DocuSign, Inc. (NASDAQ: DOCU) Q4 2020 Earnings Call Transcript

DocuSign, Inc.  (NASDAQ: DOCU) Q4 2020 Earnings Conference Call
Final Transcript

Corporate Participants:

Annie Leschin — Vice President of Investor Relations

Dan Springer — Chief Executive Officer

Michael Sheridan — Chief Financial Officer

Analysts:

Sterling Auty — J.P. Morgan — Analyst

Kirk Materne — Evercore ISI — Analyst

Matt Wells — Citigroup — Analyst

Alex Zukin — RBC Capital Markets — Analyst

Karl Keirstead — Deutsche Bank — Analyst

Hannah Rudoff — D.A. Davidson — Analyst

Pat Walravens — JMP Securities — Analyst

Stan Zlotsky — Morgan Stanley — Analyst

Kamil Mielczarek — William Blair — Analyst

Dan Ives — Wedbush Securities — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen. Thank you for joining DocuSign’s Fourth Quarter and Fiscal 2020 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions].

I’d now like to turn the call over to Anne Leschin, Head of Investor Relations. Please go ahead.

Annie Leschin — Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone. Welcome to DocuSign’s fourth quarter and fiscal 2020 earnings conference call. On the call today, we have DocuSign CEO, Dan Springer and CFO, Mike Sheridan. The press release announcing our fourth quarter results was issued earlier today and is posted on our Investor Relations website.

Now, let me remind everyone that some of our statements on today’s call are forward-looking, we believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different.

Please read and consider the risk factors in our filings with the SEC 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. Non-GAAP financial measures exclude stock-based compensation expenses, amortization of acquired intangible assets, amortization of debt discount and issuance costs from our notes and as applicable other special items.

In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from or substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP information and most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release, which can be found on our website at investors.docusign.com.

I’d now like to turn the call over to Dan. Dan?

Dan Springer — Chief Executive Officer

Thanks Anne. Good afternoon, everyone, and welcome to our fourth quarter and fiscal 2020 earnings call. We have a lot to share with you today. We’ll cover our performance for the quarter as well as the entire fiscal year. We’ll talk in more detail about our recently announced intention to acquire Seal Software. And we’ll look ahead to our focus areas for fiscal 2021.

But before we get to that, I wanted to take a moment and acknowledge the evolving situation with COVID-19, the disease caused by the coronavirus. Over the past few weeks, our team has been meeting daily to monitor the ongoing developments. We’ve taken several steps to ensure the safety and well-being of our employees and their families as well as our customers and partners.

Actions we’ve taken include; transforming our annual North America Customer Conference Momentum into a virtual live streamed event held last week; and our decision to move our global workforce to an entirely remote environment as of the end of this week. We will continue to monitor the situation and as we learn more, we’ll update our plans accordingly.

With that said, let’s move on to our business performance over our second year as a public company. It was just 12 months ago that we introduced the DocuSign Agreement Cloud. Our suite of applications and integrations that help organizations automate the entire agreement process that is; preparing, signing, acting on and managing those agreements.

We see agreements increasingly integrated with the cloud software suites like sales, service, marketing, HR and finance. Our belief is that organizations will need an Agreement Cloud to act as a platform of record for agreements and agreement processes, which will be connected to the other clouds. For example, integrating with the HR system for offer letters or the CRM system for sales contracts.

As we have said, we believe this represents the next big cloud opportunity. Over the past fiscal year, we have broadened our product and service offerings to cover every stage of the agreement process. And of the five new products that we shipped in fiscal 2020, I’d especially like to call out DocuSign CLM. Launched in November last year this builds on our acquisition of SpringCM. And it was just named by Gartner as a leader in the 2020 Magic Quadrant for contract life cycle management. We are very proud of this recognition.

The positive impact of all this work can be seen in our financial results, a few of which I want to share with you. Now for Q4, DocuSign’s revenue grew 38% year-over-year to $275 million and billings grew by 40% year-over-year to $367 million. We were again profitable on a non-GAAP basis and we continue to generate positive cash flow.

Our total customer count climbed to approximately 589,000 worldwide and our dollar net retention rate came in at 117%. For the full fiscal year, our revenue grew 39% to $974 million and our billings grew 38% to $1.1 billion. I’m incredibly proud of the entire DocuSign team for this collective effort.

But of course we’re not going to stop there. As we continue to define and grow the Agreement Cloud category, we know that contract analytics and artificial intelligence will play an increasingly important role. This technology can rapidly search large collections of agreements by legal concept rather than just by keywords. It can automatically extract, analyze and compare contract terms and it can even identify areas of risk and business opportunity for our customers.

So we couldn’t be more excited to be acquiring the pioneer in this space Seal Software. As many of you know we formed a partnership with Seal about two years ago where we began reselling its flagship offering as DocuSign Intelligent Insights. And we also made a strategic $15 million investment in the company in March of last year. Having seen Seal’s technology and people at work with our customers, as well as in the broader marketplace, we wanted to bring them fully aboard into DocuSign.

To give you a little more color let me share a few customer examples. One large international information services company reduced the time they spent on legal reviews by 75%. And a global financial services company automated the analysis of more than 2.5 million contractual data points across its supplier agreement. And an aviation company was able to review more than 25,000 agreements in just a few business days, something that could have taken months if done in the traditional manual fashion.

Once this acquisition closes, we will continue selling Seal’s flagship contract analytics product. We’ll also be able to integrate Seal’s technology across the entire Agreement Cloud. We’ll start with CLM given the immediate market opportunity for AI to enhance workflows there. And over time we expect to apply Seal’s AI technology across a broad range of our existing and new products.

Now these developments will complement and extend our other work in AI, some of which we showed at our Momentum conference last week. For example, we demoed auto-tagging. It’s a new feature in eSignature. It uses AI to automatically place the tags for signatures, dates and other fields. Normally this is something that needs to be done manually when preparing a document for signature.

With auto-tagging it can happen automatically and immediately and it is a huge wow factor for our users. We also demoed a product under development called Agreement Analyzer. It uses Seal’s AI to analyze inbound agreements identifying areas of risk and triggering actions based on the content of its various clauses.

So, we believe this whole area of AI meets agreements is incredibly exciting. While nascent today it represents a key greenfield opportunity for the future as well as a deepening of our competitive moat. We will keep you updated once the Seal acquisition closes in our second quarter.

For the last part of my comments today, I want to look to the future and how we are thinking about scaling our business. Based on our fiscal 2020 results, we are on the cusp of joining an elite group of SaaS companies that have crossed the $1 billion revenue threshold. This is a major milestone, but it’s also just a stepping stone to the exciting future that lies ahead.

Our first $1 billion was built largely on our leadership in eSignature. The next $1 billion will continue the eSignature expansion but also be boosted by substantially broader opportunities for the rest of the Agreement Cloud.

To make that happen and to ensure we operate at the intersection of the world’s business and agreement processes, we’ll focus on three key strategic priorities. One, continue executing on our Agreement Cloud vision and strategy which fiscal 2020 customer demand has shown is working well.

Two, live and breed customer success around the world in everything that we do. As part of that we’ll also continue to leverage our amazing partner network both our 350 ISV partners and our growing SI partners that are building Agreement Cloud practices to drive our joint customer success.

And three, we ensure DocuSign remains a top place to work so that we can attract and retain the talent that can drive our scale to the next level. And to that point, I wanted to share that we recently appointed Rob Giglio as our new Chief Marketing Officer; and Eric Darwin as our Head of Corporate Development. Both will be reporting to our COO, Scott Olrich.

Rob comes to us from Adobe, where he helped to architect the growth strategy for the company’s self-service cloud business and oversaw significant international expansion. Eric joins us from LinkedIn where he led the corporate development team there.

In addition you may recall that we named Emily Heath as our Chief Trust and Security Officer in October of last year. Emily was formerly the CISO at United Airlines and we are already benefiting from our considerable experience.

So, that’s it for my section of today’s call. I’m incredibly proud of the progress we made as a company in fiscal 2020 and I’m excited about the Agreement Cloud’s prospects to transform agreements and agreement processes around the world in fiscal 2021 and beyond.

So, with that I’d like to hand it over to Mike for a deeper look at our Q4 and our fiscal year financials. Mike?

Michael Sheridan — Chief Financial Officer

Thanks Dan and good afternoon everyone. As Dan mentioned, DocuSign had a very successful fiscal 2020 in which we saw continued strong growth in our core eSignature offerings and increasing interest in upsells among our customers for our broader Agreement Cloud suite.

For the fourth quarter, total revenue reached $275 million and subscription revenue reached $258 million, both representing a 38% increase year-over-year. For the full year, total revenue increased 39% to $974 million and subscription revenue increased 38% to $918 million.

International revenue continued to grow over 40% year-over-year to $49 million in the quarter and $171 million for the year. Fourth quarter billings rose 40% year-over-year to $367 million and billings for the full year increased 38% to $1.1 billion.

We added almost 27,000 new customers in the quarter including nearly 6,000 direct customers. This represents a 33% year-over-year increase in our commercial and enterprise installed base and brings our fiscal ’20 total customers to approximately 589,000 of which about 75,000 are direct customers.

We had another strong quarter of upsells into our installed base led by our North American business. This quarter our dollar net retention was 117%. Customers with ACV is greater than $300,000 grew 41% year-over-year to a total of 437 customers.

Non-GAAP gross margin for the fourth quarter was 79% compared with 78% a year ago. For the full year, gross margin was also 79% compared with 80% in fiscal ’19. Fourth quarter subscription gross margin was 84% compared with 85% a year ago. For the full year, subscription gross margin was also 84% compared with 86% in fiscal ’19.

Non-GAAP operating expenses for the quarter totaled $196 million or 71% of total revenue compared with $149 million or 75% of total revenue for the fourth quarter of last year. For the full year, operating expenses were $720 million or 74% of revenue compared with $544 million or 78% of revenue in fiscal ’19.

Non-GAAP operating profit for Q4 was $21 million or an 8% operating margin compared with $7 million or a 4% operating margin last year. For the full year, operating margin was 5% up from 2% in fiscal ’19 as we continue to make progress on improving our operating leverage.

Non-GAAP net income for Q4 was $22 million compared with $10 million last year. For the full year, net income was $59 million, up from $18 million in fiscal ’19. We ended the year with 3,909 employees a year-over-year increase of 29%.

Operating cash flow increased 33% year-over-year to $46 million in the fourth quarter compared to $34 million in the same quarter a year ago. Free cash flow was $16 million in the quarter compared to $23 million in the prior year. This decrease relates to our capital investments to complete the build-out of our Dublin office in Q4 and continued work on our dedicated federal data center which we expect to complete in the first half of fiscal ’21.

For the full year, operating cash flow increased 52% year-over-year to $116 million compared to $76 million a year ago, while free cash flow was $44 million compared to $46 million in fiscal ’19.

Turning to our guidance, as you know, we recently announced our intent to acquire Seal Software. We expect this acquisition to close in fiscal Q2. The guidance ranges I’m about to discuss do not include contributions from Seal other than topline contributions we expect to generate from our existing partnership with Seal. We will update our guidance to include contributions from Seal after the acquisition closes. Seal is significantly smaller than DocuSign, so the impact of including Seal will not be significant to our top or bottom-line.

In terms of topline guidance, we expect subscription revenue of $266 million to $270 million in Q1 and $1.21 billion to $1.214 billion for fiscal ’21. We expect total revenue of $280 million to $284 million in Q1 and $1.272 billion to $1.276 billion for fiscal ’21.

I have separately guided subscription and total revenues because we anticipate different growth rates in these components of revenue. Specifically, we believe that we will be successful in engaging system integrators to take on more of our professional services engagements in fiscal ’21 as we have more projects that involve multiple products from our Agreement Cloud. This positive development will reduce the year-over-year growth rate in our professional service and other revenue.

For the remainder of our guidance, we anticipate billings of $279 million to $289 million in Q1 and $1.43 billion to $1.45 billion for fiscal ’21. We expect non-GAAP gross margin to be 78% to 80% for both Q1 and fiscal ’21. For operating expenses, we expect sales and marketing in the range of 47% to 49% of revenues in Q1 and fiscal ’21. R&D in the range of 13% to 15% of revenue for Q1 and fiscal ’21. And finally, G&A in the range of 9% to 11% of revenue for Q1 and fiscal ’21.

For the first quarter, we expect $2 million to $3 million of non-GAAP interest and other non-operating income. And for fiscal ’21, we expect non-GAAP interest and other — and non-operating income of $8 million to $12 million. We expect a tax provision of approximately $1.5 million to $2.5 million for Q1 and $6 million to $10 million for fiscal ’21.

Finally, we expect fully diluted weighted average shares outstanding of 195 million to 200 million shares for Q1 and fiscal ’21. Overall, fiscal ’20 was another outstanding year for DocuSign. As we continue to broaden our Agreement Cloud, we are excited at the interest we are seeing from our customers and partners as we begin fiscal ’21.

Thanks for joining us today. And now we will open up the call for Q&A.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Sterling Auty with J.P. Morgan. Please go ahead.

Sterling Auty — J.P. Morgan — Analyst

Yeah. Thanks. Hi, guys. I wonder if maybe you can give us a little color as to what industries maybe you’re seeing increased strength as we’re seeing a lot more remote working remote sales engagements maybe some areas that maybe you’re seeing some weakness. And especially, what’s happening in the real estate market given what we’re seeing with refinance volumes?

Dan Springer — Chief Executive Officer

Yes. So I think the answer is our strength is a lot in our traditional places. Financial services in particular has continued to be strong for us. We see telecom with good strength as well. From your real estate question, we haven’t seen anything different. I know lower interest rates might start to change activity there. But at this point in time, we haven’t seen anything. And keep in mind, when we talk about real estate, it’s often much more focused on volume on the transactions of buying and selling homes versus refinancing.

So I wouldn’t think a dramatically different interest rate environment from refinancing would change it. I suppose it could spur additional new purchases and sales and that would have some lift, but in general, we haven’t seen any noticeable change at this point.

Sterling Auty — J.P. Morgan — Analyst

All right. Great. And then one follow-up on the acquisition of Seal. What portion of your existing installed base would you think are just the natural targets for upsell the solution that perhaps have not already adopted?

Dan Springer — Chief Executive Officer

Well, I think you have to look at two pieces. You have to look at what we’ve been doing with Agreement Analyzer think about some of the traditional Seal software pieces and that’s going to have a heavier focus towards our enterprise and our larger commercial customers. But as I mentioned on the call, we really think there’s an opportunity to take the AI technology here and spread that across our entire offering and we would be really excited to make that available to more and more smaller customers as well. And particularly this idea taking the product that was coded into Seal now, which allows people to analyze incoming agreements that I referred to. That I think is going to be an opportunity that would be used for small businesses all the way up to enterprises. So we think it’s going to be broadly based, but different aspects of it are going to be appropriate for different customer segments.

Sterling Auty — J.P. Morgan — Analyst

Thanks guys.

Operator

Thank you. Our next question comes from Kirk Materne with Evercore. Please go ahead.

Kirk Materne — Evercore ISI — Analyst

Yes. Thanks very much. And congrats on a really nice end of the year. Just two quick ones. Mike, sorry if I missed this in your prepared commentary, but when you thought about the guide for billings in 1Q, did you take anything into consideration around COVID just in terms of deal slippage? I know this is really fluid and I think we’re all digesting it in real time. But I was just kind of curious if you have thought about sort of pipeline coverage a little bit differently anything like that? And then Dan I know you had to do Momentum virtually this year. But I was also just kind of curious sort of with your conversations maybe around it with the GSIs and how that’s going? And maybe if that could be a new sort of opportunity for you this year. Thanks.

Michael Sheridan — Chief Financial Officer

Yes. So starting with guide for Q1 and really for the fiscal year, all of our guidance has been developed in the same methodologies that we’ve used in the past. Of course, we’re watching very closely any developments with COVID. We do look at our pipeline. We do look at our ability to generate opportunities. We look at our close rates. We look at all of that information. And that to date we have not yet seen any material changes in our trends. Of course, we have more visibility in the near-term than we have as the year unfolds and I think we’re all going to be learning that together. But we’re comfortable that with all the information that we’ve had we’ve incorporated it into the guidance that I just summarized.

Dan Springer — Chief Executive Officer

Yes. And the question around GSI. I’ll sort of point to three things: The first one is if you think about the guidance that Mike gave he referred to the fact that we believe there’s so much demand coming from the systems integrators to do these projects with us that we’ve actually changed our expectation on the amount of professional services growth we would have. Two, you did mention Momentum and while we did make it a virtual event, I’ll point out that we still had some of our most important customers and partners participate in it including Accenture who came and presented in our virtual cat. And three, the last point I’ll just take you back to what we said from the beginning.

As the Agreement Cloud builds out with more components, it just becomes a richer and richer opportunity for the systems integrators to build an Agreement Cloud practice. So we see all three of those things contributed to some really exciting opportunity with the GSI.

Operator

Our next question comes from Walter Pritchard with Citi. Please go ahead.

Matt Wells — Citigroup — Analyst

This is actually Matt Wells on for Walter here. And Dan I was just curious, if you could rank order the drivers of growth in fiscal 2021 and maybe just between expansion and then customer growth and net adds? And on top of that just your expectations for growth international versus domestic?

Dan Springer — Chief Executive Officer

So I think — we think this is pretty broad-based. But if I thought about your question around the first piece was the separation from the base to net new. From a revenue standpoint, as you know because it’s a SaaS model in any given period, dramatically more of the revenue is going to come from the base because we have the installed base phenomenon that Mike walked you all through in the past. But from a standpoint of the strength there, if you take a look at dollar net retention rate, we’re pleased to see a couple of quarters in a row that up at the higher end of our range at 117%. We continue to see a lot of strength with our expansion motion.

At the same time we did mention that we started putting more focus in splitting out groups that were focused on land versus expand or hunter versus farmer and we’re quite pleased with the success we’re seeing on the dedicated hunter part of that model. So I don’t — I would say, if I had to put one just because of the volume, I’ll of course put it to the base and the growth of the base.

And then the last thing I’d just add to that is because we are now starting to really produce more Agreement Cloud products on top of our incredible leadership position in eSignature, I think that gives us even more sort of gas in the tank to grow with our existing base customers.

Matt Wells — Citigroup — Analyst

The same style, one is pedal one, go ahead.

Dan Springer — Chief Executive Officer

No I just want to say and I think we see strength across the board geographically. We’ve mentioned in the past that North America because it’s the driver of our business because it’s a lion’s share. We continue to see great strength there on top of the opportunities we see in international markets.

Matt Wells — Citigroup — Analyst

That’s helpful. And I have a question related to COVID. You noted that most of your workforce is entirely remote. I’m just curious when implementing DocuSign software in a customer, how much of that work can be done remote or over the web versus actually them having to go on site?

Dan Springer — Chief Executive Officer

Yes. I mean — so the vast majority of our implementations are done remote. And of course, if you think about the perfect example of that it’s our web and mobile customers, where they never actually have to speak. Not only do they don’t have to have us in person they don’t need to speak to us to our board.

We do find with some of our larger enterprise customers that they get more value when some of the installation is done on their premises. But we have not had the opportunity in the past to consider doing that completely remotely. And it may be in the new way of business over the next X period of time here then we’ll do more of it.

I can tell you this as we’ve moved now to the model having all of our employees remote, I’ve been so pleased how all of our business continuity programs have worked and we have not missed a beat in terms of maintaining the productivity of our team. So I’m hopeful we’ll be able to have that same positive impact as we work with our customers if we need to do those installation projects remotely as well.

Matt Wells — Citigroup — Analyst

Really helpful color. That’s it for me. Thanks.

Operator

Next question comes from Alex Zukin with RBC. Please go ahead.

Alex Zukin — RBC Capital Markets — Analyst

Hey, guys. Thanks for taking my question. I guess maybe one Dan for you. With respect to Momentum, how much of a pipeline generating or closing event is that for you? And just I guess anecdotally what kind of a delay do you expect to pipeline generation or close — sale closing just given the event went virtual? And then just a quick follow-up. Mike you mentioned no change to the guidance methodology. But I guess given the current events I mean, what gives you the confidence to not change the guidance methodology at the current point?

Dan Springer — Chief Executive Officer

Okay I’ll go first. So Momentum is a super important event for us but it is — in totality of our marketing efforts it’s a very small piece. One of the things that’s interesting about the event moving to virtual, we were thrilled with the results. I’ll just give you a couple high level metrics to give you a perspective on it.

Normally, we’d expect from the San Francisco event maybe 1000, 2000 people would be here and it would be great. When we move to virtual, we basically had five times that number of people participate. So we had a big increase. And we also saw that there was a higher absolute number of leads generated than last year’s in-person event.

Now there is a mix difference because we had some more small businesses, so I can’t say all opportunities are of equal size. But we found that this is a fantastic way for us to reach our customers. And as we start thinking about our plans for next year we were actually rethinking how we’re going to do our mix in person versus virtual events. So there’s nothing that came out of Momentum this year for me thinking that was going to be a slowing or an elongation of our business.

Michael Sheridan — Chief Financial Officer

Yes and in terms of the guidance, I think our basic philosophy remains the same which is we’re going to guide what we know. Clearly the more current the information, the better finality we will have for example around Q1. And as I mentioned before, we have done a lot of work looking at our pricing trends. We’ve done a lot of work looking at our demand Gen trends, our close rates tracking trends. We have all of that information to inform us on the closer periods. And right now we’re roughly halfway through Q1. So that’s useful information.

As you look out into future quarters I think again we’re in the same position as everybody else. I don’t have information to second guess the plan that we put together to execute against and we’re putting all of our resources against that execution. And as Dan said operationally, we have not really missed a beat to date in terms of our ability to execute and be productive.

If something develops that gives us more clarity about something different than that in future quarters we of course will update it. But to do so now with the information available to us we felt would be premature and frankly would be more like guesswork than guidance.

Alex Zukin — RBC Capital Markets — Analyst

Understood. And maybe just as a quick follow-up on hiring. What are you seeing right now with respect to your hiring trends as you move more remote in that department? And is there any kind of I would say risk around just the volume of reps you need to hire or engineers you need to hire as it moves fully remote?

Dan Springer — Chief Executive Officer

Yes we have not made any changes in our expectations or plans for hiring. And I can tell you earlier this week we had one day where we onboarded 31 new DocuSigners remotely. So we have actually figured out our team has just done a fantastic job and I really appreciate you bringing it up in building these capabilities into virtual approaches.

And the best example I probably should have managed it upfront was — mentioned upfront was what we did when we moved our Momentum conference from what was going to be a multi-day event into a couple of hour stream followed up by a lot of online classes.

And our team has just mobilized, team DocuSign and said, we are going to make these things work in a virtual environment. I’m confident that we’re going to be able to continue to do that forward and scale the business this year with our hiring.

Alex Zukin — RBC Capital Markets — Analyst

Perfect. Thank you guys.

Operator

Next question comes from Karl Keirstead with Deutsche Bank. Please go ahead.

Karl Keirstead — Deutsche Bank — Analyst

Thank you. Mike, a question on margins. I think everybody on the call can agree that DocuSign should have pretty good operating leverage over time. But evidently that’s really not going to kick in in fiscal 2021 given your guidance for 6% operating margin. So I had three questions on this short ones.

First of all, what are the investment priorities for DocuSign in fiscal 2021 that might be weighing a little bit on those operating margins? Secondly, is there any change to the path to get to 20-plus percent operating margins that you talked about at the time of the IPO? And then third, when you do close Seal is there a prospect that we get a bit of a down leg in that 6% guide? Thank you.

Michael Sheridan — Chief Financial Officer

Yes. Thanks Karl. So a couple of things. One, my guidance is a range where I didn’t actually guide a percentage for operating margin. And I think within that range depending upon the investment profile that we choose for growth during the fiscal year, we could be at the higher mid or lower end of that. So I wouldn’t want to call out a single percentage. I don’t think the guidance ranges would support that.

At the highest level what I would tell you is that if you look at our performance, we continue to see ourselves as being in a high-growth period of time and we’re going to continue to invest in that. We have been demonstrating including in fiscal 2020 continued progress in leverage and I expect to continue that in fiscal 2021. The key is what is the balance that we want to adopt. And could we grow that bottom line faster? We could. It would probably sub-optimize some of the investments that we could make to continue to drive growth.

What are those investments? I would call out Seal is one of them. When we do roll Seal into our numbers, I don’t think as I had mentioned it’s going to have a dramatic impact on our top or bottom line, but it’s a smaller business that is investing a lot in R&D. And so it will have some impact on that, but the exchange of some bottom line dilution for the opportunity of growth that that provides to us long-term. Those are the kinds of decisions that we’re going to continue to make.

In terms of the long-term operating model of 20% to 25% leverage, I think that we continue to track towards that. Again, I think fiscal 2020 both in terms of the growth in our cash flow and our bottom line is good evidence that we are tracking towards that. And we’re going to continue to endeavor to find that right balance. I think we’re pretty much on target with it, but — so that everybody is clear we do continue to believe right now the right priority for us is to continue to drive growth with responsible leverage.

Karl Keirstead — Deutsche Bank — Analyst

Got it. And then maybe Mike as a follow-up on operating cash flow. I don’t think your stock is really getting valued at least near-term on cash flow, but it’s still important to model correctly. So if operating margins will be up modestly given the investment priorities you mentioned 100 bps or so. And in fiscal 2020, you did operating cash flow margins of 12%. Is it a reasonable starting point to model fiscal 2021 operating cash flow margins up a similar 100 bps to 13-ish percent? Is that a decent starting point?

Michael Sheridan — Chief Financial Officer

Well, we don’t guide the cash flow Karl specifically, but I do think that if you look at the historical relationship of our P&L margins with our operating cash flow, I think that’s the best proxy to use as you build your model.

Karl Keirstead — Deutsche Bank — Analyst

Got it. Okay. That’s very helpful, and congrats on the terrific billings guidance.

Michael Sheridan — Chief Financial Officer

Thanks.

Operator

Next question comes from Rishi with D.A. Davidson. Please go ahead.

Hannah Rudoff — D.A. Davidson — Analyst

Hi. This is actually Hannah Rudoff on for Rishi today. Thank you for taking my question. So I know you said you haven’t seen material changes in trends so far from COVID. But can you talk about the impact to the business and to adoption you expect to see from COVID-related travel bans? So I’m thinking if no one is traveling to close deals and making more businesses on the DocuSign to negotiate deals and find them so any color you could provide on that will be great.

Dan Springer — Chief Executive Officer

Yes. I think from a standpoint of visibility to that, I don’t think there’s anything we’ve seen there would be a change. And as Mike said about the guidance that we provided, we took all the latest information we can have and brought that to bear.

And then to the second part of your question around, how we think about the longer-term impact? Look, we think that there’s a digital transformation phenomenon that’s going to occur. Whether episodes like this tragedy around coronavirus make some companies mildly accelerate that? I suppose it’s possible.

We think it’s the long-term trend that’s important and companies are realizing, there’s a better way to do business getting rid of the paper-based processes, which are hard on themselves hard on their customers and hard on the environment. We don’t think that trend is going to be dramatically moved one way or another by this pandemic. So we have — it’s not leading us at this point change our perspective on the timing.

Michael Sheridan — Chief Financial Officer

And I would add to your specific question around travel. I think one thing to remember about our go-to-market structure, we have everything from e-commerce. Through large enterprise and in between is commercial and our commercial motion is largely inside sales.

So we do have travel that’s in the enterprise side of things. Many of our customers there are working with us, because they’re going through the same thing of figuring out how to work together through Zoom and other techniques like that. But do remember that a lot of our go-to-market is through inside sales reformers as well.

Hannah Rudoff — D.A. Davidson — Analyst

Okay. Great. That’s super helpful. And then could you talk about how we should be thinking about subscription gross margins across the course of the year?

Michael Sheridan — Chief Financial Officer

Yes I think I put a guidance of total gross margins and I think that the subscription trend should be similar to what we’ve seen in prior years and most recently fiscal 2020.

Hannah Rudoff — D.A. Davidson — Analyst

All right. Thank you.

Operator

Next question comes from Pat Walravens with JMP Securities. Please go ahead.

Pat Walravens — JMP Securities — Analyst

Great. Thank you. And first of all, let me say, I applaud you guys’ actions in terms of making the conference virtual and having everyone work from home keep everyone safe. And I know you made that decision early when it was harder to make than it is now. So I guess, Dan my first question is and we kind of hit this a little bit, but would you expect the usage of DocuSign to start going up basically this week as everyone is starting to work remotely?

Dan Springer — Chief Executive Officer

So we don’t expect to have any dramatic change sort of in the usage. We think the use cases that people have will be dramatically unchanged. We think they’ll be pleased that they have DocuSign as that option.

Pat Walravens — JMP Securities — Analyst

Yes.

Dan Springer — Chief Executive Officer

But at this point, we’re not expecting any dramatic change in usage. The only thing I would mention is remember that from a financial standpoint, a short-term change in usage probably wouldn’t also have a dramatic impact, because we don’t really sort of have an overage model. People buy capacity. As Mike has walked through everyone in the past, and so if there were some fluctuations we probably wouldn’t see that have a big impact on our short-term financials anyway.

Pat Walravens — JMP Securities — Analyst

Okay. And so if people use more than the capacity they licensed what happens next?

Dan Springer — Chief Executive Officer

When they get to their next cycle, I mean, if it’s dramatic then we might have a chat with them about do they have the appropriate level. But usually we just wait. And when they got to their renewal cycle, we would say, looks like your business needs have grown. That’s fantastic. We consider it great, because of the high ROI. They even consider it great too and then we increase, with an upsell motion, their capacity going forward.

Pat Walravens — JMP Securities — Analyst

Okay, great. And then, Mike, maybe this is for you. So the federal data center is going to be finished, I guess, in the next three months or so. Why is that important?

Michael Sheridan — Chief Financial Officer

Well, I think, first off, I’d want to make sure that everybody knows that we are in production today, where we have work to do to complete it. But we do — it’s actually in production with active customers today. It’s important for the long term, I think, to build out that vertical.

Pat, our approach to it has been starting a couple of years ago, getting the right certifications in place to qualify to sell to the most number of federal agencies through our FedRAMP efforts. A percentage of those agencies require the private data center, not all of them, but a percentage of them. So when I was talking before about investing in growth, the investments that we’re making today aren’t necessarily targeted at just a fiscal 2021 increase in our growth.

It’s a longer-term view of positioning ourselves as the strongest provider, such that as that market does gain more traction we’re not encountering unnecessary slowdowns in our sales process. So both of those efforts have been designed to really make fed an important vertical for us over time. And, yes, it’s good to be coming close to the completion of the data centers. It’s also good to have them in production at this stage.

Pat Walravens — JMP Securities — Analyst

Great. And then, last one and this is hard, I know, but all this digital transformation spending has been in a really strong economic environment. Do you think the level of urgency around digital transformation diminishes in a recession?

Dan Springer — Chief Executive Officer

Yes, I don’t. Because, I think, for most of our customers, at least half of the focus is around efficiency. And people see the incredibly high ROI. And I can’t speak for all-digital transformation programs, of course, but as I think about the ones that are DocuSign-centric people are laser-focused on the ROI they get from getting rid of those manual processes, the wasted labor, getting rid of things like the transportation cost, the shipping, et cetera.

That’s a big focus. So I don’t think in a recession you would see people pull back on that. I would say that any time if you had a significant recession, you expect people to kind of shoot first ask questions later and that could lead to some delays. But, in general, we think the business case just gets stronger when people need to find those efficiencies.

Pat Walravens — JMP Securities — Analyst

Okay. Great. Thank you very much.

Operator

Next question is from Stan Zlotsky with Morgan Stanley. Please go ahead.

Stan Zlotsky — Morgan Stanley — Analyst

Perfect. Thank you so much guys and congratulations on a very strong quarter. Very quick questions from my end. The CLM product, certainly feels like you’re getting a significantly more consistent performance from your sales teams around CLM? And would it be correct to characterize CLM as one of the bigger drivers of upsell that you’re seeing benefit your net revenue retention rate in North America?

Dan Springer — Chief Executive Officer

So, let me answer that in two pieces. The first piece is, to your question, yes. I mentioned, our super big excitement around the Gartner classification. Mike had mentioned last period that we were exceeding our expectations in CLM in terms of our internal goals. So I think those are both strong endorsements of your question.

But when you ask the question specifically to our overall economics, I would just remind you that eSignature is still significantly the largest contributor to our business. So if you thought about our overall upsell to our business, CLM would not actually be as big as the opportunity from eSignature.

It’s not that CLM is not amazing and we’re not killing it out there. These are just a law of large numbers issue. So, again, that would be my only modifier. But, conceptually, I think, we’re with you 100% on everything else, just don’t lose the sight of the scale of that eSignature business.

Stan Zlotsky — Morgan Stanley — Analyst

Right. That makes sense. And maybe just piggybacking on an earlier question around federal. How are you guys thinking about the federal opportunity into fiscal 2021. Or should we be thinking that that’s more of a fiscal 2022 type of opportunity, from a revenue perspective and billings, obviously? Thank you.

Dan Springer — Chief Executive Officer

Yes. I mean, I think, we continue to see the strength. We had some big wins in 2020 and I think our aspiration is we’re going to have more big wins in 2021. I know we’ve tried to be tempered and saying you have to understand in working with the federal government as a customer while they can be a great customer, the pace sometimes is not what we would see in some of our other verticals.

So we’re eyes wide open on that. But I think we look at this year as will be another strong year for us. And as Mike said, one of our big enthusiasms around completing the federal data center the IL4, we internally call it, is to unlock even more opportunity with both use cases and agencies that we’ll see that DocuSign is very federal friendly as a supplier.

Stan Zlotsky — Morgan Stanley — Analyst

Perfect. Thank you.

Operator

Next question comes from Bhavan Suri with William Blair. Please go ahead.

Kamil Mielczarek — William Blair — Analyst

Hi. This is Kamil Mielczarek on for Bhavan Suri. Congratulations on the solid results. So you’ve estimated in the past your Systems of Agreement TAM is around $50 billion with eSignature at $25 billion. Can you provide some details on your product roadmap? And as you look out over the long term, what is the time line to expand into all four phases: into preparing, signing, acting and managing? What milestone should we be looking for?

Dan Springer — Chief Executive Officer

So, let me give you a couple of thoughts on that. First off, when we talk about our TAM, we did sort of really thoughtful analysis at the time of our IPO, which we have continued to update around the eSignature TAM and we feel very solid about that $25 billion opportunity.

When we talk about the rest of the Agreement Cloud, we talked about a rough doubling of that. But I just want to make sure you understand the level of analysis on that core business. We’re the clear leader and we have so much history. It’s very, very strong. For the rest of the Agreement Cloud, it’s less precise of an estimate and that’s why we tend to use the term of an approximate doubling.

Then within the categories of the Agreement Cloud, to Stan’s question a minute ago, CLM, which is heavily in the Manage phase is an area that we’re probably most excited about. We have good progress already, but we just see tremendous growth opportunity.

In the Prepare phase, which has a component that can relate to CLM, but also has like our gen and negotiate products, we’re off to a great start in those products which we launched at Dreamforce last year. I would tell you, I think, the dollar opportunity there is smaller, because it is going to be a business that’s focused on our smaller and — SMBs and smaller commercial customers. So it may not have that same proportion of the TAM there.

And then, we’ve always talked about the Act phase and how important and integrated that is with things like API. But it’s been a part of our business for years, albeit, smaller and we see that it continuing to grow and increasingly becoming a bigger piece of the overall Agreement Cloud.

So just in closing, I’d say, we’re in all of the spaces today. Sign and Manage are the ones that we’ve said we think have the biggest growth opportunities as a share of that going forward.

Kamil Mielczarek — William Blair — Analyst

That’s great color. Thank you. And just a quick follow-up, when you first acquired SpringCM, it initially extended your sales cycle slightly, which drove some temporary deceleration in the business. How much risk is there that you would see a similar impact from Seal Software? And how will your sales or go-to-market process change once Seal Software is closed? Thank you.

Dan Springer — Chief Executive Officer

I think it’s very little and very little. There was a big difference. When we bought Spring, we didn’t have an existing commercial relationship in place, where we were selling their products. We’ve been selling Seal for over 1.5 years. And I think that motion is now very well understood by our field force. So, I don’t expect that to be very different once we close the deal and integrate them. Obviously, in the period between now and close, we have to operate the businesses independently. But once we do close as Mike said, we’re targeting that in our second quarter. I believe it will be a relatively seamless integration from that standpoint because of our experience in already selling their products.

Kamil Mielczarek — William Blair — Analyst

That’s helpful. Thanks again.

Operator

[Operator Instructions] Our next question comes from Dan Ives with Wedbush Securities. Please go ahead.

Dan Ives — Wedbush Securities — Analyst

Yes, thanks. Great quarter obviously in a volatile environment. So just — can you maybe just from a high level to talk — if you compare a year ago, six months ago, just how things are changing in terms of your conversations with customers in terms of being more strategic obviously deals are getting larger. And maybe, you can just give some examples of that and just strategically how the view of DocuSign within companies is changing at least from your perspective?

Dan Springer — Chief Executive Officer

Yes. I mean, I think in the six-month time frame, I’d say I don’t think there’s been a dramatic change. I do think there is this recent announcement with Seal, a lot of very positive responses that we’ve gotten from customers. I was actually just in Europe a couple of weeks ago and somewhat ironically just before we announced the deal, I had two large customers say, Dan, we just love what you guys are doing jointly with Seal, you guys should really buy them. And obviously, I was excited that we get to make that happen shortly upon my return.

But I think the macro change that is different is just that people are saying, we used to think of you as a fantastic provider as a eSignature process, which was a fantastic driver of success in their business. And now they’re looking at it and saying, the Agreement Cloud is something bigger and broader and we can in fact be a more strategic partner to companies. That’s why we really believe this is the next big cloud opportunity.

So, I think that’s what the change has been. I think it’s been fairly consistent as we’ve added the additional functionality and brought that vision to the market. So, I’m excited about that momentum and I expect it to continue going forward as we execute against bringing the additional product functionality to our customers.

Dan Ives — Wedbush Securities — Analyst

Got it. And do you — just given the environment especially maybe on strategic M&A on some small private companies like are — and obviously a lot of customers are going to drive potential acquisitions for you right in terms of just different areas of the product suite. Did you expect to be more aggressive on just — what I would view as more tuck-in M&A especially as you use this opportunity to just further build-out the suite?

Dan Springer — Chief Executive Officer

Well, there’s a couple of things that I think give us the potential to do that. We’re still going to try to make the right one-off each individual business decision. But we brought in Eric Darwin as I mentioned, who used to lead the LinkedIn corporate development team. We obviously wouldn’t have brought in such a senior leader, if we didn’t think there was a broad opportunity for us over time in M&A. We didn’t do that until after we had the successful execution of the Spring deal because, we wanted to make sure that we were moving at a cautious pace as we started building out this capability within DocuSign.

So Mike and I have been very clear that, we’re not going to acquire for the sake of acquiring. We’re only going to acquire when we see great deals that also drive our very clear strategy for the DocuSign Agreement Cloud. But obviously, we wouldn’t have made the pull with Eric if we didn’t see that.

Second thing is, we really feel we were successful in the integration of Spring. And having that now done and under our belt, I think that gives us more confidence that we could do more deals. Seal obviously was the next one. But I would stop short of saying; I think we’re going to become some sort of an acquisition machine. I think we’re a company that wants to do really thoughtful deals that can have a meaningful impact for our customers in building out their Agreement Cloud solution. So, I wouldn’t expect at this point a dramatic increase in velocity.

At your specific tuck-in point, there’s multiple pieces behind that like what’s happening in the macro environment. I think some of the noise we’ve been hearing around sort of the VC community, not continuing to support tech companies, I think that’s dramatically exaggerated. So, we don’t think there’s going to be some sort of shopping spree kind of phenomenon for us or for other companies coming forward. I think VC community is going to continue to do a good job of supporting the companies they’ve invested in. And they’ve raised a lot of money and have a lot of dry powder to do that.

So I would think you should expect more of the same for us with maybe some slight acceleration as we continue to build our confidence that we can do these fantastic deals bring tremendous companies into DocuSign. And as I said, really provide more and more value for our customers in their Agreement Cloud solution.

Dan Ives — Wedbush Securities — Analyst

Yes. Thanks again for all the insight and transparency and a tough time for investors. Appreciate it.

Operator

There are no further questions. I would like to turn the floor over to management for closing comments.

Dan Springer — Chief Executive Officer

Yes. Well, thank you all for joining us particularly in the light of the macro environment. We hope you all stay healthy and safe and we look forward to seeing you when we can next be out to see you all. Thank you so much.

Operator

[Operator Closing Remarks]

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