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DocuSign, Inc. (DOCU 0.25%)
Q3Â 2019 Earnings Conference Call
Dec. 06, 2018, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Third Quarter Fiscal 2019 Earnings Conference Call. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)
I will now pass the call over to Anne Leschin, Head of Investor Relations. Please go ahead.
Annie Leschin -- Vice President, Investor Relations
Thank you, operator. Good afternoon everyone. Welcome to DocuSign's third quarter fiscal 2019 earnings conference call. On the call today, we have DocuSign's CEO, Dan Springer; and CFO, Mike Sheridan. The press release announcing our third quarter results was issued earlier today and is posted on the Investor Relations website.
Before we get started, I'd like to let everyone know that we'll be hosting a KeyBanc bus tour on December 10th and be BofA bus tour on January 7th both in San Francisco and presenting at the JMP Tech Conference and the Morgan Stanley TMT Conference in late February. As other events are added to the schedule we will provide further updates.
Now, let me remind everyone that the statements made on this call include forward-looking statements that are based on beliefs and assumptions we believe to be reasonable as of this date and on information currently available to management, including estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any other results, performance or achievements expressed by -- or implied by the forward-looking statements. Further information on these risks and uncertainties is included in our perspective previously filed with the SEC and additional information available in our July 31st, 2018 quarterly report on Form 10-Q and other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Except as required by law, we assume no obligation to update these forward-looking statements or to update the reasons if actual results differ materially from those anticipated in the forward-looking statement.
I'd now like to turn the call over to Dan, Dan?
Daniel Springer -- Chief Executive Officer
Thanks, Annie. Good afternoon everyone and thanks for joining us today for our earnings call. I'm pleased to say Q3 was another strong quarter for DocuSign. We had strong execution across all segments, geographies and verticals and the factors that drive our growth engine were in full effect. I'll be talking today about each of those.
To start, let me share a quick review of the numbers, then Mike will give you more detail shortly. We had revenues of $178 million in the third quarter, which drove 37% year-over-year growth. With our acquisition of SpringCM, we were non-GAAP breakeven for the quarter. Our growth continues to come primarily from acquiring new customers and growing usage within our existing customers across their lines of business. At the end of Q3, we had 454,000 paying customers, an increase of 25,000 over the previous quarter. As we have said, this growth is not limited to the US. Our international business represented 17% of our overall revenue this quarter and it continues to be an area of significant focus for us.
We've continued to make great progress since becoming a public company earlier this year. And when we look at the factors driving our growth, we see a lot of fuel for further momentum. On today's call, I'd like to provide some additional color on these growth drivers. I'll talk about three in particular. First, every organization on the planet signs agreement, big businesses, small businesses, government agencies and not for profit. As a result, our TAM is substantial. We estimate our core eSignature business' TAM at $25 billion, which is largely under-penetrated. This TAM is becoming available as organizations worldwide make the transformation from paper to eSignature. It usually starts when a specific department in an organization adopts eSignature. Later, it's common for DocuSign to expand to other departments. And over time, we often see greater usage within each department. This is our core land and expand motion and our Q3 results are further evidence that it is working well.
In October at our annual customer event in the UK, we had a chance to illustrate how our expansion motion works in practice. One of the world's largest consumer package goods companies talked about how they have 100 different uses of DocuSign across their organization, either live, in development or currently under discussion. This is a customer that started with just a few use cases in a single department and has been expanding since that. It's a great example of a customer eager to pay us more and to do more, because the return on DocuSign has proven to be so positive.
Our second major growth driver is something that builds on top of eSignature. We call it the System of Agreement transformation. It's when organizations go from isolated use of eSignature to connecting it with the various other systems necessary to prepare, sign, act on and manage agreement. By connecting and automating the entire agreement process, organizations can do business faster at less cost and with fewer errors. So it's not the price that our leading customers are already going there now.
In Q3, we had a chance to showcase such a leader at that same UK customer event I mentioned earlier. This customer, one of the world's largest energy companies, was speaking about how they are connecting Salesforce.com, DocuSign, SpringCM and SAP. This illustrates how important connectivity is to a modern System of Agreement. If we can make it easy for customers to put the pieces together everybody win. That's why we've invested to offer the most prebuilt integrations of any company in our category and that's why we feel we're so well positioned for the key aspects of the System of Agreement transformation.
Now I just mentioned SpringCM, the company we acquired in September. I'd like to give a quick update on our progress there. You recall that SpringCM complements our strength in eSignature with their strength and activities before and after the signature. This has allowed us to provide a fuller System of Agreement platform, including new products sell and further technologies commercialize. We are already doing this by offering SpringCM flagship contract life cycle management product to our mid-market and enterprise segment. And for our SMB and lower mid market segment, we intend to release a new product in the first half of calendar 2019 called DocuSign Jet (ph). This is based on SpringCM technology for document generation. With these, as well as partner offerings that we resell, we believe we have the most comprehensive set of
products and services for modernizing customers' Systems of Agreement. And remember that the $25 billion TAM is for eSignature only. We believe these additional offerings at least double our TAM to cover activities like preparing agreement, acting on them and managing them.
Finally, our third growth driver is our partner ecosystem. It is the largest in our category and it becomes even more important in a world of modern Systems of Agreement. To illustrate, let me point to a few recent announcements. In Q3, we had our largest ever presence at Dreamforce, Salesforce's annual conference. It's always a great show and this year we did more meetings and got more leads than ever before. This included a lot of activity around Salesforce CPQ, which stands for configure, price and quote. It's another Salesforce product where we have an eSignature integration and at Dreamforce, we announced our new DocuSign Gen product will launch with a Salesforce CPQ integration. So lots of positive activity there.
Another partner announcement we recently made is with Dropbox. They announced Dropbox extension away for partner products to extend what's possible within Dropbox and as you might guess, you can now send and sign agreement using DocuSign from within Dropbox. It's another example of our philosophy to put DocuSign everywhere work gets done. For a partner like Dropbox, it makes their environment more valuable and for us, it drives more sales and usage of DocuSign, giving us leverage beyond what our own direct sales efforts can achieve.
So to sum up the growth drivers, number one, a big TAM from eSignature, which we're landing and expanding into, number two, the System of Agreement transformation and number three, our category-leading partner ecosystem. Together they explain much of our recent success as well as our confidence in DocuSign's future prospects.
Now I'd like to shift to some updates on our organization that we believe will cement our leadership for the next phase of our growth. We announced last quarter that Neil Hudspith, our Head of Sales and Customer Operations, will be retiring at the end of the fiscal year. As I said in last quarter's call, this was something we have been planning for by investing in the talent we need to grow the business going forward. Of course the announcement gave us a chance to check our assumptions against the external market for talent as well. Having done that, we are all the more confident in the team we've built and cultivated internally.
So, I'm pleased to announce that effective February 1, Loren Alhadeff will become Chief Revenue Officer reporting directly to me. Loren is currently, our SVP of North America sales. That means he has been driving the bulk of the sales numbers we've all been enjoying today. Moreover, Loren, is a pillar of DocuSign having been here over 10 years through many promotions and much success. So congratulations to Lauren for a well-earned opportunity. And for customer operations Lambert Walsh, our SVP of customer success will report directly to me as well. Lambert came to DocuSign two years ago after nine years as the Head of Adobe's Global Services and Customer Operations Organization. Before that he was Head of McAfee's Worldwide Customer Care Group for seven years. Given the incredible impact Lambert has made since arriving at DocuSign, this was an easy decision for me.
So Lambert, thank you and congratulations. We've also promoted Scott Olrich to Chief Operating Officer. He will be expanding his focus beyond strategy and marketing to take on our field enablement and business development functions as well.
Moving now to our Board of Directors. Effective January 1, our new Board Chair will be Maggie Wilderotter. Maggie serves on a number of high-profile boards including Cosco, Hewlett-Packard Enterprise and Lyft. She has been on our Board since March 2018 and before then she was on our advisory board for several years. In those capacities, Maggie has been hugely impactful for DocuSign. So we're thrilled as she has agreed to expand her role.
We also have a new Board member to announce. Cynthia Gaylor is SVP and CFO of Pivotal Software. She was also the Head of Corporate Development for Twitter and was the Managing Director at Morgan Stanley serving in the technology investment banking group. Cynthia will be the fourth woman to join our Board and she will serve on the audit committee as well. Welcome to Cynthia. So as we transitioned to a public company board over the past six months, I could not be more pleased with the experience we have assembled across the best of blue chip corporate and SaaS technology company.
So to sum up for today, the growth factors we discussed are in full effect. And as you can see by the numbers, we are executing on the opportunity. We are riding and in some case -- some cases, driving multiple waves of transformation from partner to eSignature to modern Systems of Agreement. Our market still has a lot of greenfield especially internationally and we have an excellent sales scalability opportunity with our partner ecosystem. So my outlook is very positive. And as we approach the end of the calendar year, I want to thank the 3,000 DocuSigner's for their incredible contribution.
Our recognition this week on Glassdoor as the 17th best place to work among 800,000 companies is a testament to your efforts. I could not be more proud to call you colleagues.
Now I'd like to hand over to Mike to walk through our financial performance and I'll be here for Q&A after that. Mike?
Michael Sheridan -- Chief Financial Officer
Thanks, Dan and good afternoon everyone. As a reminder, all of our financial results reflect the adoption of the 606 accounting standard for current and historical periods and our non-GAAP financials excludes stock-based compensation, amortization of intangibles, amortization of debt discount and acquisition related costs. Additionally, all results include the results of operations of SpringCM since its close on September 4. The third quarter was a busy one for DocuSign. We acquired SpringCM and completed both the secondary and the convertible debt offering. On top of this, we continued to execute well and exceeded our expectations for the quarter.
Total revenue rose 37% year-over-year to $178 million in the third quarter. Excluding SpringCM, DocuSign revenues were up 34% year-over-year. Total subscription revenue reached 38% year-over-year growth at $169 million or 95% of total revenue, with strong performance across geographies and vertical markets. Billings increased 40% year-over-year to $198 million and DocuSign's stand-alone billings grew 38% over last year. We added approximately 25,000 new customers in the third quarter, bringing our total to 454,000 customers worldwide and growing 28% year-on-year.
Of this increase, approximately 4,000 were new commercial and enterprise customers, resulting in a 37% year-over-year increase to 53,000 direct customers worldwide. We continue to achieve strong upsell in Q3, resulting in a net dollar retention rate of 114%. Strong upselling was also reflected in the number of customers at ACV greater than $300,000 which grew 57% year-over-year to a total of 285 customers. This was driven predominantly by existing customers continuing to increase their volumes and expand their use cases.
International revenue reached $31 million in the third quarter or 17% of total revenue. This growth included a year-over-year growth rate of over 40% in core DocuSign products, offset in part by the continued sunsetting of some legacy acquired products. The combined year-over-year international revenue growth was 28%. Non-GAAP gross margin for the third quarter of fiscal 2019 increased to 79% from 78% in the third quarter of fiscal 2018. Non-GAAP subscription gross margin in the quarter came in at 85% compared with 83% in the third quarter of fiscal 2018.
While our gross margins increased year-over-year, there was a slight decrease from Q2, primarily due to the impact of SpringCM's lower gross margins. We increased our non-GAAP operating expenses to $142 million or 80% of total revenue in Q3 from $105 million or 80% of total revenue for the third quarter of the prior year. Professional fees associated with the acquisition of SpringCM and additional investments to support the integration, as well as costs associated with the secondary and convertible offerings contributed to this increase. As a result, our non-GAAP operating loss for the third quarter was $1 million or a negative 1% operating margin, compared with a $3 million loss and negative 2% operating margin in Q3 of last year.
We ended our quarter with 2,900 employees, a year-over-year increase of 33%. This increase included approximately 178 employees who joined us from SpringCM. Operating cash flow was positive $4 million this quarter compared with $12 million in Q3 of last year. Lower operating cash flow during the third quarter was primarily the result of operating losses from SpringCM, costs associated with integration, the follow-on -- and the follow-on offering. This combined with additional capital investments for SpringCM resulted in third quarter free cash flow of negative $4 million compared with positive $7 million in Q3 of last year.
Finally, on our balance sheet, we ended the third quarter with $1.1 billion in cash, compared with $819 million at the end of the previous quarter. This includes $493 million in net proceeds from the convertible debt we issued in September offset by the $219 million used in the purchase of SpringCM.
Turning to our non-GAAP guidance for the fourth quarter and full fiscal year 2019, we estimate total revenue of $192 million to $194 million in Q4 and $693 million to $695 million for fiscal '19. These amounts include a $4 million to $5 million revenue contribution from SpringCM in Q4 and an $8 million to $9 million revenue contribution from SpringCM for the full year. We estimate billings of $245 million to $255 million in Q4 and $795 million to $805 million for fiscal '19.
We are maintaining our guidance for gross margin at 78% to 81% for both Q4 and the full fiscal year 2019. In terms of operating expenses, we anticipate sales and marketing in the range of 50% to 52% of revenues in Q4 and fiscal '19, R&D in the range of 16% to 18% for Q4 and fiscal '19 and G&A in the range of 11% to 13% for Q4 in fiscal '19. For the fourth quarter, we estimate $3 million to $4 million of other non-operating income related to interest income and expense.
We expect the tax provision of approximately $750,000. We expect fully diluted weighted average shares outstanding of 185 million to 190 million shares for Q4 and 155 million to 160 million for fiscal 2019. The decrease in weighted average shares outstanding in Q4 relates to our RSU settlement in November, which decreased our fully diluted shares by approximately 5 million.
With that, we'll now open the call for questions.
Questions and Answers:
Operator
Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Justin Furby with William Blair & Company. Please proceed with your question.
Justin Furby -- William Blair & Company -- Analyst
Oh, great. Hey guys. Can you hear me OK?
Michael Sheridan -- Chief Financial Officer
Yes.
Justin Furby -- William Blair & Company -- Analyst
Great. Maybe just Dan, just to start. I was hoping you could give a sense for what you're seeing across verticals. I think there's some concern around real estate. I know that's a pretty small piece of your business today. But just wonder if you could speak on that vertical, some of your other areas. And then I'd love to get an update on what you saw in the federal government space. I know it's early for you and then I've got a quick follow-up. Thanks.
Daniel Springer -- Chief Executive Officer
Absolutely. Yeah, we tend to see real estate, as you articulated it's a relatively small percent of our revenue, but it's an important aspect of the total number of customers we have and most of the individual realtors as we've discussed in the past, Justin, are very small customers. But if you look at the strength we had with the net 25,000 customer add, a significant portion of that is in real estate. We've been pleased to see through Q3, a lot of strength in that segment. So we have not seen any of the things people have talked about from a headwind in that market overall affecting our business at this point in time.
In terms of financial services and some of the other larger verticals that we traditionally point to, they've been quite strong and we are generally feeling said (ph) very bullish that's behind the significant growth numbers that in both revenue and billings that Mike just referred to.
From a government standpoint, I think you're absolutely right. We look at the federal government as a huge long-term opportunity but have the understanding that even though we now have that FedRAMP certification, it's going to be a longer sales cycle than some of the commercial customers that we tend to see in government. But I would point to the fact that we've had some very good strength in state and local government. We continue to see that being an attractive opportunity for us in the near term while we go after the longer federal government opportunity that we think will be large in the longer term future.
Justin Furby -- William Blair & Company -- Analyst
Okay, great, that's helpful. And then I know you kind of bucket the commercial and enterprise business in one sort of revenue line, but I think it's two separate go to market, two separate selling motions. Can you give a sense for what you're seeing between those two and curious more on the larger enterprise as (ph) I think that's a new area for you over the last several years? What that looks like from a demand standpoint? And then just in terms of the decision to hire internally for the Chief Revenue Officer role, should we interpret that as maybe more incremental changes over the next year or so in terms of go-to-market or is that the wrong read? Thanks.
Daniel Springer -- Chief Executive Officer
So on the first piece, we don't actually split out commercial and enterprise. And it's interesting that you make the comment about them being sort of different motion. We think increasingly of them as very similar motions. And in fact, a lot of the land and expand that we have sort of built goes across both segments and we're excited actually to take some of the best practices in the commercial business and bring that into our enterprise business as well. So that's how we sort of think about them. And I don't have a perspective of some dramatic difference. Commercial is the core of what built DocuSign on the direct side of our business and I think that will be the case for years to come for sure. So (inaudible).
In terms of the internal piece, I want to make sure I clarify your question. If you think it is more incremental versus more dramatic in terms of changes, we're feeling pretty pumped up about the leadership we have built internally and the momentum in the direction. So I don't think with our decision to have Loren take on the Chief Revenue Officer role. It's an indication that we're going to be less dynamic in how we think about changes. But I think it is a statement you hear from us that we're really pleased with the momentum and direction of our business and we don't see any dramatic changes that I would point to with that point.
Justin Furby -- William Blair & Company -- Analyst
Perfect. Thanks guys. Appreciate it. Nice quarter.
Daniel Springer -- Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.
Sterling Auty -- JPMorgan -- Analyst
Yeah, thanks. Hi guys. I know you've got the pricing plans that are up on the website, but in terms of the commercial and enterprise, can you remind us what the stratification is and where is the typical enterprise customer coming in? In another words, is there an opportunity for further upsell on feature functionality?
Michael Sheridan -- Chief Financial Officer
Hi, Sterling, it's Mike. So a couple of thoughts on that. I think if you look at one statistic that we provide in terms of accounts that are greater than $300,000 if you look at the makeup of that the significant majority of those come from upsells that accumulate to larger ACV over time. That said, there are some in there that are first time buyers as well. So we do have a mix, but the model that we provide into the end point I think across commercial and enterprise is really to drive that upsell and that expansion over time into ever increasing larger ACV and this quarter is an example with that stat grew 57% year-over-year. So we're seeing a lot of the momentum around that.
Sterling Auty -- JPMorgan -- Analyst
Okay. And then the one follow-up is extending that you gave the example of Spring with partnership with Salesforce, et cetera. What is the interest level across that broader commercial enterprise group to expand their usage to bring in something line spring versus -- I get the question a lot, jeez, are they just doing -- are companies just going to buy the basic eSignature and that's it and maybe are not interested in the expanded capabilities?
Daniel Springer -- Chief Executive Officer
Well, so it's hard to have one simple answer for our 454,000 customers. But let me kind of give you some sense of the trends we're seeing in the marketplace. We've seen System of Agreement really capture the enthusiasm of our customer base and I would say that's across commercial and enterprise and people realize that eSignature is just the first piece that they want to go with. We continue to think from a land standpoint that there will be a lot of folks that start with eSignature but already, we're seeing RFP's getting ridden with System of Agreement as the construct for the RFP and obviously, we think we're incredibly well positioned for those deals. So I don't think we see that there is a lack of enthusiasm and appetite within our customer base for buying into the broader System of Agreement. And again, the only exception, I'd tell you on the land side probably will continue for some numbers of quarters to come to be customers that start with signature and then move into the -- in the broader group. And then the one specific data point as you were talking about from a customer and partner standpoint, we do see the Protair (ph) or the DocuSign Gen product that I alluded to earlier as being the piece that will be most easy for customers to understand how quickly that connects with the eSignature and is that first step on their journey to a broader System of Agreement. We think that's the place where to go first and some of the post-sign component will probably follow.
Sterling Auty -- JPMorgan -- Analyst
Got it. Thank you.
Operator
Our next question comes from the line of Stan Zlotsky with Morgan Stanley. Please proceed with your question.
Stan Zlotsky -- Morgan Stanley -- Analyst
Perfect. Thank you so much for taking my question. So actually I wanted to follow-on -- follow-up to what Sterling was digging into with the customers over 300 K, we still have a very nice acceleration year-on-year and even if you look at it on a quarter-on-quarter basis, right, that count bumped up 39 logos which is very impressive. Maybe you could dig into what are the dynamics that you're seeing around these enterprise signings of these new logos, how much of the increase that we are seeing, how much of it is just organic growth as you mentioned within existing customers versus just very large lands with new customers.
Daniel Springer -- Chief Executive Officer
Yeah, so Stan as Mike alluded, the majority of those customers that are there, got there from a land and expand motion as opposed to starting off over 300 K. And if you take a look at the mix of those 39 incremental you're describing, same thing is true. The majority of those were expansion opportunity and we expect that to be the case going forward. It's not that we're not excited when we see an enterprise opportunity to start that big. One of things that's really important in a SaaS world is driving customer success and you've heard us talk about this in the past. And sometimes if you start off with two big of an initial chunk, you don't have that clarity to how you quickly get implemented and get those early wins and success.
So in some ways I actually prefer that core land and expand piece where we start with a manageable piece of use cases, get them done quickly, get that sort of early win mentality within the organization and then look to expand into the much larger footprint. And with System of Agreement, I actually think you're going to see the same thing. There may be some situations where someone says, I want to buy the whole System of Agreement upfront and start with a larger initial entry point. I think it's just is likely to see people say I want to start with eSignature and then build on two dimensions, one is additional use cases for signature but also adding in the overall System of Agreement functionality expanding on two different vectors. So, getting to that 300,000 faster, but not necessarily starting at a higher point.
Stan Zlotsky -- Morgan Stanley -- Analyst
Got it. And then maybe just a clarification from Mike. Was there anything one time in the quarter on the billing side, mainly the organic piece, that hit? Was there maybe a very large renewal that hit in the quarter or was it just strength across the board, within that organic billings number? That's it from me. Thank you.
Michael Sheridan -- Chief Financial Officer
Yeah. No Stan, definitely driven by strength of quarterly performance. As we've talked about we guide buildings, but it is the statistic that can be a bit more variable than others like revenue. But no, what you saw in the quarter was driven by strength.
Daniel Springer -- Chief Executive Officer
Mike and I went on a lot of sales calls ourselves this quarter. We really drove a lot of that personally, the rest of the company is giving us full credit, but I really attribute it to our involvement in the sales cycle.
Stan Zlotsky -- Morgan Stanley -- Analyst
Perfect. Thank you.
Operator
Our next question comes from the line of Alex Zukin with Piper Jaffray. Please proceed with your question.
Alex Zukin -- Piper Jaffray -- Analyst
Hey, guys. Thanks for taking my question. So maybe on just that last point that strength that you saw in the quarter, particularly that drove some of this acceleration, is there -- is there an increased confidence in the sustainability of that type of growth, at least in that you know, those 300,000 plus accounts that we should now think about in the pipeline? And then, can you maybe talk to how you think about the guidance for the fourth quarter? Was there anything one-time in nature in the year-ago period that we should keep in mind from a seasonality perspective and I've got a quick follow-up?
Michael Sheridan -- Chief Financial Officer
I would say on the statistic of customers exceeding $300,000 (ph) of ACV, I would make two comments. One like any statistic over time there'll always be some level of variability depending upon the timing of closing deals and that sort of thing. I think in general, though, when you look at the size of our customer base with time, we're getting more and more customers that are moving up toward that threshold. So I think that's going to help contribute to a bit more sustainability over time. And I'm sorry, the second part --
Daniel Springer -- Chief Executive Officer
The Q4 piece. I don't think there is anything to say.
Michael Sheridan -- Chief Financial Officer
No, there's really nothing one-time oriented. I mean as everybody knows, we had a strong second half last year and obviously, we're coming off of a strong Q3. So I think our guidance reflects that.
Alex Zukin -- Piper Jaffray -- Analyst
Great. And then just as a follow-up. Can you talk about -- you talked a little bit about the cases where the System of Agreement vision is now being written to the RFP or into the expand motion, particularly in the context of SpringCM. How do you see that impacting the upsell motion from a deal size perspective and how should we think about the dollar based net expansion metric given some of the upsell activity that you're seeing? Is that a metric we should expect to trend up over time, sustain at kind of the current teens level? How should we think about that?
Daniel Springer -- Chief Executive Officer
Yeah, so two perspectives, on the trend piece you asked about, I think it's another form of expansion. So I think it increases our TAM substantially. I don't have enough history at this point to tell you whether that rate to get to that larger TAM will be dramatically accelerated i.e., that that would lead to a much higher net retention rate sort of per period. And I just don't think we have enough history yet. We've just been in the last sort of six months since we've really started the initial message development around System of Agreement. And then from an additional product standpoint around spring, I mean, we're really -- it's really as we get to our new year, February 1 is where we're going to focus on the DocuSign side and really selling that aggressively.
We are integrating the company thoughtfully but we haven't really started an aggressive sort of cross-sell opportunity. My sense is in that 112%, 113% to 118% or 119% is still the right way to think about our net retention rate for the foreseeable future. And if we come back and see that that's really accelerating with those two vectors of growth in full swing, we will give you that guidance. But at this point, I'd say probably stay in that same core range, but think about the fact that the long term the TAM is getting bigger. So we've got more to grow into over time. That would be my view. I don't know if you have a different prospective, Mike.
Michael Sheridan -- Chief Financial Officer
That's right.
Alex Zukin -- Piper Jaffray -- Analyst
Great. Thank you, guys.
Operator
Our next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question.
Karl Keirstead -- Deutsche Bank -- Analyst
Thank you. Maybe two for Mike. First of all, congrats on billings number. That's terrific. The two for Mike, I heard you mention that you would expect the spring revenue contribution in 4Q to be $4 million to $5 million. Maybe you mentioned it and I missed it. But did you touch on what you would expect the billings contribution to be and should we assume for now that it will be similar and then I've got a follow-up?
Michael Sheridan -- Chief Financial Officer
Yeah -- no, we don't last quarter or this quarter break it out for billings. We just wanted to give you sort of this one-time visibility into the spring contribution billings as we talked about to be a bit more variable, but it should generally track with revenue and I think you have some visibility into the actual that I mentioned for Q3. So looking at that should give you a good sense as to if you need to break that out for Q4, how to do so.
Karl Keirstead -- Deutsche Bank -- Analyst
Got it. Okay, thanks. And then Mike, all the numbers were solid, maybe with the exception of free cash flow, which I think disappointed and unusual given the strong billings growth you put up this quarter and last. If you were to strip out the one-time pressures you flagged, the spring contribution of free cash, integration cost, follow-on offering cost. Just roughly would you get to the free cash flow margins in the proximity of the 5% to 6% level from 3Q? I'm just wondering what quote normalized cash flow might have looked like. Thanks a lot.
Michael Sheridan -- Chief Financial Officer
Sure. Yeah, I don't know that I could give you a percentage. The other thing I think when you talked about free cash flow to consider is that things like with 178 employees trading out all of their laptops, you have some one-time capital investments as well that relate to it. So I think all told, when we look at our core business, we were very satisfied with how free cash flow has developed and we don't see any changes in those trends going forward.
Karl Keirstead -- Deutsche Bank -- Analyst
Okay, thanks a lot. Mike.
Operator
Our next question comes from the line of Walter Prichard with Citi. Please proceed with your question.
Walter Prichard -- Citi -- Analyst
Hi, thanks. Couple of questions, just on the levels of investment going forward I guess my takeaway was on following up on Karl's question some of the (inaudible) on cash flow sounded a bit one-time this quarter. You guided for next quarter. Can you just talk about levels of investments given what happened, where you were in the quarter and some of the priorities you have here as we look forward, especially into next year and how you are thinking about margins developing?
Michael Sheridan -- Chief Financial Officer
Yeah, we're going to obviously guide next quarter our fiscal '20 outlook. I think that the impact, for example, on gross margins, bringing spring on for the first time really doesn't allow us the opportunity to integrate it and leverage those investments to move those margins in a direction more consistent with our model. I think in the coming fiscal quarters we have the opportunity to do that both in terms of leveraging the cost of revenue investments and the OpEx investments. I don't think that as we sit here today, we are anticipating next fiscal year the requirements for huge capital investment or other types of investments to get spring integrated into the business. There are obviously going to be ongoing integration costs. That's always part of an acquisition, but we don't think it's going to be a dramatic change to the model you've seen.
Walter Prichard -- Citi -- Analyst
Great. Thanks, Mike. And then just a follow-up on the sales side, I'm wondering relative to different types of reps and segments of the business that you're targeting, where are you seeing those incremental productivity in terms of sales reps you're bringing on board?
Daniel Springer -- Chief Executive Officer
When we think about the sales productivity, one of the reasons we accelerated our investment in sales and marketing, which is sort of the hiring that we pulled forward this year is to ensure that we'll have the right productivity as we go into the new year to continue to drive attractive growth rate. But I would say that the productivity enhancements we're getting are really driven by two factors. One is, as we get more scale, we're just getting better at our sort of on-boarding and enablement process for reps.
The second thing, as we get bigger we're allowed to get more specialized, right, with that scale. And so we have the ability to have people by vertical industry and by size of customers that we go after to have bigger populations in each of those and therefore get more efficient and more effective at sort of onboarding them into that level of productivity. So that's where I'd say we're seeing the most of the benefit. I don't say that -- I don't see that it's better in one particular size or one particular vertical. We're just getting a little bit better across the board on all of them, which has us excited to continue to make those growth investments.
Walter Prichard -- Citi -- Analyst
Great, thank you.
Operator
Our next question comes from the line of Pat Walravens with JMP Securities. Please proceed with your question.
Patrick Walravens -- JMP Securities -- Analyst
Oh, great. Thank you and congratulations, guys. Hey, Dan, can we talk a little bit about competition? And I'll just throw out a couple of vectors and love to hear thoughts. One, Adobe, are you seeing them a little bit more. Two, when you have sales cycles that are more API driven versus not, how is it different? And then lastly, it seems like there's a lot of sort of low-end vendors in the electronic signature space and what's happening with them?
Daniel Springer -- Chief Executive Officer
Yeah. So on the specific ones you asked about, so from an Adobe standpoint, we continue to think they're a great company but they're not being as effective in this aspect of the business as they are, where they are wonderfully successful in other segments. We do primarily still see Adobe take a bundling or discounting approach when they compete with us. And as Mike has walked through in the past when we go to look at competitive wins we see them as being significant and competitive losses is being very, very rare, nothing has changed from the previous information we've shared there.
From your API vector 60% of all of our transactions are now completed because they're launched through an API call as opposed to someone logging into our web and mobile environment. We continue to see great strength there and our focus on the developer community is, if anything, even more dramatic than it has been in the past. And we're not seeing sort of a phenomenon of other players being stronger in that dimension. Keep in mind when you move pass Adobe, the next sets of players are very, very small relative to our business. So someone would have to be doing something quite dramatic for us probably to sort of take notice of them making a successful inroad on that side. There's no one we've seen particularly strong on that front.
Similar answer to your low-end question. On a cumulative standpoint if we think about our web and mobile business, sort of the non-direct selling side, that business is performing incredibly well for us. So it may be that there are some really small players that an individual is in terms of their tiny scale, growing well. I haven't actually had one brought to my attention in the last couple of quarters as interesting.
And the only other piece you left out is the legacy players and we talked in the past about the idea there are some sort of on-prem players particularly in some other countries outside of the US. And sometimes they'll have strength in a particular vertical, but for us, our view is not really an if question it's just when those people will convert to the cloud and convert to DocuSign. So we continue to be appropriately aware and paying attention to competitive threat , but not really seeing anything to this last quarter, that was noteworthy.
Patrick Walravens -- JMP Securities -- Analyst
Okay, great. Thank you for that.
Operator
Our next question comes from the line of Shankar Subramaniam from Bank of America Merrill Lynch. Please proceed with your question.
Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst
Hi. Thank you. This is Shankar for Kash. On the partner side of the equation, could you help us understand how much of a tailwind was, say, Salesforce or Dropbox was for net new customer this quarter and how do you see that going to help the next year in terms of net new customer adds?
Daniel Springer -- Chief Executive Officer
Absolutely. Yeah, when we think about our partners I sort of split out the construct. We work with partners in a couple of different ways. Most important that I would point to is on that sort of customer account side you're talking for we tend to see that from both in the mid-market, the kind of commercial segment and moving down into SMB, the small side of commercial for us, and we see Salesforce as an example, being hugely important significant amount of growth that we see there and we believe we'll continue to do that, primarily driven by the great integrations we've built like DocuSign for Salesforce, I mentioned we've now built that capability to go into the CPQ as well as the core SFA (ph) product that they have there. And I think the sort of momentum we see with Dropbox, we look at that in that same possibility of those small -- much smaller customers providing a large volume.
But I don't want to sort of leave out the power we get in larger partnership opportunities like our SAP partnership where we're working with some of the largest companies in the world and co-selling with SAP creates a huge growth opportunity. If not as big in the customer count side that you specifically asked about Shankar, but hugely important when we look at the revenue growth opportunity for us and the bookings and billings opportunity where we see that some very large customers that we go to market with folks like SAP.
Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst
Got it, got it. Thank you. And then on the M&A front, obviously you just got SpringCM and you are still doing some investments there. But as you look at your platform and see where other -- what other features do you need to add to make it more sticky going forward, what would that be? And when you look at the R&D spend and given your plan of hiring, acquiring as well as investing internally, what are the investments that you're focused on internally versus acquiring that IP from outside?
Daniel Springer -- Chief Executive Officer
Yeah. So I think as we've always said, like many software companies we will look at both buying building as well as partnering and we talk a bit today about how we think the partnerships we've built in that broader ecosystem, leveraging our strength in API and prebuilt integration is going to be also a key part of this overall System of Agreement product solution that we want to bring to the market. In the trade-off versus build versus buy that specifically you asked about, yeah, we want to properly digest spring. We want to make this a fantastic integration to sort of prove to ourselves and the market that we will deliver incredible value for our customers when we do buy. But for sure the dominant aspect of our overall product development and delivery to the marketplace will come from build and that's why we're very focused on that R&D spend and ensuring that we've got a fantastic pipeline of new product development internally.
In terms of your specific question on which portions, which way, I would say everything building off of sign you should expect us for the vast, vast majority of everything offline will come from an internal build, increasingly in the prepared phase I think you'll see us building. We took some from Spring and some from our own to build that the DocuSign Gen product we talked about and the places where you might see us more focused on buying will be when you get to the later of post-sign phases like the manage phase where that would be I'd say more different from the infrastructure and functionality and applications we've built to date. So we don't have some definitive split, but that's how I would sort of direct you to think about the difference of where we would build versus buy.
Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst
Okay. Thank you, guys. Awesome quarter. Thank you.
Operator
Our next question comes from the line of Daniel Adams (ph) with Wedbush Securities. Please proceed with your question.
Daniel Adams -- Wedbush Securities -- Analyst
Hey, guys. Great quarter. Again -- so I have a question just on international. I mean, could you just talk about the trajectory there and just how we should think about international growth call it over the next like two to four quarters?
Daniel Springer -- Chief Executive Officer
Yeah, as we mentioned earlier, when we look at our overall growth opportunity we are very focused on international. Remember our direct business just over 80% of it is in North America. And if you start thinking about traditional software companies as they scale and get bigger and bigger that opportunity to have the outside North America be significantly larger than it is for us today is one that we are laser focused on. Now we have taken an approach which we completely feel positive about. We should say, let's not try to be everywhere at once with our direct business. It's true, we have customers in over 150 countries that have bought DocuSign but the majority of those countries are ones that come to our web and mobile business. We're focused on six markets outside North America, that's the UK and Ireland is one, France, Germany, Japan, Australia, ANZ (ph), really, but Australia focus and then Brazil and we want to continue as we go into the new year with that focus.
Once we feel we've really nailed those countries and gotten significant scale in each of them we will start to look for additional focus -- countries to go after. That's how we're thinking about that from a geographic focus and attention. And in terms of the success there, our bookings growth for our core DocuSign products is growing substantially faster internationally than it is in North America of smaller base obviously, as you'd expect, and our expectation is that's going to continue to be the case for years to come.
(inaudible).
Michael Sheridan -- Chief Financial Officer
No.
Daniel Adams -- Wedbush Securities -- Analyst
Great. And just a quick follow-up. So how do you feel about like organically building things versus just tuck-ins? Obviously, you guys are position of strength, just maybe reiterate sort of how you're (inaudible) things going into 2019?
Daniel Springer -- Chief Executive Officer
I think going back to the sort of the build versus buy discussion with Shankar, I think we believe that tuck-in type work is something that we would probably focus on small incremental component with our core development team because the integration of the overall platform is so important. But from time to time, if we uncover a company just maybe subscaled, that has developed some really fantastic functionality and for whatever reason, probably more likely the expertise than actually the customers and the business they've built, we absolutely could be excited. And you may recall just over a year ago we bought a company called Appuri and Appuri was the company that was really about machine learning functionality and capability. We didn't even have a clear expectation how we might bring that to our customers at the time. We just knew it was capability that we wanted to build. Now today after we sort of tucked in Appuri we are realizing that machine learning, which was their expertise, is a big opportunity in our manage phase of the System of Agreement. So I can definitely see us do tuck-ins around that sort of a acquihire or talent acquisition capability as being a portion of what we do.
Daniel Adams -- Wedbush Securities -- Analyst
Great, thanks.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to management for closing remarks.
Daniel Springer -- Chief Executive Officer
We really appreciate you guys taking the time and we look forward to seeing you out on the road and talking to you again at the end of Q4. Thank you so much.
Michael Sheridan -- Chief Financial Officer
Thank you.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Duration: 54 minutes
Call participants:
Annie Leschin -- Vice President, Investor Relations
Daniel Springer -- Chief Executive Officer
Michael Sheridan -- Chief Financial Officer
Justin Furby -- William Blair & Company -- Analyst
Sterling Auty -- JPMorgan -- Analyst
Stan Zlotsky -- Morgan Stanley -- Analyst
Alex Zukin -- Piper Jaffray -- Analyst
Karl Keirstead -- Deutsche Bank -- Analyst
Walter Prichard -- Citi -- Analyst
Patrick Walravens -- JMP Securities -- Analyst
Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst
Daniel Adams -- Wedbush Securities -- Analyst
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