DocuSign, Inc. (NASDAQ:DOCU) Q4 2023 Earnings Call Transcript March 9, 2023
Operator: Good afternoon, ladies and gentlemen. Thank you for joining DocuSign’s Fourth Quarter and Full Fiscal Year 23 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 this call. I will now pass the call over to Heather Harwood, Head of Investor Relations. Please go ahead.
Heather Harwood: Thank you, operator. Good afternoon, and welcome to the DocuSign Q4 and fiscal year 2023 earnings call. I’m Heather Harwood, DocuSign’s Head of Investor Relations. Joining me on the call today are DocuSign’s CEO, Allan Thygesen; and our CFO, Cynthia Gaylor. The press release announcing our fourth quarter and fiscal year 2023 results was issued earlier today and is posted on our Investor Relations website. Now, let me remind everyone that some of our statements on today’s call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different.
In particular, our expectations regarding the pace of digital transformation and factors affecting customer demand are based on our best estimates at this time and are therefore subject to change. Please read and consider the risk factors in our filings with the SEC, together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to date. And except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results.
We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s earnings press release, which can be found on our website at investor.docusign.com. I’d now like to turn the call over to Allan. Allan?
Allan Thygesen: Thanks, Heather, and good afternoon, everyone. Our fourth quarter marked my first full quarter as DocuSign’s CEO. Having led our organization for five months with the opportunity to meet many of our customers, partners and employees, I’m even more optimistic today about the future of DocuSign. We had a solid finish to a transitional year, delivering across key financial metrics in Q4 while making tangible progress against our key priorities. Q4 total revenue came in at $660 million, up 14% versus prior year, finishing the year with $2.5 billion of revenue and 19% year-on-year growth. Driven by our continued focus on profitability and efficiency, we reported 24% non-GAAP operating margin for the quarter and 21% for the year.
While we are pleased with our Q4 results, I also want to acknowledge today’s challenging macro environment. Customer sentiment continues to be cautious, and that is reflected in moderated expansion rates. Before we get further into business updates, I want to acknowledge today’s news that Cynthia Gaylor has decided to step down from her role as Chief Financial Officer. Cynthia has been with DocuSign for nearly 4.5 years, first as a Board member and Chair of our Audit Committee and last few years as our CFO. I know many of you know Cynthia well and gotten to know her even better over time as part of the DocuSign story. I want to thank Cynthia for her unwavering commitment and strategic leadership these last few years. She’s been a great partner to me during my first month as CEO, and she’s been instrumental to the company and the Board as we’ve navigated a period of dynamic change while laying a strong foundation for sustainable profitable growth at scale.
I thank her for her support during the transition as we search for a successor. Let me turn back to the business. During Q4, we refined and communicated DocuSign strategy throughout our organization to drive greater alignment on how our teams can deliver more strategic value to our customers. Today, we have a clearly defined strategy in place. To underscore the key pillars of our strategic vision, inspired by customer feedback, our focus is to deliver smarter, easier and trusted agreements. We’re improving the reach and efficiency of our go-to-market by developing a world-class self-serve experience, strengthening our direct sales productivity and amplifying our sales and marketing partnerships. We’re also strengthening our internal operational efficiency by optimizing and modernizing systems and processes.
Now, it’s important to emphasize that even as the market leader in e-signature, we are just at the beginning of capitalizing on the opportunities to redefine and truly reimagine what a smarter agreement looks like. Today eSign provides an online replica of a static document. While that is a huge improvement in convenience and productivity for senders and signers, it’s hardly the endpoint. Just like creating digital copies of maps or recorded music was the beginning of a reimagination of long-established categories, fundamentally altering creation, distribution and use. Our goal is to turn flat agreements into structured data that can be used to make intelligent decisions. Value of an agreement is in the data. Every step of an agreement can deliver more value when it’s automated, intelligent and seamlessly integrated into core business systems.
DocuSign is uniquely positioned to redefine the agreement processes across every industry. Along these lines, we released several new product enhancements during the fourth quarter, including expanded integrations to better collaborate with Microsoft Teams, Slack and Zoom. And for eSignature, we enabled new AI-assisted document highlighting and signing capabilities in mobile and web for faster time to value. In April, we will release WebForms which will help customers deliver a better and simpler experience by moving from legacy contract forms to a modern web and app experience. We also plan to accelerate our release cycles in fiscal 2024 with innovative and differentiated solutions that simplify the agreement process, while we identify new ways to revolutionize how businesses initiate, negotiate and manage agreements.
There’s substantial interest in the industry about rapid advances in AI and large language models in particular. We are already leveraging sophisticated AI models for contract analysis and automation of some workflows, and we’re very excited to harness generative AI, data and pattern identification, as yet another way we can increase productivity, reduce friction and save our customers’ time. As we move forward, we believe these can be a compelling part of our business, and we are encouraged by the significant interest from some of the very largest players in our industry, who recognize our domain leadership and expertise and want to partner with us. Moving to our product led growth and self-serve initiatives. We’ve made solid progress over the last few months, modernizing our commerce experience to reduce friction, improve ease of use and provide customers more flexibility.
We’ve expanded seat capacity available via our web and mobile sites, we’ve expanded currency options available to make the buying process easier in international markets. Gain traction with these initiatives as we exited the quarter, and we will continue to keep you updated on our progress. Further, as you saw in an announcement a few weeks ago, I couldn’t be more excited to have Robert Chatwani, joining our team as President and General Manager of Growth. Robert brings a wealth of experience, and we look forward to benefiting from his insights and expertise for more than two decades of scaling global technology companies. He joins DocuSign from an organization that’s broadly recognized as having a world-class product-led growth motion. Executing on our product growth strategy is a key priority for the company as it will be a primary driver of customer acquisition, conversion and expansion.
I’m thrilled to have Robert leading our efforts in this area. Turning to our go-to-market. We’re just coming off our global sales kickoff last week, and I can tell you that the sales team is incredibly excited and energized for the year ahead. We’re focused on delivering across three complementary channels: direct, self-serve and partners, and to provide world-class customer success in driving customer growth and retention through all three. As an example of global growth and multiproduct expansion, this past quarter, a leading global consulting firm, who has been using eSignature for a decade, expanded and added our CLM cost product. This is a competitive sales cycle since the customer is already in the process of implementing a competitor CLM solution in a few countries.
However, DocuSign won preferred vendor status for CLM and the customer has since rolled us out in six countries across two continents and has built integrations with their internal systems and the DocuSign partners Salesforce and ServiceNow. Related to go-to-market, I want to acknowledge the restructuring we recently announced. It was a difficult decision but it was a critically important step for our company to reshape and rightsize our organization for the opportunity ahead. It was not a broad-based restructuring. 95% of the workforce reduction was in our worldwide field organization. Our assessment was that DocuSign could capture more efficiency in our overall go-to-market across all segments and that we could unlock more profitable growth by investing part of the savings in product development and innovation.
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Now, the direct channel remains absolutely critical to our future. We are rebalancing our approach towards offering a lighter touch experience with more self-serve capabilities that give customers of all sizes, choice in how they engage with DocuSign. That pivot in turn frees up resources to invest more in our self-service motion and expanded road map for agreement workflows, new AI capabilities, accelerating our migration to the cloud and improving our internal systems. That, in turn, will create an even stronger and more valuable offering for our customers and for our sales team to sell. Still have some work to do to strengthen our self-serve experience over the next 6 to 12 months. And while we may see some modest near-term disruption, we’re confident these are the right steps, going forward to drive innovation and growth for our customers for the long term.
Additionally, a stronger self-serve motion will enable greater expansion opportunities internationally. Turning to our internal operations and processes, Anwar Akram recently joined as our Chief Operating Officer and will play a crucial role within our organization. Anwar’s focus is to bring together and transform our strategy, develop new strategies around pricing and packaging, driving incremental efficiencies internally and help evolve early-stage ideas into future growth initiatives. Related to these efforts, I noted on the last call, that we rolled out product bundles to introduce more features and functionalities to our customers. I’m pleased to share that these bundled promotions performed better than expected, and we saw good adoption for our new SMB customers in particular.
Our experience suggests that customers that adopt a broader set of features, renew and expand their commitment with us. You should expect to see more initiatives around pricing and packaging in the future, including bundling and ensuring early adoption of our highest value features. Finally, I would like to update you on our partner ecosystem, another key pillar of our strategy. We’re seeing good progress with a number of our largest software partners. ServiceNow is a good example, highlighted by the launch of the CLM Spoke as part of ServiceNow’s automation engine. Our partnership has gained momentum with several leading organizations utilizing our integration to digitize their agreements. This is directly aligned with our focus on capturing opportunities by integrating more deeply with partner applications.
So, in closing, this year has been one of incredible change for DocuSign. And in Q4, we made meaningful strides towards defining our strategy, rightsizing and optimizing our organization. We believe the foundation has been set and that we are in a better position to navigate the evolving macro environment while investing for opportunities that enable long-term profitable growth. We’re optimistic about the year ahead for DocuSign, and we’re committed to delivering meaningful customer and shareholder value. We look forward to sharing further progress on our initiatives as we redefine how the world comes together and agrees. We will enable smarter, easier and trusted agreements. With that, let me once again thank Cynthia and turn the call over to her to walk through the financials.
Cynthia?
Cynthia Gaylor: Thanks, Allan, for the kind words. I’d like to start off by thanking our employees execution. We closed out the year strong, and I’m proud to share that we achieved an impressive milestone for the Company, delivering $2.5 billion of revenue for the fiscal year, reflecting 19% growth year-on-year. Our Q4 results were solid, demonstrating the durability in our business model and DocuSign’s important position in the broader ecosystem. While we are pleased with our results and execution in Q4, we continue to experience a challenging macro environment with softening demand trends, including moderating expansion rates. However, we are seeing healthy results as customers recognize that DocuSign offers high ROI applications that are easy to use, efficient and cost effective.
With that, let me turn to our Q4 and fiscal 23 results. For the fourth quarter, total revenue increased 14% year-over-year to $660 million, and subscription revenue grew 14% year-over-year to $644 million. Total revenue for the year reached $2.5 billion, a 19% increase over last year and subscription revenue was $2.4 billion, a 20% year-over-year increase. Our international revenue grew 19% year-over-year to reach $165 million in the fourth quarter. For the full year, international revenue grew 29% to $260 million, representing 25% of total revenue for both periods. Fourth quarter billings rose 10% year-over-year to $739 million. For the full year, billings increased 13% to $2.7 billion. We added approximately 30,000 new customers during the quarter, bringing our total installed base to $1.36 million at the end of the year, a 16% increase year-over-year.
This includes the addition of approximately 9,000 direct customers to reach a total direct customer base of 211,000, a 24% year-over-year increase. We also saw a 27% year-over-year increase in customers with an annualized contract value greater than $300,000, reaching a total of 1,080 customers. Dollar net retention was 107% for the quarter. The headwinds we’ve highlighted over the last couple of quarters continued to persist. And as a result, we are seeing muted growth in our expansion rates. We expect this to continue into Q1, and as a result, would expect the dollar net retention in Q1 to trend lower. Non-GAAP gross margin for the fourth quarter was 83% compared with 81% a year ago. For the full year, gross margin was 82%, in line with last quarter.
Fourth quarter subscription gross margin was 85%, consistent with last year. For the full year, subscription gross margin was also 85%, flat versus prior years. Q4 non-GAAP operating income reached $155 million compared with $104 million last year. Non-GAAP operating margin was 24% compared to 18% last year. For the full year, non-GAAP operating income rose 23% to $570 million and operating margin was 21% versus 20% in fiscal 2022. In Q4, we saw lower expenses for employee-related costs related to the workforce reduction announced in September, which contributed to the strong operating margin in the quarter. Non-GAAP net income for Q4 was $133 million compared with $100 million in the fourth quarter of last year. For the full year, non-GAAP net income was $419 million, up from $411 million in fiscal 22, a growth rate of 2% year-over-year.
As noted on our Q1 call last year, we introduced a non-GAAP tax rate on our non-GAAP net income calculation for fiscal 23 as we reached consistent non-GAAP profits for the prior three years. We are using a non-GAAP tax rate of 20% for fiscal 2023 and fiscal 24. Q4 non-GAAP EPS was $0.65, while full year non-GAAP EPS was $2.03. Let me take this opportunity to share a bit more context regarding the recent restructuring. As Allan mentioned, this was a difficult decision and one not made lightly, but it was an important decision aligned with our strategy to reshape the Company and free up resources to invest in critical areas across our innovation and product development efforts. As we outlined in the filing last month, we expect to incur related restructuring charges ranging from $25 million to $35 million, with the majority of the expenses and related cash to be incurred in Q1 of this year, with the restructuring substantially completed by the end of the second quarter.
We ended Q4 with 7,336 employees compared to 7,461 last year. Operating cash flow in the quarter grew 56% year-over-year to $137 million, representing a 21% margin. This compares with $88 million, a 15% margin in the same quarter a year ago. Free cash flow for the quarter was $113 million, a 17% margin compared to $70 million, a 12% margin in the year prior, a 61% increase year-over-year. As we mentioned on our last call, we went live with a new ERP in Q3 which delayed some of our cash collections last quarter. As a result, we saw strong cash collections this quarter in addition to lower restructuring cash payments on a relative basis. For the full year, operating cash flow was $507 million, representing a 20% margin compared to $506 million, a 24% margin a year ago.
Free cash flow declined 4% year-over-year to $429 million, a 17% margin compared to $445 million, a 21% margin to fiscal 2022. We exited Q4 with more than $1.2 billion in cash, cash equivalents, restricted cash and investments. With that, let me turn to our Q1 and fiscal 24 guidance. As a reminder, on our Q3 earnings call, we provided a preliminary outlook for fiscal 24. We are pleased to narrow the preliminary range we provided, incorporating our Q4 landing and the dynamics of the current environment into our guidance. We anticipate the macro environment will remain challenging as we move through the year. And as Allan mentioned, we may also see modest near-term disruption as we realign our sales force and shift to more of a self-serve motion.
For the first quarter and fiscal year 24, we anticipate total revenue of $639 million to $643 million in Q1 or growth of 9% year-over-year. And $2.695 billion to $2.707 billion for fiscal 24 or growth of 7% to 8% year-over-year. Of this, we expect subscription revenue of $625 million to $629 million in Q1 or growth of 10% to 11% year-over-year. And $2.633 billion to $2.645 billion for fiscal 24 or growth of 8% year-over-year. For billings, we expect $615 million to $625 million in Q1 or flat to 2% growth year-over-year and $2.705 billion to $2.725 billion for fiscal 24 or growth of 2% year-over-year. We expect non-GAAP gross margin to be 81% to 82% for both, Q1 and the fiscal year. We expect non-GAAP operating margin to reach 21% to 22% for Q1 and 21% to 23% for fiscal 24.
We expect non-GAAP fully diluted weighted average shares outstanding of $207 million to $212 million for both Q1 and fiscal 24. Fiscal 23 was a year of transition, and we are pleased with our execution and the progress we are making as we navigate a challenging macro environment. We remain committed to delivering sustainable growth and profitability at scale, and we will continue to be disciplined with our investments across strategic priorities. We are focused on delivering long-term value to our customers, partners, employees and shareholders. Looking ahead, we are encouraged by the steps we are taking and look forward to updating you on our progress as we move forward. The journey to $2.5 billion has been hard work and a testament to the compelling value proposition DocuSign brings to our customers.
Together, we have played an important role in how the world agrees. I look forward to the future. And finally, I’ll be here a little while longer, as Allan said, so no goodbye’s for now. And with that, we will open up the call for questions. Operator?
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Q&A Session
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Operator: Thank you. One moment, please, we will be polled for questions. Our first question comes from Brad Sills with Bank of America.
Brad Sills: Oh, great. Thank you. Cynthia, congratulations on your next move. It’s been a pleasure working with you. I wanted to ask one on the moderating expansion activity that you saw during the quarter. Was it a certain cohort of customer where you saw that? Was it across the board? Was it in that enterprise cohort or just the broader base? Just any color on that? And any segments that you might have seen that occur? Thank you.
Cynthia Gaylor: Thanks, Brad. Yes. So, I think on the expansion rate, I think it’s a continuing trend that we’ve been talking about from — over the last few quarters, which is, as the book of business has grown and the macro environment has softened, the rate at which customers are expanding is slowing. So that growth rate and expansion is slowing. And so, I would say, there wasn’t a big change in Q4 relative to the couple of quarters before but it is a continuing trend that’s putting some pressure on the top line. On the cohorts, we actually do, do a lot of analysis on the cohorts. And I would say some of the cohorts are probably expanding at a slower rate and some are moderating the rate at which they’re expanding. But I’d say overall, it’s having the same impact.
And part of it is, as we’ve talked about in past quarters, is a little bit of a law of large numbers as that book of business gets bigger, you need more and more expansion dollars to move in. And so customers are still expanding. But when you look at the top line, that’s probably the biggest factor kind of impacting the compression of some of those growth rates.
Operator: Our next question is from Brent Thill with Jefferies.
Brent Thill: Allan, just on the sales overhaul. Can you just talk to how long you expect this to send kind of wake turbulence through the sales organ when you feel like you kind of resume full strength? And I had a quick follow-up for Cynthia. Just as it relates to the billings growth decel from 13% to 2%. Can you just give us a sense of kind of what you’re factoring into that?
Allan Thygesen: I’ll go first. Thanks, Brent. I think on the sales force, so I’d say, I think we are in a significantly more stable situation than 6, 12 months ago. Attrition rates have slowed. We’ve got, I think, a pretty full team in place. Steve has done a very nice job with that. There’s more better execution, better predictability. Part of what gave us the confidence to take the restructuring action was in fact that and that we could see what our sales capacity was, and we felt we had a little bit of excess capacity there as well as a keen understanding of where we could deinvest and free up resources to invest elsewhere. So, we’re being cautious in saying there could be a little bit of disruption as some of the — particularly the very low end, some of the business that might previously have had a little bit of human touch, we’ll try to do that more particularly through our self-serve motion.
But I think that should play out in a relatively very quick order over 1 to 2 quarters. But I think the sales force is actually in the best place it’s been for a while. We just had our global kickoff last week in I think I’m presenting them saying that they’re incredibly energized by the road map. And they all have slightly larger territories, now too. So, it’s a very positive feel I think, throughout the sales team.