue, as well as in product development to continue innovating and maintaining our market leadership. These are our primary investment areas. Additionally, as the company has scaled, we are also working on improving our back-office systems and processes. We are committed to making these investments to effectively serve our customers at scale. However, our top-line growth this year has outpaced our ability to improve, and we aim to address this by the end of the year as we prioritize growth over maximizing operating margin.
Shelby Seyrafi, Analyst
Thanks.
Operator, Operator
Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.
Dan Springer, CEO
Well, thank you all for joining us. We look forward to seeing you, albeit unfortunately virtually, in the next coming months and then talking to you after Q3. Thanks so much for joining us.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.