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Edited Transcript of DOCU.OQ earnings conference call or presentation 5-Sep-19 8:30pm GMT

Q2 2020 DocuSign Inc Earnings Call

SAN FRANCISCO Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of DocuSign Inc earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anne Leschin

DocuSign, Inc. - VP of IR

* Daniel D. Springer

DocuSign, Inc. - President, CEO & Director

* Michael J. Sheridan

DocuSign, Inc. - CFO

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Conference Call Participants

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* Daniel Harlan Ives

Wedbush Securities Inc., Research Division - MD of Equity Research

* Gowrishankar Subramanian

BofA Merrill Lynch, Research Division - VP

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Matthew Ryan Wells

Citigroup Inc, Research Division - Associate

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Stan Zlotsky

Morgan Stanley, Research Division - VP

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Second Quarter Fiscal 2020 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. (Operator Instructions)

I will now pass the call over to Anne Leschin, Head of Investor Relations. Please go ahead.

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Anne Leschin, DocuSign, Inc. - VP of IR [2]

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Thank you, operator. Good afternoon, everyone. Welcome to DocuSign's Second Quarter Fiscal 2020 Earnings Conference Call. On the call today, we have DocuSign's CEO, Dan Springer; and CFO, Mike Sheridan. A press release announcing our second quarter results was issued earlier today and is posted on our Investor Relations website.

Before we get started, I would like to let everyone know that we will be participating in the Deutsche Bank Conference in Las Vegas on September 10. As other events come up, we'll make additional announcements.

Now let me remind everyone that the statements made today include forward-looking statements that are based on assumptions we believe to be reasonable as of this date and on information currently available to management. Generally, these statements are identified by the use of words such as expect, believe, anticipate and other words that denote future events. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results or performance to be materially different from any other results or performance expressed or implied by such statements. These risks and uncertainties are described in our press release and in risk factors in our annual report, quarterly reports and other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Except as required by law, we assume no obligation to update these forward-looking statements if actual results differ materially from those anticipated in such statements.

During this call, we will present GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude stock-based compensation expenses, amortization of acquired intangible assets, amortization of debt discount and issuance costs from our notes and as applicable, other special items.

In addition, we provide non-GAAP weighted average share count and non-GAAP information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from or substitute for or superior to our GAAP results, and we encourage you to consider all measures when analyzing our performance. For information on 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.

I'd now like to turn the call over to Dan. Dan?

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [3]

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Thanks, Anne. Good afternoon, everyone, and thanks for joining our Q2 earnings call. Today, I'm going to cover 3 sections: our high-level financial results and how we are driving strong growth; an update on our Agreement Cloud vision and how our strength in eSignature is the perfect on-ramp to expanded relationships with our customers; and finally, how we are rapidly delivering innovative solutions to support the Agreement Cloud vision. I'll then pass it over to Mike for more detailed rundown of our financials.

Together, we believe that will showcase the strength in our existing business and the incredible potential for the future. So let me start with our results and our commitment to growth.

As part of our overall strategy, DocuSign has 3 main growth drivers, which you've heard me talk about before: one, acquire new customers; two, expand usage and use cases within existing customers; and finally, three, introduce innovative solutions to help customers modernize new parts of their systems of agreement.

In this quarter, we saw progress on all 3 fronts. We acquired 29,000 new customers, approximately 4,000 of which are direct, bringing our total number of paying customers to 537,000 worldwide. 64,000 of those are direct.

With strong customer demand for our products within the DocuSign Agreement Cloud, we grew our revenues 41% year-over-year to $236 million and billings 47% year-over-year to $252 million. The expansion of eSignature volumes and use cases was evident in our net dollar retention rate of 113%. These results reflect solid progress for our second quarter, and they support our confidence in and our excitement for our future.

Next, I'd like to update you on our Agreement Cloud vision and our success with new product development there. Earlier this year, we introduced the DocuSign Agreement Cloud. It is the umbrella for our suite of more than a dozen products and over 350 prebuilt integration, all to help organizations connect and automate the entire agreement process for preparing, designing, acting on and managing their agreements. This quarter, we saw particularly strong progress from the CLM product that came via our acquisition of SpringCM. CLM stands for Contract Lifecycle Management, a term we will increasingly use as we transition the SpringCM product name to DocuSign CLM.

Of course, we are still doing plenty of deals for our core eSignature solution by itself, and we believe its $25 billion market opportunity is still largely untapped. Moreover, we view nearly every eSignature win as the basis for future expansion to other Agreement Cloud products.

We've begun to see multiple examples of how customers are connecting and automating various stages of the agreement process while continuing to expand their eSignature use cases. One of the world's largest energy companies is currently using eSignature and CLM together for generating, negotiating and signing sales agreements. With their deployment of the Agreement Cloud integrated with their instances of Salesforce, Microsoft SharePoint and SAP, they now can complete agreements that used to take days or weeks in as little as 2 minutes. The efficiency improvements they've seen with the DocuSign Agreement Cloud are saving the company tens of millions of dollars and have the potential to save even more.

Another customer, a cloud payroll services company, not only expanded on their core signature usage as they brought more internal processes into DocuSign, but they also extended their implementation to include CLM. This is a prototype of the cross-sell opportunity which has us so excited.

And yet another customer, a consumer credit reporting agency, previously had a small eSignature footprint for one of their sales teams. This quarter, they added a company-wide deployment of CLM, which in turn may lead to further eSignature opportunities throughout their business. This is a great example of how our land-and-expand motion can take multiple paths.

Next, I'm pleased to report that we began to see some nice progress in the federal vertical. This quarter, we partnered with a prominent government agency for a very significant deal. They are currently deploying CLM as the foundational system for the department to better track document status, identify delays in their processes and provide better transparency throughout the agency.

Also this quarter, we signed a branch of the United States Armed Forces through an ISV partnership. First, they purchased eSignature to help streamline the recruiting process. Now in an effort to further modernize the recruitment and retention system, they are expanding this use case with the addition of other Agreement Cloud offerings, which are very closely integrated with their Salesforce CRM.

This expanding adoption of eSignature and the increasing traction of other products in the Agreement Cloud continues to drive our business. We believe the DocuSign Agreement Cloud defines an entirely new category of cloud software. It complements the marketing, sales, HR, ERP and other cloud categories that already exist, connecting them all into the agreement process. To realize this big vision, we need to create and deliver a number of products that automate and connect the entire agreement process across multiple departments and industry verticals.

Most notably this quarter, we added DocuSign's Rooms for Mortgage, a solution that helps mortgage lenders accelerate closing time and improve the borrower experience. It provides a secure digital workspace for everyone involved in a mortgage. It's actually flexible enough to support traditional closings via pen and paper as well as drive fully digital closings and hybrid closings as well.

Rooms for Mortgage is a great example of DocuSign's focus on a particular vertical. In the mortgage industry, it costs thousands of dollars for a lender to process mortgage end to end. One of the reasons is that there are so many agreements involved from the application, to the title and settlement. These processes today are manual and costly. That's why we think a mortgage-specific solution is such a great opportunity for us. We can automate and connect the many steps within the process, making it faster, less expensive and a better customer experience for all parties.

So to wrap up, let me summarize. We are seeing strong performance across our core growth drivers of eSignature expansion and increasing adoption of other Agreement Cloud products. We are positioning the DocuSign Agreement Cloud as the next must-have cloud that underpins both front office and back office function. And we are seeing the market respond well with the public and private sectors embracing our vision and our technology. Together with our core eSignature offering, we believe that this expands our TAM well beyond the original $25 billion projection.

In closing, I wanted to mention one last item. I'm pleased to share that we recently appointed Trâm Phi as our new general counsel to lead and oversee legal affairs and risk management. Trâm brings more than 20 years of corporate legal and general counsel experience to her role, including leading 2 technology IPOs. We are very excited to have her on board.

Now I'd like to hand it over to Mike to walk through our financials in greater detail. Mike?

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Michael J. Sheridan, DocuSign, Inc. - CFO [4]

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Thanks, Dan, and good afternoon, everyone. First, I would like to remind you that our non-GAAP financial results exclude stock-based compensation, amortization of intangibles, amortization of debt discount and employer payroll tax on employee stock transactions. In addition, this quarter's results include contributions from SpringCM, whereas the comparable quarter a year ago excludes SpringCM, which was acquired in Q3 of fiscal '19.

We saw substantial top line growth in the second quarter driven by strong customer demand. Our total revenue rose 41% year-over-year to $236 million with subscription revenues growing 39% to $221 million.

Our North American business was particularly strong this quarter. In addition, international revenues grew 47% year-over-year to $42 million.

Second quarter billings increased 47% year-over-year to $252 million. On a 4-quarter rolling average basis, billings grew -- growth was 36%.

We saw strength in our core eSignature solutions as well as good progress in our sales of CLM products to new and existing customers. As Dan mentioned, this quarter, we also saw good progress in our sales into federal agencies. In Q2, we completed our first federal sale that exceeded $1 million in ACV, and this sale included significant components of both eSignature and CLM.

We added a total of approximately 29,000 new customers this quarter, of which 4,000 were new direct customers. This was an increase of 31% in our commercial and enterprise installed base. This brings our total customer base to 537,000 with 64,000 direct customers worldwide.

In addition to strong new customer growth, we also saw strong growth in upsells into our installed base. Our dollar net retention increased to 113%, and customers with ACVs greater than $300,000 grew 50% year-over-year to a total of 370 customers worldwide.

Non-GAAP gross margin for the second quarter was 78% compared to 81% in the same quarter last year. Subscription gross margin in the quarter was 84% compared with 87% a year ago. These margin impacts relate primarily to the addition of SpringCM as well as higher capacity needs of our outsourced data centers in developing regions where we do not have our own proprietary data centers.

Total non-GAAP operating expenses for the quarter were $185 million or 78% of total revenue compared with $132 million or 79% of total revenue for the second quarter last year. These expenses include approximately $6 million related to the RPost litigation, which settled in the beginning of Q3. The significant majority of these RPost expenses are legal fees with a smaller amount related to the settlement. This settlement resolved all outstanding disputes with RPost, so we do not expect any significant expenses related to these matters in Q3 or going forward.

Non-GAAP operating loss was less than $1 million in Q2, which includes the $6 million of RPost expenses. This compares to a $4 million non-GAAP operating income or 3% operating margin in Q2 of fiscal '19.

For the first half of fiscal '20, our non-GAAP operating profit was $9.7 million, which includes the impact of $9.2 million of RPost legal and settlement expenses.

We ended the quarter with 3,489 employees, a year-over-year increase of 35%.

We generated $26 million in operating cash flow compared with $23 million in Q3 -- Q2 of last year. Free cash flow came in at $12 million compared to $18 million from the prior year. As we discussed previously, we saw particularly strong collections in Q1 of amounts that would typically be collected in Q2. For the first half of this year, we generated $72 million of operating cash flow, a 91% increase year-over-year; and we generated $42 million of free cash flow, a 56% increase year-over-year. In Q3 and the second half, we will continue to invest in the data center and real estate projects we have discussed previously, which will reduce second half cash flows below recent trends.

Turning to our guidance for the third quarter and fiscal 2020. We estimate, first, that revenue will range between $237 million to $241 million in Q3 and $947 million to $951 million for fiscal '20, and billings will range between $260 million to $270 million in Q3 and $1.063 billion to $1.083 billion for fiscal '20.

We are maintaining our guidance for gross margin of 78% to 80% for Q3 and the fiscal year. For operating expenses, we expect sales and marketing in the range of 48% to 50% of revenues in Q3 and fiscal '20, R&D in the range of 15% to 17% for Q3 and fiscal '20 and G&A in the range of 10% to 12% for Q3 and 11% to 13% for fiscal '20.

For the third quarter, we expect $3 million to $4 million of interest and other nonoperating income, including interest income and expense associated with our convertible debt. And for fiscal '20, we expect interest and nonoperating income of $13 million to $16 million.

We expect the tax provision of approximately $1 million to $2 million for the third quarter and $6 million to $8 million for fiscal '20.

We expect fully diluted weighted average shares outstanding of 185 million to 190 million shares for Q3 and 190 million to 195 million shares for fiscal '20. We continue to be on track to spend $60 million to $70 million in capital investments in fiscal '20. We expect the majority of our second half spending to occur in Q3 as we ramp up the buildout of our Dublin office and the dedicated federal data center.

In summary, we are very pleased with the progress we have made in the first half of fiscal '20 towards our strategic and financial goals, and we believe we are well positioned to continue our strong execution in the second half of the fiscal year.

With that, I'd like to now open it for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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So last quarter, you talked about the potential for elongating sales cycles as customers were evaluating CLM in a broader part of the portfolio. Are we to take, given the strength in the results, the guidance and some of the examples that those deals have closed and perhaps you're kind of settling into what you think is the new norm around sales cycle timing?

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Michael J. Sheridan, DocuSign, Inc. - CFO [3]

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Yes. I would tell you similar to what we said last quarter that last quarter was the first quarter where we had CLM offerings available to our sales force to sell. So we had some deals slip out in the quarter where we didn't have any deals slipping in since it was the first quarter.

I think if you look at Q2, as we expected, some of those Q1 deals moved into Q2, and there were some Q2 deals that moved to Q3, much like we expected. So yes, I think that going forward, we would expect that to normalize.

I would say also that while the more complicated multiproduct deals will continue to have longer sales cycles, I think we made a good progress in the sales teams moving down the learning curve as we get more experience.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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All right. Great. And then one follow-up on the federal opportunity. Are you -- in terms of your go to market, should we expect that most of the opportunities are going to go through either some sort of prime contractor or other partner? Or how much of the opportunity can you actually now take direct based on where you are with certifications, et cetera?

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [5]

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Yes. I think we're going to see a combination, Sterling. I think the phenomenon is that there are certain sort of master contractors who have very large overall relationship, and they will look -- even if we're doing sort of the selling directly to the agency, we'll get pulled into those larger master agreements, which we're perfectly happy to do. As we mentioned on the call, of the sort of 2 big pieces we are excited about this quarter, one of them was more direct, and one of them was through sort of a bundle of master contractor. I think there's going to be a mix. At this point, it will be early for us to try to give you a flavor what that mix would look like other than to say I think we'll see both flavors.

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Operator [6]

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Your next question comes from the line of Karl Keirstead with Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [7]

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Two, maybe one for Mike, one for Dan. Maybe I'll ask both at the same time. So Mike, $27 million billings outperformance is, I think, your biggest perhaps since the first quarter when you came public. So I just want to press a little bit more on where that outperformance came from, and maybe you could answer it in the context of whether it was core eSignature really outperformed or the CLM stuff really took off. Or perhaps, and this is maybe what Sterling was getting at, was there an unusual catch-up in the 2Q quarter, where some of the deals that slipped out of Q1 all closed in 2Q so this outperformance was unusual? So that was the question for Mike.

And then for Dan. Last earnings call, you talked a little bit about this new sales structure, at least in North America, where you split it between new logos and installed base. And perhaps, you can give an update on 3 months later whether that process is now fine-tuned and whether you're looking to make any other sales structure changes.

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Michael J. Sheridan, DocuSign, Inc. - CFO [8]

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Thanks, Karl. Yes, I'll take the billings question first. I guess at the highest level, I would reiterate what I talked about in prior quarters, which is billings, as we all know, is a statistic that is affected by timing differences, timing of orders booked and everything else. And so it's not a perfect growth statistic. And so I always look at it as a 4-quarter rolling average, which was 36%, which for example, last quarter a 27% year-over-year growth isn't terribly telling and a 47% might not be as telling this quarter either. I think looking at those trailing averages makes sense for that particular statistic.

With that said, we had an excellent quarter in the things that we're talking about, strong North American performance, good growth in CLM, the Fed coming online first. Those all contributed to the good growth statistics we saw both in billings and revenue.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [9]

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And on the sales structure, Karl, I think we felt really good, as I indicated before, that the right answer was to have a split between what we call NewCo and installed base, and we had tested that at the end of last year with our SMB business and decided it was successful.

And I think the best telltale sign of why we're pleased with that result is the core goal there is to make sure we have enough people focused on generating NewCos, which are traditionally a harder sales process than the upsell to the installed base. And the fact that you saw the 4,000 new direct customers coming on board, that's a great indication to me that it was a very strong quarter and that our efforts in sort of bifurcating the sales force that way is spot on. So we're really pleased with that approach.

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Operator [10]

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Our next question comes from the line of Rishi Jaluria with D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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First, I just wanted to go back to billings. I don't mean to harp on it, but that's clearly going to be a bit of the headline after what happened last quarter and where we are this quarter until they understand all the moving pieces.

But I just want to understand, a, if we kind of think about this on a rolling 4-quarter basis like you alluded to, is -- somewhere in that, let's call it mid- to upper 30s type of growth rate, is that the right way to think about what the underlying growth of the business is right now, right, versus looking at the 27% or 47% in isolation?

And then alongside that, it looks like there wasn't a duration impact, right, with average contract lengths both on dollar weighted and by contract, pretty consistent with where they've been in the last several quarters. But I just wanted to confirm that none of the uptick or -- in billings was caused by something on the duration side.

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Michael J. Sheridan, DocuSign, Inc. - CFO [12]

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Yes. So let me answer the second part first. On the duration, that doesn't have an impact on billings. It's stable, number one. But also even in multiyear contracts, we still bill them annually. So even if we did have a change in duration, it wouldn't affect the billings statistic.

And in terms of how to look at billings as a growth indicator, yes, I think you summarized it correctly, which is in any particular quarter, you can have that particular statistic affected by timing and other things. And so we do look at it on a rolling basis and when quarters were a bit lower. We don't want that overinterpreted in a quarter like this. We don't want the 47% overinterpreted either. I think in fairness, looking at that blend which takes away some of the noise of intra-quarter movement of deals that closed in 1 week versus another, those kinds of things. The rolling average, I think, helps to give you a better indication where the core growth is going.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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Got it. That's helpful. And then just a quick follow-up, if I may, going to subscription. Gross margin, I understand, again, a lot of moving pieces here. If we kind of focus on the 2 of the data center side and then SpringCM, maybe just help us understand going forward, a, can we expect to see some optimization of the SpringCM or, I guess, DocuSign CLM gross margins to come back in line with where the core eSignature offering is? And then, b, on the data center side, is that something that again the -- at least weight on overall subscription gross margins can maybe start to go away over time? That's it.

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Michael J. Sheridan, DocuSign, Inc. - CFO [14]

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Yes. So I think if you look at our guidance, the 78% is on the low end of the range, so I think that would tell you that I do believe there's opportunities upwards to continue to optimize and leverage our investments.

The SpringCM model did have a lower margin profile. I think as we continue to expand our success with CLM, we will get better leverage out of some of that infrastructure.

And yes, the data center usage variance that we had some this quarter, while it cost us a bit more money, it's an indication that we needed that capacity for more usage in our installed base. So it might have a little bit of an unfavorable impact on cost, but it's a pretty positive indicator in terms of what our customers are doing with the product.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [15]

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And I would just add to that one. I think for the growth, we see that -- when we see that progress, as Mike described, it's a good leading indicator that we're seeing that growth's strength going forward.

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Operator [16]

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Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [17]

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Really nice job in the quarter. From my end, looking at the dynamic that we saw in Q1 where you had extended selling cycles into existing, it's not something that software investors typically see. Usually, we see extensions of sales cycles into new customers. What are the adjustments that you've been making behind the scenes to get that under control on your sales -- or within your sales organization and get those cycles back in line? And how are those -- how are you thinking about these kind of extensions as we get into the really big second half of the year, especially Q4? And then I have a quick follow-up.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [18]

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Sure. So Stan, I think 2 things. One is, as Mike indicated earlier in the commentary, there's definitely a phenomenon that not all products have that same cycle time, and we do see that -- and do expect that CLM will have a longer cycle time in sales. And one of the major drivers behind that is there's more of an implementation plan, so you actually have to have a bigger statement of work. And again, we love it, and we get to one of our system integrator partners. Sometimes, we do that work ourself. But regardless, there ends up to be more effort, and I think it is an elongated process than we would have in our traditional eSignature. So as Mike said, think about that mix over time, you will expect some elongation because of that. We don't -- again, we don't think that's a bad thing. We think it's an opportunity to have larger footprints at our customers.

But the second piece to get to the opportunity that we can improve our performance aspect is really around sales enablement, and I think the phenomenon for us is when it was very early first couple of quarters of new products, we just didn't have the scale of enablement we needed to have. As we look into the second half, I think you're spot on that that's the big opportunity for us because we have so much of our business that occurs in the second half, and we feel we really are accelerating those investments to enable our team to not just be successful with the traditional eSignature offerings but also with the broader System of Agreement offerings we're delivering through the DocuSign Agreement Cloud.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [19]

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Got it. Perfect. And then a follow-up, as you sell these larger Agreement Cloud contracts into customers, just maybe anecdotally, how much bigger are these contracts that you sell into these customers or at least what you've seen thus far as the proof points?

And Mike, maybe for you, what does that do to your net revenue retention as we move through the rest of this year and perhaps into next year? That's it for me.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [20]

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So Stan, on the first piece, I think the number of observations we have are still limited, so I don't know that we can yet give you a sense of here's how we think they'll play out. I can tell you this from the observations we've had. With some customer situations where the CLM opportunity, just one of the other components of the Agreement Cloud that most focus on, can be significantly larger than what they would do from an eSignature standpoint. But we also have lots of customers that are going to be eSignature customers that CLM, as an example, might not be appropriate for their business, where we think virtually every company on the planet will eventually be using us for eSignature. So if you think about it that way, there's going to be a lot of difference in them. In general, I would say the CLM opportunities can be bigger, but it's too early to tell right now sort of what that average would look like.

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Michael J. Sheridan, DocuSign, Inc. - CFO [21]

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And in terms of the dollar net retention, obviously, having more products available to the sales force to bring to the installed base is a good thing when it comes to both mitigating churn but also expanding the footprint that we have inside the customers. So the range that we've seen historically is -- of 112% to 119%, I think, is still a valid range, but I think that it can certainly be helpful in moving us up into that range as we continue to get success in the installed base.

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Operator [22]

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Your next question comes from the line of Dan Ives with Wedbush Securities.

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Daniel Harlan Ives, Wedbush Securities Inc., Research Division - MD of Equity Research [23]

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Great quarter. So can you talk about international in terms of what you're seeing there, just changes? Obviously, seems like ramping growth. Maybe you can just talk about the international trajectory and maybe what you saw this quarter.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [24]

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Sure. So overall, Dan, as you've heard us talk about, we believe that we have an opportunity for our international growth overall to outpace our U.S. growth, although had very strong quarter in the U.S. Those guys are doing their darndest to make it harder for the international team to, "take share," if you will, of our overall business.

I think traditionally, we've talked about this a lot, it's a consistent message, which is the folks that were in the common law countries were the places that we got most of our initial traction, and that's places like the U.K. and Canada and Australia. And I think we continue to see good strength there. In particular, we've now started to see some acceleration in some of the civil law countries. We see that in sort of France, Germany. We see that in Brazil. And we'll see that, I think, over time in Japan more as well. So we had some pockets that were quite encouraging for us that we're going to continue to achieve what we said from an international growth standpoint. And again, I think it's broadly across the board that we see those opportunities across both common and civil law.

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Daniel Harlan Ives, Wedbush Securities Inc., Research Division - MD of Equity Research [25]

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Got it. And in terms of the product strategy, could you maybe talk about your view of organically building on to the footprint versus maybe some acquisitions in terms of what you could see in the market? Just talk about maybe the puts and takes there and how you're thinking about it.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [26]

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Absolutely. And so if you think about what we've laid out with the overall DocuSign Agreement Cloud opportunity, we've been very clear that we want to provide for our customers the fast possible solutions, and we have a very strong commitment to having an open platform. And I don't think you're going to see anyone who is more motivated than we are to continue to build out both our API capability as well as the prebuild integrations. And we have just over 350 of them now. So again, strong commitment to keep it open.

At the same time, part of the reason we got to the construct of the Agreement Cloud is that our customers were telling us we want to have more integrated strongly with the core eSignature capability. And that's why we started, if you remember the history, looking for folks who are interested in the prepared product. And they said it'll be great if that could be integrated, the doc gen capability right into DocuSign.

Going forward, we make the choice versus sort of the build and the buy and the partner. I think the answer is all of the above. I think we're going to continue to look for opportunities as we did with Spring where we saw there was a significant amount of customer demand, and we felt that there was a skill set, sort of a capability that we didn't have that domain expertise as strong within DocuSign. So we could build it ourselves if we just think it makes sense to get there faster to acquisition, and that's how we look at things today. We see the ability that's very close to what we already have. Those intrinsic capabilities, we'll probably continue to build and innovate internally. And when we see someone that's just far ahead of us with that expertise and that domain knowledge, then we'll look for the acquisition. That really, I think, is going to be the pivot on how we buy versus partner versus build ourselves.

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Operator [27]

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Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch.

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Gowrishankar Subramanian, BofA Merrill Lynch, Research Division - VP [28]

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This is Shankar on behalf of Kash. I have 2 questions. One, can you add some more color on the strength of your pipeline in the government and your CLM business? Do you expect them to kind of accelerate through the year? Or do you see any kind of lumpiness in those businesses? And then maybe you can even add some color on the eSignature pipeline.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [29]

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Sure. So to your perspective on the pipe and specifically around government, look, we've been very clear from the beginning that we are hugely excited about what we think is, quite frankly, a massive opportunity for us in public sector. And at the same time, I think we've also tried to be very cautious about understanding that the cycle, to sort of realize that opportunity, is not going to be the same as we've had in our traditional commercial business. And so I think the best way for us to look at it right now is we look at Q2, we're very pleased with these significant deals that we talked about on the call, and we believe there will be more deals like them.

I don't think I would characterize it as if they're sort of like a floodgate opened up. And once we have our first large deal, all of the rest of the government agencies are going to come running. And at the same time, I think it's a very strong proof point that the government agencies will eventually come to DocuSign.

So that goes back to as we try to think about the TAM, a significant portion of what we always thought was a big opportunity not only for eSignature but for the broader Agreement Cloud offering was on the federal and continued state and local success as we've had in the past. That's how we sort of think about it. It's a really big proof point on the size of the opportunity, but we're not yet making a call that it's going to lead to some acceleration in our business in the near term.

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Gowrishankar Subramanian, BofA Merrill Lynch, Research Division - VP [30]

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Got it. Got it. Now one of the things that I took away from the conversations in your conference in June was that the CLM business, while this adds a lot of value to customers, it was kind of hard to find the budget for CLM. It was a new kind of a venture for a lot of the customers. Can you maybe address how you're addressing that, the dollar, the budget question among customers? And maybe some color around the recent deal that you have closed, kind of the -- how the sales cycle started and how did we get the customer to kind of move from, I don't know what it is, like back to signing a deal.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [31]

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Absolutely. Well, I think in CLM, it's actually not too different than it was several years ago with eSignature. As the pioneer in that space, there was no one that had an eSignature-specific budget. But if you were at Human Resources team, you were spending money on, as an example, sending out offer letters and having people manage that manual process. And we came along and said, "Here is what a budget opportunity is. Let's replace that labor-intensive and manual process that has postage and other physical costs and FedEx costs in it with our solution." So we really transferred budget that came from sort of the off-line to the online. And we see the exact same phenomenon in when we're talking to people at CLM.

It's true that a lot of people didn't have a historic budget for CLM if they're coming in -- entering the space now. But they had a way that they manage all those contracts. And a lot of it is manual processes, and that's the opportunity we come in and show a fantastic ROI by telling them that the money and time their people are spending today on those processes can be dramatically more efficient and provide a better customer experience. So we really substitute their old spend with the new spend. I think we're seeing the exact same phenomena, as I said, in CLM as we saw -- developed with eSignature.

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Operator [32]

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Your next question comes from the line of Pat Walravens with JMP Securities.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [33]

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Congratulations. So Dan, I think one thing that makes investors nervous about DocuSign is when they spend too much time talking to the IR people at your competitors. And so I think it would be helpful if you talk a little bit about how your approach to the market is different than Adobe or Dropbox.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [34]

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Yes. I mean, so Pat, my sense is, as you know, when we talk about the competitive dynamics, on the one hand, we are laser-focused on what we see other people doing in the market space, and you're talking mostly by eSignature competitive set there. But it's exact same thing when we look at the overall Agreement Cloud. We look very closely what other people are doing. And at the same time, even though we have that maniacal focus on potential competitive threats, we have been fortunate to have a very strong leadership position in the marketplace. Not only did we build the core eSignature market, but we have maintained a dramatic market share lead.

And so we really believe that our biggest focus is less about being overly concerned about specific actions or tactics that other people are doing and rather focus on going after this giant TAM that's ahead of us, where we have so much of a high ROI opportunity to provide to our customers. So again, when we talk about what products we're going to build, we actually talk to our customers and say what's the functionality and capability you need to have a broader relationship with DocuSign, which is why we got into the Agreement Cloud vision that we talked about in the past.

So we just don't see them having a significant part of our business -- impact on our business from those competitive threats. So I don't know exactly what the IR departments in those other companies say. But from our standpoint, we are laser-focused on the customer side and really not putting too much focus on what the other folks are saying.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [35]

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All right. Great. And then a quick one, is the federal data center done?

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Michael J. Sheridan, DocuSign, Inc. - CFO [36]

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No, it's not done yet, but we're going to complete it this fiscal year. There's more work to be done in Q3.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [37]

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And Pat, just a clarification to make sure you draw on takeaway is like that we're building that separate data center for federal, but we are serving government including federal customers to date. Not all government business requires a dedicated government infrastructure. So we are, in fact, serving them today, but it unlocks additional use cases and opportunities for people that have higher security requirement.

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Operator [38]

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(Operator Instructions) Your next question comes from the line of Matthew Wells with Citi.

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Matthew Ryan Wells, Citigroup Inc, Research Division - Associate [39]

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When I size 1/2 billings growth, there is an acceleration year-over-year while net expansion rates in the first half have actually trended down. I'm curious if you can just unpack what's driving this. Are you seeing larger initial deals in the commercial and enterprise space?

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Michael J. Sheridan, DocuSign, Inc. - CFO [40]

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I think one piece of it is going to be that in the first half of this year, we had SpringCM and we had CLM as part of our business. In the first half of last year, we did not. And so Q3, this coming quarter, will be the first quarter where CLM will be in both quarters. So I think that's one factor.

I think on the dollar net retention, it has fluctuated a little bit, but it's remained relatively in the same place. So I think some of what you're seeing this year, as we've been talking about it, starting to see greater contribution just not in the former Spring business but actually seeing CLM getting sold by our sales force into our accounts is helping. Seeing the expansion internationally is helping. Things like starting to have success in Fed, all those things are contributing to that year-over-year improvement.

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Matthew Ryan Wells, Citigroup Inc, Research Division - Associate [41]

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And are you able to size the revenue and billings contribution from SpringCM in the quarter?

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Michael J. Sheridan, DocuSign, Inc. - CFO [42]

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No, we don't break it out separately. But with and without, it was a very strong growth quarter.

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Operator [43]

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Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

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Daniel D. Springer, DocuSign, Inc. - President, CEO & Director [44]

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Well, one, thank you all for joining us. We're pleased with the progress in the quarter, and we look forward to seeing you all in the road in the weeks ahead. Thanks for joining us.

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Operator [45]

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