Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, this call is being recorded and will be available for replay on the Investor Relations section of the website following the call. [Operator Instructions] I will now pass the call over to Roger Martin, Vice President of Finance. Please go ahead.

Thank you, operator. Good afternoon and welcome to DocuSign's Q4 and Fiscal Year 2024 Earnings Call. I'm Roger Martin, DocuSign's Vice President of Finance. Joining me on today's call are DocuSign's CEO, Allan Thygesen and our CFO, Blake Grayson. The press release announcing our fourth quarter and fiscal year 2024 results was issued earlier today and is posted on our Investor Relations website. Before we begin, let me remind everyone that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations regarding the pace of product innovation 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 these 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?

Thanks, Roger, and good afternoon, everyone. DocuSign's fourth quarter operating results reflect strong progress across the three pillars of our strategic vision, accelerating product innovation, improving the reach and effectiveness of our omnichannel go-to-market initiatives and strengthening operating and financial efficiency. Before discussing the pillars, I'll briefly highlight Q4's strong business results. Q4 revenue was $712 million, up 8% year-over-year, while full year revenue was $2.8 billion, up 10% year-over-year, both outperformed our expectations. Our continued focus on efficiency while still investing for long-term growth, drove significantly improved profitability. Q4 non-GAAP operating margin rose to 25%, up one point versus last year, while full year non-GAAP operating margin improved by more than five points to 26% from 21% in fiscal '23. In addition, free cash flow more than doubled in fiscal '24 to nearly $900 million. Similar to Q3, we're encouraged by momentum across the business. From solid retention and improving usage with existing customers to strong new customer growth, organizations, large and small, continue to invest in DocuSign's value proposition. Let's turn to our strategic pillars, starting with continued improvement in our omnichannel go-to-market initiatives. In Q4, we were encouraged by improving performance with customers managed by the direct sales force. We substantially increased the amount of business from customers signing and renewing multiyear, multimillion dollar contracts with DocuSign, including Fortune 500 global leaders in energy, industrials, consumer goods, insurance and several federal and state government agencies. Our partner channel has been instrumental in driving large customer momentum. We continue to deepen relationships with strategic, enterprise-focused organizations, including SAP, Microsoft and Deloitte. These organizations are helping to accelerate our customers' digital transformation journeys. They also represent progress in building a vibrant partner ecosystem to extend DocuSign's reach into new markets and customer segments. To that end, we recently launched…

Thanks, Allan, and good afternoon, everyone. Throughout fiscal 2024, we continue to build a solid foundation on the three pillars of our strategic vision, accelerating product innovation, enhancing our omnichannel go-to-market initiatives and strengthening our operating and financial efficiency. As a result, in Q4, we delivered strong operating and financial results. Q4's financial performance exceeded the high end of guidance across every metric, with material improvements in operating income, operating margin and free cash flow. Total revenue in Q4 increased 8% year-over-year to $712 million, and subscription revenue also grew 8% year-over-year to $696 million. Billings of $833 million grew 13% year-over-year, accelerating from 5% year-over-year in Q3. Q4 represented our highest year-over-year billings growth performance in over a year. With respect to billings, approximately half of the eight point acceleration versus Q3 came from solid execution around renewals, especially with large customers. This includes spillovers from the prior quarter and better early renewal strength from contracts that would have otherwise been billed in fiscal year '25. The remaining half came from a strong close to Q4 and net new growth, which will support the business in future quarters. Similar to Q3 results, we are encouraged by continuing signs of stabilization in the business. First, customer usage continues to improve. Total envelope cent increased moderately year-over-year. Similar to last quarter, we saw improving year-over-year usage trends in key verticals with technology, insurance, business services, financial services and health care, all growing faster than the total business baseline. Also, consumption with direct customers, our contract utilization measure increased slightly year-over-year. Second, customer retention is stable with positive large customer momentum. Gross retention was flat year-over-year in Q4 across the direct book of business. As expected, dollar net retention trended downward in Q4 to 98%, and we're encouraged that the pace of…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Yeah, thanks for taking the question. A couple for Blake, just to kick things off. So Blake, I appreciate the comments on kind of unpacking the Q4 billings outperformance. Obviously, the nine point beat versus the guide was pretty impressive. As I think about the moving pieces on that, could you just help frame the Q1 guide relative to the full year guide on billings. I think the full year would imply you need to grow a little bit faster than you're guiding to on billings in Q1. So curious if some of that's related to the pull forward? And then secondly, how should we think about NRR trends? I think that dipped below 100% at 98%. So as you just think about the drivers between expansions and new business for next year, just help us understand the trajectory of that and how that all fits into the guide. Thank you.

Sure. And thanks for the question. So to address the question on billings, I think it's helpful to kind of cover it in totality. So starting with Q4 and then going into 2025, because the timing does play a big role as you think about the year-over-year comps. So just to recap quickly, Q4, really pleased with the execution and the acceleration from Q3. And like you heard in the prepared remarks, half of that acceleration was from renewals timing, and that includes early renewals from fiscal year '25. In Q4, our book of renewals have the highest contribution from early renewals for any quarter that we've seen all year long, and that's okay because that's great execution by the team, like we're super happy about that. And then the other half was just from strong net new growth. We had a great close to Q4. And so that was a nice job again by the team there. Now that timing component impacts fiscal '25. So with respect to Q1, and this also applies to Q2, there's -- we've got two hard comps to deal with -- address in this first half of this year. The first is, if you recall, we had really strong on-time renewals in the first half of 2024, that came about because we made some adjustments to our sales incentive plans to improve execution there, and we did, and we did a really good job with it, when you go back and look at our billings performance in the first half of last year or 2024. And then the other hard comp is that Q4 component that I just mentioned that leads to some less spillover into Q1. And so those two hard comps apply, obviously, to the full year as well. So you've got…

Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question

Hey, thanks for taking the question and congrats on the great results. Blake, just a follow-up on that DNR remark. Can you help us understand how much of the downtick in that metric was driven by those remaining COVID era contracts that you just called out in your last answer. And then, Allan, it looks like you actually reaccelerated new customer adds this quarter. Do you feel like the 40,000 quarterly adds is the right way to think about the business moving forward? Or could that actually continue to ramp as the macro normalizes, and some of those new product-led growth initiatives take hold?

I'll just take a stab at the DNR follow-up and then Allan take the other one. But we're not breaking out the level of detail and granularity in the DNR from COVID. I think it's just an obvious output where we have some pretty strong expansion in those prior quarters. But that said, we are seeing signs of stabilization in the business. And so it's, I would say, it's definitely not all related to COVID. I don't want to have anybody walk away with that kind of thought process or perspective. But I think it's one of these things that we are seeing stabilizing signs on our business. And we think we have means and mechanisms that we're going to continue to pursue, where we can work to flatten that out that curve and then hopefully improve it over time. But, Allan, on accounts?

On the second question related to customer acquisition. Yes, I don't know that we track and measure ourselves that directly on that. But I would just say we have a healthy customer acquisition funnel. It is -- there is still white space, particularly internationally and acquiring new customers and we're benefiting from that and I think getting our fair share, although, of course, I always like even more. But I'm not prepared to make any forward-looking statements about the exact number of acquisitions we'll have on a quarterly basis.

Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Thanks for the question. I want to shift over to margins and profitability. Allan, a question for you. If you could just talk a little bit about the change in investment philosophy from the top. And Blake just wondering the comments around commitment to improving efficiency, does that translate to continued margin expansion even after FY'25 as we think about 2026 and beyond?

Yes. So first on our overall investment and expense philosophy. Look, we want to balance solid operational execution and efficiency today with being able to invest for the medium to long-term growth that we think we have in front of us. And so we're balancing that all the time, as we looked at taking the action that Blake referred to at the beginning of February, we felt we had a little more room to get just a little leaner and be ready and still not impair our ability to grow as we launch new products and so on. So that's the balance that we're taking. We will keep looking for opportunities, and it's obviously not all about headcount. We have gotten tremendous efficiency out of the organization on many fronts, that's what produced the strong results that you saw in Q4, really, throughout the year, and the operating cash flow improvements. So we'll keep looking for those opportunities. But we feel we're rightsized for our plan right now. And if we start seeing further investment opportunities, then we will invest, but we do that on a cautious and informed basis.

And then just a follow-up on your question on just margins in the future. I just want to point out that I'm really proud of this team for the efficiencies that we've gained this year. I mean, just specifically, in fiscal '23, our sales and marketing expense was 40% of our revenue. In this year, fiscal '24, it improved to 34%. I expect next year to be in the low 30s. And that's not an easy kind of process to go through. But it's important, and I'm really proud of the focus of the team to address those gains. I think for us in the future, and the future, what I'm talking about is let's talk about long term here now without a time line on it, is that we have opportunities to be able to drive further operating leverage with scaling growth. It's that -- can we grow our revenue faster than we do our expense base? And that's partly what we're building here. And one of the things we're focusing pretty hard on as a team is you hear about PLG motions, and self-service motions and things like that. And I think over the long-term, those opportunities do provide us the opportunity to get better margins into the future, but no specific time line or anything around that.

Yes, that's great. And maybe just as a reminder to the point that they just made about our sales marketing efficiency. The reduction force that we had last February was 95% focused in the sales marketing area. This time around, it was a little bit more balanced, but still were weighted in sales and marketing, reflecting that we felt we had efficiency opportunities throughout the company, and we wanted to make sure we capture those. I think at this point, to the extent we make incremental investments, it will probably be in R&D first. But obviously, as we launch new products, and if -- that we start seeing some leverage there, then we'll not hesitate to invest there as well. Just want to see that first.

Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Thank you, Blake and Allan for taking my questions. This is Luv Sodha on for Brent Thill. Wanted to maybe ask first to Allan, if you could just tease out like how much -- it sounds like most of the improvement this quarter was because of better execution versus more macro normalizing. Could you just tease that out and which verticals sort of drove the improvement that you saw. And then Blake, it sounds like free cash flow was really strong this quarter. I guess just talk a little bit more about how you're planning to use that free cash flow specifically for share repurchases.

Yes. So I'll go first. We really did see strength across the board. So our cost segments, Blake highlighted that we had progress both on the enterprise side and the SMB side. From a geography perspective, yes, we grew faster internationally, but we did grow everywhere. And on the industry side, we did see a broad-based strength there as well some recovery effects, those mortgages, but we sell to customers in all industries. I highlighted during the full, new significant deals with in manufacturing, in energy and health and so on. There's hardly an industry that doesn't rely on agreements and that therefore, it doesn't represent an opportunity for us. So there really isn't much there. At an overall macro sentiment, I would say, marginally improved from my standpoint. We're not projecting anything more than that looking ahead. As always, we base our plan on current macro conditions. But I think there was a little bit of help across the breadth of our business, but we're almost an index just given the breadth of verticals, segments and countries that we have.

And then to follow up on the second question about free cash flow and how we utilize it. We're in a great spot. We ended the quarter of the year with cash and investments of $1.2 billion. No debt now on the balance sheet. This last -- and also, obviously, we have a foundational business now that generates considerable amount of free cash flow, we use some of that deployed some of that this year for -- like you talked about stock buybacks, but we also use it to retire debt. There's obviously M&A opportunities for us. And we're likely more active than you think we are about looking around what opportunities are available for us. And then there's -- we can invest in the business or you have options for dividends, things like that down the road. I would say that with that kind of stabilizing results and the operating efficiency improvements we feel we can increase our ability to opportunistically return capital to shareholders while still investing in the business. And it's just -- we're committed to increasing the rate with which we return excess capital opportunistically to shareholders, and we'll see how that develops out over the year.

Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.

Hi. This is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to first ask about the large customer cohort strength that you saw in the quarter. Is that like better volume and consumption trends? Or is CLM capabilities kind of starting to push some customers over that $300,000 ACV cohort. And then also, I was wondering if you could just dig in a little bit more to the R&D investment priorities you mentioned for the coming year? Thanks.

I'll take the --

You take the first one and I'll take the other one.

So, yes, I would say definitely saw improvement in enterprise customers, again, the $300,000 accounts growing sequentially quarter-over-quarter. I'll say that from a renewal rate perspective, enterprise still has room to improve. But I will say that our renewal rates improved sequentially Q3 to Q4 in the enterprise space, more than any other kind of large customer segment that we had, but still room to improve there admittedly. And so we're excited about the opportunities and mostly in R&D, right, that give us those opportunities to provide additional solutions and products to customers. Then I'll let Allan.

Yes. On the R&D investment front, I'd say we've long felt there was an opportunity to reimagine the agreement journey for companies large and small. And we've add solutions for -- at various stages of that journey in the past, obviously, most exemplified by our signature products. In about a month, we will release a broader suite of solutions there, and that there's been a significant investment in that effort during the course of the last fiscal year. And that will continue because we feel we have a multiyear road map of value creation ahead of us there. So that is the biggest investment area. In addition to that, one other area that's getting a meaningful amount of investment is we are moving our platforms to the public cloud, Microsoft Azure, it's underway, and that's a significant effort as well from an infrastructure perspective. Those are the two things I'd highlight.

Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Hey, this is Adam Bergere on for Brad. I guess I'd like to start, what are some of the initiatives you are making in terms of like the product-led growth or self-serve missions? And what changes have you made so far there? And what changes do you still want to make?

Yes. Let me take that one. So I think during the course of the fiscal year that we just finished here, a lot of our effort was on making the process of buying DocuSign directly from DocuSign, and on our website and in our products much more seamless. And we made substantial improvements there. So much better flows to allow you to easily upgrade solutions to focus on -- put better use of a variety of payment solutions, et cetera. I'd say this year, that will expand beyond the core e-signature products to some of the newer products that we'll be launching and to supporting other channels. Those notably our direct sales channel, we want to offer those customers the ability to self-serve to the greatest extent possible and there will be significant capabilities added there throughout the year. And also for our partners where we have I think, opportunities for meaningful improvement and how easy it is to do business with us. And that's another area we're investing in. So this is across every pillar of our go-to-market effort that has already borne fruit, as you've seen in our digital sales growth, and it will really impact across the business, I think, this year. So very excited about that.

Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question.

Hey, thanks for taking my question. This is Austin Cole on for Pat. So last quarter, it seemed like you mentioned that there was kind of an uptick in interest in CLM, and now you're seeing strong adoption of CLM among enterprise customers. Is there kind of an incremental improvement in tone there? Or can you just talk broadly about just the CLM opportunity and how you guys are situated? Thank you.

Yes. So I do think the CLM market overall is improving. And I do think we're executing better in the CLM market. So I think CLM overall, I think more and more companies are realizing that managing your agreements better and getting more value out of them is a very strategic opportunity. It's definitely rising in the priority list. And so CLM, ours and others, is an increasingly strategic and interesting solution. So we're seeing more RFPs and so on. In terms of our competitive position, I think we're in a very strong position as illustrated in the Gartner survey and other measures of our position in the market. I think we are -- we have the largest number of accounts and are very well rated by customers for our experience. And we think there's more opportunity there to, should we say, popularize CLM to a broader audience, both within companies that are -- who are going to adopt it, as well as to smaller companies where the weight of the current solutions might not be appropriate. So it's a very positive and strategic opportunity for us. And yes, I do would summarize that to say on both fronts, some improvement.

Yes. And just a follow-up and maybe to add on to what Allan said. You heard in our prepared remarks, CLM grew faster than the total business and also accelerated from -- on a year-over-year basis from Q3 to Q4. Obviously, it's still a smaller share of our business, but still encouraged by that acceleration for that product.

Our next question comes from the line of Scott Berg with Needham. Please proceed with your question.

This is Rob Morelli on for Scott. Thanks for taking my question. Helping [Technical Difficulty] for margin here with non-GAAP operating margins expanding 500 basis points. However, G&A was actually up as a percentage of revenue. Two questions here. First, why were we not able to drive leverage here throughout the year? And then second, how do we think about spend in 2025 in this line of events? Thanks.

Sure. Let me take a stab at that. So, yes, G&A expense, non-GAAP G&A was up 14% year-on-year. There's two unique items that are kind of contributing to that. One is, we used to have an immaterial dollar amount, so when you look at a relatively small kind of SEC split out bucket, it has a bit of an effect. So a couple of million dollars, we used to allocate out in the prior year. We're not doing that now, but it's an immaterial kind of dollar amount overall. And then also a little bit higher litigation cost for us this year versus last year. If you exclude those two, what I'll call, unique items, G&A would have grown in the low single-digits year-over-year. So what I would say is from the efforts we've taken over the past few months and recently not only do I expect that sales and marketing expense declined year-on-year as a percentage of revenue, but I also expect to see some efficiencies and improvements in G&A as well. So I think we're focused across this business to drive efficiencies where needed, and I expect to see that next year.

Next question comes from the line of George Iwanyc with Oppenheimer. Please proceed with your question.

Thank you for taking my question. Allan, maybe you could dig in a little bit deeper on the international strength you're seeing. How much of that is being partner-led? What are you seeing from your digital initiatives there? And maybe give us some color on the regional breakdown.

Yes. Our international growth is led more by our direct channel today. I think we have very substantial opportunity on the digital front and on the partner side, which is relatively mature right now. I think there's a lot of headroom. So lots of growth opportunity there, but most of the growth today is coming from our direct sales efforts, principally in the larger focused countries. So the top 10 markets outside the US that you would expect. As you know, we've been investing in Japan and Germany. But today, UK, Australia, Canada, France are a little larger than both of those. So all of those markets are priorities.

Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Hi. Thanks for taking my question. Just a quick one around your LLM training. I know there was some stuff in the media just regarding privacy. Kind of curious, from your perspective, what are internal policies? And how are you training those LLMs? Thanks.

Yes, I'll take that one. Yes, I want to be very clear. We do not use any customer data for training any of our AI models without specific contractual consent from customers. End of story. So we have a high trust position with customers. They trust us with their most sensitive documents. And we don't want to do anything to violate that trust. There are probably some companies who -- people are willing to move aggressively here, but I think we're moving responsibly and cautiously on that. We are, with all that said, we are very excited about what AI can bring, and our customers are asking us for how can we extract more value from our [indiscernible] using more modern AI technology. And so you'll hear a lot more about that in a month at momentum. But to the point about -- the trust is the starting position. Maybe one other point I'd make is, assuming you give us consent, we then anonymize and aggregate that data so that there is no opportunity for anyone to extract any confidential issues or data out of the agreements.

Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Thank you very much and congrats on a nice finish to the year. Thinking back to last quarter, you had mentioned the introduction of some new enterprise licensing structures, and there was some comparison, I believe, to ELAs. Wondering if you can shed a bit more light on any changes made there. And when they were implemented? And Blake, did it have any effect on Q4 financial results? For instance, would it change any of the ratios between bookings and billings and recognized revenues or any type of impact to think about from those changes going forward?

Yes, we have done a few deals like that, and I think it will continue to grow with some of our very largest clients. And as we offer a broader set of products, obviously, an enterprise license also becomes more interesting as you can mix and match across products. But it still remains a very small part of the business. We even some of our very largest customers, some of the contract renewals remain on an envelope basis.

Yes. And just to add on top of that, it's -- while we're super excited about the opportunity in very specific cases to consider those, it's not a huge number for us today, it grows. It's continuing to grow. And again, I think, and to directly answer your question, no material impact on our results for Q4. But it's also one of these things, I think, in this business, we have a very, very broad and diverse customer base. And so there's -- we don't have single customers that, I would say, vastly impact us like there might be other companies, which, I think is a strength for us. And so -- but anyways, just to directly answer your question, no material impact.

Yes. I would make one other point. ELA has a very specific connotation of sort of unlimited consumption and being able to combine products across. We have leaned in significantly harder to make sure that we are competitive in large enterprise deals. And we did some very large and very nice renewals with some large customers. I think in part as a result of that improved motion. So we have senior people on it. We have our large deal desk. We have all the things that you would expect to make sure that we are as competitive as possible.

Our next question comes from the line of Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Hi. Thanks for taking my question. This is Michael Berg on for Michael Turrin. I just wanted to touch on free cash flow. You had a very strong free cash flow generating quarter and year. Maybe you could just shed some light on what drove that? Was it some of the renewal timing you discussed on your -- in terms of billings on the quarter? And how can we think about the relationship between operating margin and free cash flow moving forward? Thanks.

Sure. And so yes, we did have a very strong quarter and year as it regards to free cash flow, we had a 32% free cash flow yield for fiscal '24. And the reason why it's materially higher than our operating margin is frankly, just a working capital tailwind that we had, and it's really driven by two components. One is if you recall about a year ago, we had an ERP implementation that caused a delay in our ability to do some collections. So earlier this year, we've got a tailwind from that. But on top of that, we've also improved our collections process, I would say, extremely well, reduced agings. And so kind of, I would say, just really brought some operational efficiency to our working capital that showed that improvement. Now going forward, as you all know, like being able to repeat working capital improvements on top of each other year-over-year, while we're going to strive to be able to continue to improve and gain efficiencies, it's not something you usually can just get pretty easily. And so that's why in the prepared remarks, you'll find that I would expect longer term to assume a free cash flow yield more closer to that operating margin.

Our next question comes -- our final question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Hi. This is Arsenije on for Alex Zukin. Congrats on results. With the international strength you have seen this year, I think it has contributed close to 45% of total revenue growth in fiscal '24. Do you expect this to be an even greater contribution to growth in fiscal '25? Does this mix stay the same? Or as you roll through the drag from the pandemic cohorts early in fiscal '25, do you think that there is strong renewal expansion domestically if macro stays the same, that leads to more US contribution to top line growth in fiscal '25? Thank you.

Yes. Thanks for the question. Well, first off, again, really happy with how our international growth has progressed to the year, growing much faster than the overall business. All of our major regions grew to the double-digits in Q4. To the question about whether we think it accelerates more or less, I'm not going to provide any guidance out to that. But what I will say is that, just to reiterate, the international opportunity for us, I think, is quite sizable. Only 27% of our revenue in Q4 came from our international business. And if you think of GDP or something as a proxy, it should be, not higher than that. And so I think I'm really excited for that longer-term opportunity, but not any place to say, oh, I think it will accelerate faster or slower than any other market.

Okay. With that, thank you all for joining and for your support as we continue to build a solid foundation for DocuSign. We are proud of the strong results in Q4 and of the progress that we're making to reinvigorate innovation and add value for our customers, our employees and shareholders. We look forward to what will be a very exciting fiscal 2025. Thank you. We'll see you next quarter.

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