DOCU - NASDAQ

Q2 Fiscal 2026 Earnings Call. Joining me on today's call are DocuSign's CEO, Allan C. Thygesen, and CFO, Blake Jeffrey Grayson. The press release announcing our second quarter fiscal 2026 results was issued earlier today and is posted on our Investor Relations website along with the published version of our prepared remarks. Before we begin, let me remind everyone that some of our statements on today's call are forward-looking, including any statements regarding future performance. 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 factors affecting customer demand and adoption 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 share counts 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. 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 like to turn the call over to Allan.

Thank you, Matt. And good afternoon, everyone. Q2 was an outstanding quarter. Platform innovation launches and the long-term focused go-to-market changes introduced in Q1 drove strong performance in commercial and enterprise customer segments, across eSignature, CLM, and our AI-native DocuSign Intelligent Agreement Management Platform. Q2 business results outperformed our expectations. Revenue was $801 million, up 9% year over year, and billings were $818 million, up 13% year over year. Q2 top-line performance accelerated and represented one of our strongest growth quarters over the past two years. With improved fundamentals across eSignature and CLM customers, and growing contribution from IAM demand. Beyond an individual quarter, we're excited to see billings begin to accelerate on a full-year basis and more so when we adjust for early renewals. Profitability benefited from top-line strength, combined with our ongoing commitment to driving efficiency. Non-GAAP operating margins were 30% as we continue to maintain strong profitability. Free cash flow margins improved modestly year over year to 27% which supported significant share repurchases with $200 million buybacks this quarter. As we make progress towards our goal to realize long-term profitable double-digit growth, we continue to execute effectively on our three strategic pillars. Strengthening our routes to market, accelerating innovation, and improving operational efficiency. Let's start with our omnichannel go-to-market this quarter. At the beginning of the year, we made meaningful changes to the direct sales organization. Which included introducing new sales segments, territories, and performance-based compensation all focused on maximizing DocuSign's long-term opportunity, and multiyear growth acceleration. In Q2, we saw initial success from those changes, resulting in strong direct sales performance and growth in gross new bookings. Dollar net retention also reflected that strength, increasing to 102% on the back of higher gross retention rates. Continued steady growth in envelopes sent and year-over-year improvement in contract utilization reflects strong execution, and eSignature demand. International growth continued to outpace domestic, and digital revenue continued to grow faster than the overall business. In Q1, we relaunched our partner program to align partners with our IAM strategy and build solutions with IAM that deliver value to customers. Our largest deal in Q2 was transacted through the Microsoft Azure marketplace. Also, a new partnership with the US federal government's General Services Administration creates an opportunity to expand our existing eSignature sales to federal agencies, with IAM Fall. Specific to IAM, the go-to-market changes are focused on realizing the massive multiyear opportunity ahead. In Q2, customers moving to the IAM platform represented a greater share of direct deal volume and total gross bookings than in Q1. We're also finding that when customers move to IAM, they increase their eSignature usage. Commercial SMB customers continued their strong pace of investment into IAM, with companies like Kindsight, Simplify, and JustPoint. A VC-backed legal AI company, using IAM to speed up sales cycles and gain a deeper understanding of their agreements. We remain on track for IAM customers to represent a low double-digit percentage of our book at year-end. In Q2, we also saw encouraging demand for IAM from enterprise customers. While still early days, more than 50% of our enterprise account reps closed at least one IAM deal during the quarter. Notably, average overall deal size also increased in Q2 with IAM making inroads with large organizations like Sensata Technologies, a global sensor manufacturing leader, which has accelerated its workflows and is beginning to use the DocuSign Iris AI engine to surface insights from agreements. DocuSign CLM saw improved momentum in Q2, delivering one of the strongest quarters in year-over-year quarterly bookings growth in the last several years. CLM continues to be a top choice for enterprise customers with sophisticated enterprise workflows. Like T-Mobile, which has cut agreement processing time by 44%. Also, DocuSign was recognized as a leader in the 2025 IDC MarketScape AI-enabled buy-side CLM report, which acknowledged that IAM is core to the DocuSign strategy, of replacing legacy and fragmented systems. On the product side, our rapid pace of innovation demonstrates consistent progress against our ambitious public roadmap and a steady increase in the value that IAM creates for customers. The IAM platform delivers end-to-end agreement management, empowering organizations to create, commit to, and manage their agreements at unprecedented scale and efficiency. IAM is an AI-native platform that combines proprietary AI models with best-in-breed LLMs, drawing on DocuSign's vast agreement library unmatched domain and workflow expertise, and seamless integration with important third-party systems. Over the past two quarters, the number of documents ingested and available in DocuSign Navigator, our intelligent repository, has increased by over 150%. And customers are processing tens of millions of agreements per month. Customers tell us IAM is delivering significant value by performing tasks in minutes that used to take hours or even days. DocuSign covers a far broader range of agreement workflows than any other vendor, and the deep integration of cutting-edge AI lets customers leverage years of agreement data with the leading ease of use, security, trust, and scalability they've come to expect from DocuSign. In the coming months, we'll launch AI agents within IAM. Enabling new customer use cases and expanding our addressable market opportunity. In Q2, we launched several new AI-powered IAM capabilities to help customers unlock value across the entire agreement management life cycle. These include custom extractions, which let customers identify and capture organization-specific agreement information or client-specific terms without manually reviewing hundreds of thousands of contracts. We also recently launched agreement preparation which enables IAM to detect the type of agreement you're creating, build a template, and automatically suggest to position relevant fields. And to address the enterprise need for efficient, secure, and scalable user management. SCIM for DocuSign allows customers to automatically provision users through their existing identity providers. In closing, we're proud of our strong execution and performance in Q2 and encouraged by the positive feedback we're receiving from IAM customers in the commercial and enterprise segments around the world. We believe IAM and the DocuSign Iris AI engine are uniquely positioned to transform how organizations operate their business with deeper insight, and actionability from their agreements. As we deliver greater value to customers, we're doing it more efficiently and nearly the highest level of profitability and capital return to shareholders in our history. I want to thank the entire DocuSign team for their hard work, passion, and customer focus. I also want to acknowledge the announced changes to our board of directors and thank Maggie Wilderata for her leadership during a time of transformative change in our company, congratulate James Beer for becoming our board chair, and welcome Mike Rosenbaum to the DocuSign family. DocuSign is the leading provider of AI-driven agreement management solutions and we are incredibly excited about the enormous opportunity that lies ahead. Now I'll turn it over to Blake to discuss our financial results.

Thanks, Allan, and good afternoon, everyone. Our performance was strong across the business in Q2, a testament to our continued execution against our three strategic pillars. Accelerating product innovation, strengthening our go-to-market channels, and improving our operating efficiency. In Q2, total revenue was $801 million and subscription revenue was $784 million, both up 9% year over year. There was no material impact on revenue growth related to foreign currency. Revenue outperformance this quarter was driven primarily by our direct sales channel, particularly within our eSignature business. Q2 billings were $818 million, up 13% year over year. This included a foreign currency growth tailwind of approximately 1% year over year, just slightly ahead of our expectations. Billings outperformance this quarter was driven primarily by three different factors, with each having a relatively similar level of impact. The first factor was strength in direct customer demand and improved gross retention in our eSignature portfolio. Although it represents a much smaller share of our business, CLM also had a strong quarter as the CLM business grew well into the double digits year over year in Q2. The second factor was due to early renewal strength. While we saw higher early renewals than forecasted, and the favorable timing of deals booked in Q2, the health of those renewals continued to improve year over year as the percentage of early renewals with expansion grew, and the share of those that were flat or included partial churn declined. This dynamic is consistent with the trend we saw in Q1, where a byproduct of sales incentive adjustments resulted in healthier early renewals. We are encouraged by the consistency from Q1 to Q2, still recognizing that the timing of renewals can impact quarterly billings. The third factor of outperformance was driven by a slightly higher payment frequency shift to annual billing contracts. While the vast majority of our direct customers are billed on an annual basis, the share was slightly higher than forecasted. When removing the impact from timing relative to our forecast, billings growth during the quarter was approximately 10% year over year. As a reminder, quarter-to-quarter billings can meaningfully fluctuate due to the timing of customers signing contracts. As a result, we are actively evaluating potential updates to our future top-line reporting, including replacing billings with an alternative measure. We plan to provide more details during our third-quarter earnings call in December. Dollar net retention rate rose to 102% in Q2 from 101% in Q1 and increased year over year from 99% in 2025. We are pleased to see the modest improvement in DNR which continues to be mostly driven by better gross retention. Usage trends also continue to show improvement. Consumption, a measure of envelope utilization, improved across all customer segments, and nearly every major vertical in Q2, and the volume of envelopes sent in Q2 increased year over year at a rate consistent with prior quarters. IAM sales maintained strong momentum this quarter, which slightly outpaced our expectations as we continue to scale the platform. In Q2, we saw an increase in average IAM customer deal size, an encouraging sign as we took the first step to upmarket with the IAM enterprise ramp. We remain on track for IAM customers to contribute a low double-digit percentage share of the subscription book of business exiting Q4. International revenue represented 29% of total revenue and grew 13% year over year. We're encouraged that the Asia Pacific region was our fastest-growing international region this quarter. Allan, Paula, and the team just held momentum events in that region in August, and we're pleased to see the growth there. Digital revenue continued to deliver results with growth outpacing the overall business. In Q2, total customers grew 9% year over year, ending the quarter above 1,700,000. Large customers spending over $300,000 annually increased by 7% year over year, to 1,137 in Q2. Turning to the financials. Our focus on operating efficiency continued to yield strong results this quarter. Non-GAAP gross margin for Q2 was 82%, relatively in line with the prior year as higher revenue mostly offset the impact of cloud migration costs. We delivered record high non-GAAP operating income in Q2 at $239 million with outperformance versus our expectations attributable mostly to top-line strength. Operating margin was 29.8%, down 240 basis points versus last year. As a reminder, we expected Q2 to have the most challenging year-over-year operating margin comparison of any quarter in fiscal 2026 due to several factors, including the timing and impact of our compensation programs, specifically the shift to cash from equity for some employees. As you may also recall, Q2 fiscal 2025 also had a onetime operating margin benefit of approximately 150 basis points associated with insurance reimbursements and the release of a litigation reserve. Our cloud computing migration also continues to provide a year-over-year headwind to margins. We ended Q2 with 6,907 employees, up slightly versus 6,838 at fiscal 2025 year-end. This reflects our measured approach to hiring in fiscal 2026, to support our strategic initiatives while maintaining efficiency. In Q2, we delivered $218 million of free cash flow, a 27% margin which was a slight increase versus Q2 of last year. As our collections efficiency remains strong combined with in-quarter billing strength. We do expect to see a lower free cash flow yield in Q3 versus Q2 primarily from the timing of billings. Our balance sheet is healthy. Ending the quarter with approximately $1.1 billion of cash, cash equivalents, and investments. We have no debt on the balance sheet. In Q2, we slightly increased the pace of our buyback activity and repurchased $200 million in share value, effectively the bulk of our quarterly free cash flow generation back to shareholders. We will continue to opportunistically repurchase shares and while the pace of this activity may fluctuate quarter to quarter, share repurchases underscore our commitment to returning excess capital to shareholders. Non-GAAP diluted EPS for Q2 was $0.92 compared to $0.97 last year. GAAP diluted EPS was $0.30 versus $4.26 last year. As a reminder, in 2025, related to our GAAP financials, we released a valuation allowance on certain existing deferred tax assets, decreasing our noncash tax expense by approximately $838 million. Diluted weighted average shares increased slightly year over year to 211 million shares, whereas basic weighted average shares decreased slightly year over year to 203 million due to the impact of the repurchase program. With that, let me turn to guidance. We expect total revenue between $804 to $808 million in Q3 or a 7% year-over-year increase at the midpoint. For fiscal 2026, we expect revenue, between $3.189 to $3.201 billion or a 7% year-over-year increase at the midpoint. Of this, we expect subscription revenue of $786 million to $790 million in Q3 or a 7% year-over-year increase at the midpoint and $3.121 to $3.133 billion for fiscal 2026 were at 8% year-over-year increase at the midpoint. For billings, we expect $785 to $795 million in Q3 or a 5% year-over-year growth rate at the midpoint and $3.325 to $3.355 billion for fiscal 2026 or a 7% year-over-year growth rate. At the midpoint. Q3 billings guidance reflects a renewal timing headwind that is similar in magnitude to the Q2 early renewal timing benefit as discussed earlier. As continually shown in recent quarters and years, billings are heavily impacted by the timing of customer renewals leading to meaningful variability from period to period. Also, our outlook for Q3 and Q4 factors in a more challenging year-over-year comparison versus billing strength in the second half of fiscal 2025. Our updated full-year top-line guidance reflects the following dynamics present in our business and the external environment. For full-year revenue, the annual guidance midpoint is increasing by $38 million from last quarter's full-year guidance. The increase is driven primarily by Q2 business strength, and the expectation that a portion of these trends will continue into the second half of the year. For full-year billings, the annual guidance midpoint is increasing by $28 million from last quarter's full-year guidance. This increase reflects a positive impact from Q2 business strength, but does not include the timing benefit from early renewals that we saw in Q2 as that will largely be offset in the remainder of the year. As a reminder, we have a hard comparison against last year's higher volume of early renewals, particularly in the second half of the year. Adjusting for early renewals compared to last year, we continue to expect full-year billings growth will be approximately one percentage point higher year over year, leading to modest acceleration over last year. For profitability, we expect non-GAAP gross margin to be 80.3% to 81.3% for Q3 and between 81% to 82% for fiscal 2026. We expect non-GAAP operating margin of 28% to 29% for Q3 and 28.6% to 29.6% for fiscal 2026. For the full year, we included the following two considerations in our non-GAAP profitability guidance. For gross margins, we continue to expect approximately one percentage point of headwind year over year from our ongoing cloud data center migration efforts. This headwind was slightly lower than anticipated in both Q1 and Q2 due to a shift in migration timing out to the remainder of fiscal 2026. We continue to expect a gradual easing and migration cost impacts in fiscal 2027 and beyond. For operating margins, we continue to expect and are approximate 1.5 percentage point operating margin headwind due to the combined impact of cloud migration, the shift of some roles to cash compensation from equity, and the comp against onetime professional fee savings last year in 2025. We expect non-GAAP fully diluted weighted average shares outstanding of $207 million to $212 million for both Q3 and fiscal 2026. Please see the modeling consideration slides in our Q2 earnings deck for a full summary of guidance context. In closing, Q2 represented another of DocuSign's commitment to product innovation, enhanced go-to-market motions, and improved operational efficiencies. As we look ahead, our focus remains on sustaining this momentum. While continuing to generate significant cash flow and returning capital to shareholders through strategic buybacks. That concludes our prepared remarks. With that, operator, let's open up the call for questions. Thank you.

We will now be conducting a question and answer session.

If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset. Before pressing the star keys. One moment please while we poll for questions.

Thank you.

Our first question comes from the line of Robbie David Owens with Piper Sandler. Please proceed.

Great. Good afternoon, and thanks for taking my question. While the early success in IAM is compelling, I actually want to drill down into improved fundamentals across your core eSignature, and you spoke to improvement in consumption, growing volumes, and really, what's underpinning this? Is it economic? Is it evolutionary? Higher utilization driven by attach of IAM? Thanks.

Yeah. I'll take a stab at this, Allan can jump in. Thanks for the question. This is a trend we've been seeing pretty consistently over the past year. We saw certain verticals, you know, just to highlight a couple financial services, so, you know, like, especially now in Q2, health care, business services, all growing, you know, super well, for us on a year-over-year basis. People ask about real estate. That's growing a little bit slower than the average, but still growing at a positive rate year over year. You know, it's anecdotal, of course, but it's all dependent on how our customers' businesses are, you know, working whether or they're adding use cases because we're seeing that. In some existing customers also, and then just also macro effects for them as well. But it's not wanna make sure, like, the consumption and the envelope send trends really are things that we've seen pretty consistently over the last twelve months. And we highlight them, I think, pretty consistently as well. And so I'm just, you know, excited to see that.

Yeah. I don't overall, I don't think we're seeing any significant evidence of macro weakness in our numbers or in the contract volumes or utilization numbers.

Alright. Thanks for the color.

Thank you.

Our next question comes from the line of Tyler Maverick Radke with Citi. Please proceed.

Yes. Thank you for taking the questions. Wanted to ask you about CLM, which, you know, seemed like it had a breakout quarter with some of the large deal momentum you referenced. Including T-Mobile. Can you just talk about the pipeline that you're seeing in that business? Would you sort of say that this was a timing benefit, or do you think this is kind of the start of a more sustainable trend? Thank you.

Yeah. Look, I think we think that the overall trend in the market is positive. I don't know that there's I wouldn't overinterpret the second quarter as the breakout for the category or for us. I think it was a very strong quarter. We closed some very large deals really exciting and great to see, but a little too early to call a broader category trend but they're definitely encouraging.

Alright.

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

Yes. Thanks for taking the question, and congrats on the great results. Nice to hear that more than 50% of your enterprise reps have already signed at least one IAM deal. Could you talk a little bit more about how the rollout of your newer markets, enterprise and international have progressed compared to your core North American commercial market and just whether that pricing uplift that you originally thought has held as you've entered into those new markets.

Yeah. There was a lot there. Let me try to unpack that. First, just as a reminder for everyone, we launched initially two commercial customers. In North America, then we rolled it out globally. And to you know, our first enterprise release was in December, and we know, since released multiple features aimed specifically at enterprise customers. And I think the noteworthy thing here in Q2 is we started to see some larger deals with enterprise customers. It's very exciting because that's an even larger market opportunity for us in the long run. We're not relying on a lot from the enterprise segment this year, but we feel that over time that could become even bigger. And so as we ramp up our capabilities both on the product and go-to-market side, it's nice to see larger deals with big sophisticated clients, and I think there's more to come there. So very encouraging. And, of course, this is what we were laying the groundwork for at the beginning of this year. It was setting ourselves up to go deeper with customers of all sizes, but in particular enterprise customers. And those changes have now landed well, I think, and we are really pleased with how the teams have settled in. And there's more to come.

And I'm just might add on top of that. You know, it's to see the international regions embracing IAM. Mhmm. That's been something exciting to see just on a vintage basis. Obviously, you know, IAM did launch in most of our international results later than it did in North America. And then, you know, to your question on the expansion rate side, you know, we don't break that out. But one thing that, you know, we have said previously, and it continues to be the case, is we see a meaningful expansion for these customers that are moving from just the sign platform over to IAM and it's been remarkably consistent. And so that's great. And we're gonna continue to watch that still very early days for us, but that's been exciting, from my perspective to see.

Great. Thanks for taking the question, and congrats on the results.

Thank you.

Our next question comes from the line of Joshua Phillip Baer with Morgan Stanley. Please proceed.

Congrats on a very strong quarter. Appreciate all the detail with kind of breaking out the outperformance in billings between, you know, gross retention CLM, early renewal strength, duration, number of other factors. I don't think IAM was really one of them as far as driving the outperformance. Was hoping you could talk about that a little bit and really just straight, you know, being straightforward, what are the economics when a customer adopts IAM? Is it accretive to growth and by how much?

Sure. So yeah. So the biggest drivers of the billing is outperformance, you know, as mentioned in the prepared remarks, stronger bookings, primarily in our eSignature business. Right? It's obviously the vast majority still of what DocuSign has in its portfolio. But also, you know, then timing and then also billings, payment frequency. With regards to IAM, it did slightly outperform our expectations, but it's still very early days. Us in that in that area, in that platform. And so what led to the beat versus our guidance was predominantly that eSignature base. With regards to expansion, don't break it out. It's still super early for us. We have to see how this goes, especially as we move upmarket. But it's very clear, and we've said this before, we see a, you know, a meaningful expansion for customers when they move from an eSignature only situation to an IAM. There's just so much more value that we're providing to a customer. And, you know, it's early days, but, frankly, customers are seeing that value, and they're being willing to share that with us. And so we're really really excited about that, but no other detail besides that.

Could just add a couple comments. I mean, first of all, IAM is a critical factor on year-on-year growth. And an even more important factor in the growth acceleration that I think we and you are all excited to begin to see and for the future. We're kind of right where we want to be with IAM for this year. We reiterated our guidance that we expect IAM to be a low double-digit percentage of our overall book, which is pretty impressive for a new platform. Look, it's the critical part of our story as Blake said, is so large now that just on pure dollars, it's always gonna it's gonna dwarf everything else for a little while, but we can't get to where we wanna go without growth acceleration from IAM as well. The fact that we had a strong and healthy quarter coupled with continued growth in IAM, that's really the magic formula for the company. And I think that's gonna produce the strong results.

Yep. That's really helpful. And, I mean, you sound great, and there's a lot of and this quarter was really strong. There's a lot to like. I think I mean, it would be super helpful if IAM is gonna be double-digit percentage of bookings to just better understand the economics of, you know, the uplift with moving over to IAM and what other, you know, factors are changing in the contracts. Like, that would really help to unlock that story, but something it sounds like we'll look forward to as you have a couple more quarters actually, you know, selling to the enterprise and upmarket. But congrats again.

Thank you.

Our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed.

Hi. This is Bill on for Kirk, and thanks for taking my question. You dive into some of the drivers behind the improved growth retention? And is there more to go on that front in the second half of this year and into next?

Sure. This is a trend we've seen, gosh, over the past at least eighteen months for us. Like, if you look at our dollar net retention rates, we've been able to improve from, I think, about a low of 98%. About eighteen months ago in I would just say operational execution plays a huge part of this. '24 to the 01/2002 that we adjusted for Q2. We have folks at DocuSign now spanning a much greater portion of time with regards to staying in front of these renewal opportunities getting in front of them, you know, months, many months in advance to be able to address any concerns that a customer might have, whether it's for potential expansion or issues that they're having. And so we've seen the fruits of that labor, I think, you know, kind of pour into this business, and there's still a lot of opportunity left for us. I don't not gonna make a forecast regarding for the next second half of the year, but for this business, we have opportunities both on improving our gross rates of our core portfolio and then also expansion, which is driven predominantly by IAM. And when we can get both of those things working together, that's where we really believe we have the ability to unlock the flywheel for us for the long term.

Great. Thanks for taking the question.

Our next question comes from the line of Bradley Hartwell Sills with Bank of America. Please proceed.

Oh, wonderful. Thank you so much. I wanted to ask about the federal, the partnership with the US Federal, General Services Administration. It seems like a big deal. Just curious what this means for your federal business, your federal pipeline, and what we should expect out of that segment of the business going forward?

Yes. No, we were really pleased to do that. In fact, I'll be in DC next week meeting with a number of folks across many different departments, the federal government, and it's great to see the engagement. And this contract is really sort of a facilitation, making it easier to buy any federal department. We don't I would say our federal business is relatively modest today. While we're present in, like, all 15 cabinet-level departments, so we're certainly, you know, used. Relative to our opportunity, there's just a lot of headroom. Interestingly, we do better and have historically had a bigger business in state and local, and that continues to do well. But we felt we had a big opportunity in federal. So I think GSA was interested in partnering with us because, you know, we're a very natural partner for bringing more efficiency and customer service to the federal government, and we're, of course, excited about that opportunity. So it's a big growth opportunity for us, but it's still early days. I we're it's not a meaningful contributor to the business yet, but I'm spending time on it as our executives, so we're hopeful.

Excellent. Sounds exciting. Thanks, Allan.

Thank you.

Our next question comes from the line of Austin Cole with Citizens. Please proceed.

Great. Thanks for taking my question. I wanted to ask on the go-to-market front and those changes that were made at the beginning of the year. How do you feel about how reps have adapted to those changes? Are they kind of well equipped and incentivized to sell IAM, or might there still be some changes to make down the road? Thanks.

No. I feel really good about look. We made those changes to position us for the long term to accelerate our IAM business and just more generally be able to go deeper with customers. And I think the reps have responded really well. We put in a lot of enablement. New incentive system, new quotas, territories. It was a lot, but I'm very proud of how the team responded to that. And as you can see here in Q2, the direct sales team did a really nice job in Q2. So shout out to them. Yet we have it's just so early. We have so much headroom. You know, I think in terms of I'm not planning meaningful changes this year and nothing of that magnitude. In the foreseeable future, but it was it's great to see bold changes that Paula led. So I just wanted to get tip of the hat to her. For having both conceived of all the changes, driven them, and landed them. So well done.

Great. Thank you.

Thank you.

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

Thank you very much. Allan, is there any way to approximate the kind of customer acceptance for opting in where they would have Iris AI scan their agreements and, you know, learn from them or index them. It's hard externally to understand if they just, you know, do that by default or not. And then is it common enough, that you can build up an agreement library, you know, that would with enough intelligence that, you know, we can kinda move the risk scoring and the cycle times to a different level.

Yeah. Actually, I think that's perhaps one of the strongest aspects of our story right now. So, yes, we ask customers to explicitly to opt in and consent to sharing their agreements. And that unlocks a lot of the AI features. And, I mean, practically, everybody's doing that. And we now have we're approaching 100 million agreements just with Internavigator and available for AI processing. And it's just such a diverse group. It's everything from sales agreements to procurement agreements to employment agreements and literally every function of the company. I don't think there's anybody who comes close to that. And as you know, one of the key drivers of AI quality is data. And so we're in a great position to leverage that. And that's what allows us to do this right out of the box. We you know, one of the things that's maybe not as well understood is we often have your agreements already. So if you consent to this, we can make the AI features available instantly. And the average customer goes live in a few weeks. I mean, that's just unheard of for enterprise software. And so that's just the time to value coupled with the potential value unlock in the agreement library is very significant. And our scale is just very different from others in that business. So it's part of what I think makes us all so excited about the future.

Thank you.

Thank you. Our next question comes from the line of Brent John Thill with Jefferies. Please proceed.

Hey, Blake. On the margin, I know you're kind of stalling the margin progression this year last year, I guess. Many are asking why when do we see the fall through on the top line? We're not necessarily seeing we saw a good quarter, but in terms of just overall real, real acceleration, I think Allan's aspiration to be back to double-digit. How do you think about that trade-off? And where are all these investments going this year? Is it go to market? Is it in the products? All the above? Any color there would be helpful. Thanks.

Yeah. Appreciate the question. So we have three hard comps for us this year. They're particular impact into this quarter that we saw. Right? We've got the higher hosting costs for cloud migration, have a hard comp against some onetime legal benefits from insurance through personal litigation credit. And then we also, this year, have some headwind really starting this quarter with regards to shifting some roles to cash versus equity as we manage the long-term dilution. Those three components in the prepared remarks you'll recall, provide about 150 basis points of pressure. Our full-year guide now for operating margin reflects only about half of pressure. So we've been able to offset a portion of that actually above and beyond what we had originally expected. So I'm excited about that. And so it's all about this balance right now of maintaining the game that we worked really hard, you know, to get. I think over the last two fiscal years, we've increased non-GAAP operating margins from around 20% to 30%. And so, those are some tough decisions that we had to make, and so maintaining them are important. And so we're doing that. But, also, while, you know, making these investments in a little bit in the to market and then particularly into R&D with regards to the IAM, you know, development and launch. And so we can spin that top wheel that top line number the flywheel really does drop to the bottom line, Brent. And so I think for us, that's where the future leverage opportunity that we have to get to that double-digit top-line growth. I think provides a, you know, a lot of output for us in terms of for leverage. So I'm really happy with the consistency and the path we're on. I think we're balancing this kind of this investment between growth and efficiency really well. We've got some opportunities longer term for sure.

And just real quick. When on the cloud transition, when do you approximate that? Well, will be less of a headwind? When does that actual transition end?

Yeah. So this is the peak year. For us that we've gotten. So we should start to see those, you know, start to, less of an impact for us in FY 'twenty seven and then even later and beyond. You know, I just wanna make sure folks remember, like, hosting costs are a big chunk, you know, for us, for our cost of revenue, but it's not the majority of it. Right? We got a lot of people in there and things like that. But no, we definitely expect to see that pressure kinda start to mitigate for us next year.

Great. Thanks.

Our next question comes from the line of Alex

Hey, guys. Thanks for taking the questions. Just two quick ones. On IAM, clearly, you're continuing to see, maybe on the broader business, early renewals strength and the percentage of early renewals with expansions continue to grow. Are any of those starting to be driven by IAM attach? I think before you were you talked about it more heavily skewed towards new users. I'm curious if the sales changes and some of the momentum you're seeing is kinda shifting that to or not shifting, but in addition to that, also now grabbing some of the existing customer relationships that you have, and then I have a quick follow-up.

Yeah. I would say, yes. It does. It's just we just got to remember again just the relative size that we have in this book of business. We're now actually just starting to lap the first full year from our customers that we're really just signing up in IAM this quarter last year, very early days of that. You know, it's encouraging. You know, we're saying gross retention rate is higher than we are for eSign. It's still early. It's a small sample size, but we're excited about it. And we are seeing those conversations lead to it. But it's not like it's the overarching component. I think the eSignature business foundation is strong and held up well this quarter.

Perfect. And then maybe yeah, just a broader question. Allan, I'm sure you could appreciate there have been a lot of questions about how changes in kinda search and SEO are affecting top-of-funnel dynamics for a lot of companies. You know, anything that you guys are seeing there or maybe you know, you're completely immune to it or you, you know, course-corrected a while ago. And are you seeing any changes to top-of-funnel? What percent of top-of-funnel is this SEO related, etcetera?

Yeah. I'm not seeing anything yet. I think we're very pleased with our organic traffic and DocuSign has an amazing brand and recognition, reputation and I think that plays well both in an SEO world and a TDO world. With that said, look. Behavior consumer and enterprise buying behavior is changing as a result of ALMs and so I think we're keeping a very close eye on those changes and how that affects behavior throughout, you know, what we've historically talked about, stool funnel. So that's number one. And we continue to look to acquire new customers and acquire a substantial number of every quarter, and that will continue to be a focus. But know, the big opportunity for us is to upsell our existing 1.7 million customers pretty much all Nissan customers, to IAM. And we are hyperfocused on that as an opportunity at all levels, and that's what's driving the bulk of the IAM results. And that's where the big dollars are. And so we wanna continue to feed the top of the funnel with new customers, and that's very important for the long-term health of the business. But I don't wanna get distracted. I think the number one big expand opportunity for us is to move people from ESI into IAM and we're making good progress on that. With a lot of head.

Thank you.

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

Oh, wonderful. Thanks so much for squeezing me in. Nice to see continued in the business and broad-based momentum. I want to maybe drill and ask a little bit philosophically about IAM. Obviously, you've discussed all the use cases and the real unlock is especially with AI. Now the question I wanna ask is we hear a lot of, you know, AI vendors talking about one of the use cases for LLMs and search and reasoning b, you know, analyzing contracts, finding, the right answer being able to synthesize information from multiple contracts, etcetera. And almost feels like they're trying to tackle that same problem, you know, in a different way. Maybe can you help us understand, you know, even with others kind of looking into that use case, what gives you that kind of continued right win? And where are investment opportunities that you can make to drive further differentiation versus those so this doesn't become, you know, more competitive or more commoditized? Thank you.

Yeah. Thanks for that question. Look. I think AI is a massive tailwind for DocuSign. And it's both a tailwind because of the overall subcategory enabled. Can do so many more things with contracts now. They used to be dump flat files, and know, that was there wasn't much anybody could do with them. But to your point, that's a, you know, elevation of everyone's capability. But then it plays into our strengths. We have deep knowledge of agreement structure. We're embedded in agreement workflows. We have exceptional scale. I just referenced no one else touches at this point now, you know, 100 million proprietary customer agreements with consent. And an incredibly rich agreement diversity of course, we're integrated into practically every enterprise system, whether you're a Salesforce or a SAP or a or ServiceNow or Google or Workday customer, customers typically use DocuSign as a complement to those systems. And so it's easy for us to roll things out and for customers to access DocuSign Insights in whatever tool they prefer. So never want to be naive about these things. They're and they're certainly a tremendous amount of innovation and investment that's happening. But I think our unique position from a modeling, from a data perspective, from a workflow perspective, from a customer access perspective. I'm I think it's a very strong tailwind for us. And I think it's partly what gets everyone in the company so excited about our future.

Very helpful. Thank you.

I would now like to pass the call back over to management for any closing remarks.

Yes. Thank you, operator. And thank you to all who joined today's call. I want to thank the entire DocuSign team for their commitment to putting our customers first after delivering the powerful AI-native value through the IAM platform. And to our investors, we will continue to manage this business in order to realize its full potential over the long term. So thanks for sharing your time with us, and we look forward to speaking with you next quarter.