DocuSign, Inc. (DOCU) Q3 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture. While there is steady growth in subscription revenue and positive signs in utilization rates, concerns arise from slightly lower Q4 growth guidance and management's reluctance to provide specific details on ARR and AI initiatives. The overall sentiment is balanced, with positive developments in IAM adoption and strategic focus on organic growth, but offset by uncertainties and lack of detailed guidance.

Key Financial Performance

Revenue $818 million, up 8% year-over-year. Driven by continued customer investment in core products and the Intelligent Agreement Management (IAM) platform.

Billings $829 million, up 10% year-over-year. Driven by renewal timing, early renewal strength, and slight FX favorability.

Non-GAAP Operating Margin 31%, up nearly 2 percentage points year-over-year. Attributed to higher revenue, cost discipline, and some savings from onetime expense items.

Free Cash Flow $263 million, up 25% year-over-year. Supported by higher collections efficiency, higher in-quarter billings, and lower expenses.

Dollar Net Retention Rate (DNR) 102%, up from 100% in the prior year. Supported by improving consumption and envelope utilization.

International Revenue 30% of total revenue, grew 14% year-over-year. Driven by international expansion and sales efforts.

Subscription Revenue $801 million, up 9% year-over-year. Driven by modest sales-driven strength.

Non-GAAP Gross Margin 81.8%, down 70 basis points year-over-year. Due to cloud migration transition costs.

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Operating Highlights

Intelligent Agreement Management (IAM) platform: Achieved significant growth with over 25,000 paying customers, up from 10,000 in April. IAM is on track to represent a low double-digit percentage of recurring revenue by year-end. Customers report faster contracting cycles and improved document turnaround times.

Agreement Desk: Launched as an internal workspace to streamline agreement processing. Also introduced AI contract agents in beta.

eSignature: Continued strong performance with improved dollar net retention (102%) and high utilization rates. New York Life integrated eSignature with Salesforce, achieving 65% of agreements signed within hours.

International Revenue: Now accounts for 30% of total revenue, growing 14% year-over-year. Hosted customer events in Sydney, Singapore, and Tokyo, reflecting increased interest in IAM.

Operational Efficiency: Achieved a non-GAAP operating margin of 31% and a 32% free cash flow margin. Conducted the largest quarterly share buyback of $215 million.

Cloud Migration: Ongoing efforts caused a slight decline in gross margin but are expected to ease in fiscal 2027.

AI and Ecosystem Expansion: Expanded IAM's ecosystem with integrations into ChatGPT, Anthropic Claude, and other platforms. Launched APIs for third-party system connections.

Trustworthy AI: Achieved FedRAMP Moderate and GovRAMP authorization, emphasizing secure and compliant AI solutions.

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Risk or Challenges

Customer Demand and Adoption: The company's expectations regarding customer demand and adoption are based on estimates and are subject to change, indicating potential risks in accurately forecasting market behavior.

Renewal Timing Variability: Renewal timing can create significant variability in billings as a reporting metric, which may impact financial predictability and investor confidence.

Cloud Migration Costs: Ongoing cloud migration efforts are causing a 1 percentage point headwind on gross margins, with gradual easing expected in fiscal 2027 and beyond.

Foreign Currency Impact: Revenue and billings had small foreign currency benefits, which could reverse and negatively impact financial results if currency trends change.

Early Renewal Activity: Elevated early renewal activity in the second half of fiscal 2025 creates a more difficult year-over-year comparison for billings in Q3 and Q4 of fiscal 2026.

Operating Margin Pressures: Operating margins face pressures from cloud migration costs, shifts in compensation structures, and comparisons against prior year savings.

International Revenue Growth: While international revenue grew, it introduces exposure to geopolitical and economic risks in foreign markets.

IAM Platform Adoption: The adoption of the IAM platform is growing, but its contribution to revenue is still in the low double-digit percentage, indicating dependency on its success for future growth.

Data Security and Compliance: The company emphasizes trust and compliance in its AI models, but any breach or failure to meet standards could harm reputation and customer trust.

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Guidance & Outlook

Revenue Expectations: For Q4 FY2026, total revenue is expected to be between $825 million and $829 million, representing a 7% year-over-year increase at the midpoint. For FY2026, total revenue is projected to be between $3.208 billion and $3.212 billion, an 8% year-over-year increase at the midpoint.

Subscription Revenue: For Q4 FY2026, subscription revenue is expected to be between $808 million and $812 million, a 7% year-over-year increase at the midpoint. For FY2026, subscription revenue is projected to be between $3.140 billion and $3.144 billion, an 8% year-over-year increase at the midpoint.

Billings Projections: For Q4 FY2026, billings are expected to be between $992 million and $1.002 billion, representing an 8% year-over-year growth at the midpoint. For FY2026, billings are projected to be between $3.379 billion and $3.389 billion, a 9% year-over-year growth at the midpoint.

Operating Margin: Non-GAAP operating margin is expected to be between 28.3% and 28.7% for Q4 FY2026 and between 29.8% and 29.9% for FY2026. The company expects flat year-over-year operating margins for FY2026.

Gross Margin: Non-GAAP gross margin is expected to be between 80.8% and 81.2% for Q4 FY2026 and between 81.7% and 81.8% for FY2026. The company anticipates a 50 basis point year-over-year decline in gross margin for FY2026 due to cloud migration costs.

IAM Contribution: IAM is expected to contribute a low double-digit percentage share of the subscription book of business exiting Q4 FY2026.

International Revenue: International revenue is expected to continue its growth trajectory, having reached approximately 30% of total revenue in Q3 FY2026, with a 14% year-over-year growth rate.

ARR and IAM Metrics: Starting Q4 FY2026, the company will disclose annual recurring revenue (ARR) and IAM as a percentage of ARR as new metrics to provide better transparency into long-term growth and IAM's contribution.

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Shareholder Return Plan

Share Repurchase: In Q3, DocuSign repurchased $215 million in shares, marking the single largest quarterly dollar buyback in the company's history. This activity reflects the company's commitment to returning excess capital to shareholders. The company has over $1 billion in remaining buyback authorization and plans to continue opportunistic share repurchases, although the pace may fluctuate quarter-to-quarter.

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Key Q&A

Q:As you start to transition to ARR, should we expect that ARR is seeing a fairly similar reacceleration that we're seeing with billings on a full-year basis? Or would there be any puts or takes that we should be thinking about around that metric moving forward?

A:Blake Grayson stated that ARR is not being disclosed yet and will be discussed in the March call. He mentioned that billings growth is a good proxy for the business trajectory and highlighted opportunities with IAM expansion and gross retention improvements to drive ARR forward into FY '27 and beyond. Allan Thygesen emphasized that the company is now running the business on ARR and sees it as the right long-term metric.

Q:Could you talk more about what you're seeing with the early renewal cohorts? Are you starting to see those customers shift to broader and wider IAM deployments on renewal?

A:Allan Thygesen noted that early renewal cohorts are renewing at higher rates than traditional signed business. He mentioned that smaller companies have less expansion opportunity, while larger companies offer more significant expansion opportunities. Overall, the company is optimistic about IAM's progress and adoption.

Q:How do you think about what the use cases and future monetization opportunity is for Navigator?

A:Allan Thygesen explained that Navigator is a foundational capability for the IAM platform and is not monetized separately. It enables features like obligation management, automated notifications, and workflow advantages. He highlighted that DocuSign benefits from proprietary consented private agreements, which enhance accuracy and provide a competitive advantage.

Q:As we look at the subscription revenue guide for Q4, the growth is a little bit below where you guided Q3. How would you characterize the underlying growth of the business?

A:Blake Grayson explained that the Q4 revenue growth rate is slightly lower due to a strong Q4 last year and some early revenue acceleration in Q3. He emphasized that the underlying business growth remains steady and resilient.

Q:Are the envelope sent growing mid-single digits or high single digits? And what is the takeaway from utilization rates reaching multiyear highs?

A:Blake Grayson stated that envelope sent growth has been consistent year-over-year for the past five quarters. Utilization rates are higher than the prior year, indicating positive signs for the business. Allan Thygesen added that increased utilization provides broader upsell opportunities beyond just selling more envelopes.

Q:Are you able to give any kind of sneak peek of what you're engineering with AI contract agents?

A:Allan Thygesen mentioned that AI contract agents are in beta and focus on relatively simple workflows across sales, HR, and procurement use cases. He emphasized that while it's early days, the company is leaning into automation opportunities and partnerships with chat platforms like OpenAI.

Q:Strong quarter in the large customer segment, that $300,000-plus ACV customer group. How much of that's being driven by IAM adoption at the enterprise level versus just more broadly a stronger go-to-motion?

A:Allan Thygesen stated that both IAM adoption and expansion of eSignature usage are contributing to the momentum in the $300,000-plus ACV customer group.

Q:IAM has been in the enterprise market for a few quarters now. Any learnings or thoughts on the go-to-market playbook as you head into fiscal '27?

A:Allan Thygesen highlighted that IAM is still in early stages and emphasized the importance of scaling enterprise features, ISV and system integrator partnerships, and testing a platform pricing model with tokens. He noted that these efforts are being well received and will continue to evolve.

Q:What do you think it needs to take from here for you to continue to sustain or get to double-digit growth?

A:Allan Thygesen identified retention and new expansion bookings, particularly driven by IAM, as the two key levers for achieving double-digit growth. He expressed confidence in the company's progress on these fronts.

Q:Why not lean a little harder into M&A in the age of AI?

A:Blake Grayson stated that the company actively considers M&A opportunities but maintains a high bar for acquisitions. Allan Thygesen added that the company is focused on organic growth but is open to strategic acquisitions that align with their goals, citing the successful Lexion acquisition as an example.

Q:Could you give us some more color on the 25,000 IAM customers, specifically how many are new to DocuSign versus existing eSign customers?

A:Allan Thygesen stated that the vast majority of the 25,000 IAM customers are existing eSign customers upgrading to IAM, though some new customers are also onboarded directly onto IAM.

Q:What should headcount growth look like, and what areas are you investing in aside from IAM?

A:Allan Thygesen and Blake Grayson indicated that headcount growth will be modest, with a focus on reallocating resources to areas like product and security. They emphasized maintaining efficiency gains while investing judiciously.

Q:What do they see in IAM, and is it kind of Navigator where they're getting most of the unlock?

A:Allan Thygesen explained that Navigator and its associated capabilities, such as milestone agreement types and Agreement Desk, are key drivers of IAM adoption. He highlighted the broad potential for expansion from the eSign base into IAM.

Q:How much of IAM is included in early renewal conversations around upsell dynamics?

A:Blake Grayson stated that the vast majority of early renewals are still driven by the core business, but IAM plays a role in some of these renewals. He emphasized the focus on expansion opportunities, whether through IAM or eSign.

Q:How should we think about the underlying run rate billings growth, excluding early renewal timing or duration in FX for Q4?

A:Blake Grayson explained that early renewals will always be part of billings, but the focus is on expanding these renewals. He noted that Q3 billings growth was about 10%, or 8% excluding early renewal outperformance, and emphasized the volatility of early renewals.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on ARR, stating that it will be disclosed in the March call. They also provided limited information on the expansion opportunities for IAM and the specific growth rates of envelope sent. Additionally, Allan Thygesen was vague about the financial impact of AI contract agents in fiscal '27, emphasizing that it is still early days.

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Earnings Word Cloud

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