DocuSign Inc (DOCU) 2019 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's first-quarter fiscal 2019 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 Annie Leschin, head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to DocuSign's first-quarter fiscal 2019 earnings conference call. On the call today we have DocuSign's CEO, Dan Springer, and CFO, Mike Sheridan. The press release announcing our first-quarter results was issued earlier today and is posted on the Investor Relations section of our website.

Before we get started I'd like to let everyone know that we will be participating in the William Blair conference on June 12 in Chicago, Illinois. We will provide updates as we add other events to the schedule.

Now let me remind everyone that the statements made on this call include forward-looking statements that are based on management's beliefs and assumptions and on information currently available to management, including estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry.

Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Further information on these risks and uncertainties that could affect the Company's financial results is included in the section titled Risk Factors in the MD&A of financial conditions and results of operations in our prospectus previously filed with the SEC.

Additional information will be made available in our quarterly report on Form 10-Q for the quarter ended April 30, 2018 and other filings we make from time to time with the SEC. You should not rely upon forward-looking statements as predictions of future events; they are based on assumptions that we believe to be reasonable as of this date. Except as required by law, we assume no obligation to update them or to update the reasons if actual results differ materially from those anticipated. I'd now like to turn the call over to Dan. Dan?

Good afternoon and welcome, everyone. Thank you for joining us today for our first earnings call as a public company. We are excited to share with you our first-quarter performance, how our eSignature solution is redefining the way people do business, and the progress we are making towards our vision of creating a modern system of agreement platform.

For those of you new to our story, DocuSign offers the world's leading eSignature solution as part of our broader platform to automate the agreement process. We accelerate the process of doing business for companies and we simplify life for their customers and employees. And we do this by transforming the foundational element of business, the agreement process.

We started back in 2003 by pioneering the category of electronic signature. Today this represents a $25 billion market and we've only just begun to scratch the surface. There is an even bigger opportunity when it comes to modernizing the rest of the agreement process, that is what happens before and after the signature, enabling what we call modern systems of agreement.

These systems automate and connect the entire process of preparing, signing, acting on and managing agreements. They allow companies to get business done more efficiently and cost-effectively while significantly improving the customer, partner and employee experience.

Our leading eSignature solution, and our broader system of agreement vision, has enabled us to continue attracting customers across a variety of industries such as real estate, financial services, healthcare life-sciences and technology.

Over the past six years we have seen our paying customer base grow an average of almost 50% per year. During the IPO we talked about having 370,000 of those customers. And today I can tell you that at the end of our first quarter that has grown to over 400,000 customers ranging all the way from local businesses to some of the largest corporations in the world. Our other main growth lever is a successful expansion of our relationship with these existing customers.

Many companies deploy DocuSign for an initial series of use cases, often one or two critical business processes that eSignature can help accelerate and simplify. Once those are successful, companies often look to bring the benefit to other opportunities and functions in their business and today we have customers that have expanded to more than 350 cases all across their enterprise. So the upside here is substantial.

Now, let's talk about this in terms of our results. For the first quarter we posted total revenue of $155.8 million, a 37% year-over-year increase. And we added over 30,000 new customers across our enterprise, commercial and web and mobile businesses. We achieved a non-GAAP operating profit of $4.5 million and we generated $8.8 million in free cash flow in the quarter.

One of the key pillars of our growth strategy is our targeted international expansion. Currently business from outside the United States represents only about 17% of our revenue and there remains an incredible opportunity across our target market. Here are just a few of the highlights.

We recently went live with our Canadian data center, which enables us to offer public and private cloud options for local businesses. Not only does this address the need for local data residency, it also serves as a marker for our investment in and our commitment to the Canadian market. We expect the data center to help us compete even more effectively, especially across the Canadian public sector and financial services vertical.

As most of you know by now, the EU's General Data Protection Regulation went into effect on May 25. Thanks to a lot of hard work on the platform, signing, administration, security engineering, IT, legal, info security, and other teams across the Company, DocuSign has implemented a robust data privacy program to comply with GDPR.

In fact, we went an extra step by obtaining approval from the EU data protection authorities for something called Binding Corporate Rules, or BCR. BCRs are widely considered the gold standard for cross-border data transfer by data processors and data controllers. And we are the only Company in our competitive space to have proved BCR as both data processor and a data controller.

Another pillar of our growth strategy is our commitment to innovation. We are continuing to invest in our core eSignature capability and, having listened to our customer, we've implemented new features to help them simplify the way they do business.

One of our most common requests was the ability to make comments or ask questions directly inside a document created as part of an agreement. So we built a chat style interface that works in real time, can be tied to any part of an agreement, and is retained as part of the agreement's certificate of completion.

For customers it means they can resolve questions faster and can have an auditable record of what was discussed. As a very heavy user of this feature myself, I can tell you personally it's a huge productivity accelerant.

Another new feature is the ability to strike through a word or section of a document while still keeping a record of it. We designed this feature based on direct feedback from our customers. Having launched it just prior to our IPO, we have already heard directly from hundreds of customers to thank us for the impact it's having on their business, and over 100,000 customers have already used this feature as well.

We are also developing solutions for specific industries. For example, we are continuing to develop our eNotary feature, which allows notary publics to participate in the eSignature process. There are a growing number of US states that allow this, most recently the state of California.

We are also investing significant R&D resources into capabilities that support our broader system of agreement platform, which includes eSignature and goes beyond to automate and connect the activities before and after the signature.

One example is our payments feature. It allows our customers to collect payments associated with an agreement right after signing. Payments can be made through credit card, electronic checks, Apple Pay and Android Pay. And just recently we added PayPal. Our customers can now use it to collect payments and so can we.

In fact, in the short time it's been active we've seen a noticeable effect from new small business customers using PayPal to pay us. We expect our customers who use our payments feature will see the same thing. So it's a great example of adding a system post-agreement feature that helps everyone involved, our customers, our customers' customers and us.

Just last week we upped our commitment to the developer community by launching a new developer center designed to help them get up and running even faster with our technology. The center will make it easier for developers to integrate the DocuSign API into their app and business processes.

This is a very important market for us. After all, almost 60% of the transactions on our platform today come through our API, and we've seen 50% growth in new apps that integrate our API over the past year. And there are now more than 80,000 developer sandboxes open on our platform.

And finally, we will kick off our annual customer and developer conference, Momentum, in a little over two weeks' time. We anticipate thousands of customers and developers joining us for what will be a strategic, educational, inspiring and hands-on two-day conference focused on what it takes to fully modernize their systems of agreement. With that I'd like to hand over to Mike for some more details on the numbers.

Thanks, Dan. Let me add my welcome to everyone and tell you how excited I am to report our first-quarter results. Before I discuss our Q1 results I'd like to remind everyone of a couple of things.

First, all of our financial results reflect the adoption of the 606 accounting standard for current and historical periods, and our non-GAAP financials exclude stock-based compensation and amortization of intangibles.

And secondly, while most of the results I'm about to present are on a non-GAAP basis, I wanted to mention the significant stock-based compensation charge we recorded in the first quarter related to our RSUs.

Our RSUs granted prior to the end of fiscal 2018 have a service-based vesting condition and a liquidity-based vesting condition. With the effectiveness of our IPO on April 26, the liquidity condition was satisfied and, as a result, we incurred a $263 million stock-based compensation charge. This one-time charge led to a low GAAP gross margin and a large GAAP net loss in the quarter.

You will also note in our GAAP results an unusually low weighted average shares outstanding. This anomaly relates to the fact that our IPO did not close until the beginning of Q2 and, therefore, our preferred stock outstanding is not included in our weighted average shares outstanding. In a moment I will provide guidance on our weighted average shares outstanding for Q2 and for the full-year fiscal 2019.

Turning to Q1, we kicked off fiscal 2019 with a strong performance delivering top-line growth and positive free cash flow while also generating non-GAAP operating profitability. Total revenue grew 37% year over year to $156 million in the first quarter as our business continued to scale. Subscription revenue grew 39% year over year to $148 million, or 95% of total revenue, with strength across all customer segments. Billings grew 33% year over year to $169 million.

We continued to see strong customer growth in Q1 during which we added a total of 30,000 new customers. This is a 29% increase over Q1 of 2018 and it brings our total customers to more than 400,000 worldwide. Of this growth, 2,000 of these customers were enterprise and commercial businesses representing a 33% increase over Q1 of 2018.

High levels of customer satisfaction were again reflected in our strong net dollar retention of approximately 114% in the fiscal quarter, consistent with the historical rates that generally range from 112% to 119%.

Our commitment to and investment in customer success also drove sizable expansions at existing customers. By the end of the quarter customers with ACV greater than $300,000 grew to 215, a 40% year-over-year increase.

International revenue grew 52% year over year to $26 million in the first quarter, which represented 17% of total revenue. Markets outside of the US remain an important growth driver as we continue to make sales capacity and marketing investments in key global regions.

Non-GAAP gross margin for the quarter increased to 80% from 78% in the first quarter of fiscal 2018. Non-GAAP subscription gross margin also expanded to 86% from 84% last year. This improvement reflects our continued progress in driving efficiency and leverage at scale.

We are focused on expanding our leading position in the eSignature category and building out our broader system of agreement platform. As a result we invested on multiple fronts to advance these initiatives. In sales and marketing, investments in selling capacity and lead generation activities drove the majority of the expenditures in the quarter.

In R&D we continue to invest resources to strengthen our core offerings and expand our product portfolio. In G&A expenses increased largely due to the investments in preparing to become a public company. In total, non-GAAP operating expenses climbed to $121 million, or 77% of total revenue, compared to $97 million, or 85% of total revenue for the first quarter of fiscal 2018.

We ended our quarter with 2,376 employees, which was an increase of 16% year over year. All of this led to first-quarter non-GAAP operating margin of 3% compared to a negative operating margin of 7% last year.

This quarter we incurred foreign currency losses of $2.5 million associated with intercompany transactions and accounts receivable held in local currency. We are taking steps to minimize FX gains and losses in the future.

We achieved non-GAAP net income of $2 million, up from a net loss of $8 million a year ago. Our growth in leverage also drove positive operating cash flow of $15 million in Q1 which is approximately 10% of revenues. This compares to negative operating cash flows of $1 million in Q1 of last year. Free cash flows in Q1 were $9 million, or approximately 6% of revenues, compared to negative $7 million of free cash flow in Q1 of last year.

Looking to our balance sheet, we ended the quarter with $270 million in cash compared with $257 million at the end of the previous year's quarter. As a reminder, this excludes $525 million in net proceeds from our IPO which closed on May 1.

Turning to our non-GAAP guidance for Q2 and for fiscal 2019, first we estimate revenues of $157 million to $160 million in Q2 and $652 million to $658 million for fiscal 2019. We estimate billings of $160 million to $170 million in Q2 and $680 million to $700 million for fiscal 2019. We estimate that our gross margin will be 78% to 81% for both Q2 and full-year fiscal 2019.

In terms of operating expenses, we estimate that sales and marketing will be 49% to 51% of revenues for Q2 and the full-year fiscal 2019, R&D will be 16% to 18% for Q2 and the full-year fiscal 2019, and G&A will be 10% to 12% for Q2 and the full-year fiscal 2019.

We estimate that less than $500,000 per quarter of other non-operating expenses for the remainder of fiscal 2019 and we expect a tax provision of approximately $750,000 per quarter for each of the quarters remaining in fiscal 2019. We estimate fully diluted weighted average shares outstanding of 190 million to 195 million shares for Q2 and 160 million to 165 million shares for fiscal 2019.

As we enter the second quarter of fiscal 2019, we are very happy with the continued momentum in our business. We believe we are still in the early innings of a large and growing opportunity to help our customers transform their businesses. And with that I'd like to open the call for questions.

(Operator Instructions). Sterling Auty, JPMorgan.

Yes, thanks. Hi, guys. I wanted to start with -- it looks like you are continuing to see really nice improvement in the average revenue per customer. I'm kind of curious, are you seeing new customers coming in in the higher price point packages or is it your existing customers that you are seeing the uplift from?

Well, to give you a couple of thoughts. First is it's always important to understand we really have two majorly different segments of customers between what we have in our web and mobile business and what we have in the direct customer relationships. So I think it's dangerous to do averages across both of those units.

But in terms of the perspective, I think we see growth on both sides. We have customers coming in at good rates, as you've seen, with solid initial sort of relationships. But we are also seeing great growth because we have that opportunity to expand that land and expand model we talked about on the IPO road show. So we are seeing strength on both sides of it.

And Sterling, I would add having a 40% growth in customers with ACV over 300,000 is a good indicator of the expansive opportunities that we continue to have in the installed base.

Got it. And one quick follow-up. Can you talk to us a little bit about the industry diversification in the quarter? Any changes from what you were seeing in terms of a trend?

I don't think there's any material change. We continue to be quite diverse across a number of industries. We don't have very much concentration by customer or by vertical.

All right, great. Thank you.

Stan Zlotsky, Morgan Stanley.

Perfect. Thank you so much for taking my question. A high-level question for Dan and then a follow-up for Mike. The new large customers you guys signed in the quarter and the increase sequentially looked very impressive, especially considering it's a Q1 and typically Q1 is not a large enterprise quarter.

When you look at the large customers that you signed in the quarter, was there a common theme among them as to what brought about the deal and why you guys were the winning entity? And then a quick follow-up.

Yes, absolutely. So, two things. When you look at what Mike was just describing about the number of customers above $300,000, some of those are initial deals, but a significant number of those are increases. So whenever you look at that -- the numbers you are referring to, make sure you keep that in mind.

But secondly, to your macro question about what is driving it, I'd say there's two things. One of them, I think this construct of a -- concept of a systems of agreement is really taking hold in the marketplace and we see that a lot of the companies with which we speak say they want to broaden and modernize their system of agreement and that also gives us the opportunity to have expansion.

I think the second piece is we really are focused on customer success at DocuSign and we are driving a greater and greater adoption rate and greater and greater success for our customers, which leads us to those increased deal sizes you referred to. Those would be the two big drivers in my mind.

Perfect, thank you. And a quick follow-up for Mike. Mike, we noticed the guidance for billings for the full-year, the midpoint around $690 million. It implies 15% growth for the full-year. Is there something that we need to be mindful of as we think about billings given the really big beat in Q1 and how the cadence of it evolves through the year? That's it for me. Thanks.

Yes, it's a good question, Stan. I would say billings in a SaaS business is the one statistic that can be affected by timing of renewals that you can see move from one quarter to the other. So I think the ranges that we are guiding are appropriate. Of course, we always aspire to grow as quickly as we can. But I think the variability around billings is unique to that particular statistic.

Got it. All right, thank you.

Walter Pritchard, Citi.

Hi, thanks. Two questions first for Dan. Just on your payments offering and generally on your sort of add-on services, can you talk about revenue significance and sort of what we should look at in terms of timing for some of those services becoming more significant from a revenue perspective? And then just had a follow-up for Mike.

Yes, absolutely. So one thing to understand is we don't break out separate revenue line items from the standpoint of how we report the revenue across different features within our products. But a big part of the reason we don't do that is because that's not how we engage with our customers.

So most customers are engaging with us if it's just an eSignature or if it's with a broader system of agreement, whether it's the volume that they purchase from us or the seats they purchase from us, it's not really structured that way. So you won't -- I don't think you will have a lot of ability to kind of break that out or for us to give you direction on that.

From a standpoint of what we are seeing in the marketplace from an adoption standpoint, I think we are seeing significant uptake in a lot of the new functionality. Payments is a great example of that where the percentage of growth has been substantial on the number of customers that are leveraging those functionalities.

Similarly, you saw the data that we gave on what's happening with things like strikethrough. And I think we continue to believe we will have that kind of success at our upcoming Momentum conference. It's a great opportunity for us to be with thousands of folks that are really excited to take on that broader and broader product portfolio.

Great, and then, Mike, you are seeing good really good leverage in the business here; I think employee count is growing at like half the rate of revenue growth and OpEx is growing pretty materially below revenue. I am wondering how sustainable is that?

I mean it seems like the top-line growth may drive you to spend more. Just trying to understand -- obviously you have given your guidance for the year, but how are you thinking about leverage and spending upside in quarters and so forth given what you are seeing so far?

Yes, Walter, I would characterize it this way. I think our primary focus is and will continue to be growth and we are going to invest in sales and marketing, in product development, in international and all those growth drivers, because the market is very early in terms of penetration and we see a huge opportunity in front of us.

With that said, we also will try to be very mindful around building our investments in a way that are well matched to the growth that's in front of us and, for example, in some new emerging markets overseas we don't over-invest too early. So I think we've got a good balance of that.

So, I would say that obviously both are important to us. Growth is our primary goal and, at the same time, we believe that we are at a stage and a scale right now where we can continue to drive leverage and profitability and cash flow in the model.

Great, thank you.

Justin Furby, William Blair & Company.

Thanks, guys, and congrats on a successful IPO and solid first-quarter out-of-the-box. I guess I want to start with Dan and just look for an update on the enterprise specific sales team going after the Global 2000.

I was wondering if you could give a sense today in terms of how much logo penetration you have within the G2k. And if you think about the different segments, commercial enterprise and web, how much opportunity do you think that large enterprise is when you look out over the next three to five years? And then I have got one quick follow-up.

Sure. Well, I think what we think about the segmentation, we tend to think about commercial and enterprise more together as our core direct channel versus the web and mobile, which of course is very, very different. As you saw us talk about, there has been a lot of success that we've had in the web and mobile business -- continues to be a significant driver of a lot of those new accounts that Mike walked you through. So we are excited about that.

In the direct business with commercial and enterprise I am quite pleased with the very significant penetration we are making in that marketplace. And I believe as we continue to scale our go-to-market business and our operations on that front, we have opportunity to continue to accelerate that not only in North America but, because of the investments Mike just referred to in international, we think that is only 17% of our revenue, a huge opportunity for us to continue that momentum.

I was just in Europe a few weeks ago in the market and I just saw increased demand for people starting to understand what a system of agreement could really mean for their business there. So I think those of the way I think about the opportunity.

Okay, guys, that's helpful. And then maybe for Mike in terms of the retention. You guys have been very successful in that 115 or so level and it looks like you did so again in Q1. I am just wondering if you think that is sort of a sustainable number when you look out over the next two, three years. And can you remind us of the impact on the margin for you in terms of when growth comes from the base versus net new logos? Thanks.

Sure. I would say that a net new logo, obviously because it's going to be an initial deal, which generally tends towards the initial use case a smaller deal size, aren't going to have as much leverage embedded in them as a customer who is experienced with this and expanding their platform.

So in terms of our ability to sustain these levels, we make significant investments in our business to drive them in particular around adoption. As we've talked about, our customers' success organization is an organization that proactively works with our customers to help them with adoption. As customers realize the significant ROIs that come from our technology and their businesses and they adopt successfully, that's what brings them back.

So yes, I think that you will see over time they can range between, as I mentioned 112% to 119%, anywhere in there we consider to be healthy and, by the way, by any comparison, I think consider to be very strong. And given the size of our installed base we see it as a huge engine for our growth and leverage.

Great, thanks very much.

Alex Zukin, Piper Jaffray.

Hey guys, congrats on a great first-quarter out of the gate. Maybe, Dan, first one for you. Big picture, one of the more compelling aspects of the story is when you can really touch that -- your customers' customer and be part of that customer experience for their business.

Any great examples in the quarter where you are able to -- that you're able to talk about or cite from a customer facing use case and how that -- how you are seeing that evolve? And then I've got a quick follow-up.

Sure. Well, I think the case that I've sort of been most excited about really over the whole last year that we saw acceleration in in the quarter is T-Mobile. We had a chance to talk about them before, Alex, where they have fundamentally transformed the relationship they have with their customers through leveraging the DocuSign technology.

I think these what we like to call front office use cases will also continue to play out really aggressively across all of the partnerships we do through salesforce.com. We've talked about before that Salesforce has a unique capability to partner with us around how a customer uses Salesforce to win new customers, but then leverages the DocuSign technology to not only make it easier and faster to bring the customer onboard, but to improve their experience as they are onboarded.

So, that kind of core B2B sales base, as well as the consumer side we talked about at T-Mobile, those would be the examples that I've seen the greatest traction on recently.

Great. And then, Mike, maybe can you help us just on free cash flow margins from a seasonality perspective and for the year, how should we think about those evolving as we get through the first year?

Sure. So, I would say just in terms of seasonality Q4 tends to be the stronger cash flow quarter just because of deals and renewals that tend towards that quarter. The Q1 through Q3 timeframe generally are pretty stable one to the next, not as much fluctuation. And just in terms of how you should see them trending, they generally should trend in a similar direction as our EBITDA and our operating margins.

Great, thanks. Congrats, guys.

Karl Keirstead, Deutsche Bank.

Thank you and congrats on this first public call. Maybe one for Dan, one for Mike. Dan, on the international side, you guys have flagged a lot of investments there. I am just curious what you think the timing of the payoff period will be from those big investments.

And just to zero in on the numbers, when do you think that percentage of revenues, which is now 17% international, can really start to ramp up? And maybe another way of asking that is whether the percentage of billings is tracking today well above 17%.

And then maybe I'll ask the second question right now as well. Mike, obviously invoicing duration can be a big determinant of billings as well. Could you just remind us what the average invoicing duration is? I know the contract terms tend to be one to three years and whether in the quarter you did see any duration change worth calling out. Thank you both.

Let me jump into the international question first. So I think the answer to when do we see it, we see it now. We have a tremendous amount of success and, as you know, the biggest success we've had is first with the other common law countries. So thinking about the UK and Ireland, thinking about Canada, thinking about Australia. But we really are starting to see in the civil law countries that acceleration.

I'd point you to a couple of factors. If you look at the revenue, that 52% growth in international and our overall 37% growth, you can see that we are already seeing an acceleration and we will continue to see the share of our revenue grow faster internationally than we do domestically. So that's how I see the opportunity. I think it's really current and it's with us today.

And Karl in terms of duration, so if you looked at our dollar weighted duration this quarter it's very similar to what it was last quarter. Last quarter I think it was 19 months, this quarter it was like 19 -- or last quarter it was 20, this quarter it was around 19.

So that gives you on a dollar weighted basis an indication that our commercial customers tend to have annual contracts; our enterprise customers tend to have multiyear contracts. Whether it's a multiyear or a single year we bill it annually. So, if you have a three-year contract we are going to bill it one year at a time. We won't bill all three years.

So, the billing is very stable and the duration has been very stable. So, from a billings trending standpoint you shouldn't see much fluctuation as that statistic moves because they continue to get billed out annually. But it's very helpful for us to have a strong statistic like a 19 or a 20 month because that just gives us better visibility and stickiness in the accounts.

Yes, that makes sense. Thank you both.

Kash Rangan, Bank of America Merrill Lynch.

Hi, guys, congratulations on your first quarter as a public company. I was curious to get your thoughts on the intended sales force capacity expansions over the next coming 12 months and what trends are you seeing in sales force productivity across the different tiers of your business, be it enterprise, commercial and other? Thank you so much.

Yes, so again, there is quite difference the way we think about the web and mobile business versus the direct business both from a sales force standpoint because, of course, in the web and mobile business it's really more of an e-commerce. So we don't have -- while we make investments in that infrastructure of course, it's not in a traditional go-to-market with sort of salespeople, SDRs, MDRs, lead gen, etc.

But what I would say is if you take a look at the guidance that we are providing for the growth, the reasonable assumption that you should make is that we will be scaling right at that same level in our capability that we want to build for sales.

We think we have opportunity with our scale to have some productivity improvement, which will allow us to, as the earlier caller mentioned, the number of people we are adding, the rate at which we add them is lower than the top-line revenue growth. So we do feel we are getting some efficiency in the business, which is of course what is allowing us to have the improvement not only in our profitability but in our cash flow metrics.

I would guide you to think about those investments in the direct business in that same sort of scale and rate at which we grow the top line.

Got it. Could it also be possible that there is a mix away from the more OpEx intensive side of the business? And that the natural business leverage continues to rise as the idea of an eSignature becomes more broadly institutional, as you really don't need the same level of intense direct effort as you did in the past and more of it can actually be pulled in through a web mobile channel? Is that at all possible in the long-term?

I think that the trend you are describing is absolutely real. I think the way I would just caution you to think about our business differently is that the web and mobile business is focused very much on what we call very small businesses. So, if you think about once you get to the core commercial or enterprise count we will continue to manage those relationships and service those relationships in a very direct way.

I think the bigger benefit to the efficiency that you are sort of looking for and, by the way, so are we, comes from the fact that as we drive more customer success that drives greater adoption within those businesses. And the efficiency we get is the absolute size of the relationship with those direct customers goes up. So, that's really why we are so excited on looking at components of scale and adoption. That is how I would direct you to think about it.

Thank you very much. Congratulations.

(Operator Instructions). Patrick Walravens, JMP Securities.

Oh, great, thank you and let me add my congratulations. Hey, Dan, can we talk a little bit about the system of agreement? So you talk about preparing, circulating, signing, activating, integrating. Where are we today and where is your vision for where it is going to end up on how long is it going to take?

Absolutely, Pat. So I think the first piece I'd start off is Signature, which is the core of the business that we built today -- and we talk about that kind of $25 billion TAM that we are focused on; we have only just started to scratch the surface and a few percent penetrated there -- is still going to be a core focus area. We believe we can continue to grow that substantially.

When you look at the other components in the system of agreement that you referred to, I see the opportunities in sort of this order. I think in the pre-agreement or we like to say prepare phase, that's the place where we are most focused right now as we think about our product development and the innovation that we are driving, and as well as we are seeing with the conversations we are having with customers saying this is where they are really pulling us.

And the other piece I would point you to when I look at the long-term and the real macro building this out, I think some of the post-agreement phases, particularly around manage, and that's where you remember Appuri -- the company we bought with machine learning capability -- we start thinking about the artificial intelligence opportunity to go to our customers and say all your agreements are now in DocuSign and you can now make your business better by the way we help you manage your core company through these agreement processes.

Helping them understand risks, helping them understand trends in their business. That's the place that I think I may be even most excited for the biggest opportunity going forward. But in time frame I think prepare first and manage coming second.

Great, thanks. And if I can just throw in a quick one, how does the pipeline look and did the IPO help generate more leads?

That's a great question. I think the pipeline looks strong and that sort of gives you an indication of both the results we've had in the quarter that were strong as well as the guidance that Mike indicated. And raising that outlook is of course influenced by the comfort we see in that strong pipeline.

From an IPO impact, we have sort of heuristic conversations I have with people in the field. And I don't know that we think it actually increased the pipeline from sort of a lead generation dramatically.

But one thing we have seen is that there is a comfort level that some of the customers that are interacting with us have said, wow, we didn't realize how substantial DocuSign was as a Company and it's helpful to see that now that information is public. And we believe that could have a positive impact on our ability to accelerate through the sales cycle the leads that are there today.

Awesome, thank you.

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.

We want to thank you, everyone, for joining us. We look forward to seeing you at the upcoming events and we will be back next quarter to visit with you again. Thank you so much.

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