Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's third quarter fiscal 2020 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 brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now pass the call over to Annie Leschin, Head of Investor Relations. Please go ahead.
Unmute.
Thank you, operator. Good afternoon, everyone. Welcome to DocuSign's third quarter fiscal 2020 earnings conference call. On the call today, we have DocuSign CEO, Dan Springer, and CFO, Mike Sheridan. The press release announcing our third quarter results was issued earlier today and is posted on our investor relations website. Before we get started, I'd like to let everyone know that we will be participating in the UBS Global TMT Conference on December ninth in New York, and the Needham Growth Conference on January 15th, also in New York. As other events come up, we'll make additional announcements. 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, together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to date. 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 counts and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, or a 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, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's press release, which can be found, again, on our website at investors.docusign.com. I'd now like to turn the call over to Dan. Dan?
Thanks, Annie, and good afternoon everyone on the call. I'd like to start today with some brief updates on two areas of our business. One, our positive financial results for the third quarter and how we're driving demand for the DocuSign Agreement Cloud, led by our core eSignature offering. Two, a quick recap of our vision and strategy since going public last year, and how we've continued to execute against that in this current Q3. I'll now hand it over to Mike for a deeper discussion on our financials, after which we can open up for Q&A. First, let me start with some comments on our third quarter.
As many of you know, DocuSign's growth is driven by three primary factors, increased adoption and use case expansion within our existing customer base, the acquisition of new customers, and the development of new solutions that help companies modernize their systems of agreement. We believe our Q3 results reflect ongoing progress across all of those factors. With strong demand for the DocuSign Agreement Cloud, we grew revenue by 40% year-over-year to $250 million, and billings by 36% year-over-year to $269 million. We acquired 25,000 new customers, approximately 5,000 of which were direct, bringing our total number of paying customers to 562,000 worldwide, of which roughly 69,000 are direct. We were again profitable on a non-GAAP basis with operating income of nearly $17 million. This is our eighth consecutive quarter of positive non-GAAP EPS.
We also saw a solid uptick in our dollar net retention rate to 117%. These positive results showcase that demand for our Agreement Cloud suite remains strong as we head into our largest quarter of the year. Next, I'd like to share how we are progressing on the vision and strategy we laid out when we went public last year, and how we continued to execute in Q3. By now, you're probably familiar with our Agreement Cloud vision. It builds on top of our global eSignature leadership and helps companies automate and connect their agreement processes both before and after a signature takes place. We first discussed this during our IPO, and at that time, we reinforced the importance of our core eSignature business and clearly articulated the $25 billion opportunity, which is still only about 5% penetrated.
We also showed how that TAM could potentially double with the expanded opportunity for the rest of the Agreement Cloud. Over the past 18 months, we've taken several steps to deliver on that vision. We acquired SpringCM in September last year. We have integrated its technology and talent into our product line and operations. Our own product development team built and delivered several new Agreement Cloud solutions, and we partnered with specialist companies to resell select additional products that expand on our offering. We brought all this together under the Agreement Cloud umbrella, our suite of more than a dozen products now and over 350 pre-built integrations that helps organizations connect and automate their agreement processes. We also collaborated with systems integrators like ATG, Simplus, and Spaulding Ridge, who are building out Agreement Cloud practices and broadening our ability to drive success for our joint customers.
Amid all of this, we have continued to enhance the functionality of our core eSignature offering with features like responsive signing, where the agreement automatically adapts its formatting to the size and type of the device that the signer is using. In Q3, we continued this momentum by announcing two new Agreement Cloud products. The first is DocuSign Negotiate. It helps companies that don't yet need full-blown CLM to simplify and accelerate the process of generating, redlining, and negotiating agreements. We just launched the initial version in November, and it's optimized specifically for the Salesforce ecosystem. The second is DocuSign CLM. This is the next generation of SpringCM's flagship product. It includes all the capabilities of DocuSign Negotiate, plus an end-to-end workflow builder, a centralized contract repository, and a clause library. It is targeted at upper mid-market and enterprise customers.
We're still in the early stages of our Agreement Cloud journey. We are pleased with our progress to date. By expanding our portfolio, we're motivating customers to automate more of their agreement processes, which in turn drives even more eSignature revenue. This virtuous cycle is illustrated by some interesting customer expansions we had in Q3. One of the global leaders in the ride-sharing space has used both DocuSign eSignatures and CLM in their sales, HR, and business operations for many years. Building on that success, the company expanded its use of CLM in Q3 to cover its departments for commercial transactions, emerging technology, and legal. This significantly increased the size of our commercial relationship. Additionally, a large U.S. credit union increased its eSignature usage by 300% this year. In Q3, also made a commitment to use our API to integrate eSignature into its other systems.
This company plans to expand eSignature to 10 additional business units next year and will also evaluate using DocuSign CLM for potential implementation. A mobile analytics company expanded its use of eSignature into HR, leveraging our integration with the recruiting software provider, Greenhouse. This is a great example of how the Agreement Cloud's integrations drive departmental expansion, which in turn drives revenue from greater usage. As I bring my remarks to a close, I want to reiterate that when we went public, we had a strong eSignature business and a vision to expand our offerings for the entire agreement process. We have executed on that vision, and the customer response has been strong. Based on our progress, I believe we're in a unique position to create and be a leader in the next big platform category of Agreement Cloud.
Just before I hand over to Mike, I also wanted to share two quick executive team updates. The first is that our Chief Product Officer, Ron Hirson, will be taking a mid-career break to focus on a health issue in his family. Ron and I have talked about this transition at great length, and he's going to stay with us through the middle of next year. Even though we're incredibly sad to see him leave, we support his decision. We really appreciate his incredible impact during his six-year tenure, and we're proud of the team he's built to continue the innovation at DocuSign. Second update is our creation of a new Chief Trust and Security Officer role, which former United Airlines CISO, Emily Heath, is taking on.
Emily has an incredible pedigree in the info-sec industry, and she will oversee information security, application and physical security, and trust services for the company out of our San Francisco office. We're thrilled to have someone of Emily's pedigree join us in this vital role. That's it for me. Thanks for joining us today. Now Mike will walk you through the Q3 financials.
Thanks, Dan. Good afternoon, everyone. As a reminder, our non-GAAP financial results exclude stock-based compensation, amortization of intangibles, amortization of debt discount, and employer payroll tax on employee stock transactions. Also, having acquired SpringCM in September of last year, this is the first quarter that we'll include SpringCM in comparable periods from a year ago. Our third quarter results reflect solid execution, delivering strong top-line growth and profitability while continuing to drive customer success. Total revenue rose 40% year-over-year to $250 million, and subscription revenue grew 41% to $238 million. Total international revenue grew over 40% year-over-year to $43 million. Total billings increased 36% year-over-year to $269 million. On a four-quarter rolling average basis, billings growth was 35%. Strong demand for our core e-signature solutions, coupled with growing adoption of our broader portfolio of Agreement Cloud products, continued this quarter.
We added approximately 25,000 new customers this quarter, 5,000 of which were direct customers. This drove a 30% year-over-year increase in our commercial and enterprise installed base. This brings our total customer base to 562,000, with roughly 69,000 direct customers worldwide. We saw notable strength in up-sells into our installed base, with particularly strong contribution from our North American business. We also continued to see progress in up-sells of DocuSign CLM into our installed base. The combination of these factors increased our dollar net retention to 117% this quarter, within our historical range of 112%-119%. Customers with ACVs greater than $300,000 grew 41% year-over-year to a total of 401 customers. Non-GAAP gross margin for the third quarter was 79%, consistent with a year ago. Subscription gross margin was 84%, compared with 85% a year ago.
Total non-GAAP operating expenses for the quarter were $180 million, or 72% of total revenue, compared with $142 million, or 80% of total revenue for the third quarter of last year. With the settlement of the RPost litigation, G&A returned to more normalized levels in the third quarter. Non-GAAP operating profit was $17 million, or a 7% operating margin in Q3. This compares to a $1 million non-GAAP operating loss or a negative 1% operating margin in Q3 of fiscal 2019. We ended the quarter with 3,723 employees, a year-over-year increase of 28%. Operating cash flow was negative $2 million as we paid out the RPost settlement in the third quarter. This compares with a positive $4 million in Q3 of last year. Free cash flow came in at negative $14 million compared to negative $4 million in the prior year.
As anticipated, the RPost litigation payment, together with planned real estate investments, including our office in Dublin and our Fed data center, impacted our cash flow in the quarter. Turning to our guidance, we estimate first revenue of $263 million-$267 million in Q4 and $962 million-$966 million for fiscal 2020. We expect billings of $346 million-$356 million in Q4 and $1,000,083,000-$1,000,093,000 for fiscal 2020. We are maintaining our guidance for non-GAAP gross margin of 78%-80% for Q4 and fiscal 2020. For Q4 and fiscal 2020 non-GAAP operating expenses, we are maintaining our guidance of sales and marketing in the range of 48%-50% of revenues, R&D in the range of 15%-17% of revenues, and G&A in the range of 10%-12% of revenues.
For the fourth quarter, we expect $3 million-$4 million of non-GAAP interest and other non-operating income, including interest income and expense associated with our convertible debt. For fiscal 2020, we expect non-GAAP interest and non-operating income of $16 million-$17 million. We expect a tax provision of approximately $1 million-$2 million for the fourth quarter and $5 million-$6 million for fiscal 2020. We expect fully diluted weighted average shares outstanding of 190 million-195 million shares for Q4 and fiscal 2020. In summary, we are off to a great start of the second half of fiscal 2020 and look forward to executing on our strategic and financial goals. Thanks again for joining us today, and we can now turn to Q&A.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Pat Walravens with JMP Securities. Please go ahead.
Oh, great. Thank you very much, and forgive the background noise, and congratulations. Hey, Dan, do you mind commenting to start out just on sort of what you saw from a macro point of view? Is there any weakness anywhere domestically or internationally? Then also, I'd love to hear your thoughts on how the channels delivered for you this quarter.
Absolutely, Pat. From a macro standpoint, we haven't seen anything very different, really, across the geographies. One of the things we talk a lot about is that I'm not sure DocuSign will be the best bellwether for understanding economic change, because our customers have such a high ROI with our product that I think it would be not the initial tech spending that would be cut. We haven't seen anything really across any of the theaters in which we play that's different this quarter versus the last few quarters. We continue to think it's a strong market for our products and services. From a channel standpoint, we, as you know, have a lot of very strong channel relationships with ISV players. Interestingly, we've also become much more focused on the partner side in terms of the SI, or the systems integrators.
We've seen good strength in both, particularly the progress we have in sort of going to market with systems integrators. I think that's really an indication of the Agreement Cloud overall sort of broadening, and particularly on the DocuSign CLM side, the original Spring product, where it sort of requires more of a statement of work and more integration opportunity there. We're super excited about the progress there.
Awesome. Thank you.
Our next question comes from Dan Ives with Wedbush Securities. Please go ahead.
Yeah, thanks. Can you talk about international in terms of what type of growth you're seeing there? I mean, does it really feel like it's starting to inflect in terms of what you're seeing in the field? Thanks.
Hi, I'll start. Yeah, we saw good growth globally. Internationally grew over 40% again this quarter. Most of that, of course, as you can imagine, I shouldn't say most, but a higher portion of that is new customer logos. They're emerging markets compared to the U.S., where we had a lot of upsell contribution as well. In terms of CLM, we're seeing good growth in the U.S. on CLM. We are also focusing internationally, but we haven't made as much traction internationally as we have domestically.
Great. Then can you talk maybe just from a sales cycle perspective, how things are changing? Does it just feel more and more strategically in terms of how the type of conversations are going with enterprises, the upselling? Maybe, obviously, we see the numbers. Maybe you could just talk about it in terms of just the type of conversations you're having with customers and how it's changing compared to, let's say, the last three, six, nine months. Thanks.
I think the vast majority, and remember, our business is still eSignature heavy, and so the vast majority of that I don't think has changed. Where we have seen change is particularly in that mid-market and enterprise, really to the nature of your question, where people are asking for a broader conversation about their overall Agreement Cloud. As we talked about back at the beginning of this year, as expected, that would, in some cases, elongate those conversations and sales cycles, but lead to larger overall deals. I think we've seen that, and we're seeing some nice uptick in areas like our dollar net retention, because I think we're going to continue to have that opportunity to broaden and upsell there.
In terms of the conversations, one thing that's also interesting is at the very beginning, when we rolled this out, we had the phenomenon that we had some sales cycles that were longer and would push into the next quarter. Now that we're a few quarters into this, we get some deals that get pushed from one quarter to the next, and some that get pushed from this quarter out, and they're sort of netting each other out. We feel like our ability to accurately understand and forecast that has improved as we've moved through the year.
Awesome. Thanks.
Next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yeah, thanks, guys. I have one quick question. How did you do in Federal, and how is it tracking given the opportunity that you see there?
I think Federal continues to be one of the areas we've spent a lot of time focused on because we think it's a very big opportunity. We had last time a very exciting, dramatic, big-ticket win. As we said, those will come from time to time. Really, a lot like our core business, we've always said in the past, it's more about that solid quarter in, quarter out, growing those core relationships. One thing that we're quite excited about is we have the IL4 investment that Mike's talked a lot about, and we now have that active, and our first customer is, in fact, using that platform. It's still early. It's not close to its full potential, but it's indicative, I think, of the progress we see there and the progress we think we're going to continue to see in the vertical.
Thank you.
Next question comes from Alex Zukin with RBC Capital Markets. Please go ahead.
Hey, guys. Thanks for taking the question. Maybe just the first one. If I look at the Negotiate product that you announced at Dreamforce, maybe what's the opportunity set within your customer base? How big could that opportunity be to sell Negotiate? Is there an opportunity to announce something similar with some of your other partners like SAP? I've got a quick follow-up.
Yeah. I think DocuSign Negotiate, if you think about it, we position this as the customer that says, "I don't necessarily need an entire CLM solution. Just the nature of my business from complexity or scale doesn't need that full capability." We built DocuSign Negotiate just for those customers. I think we're really pleased with the initial reception we had at Dreamforce when we were announcing it. There was just a very significant amount of demand for people to understand how they could leverage the partner from the signature side, DocuSign, that they love working with, to take on a broader piece of their DocuSign Agreement Cloud needs. We feel good about that. That will necessarily, as I said, be focused on that kind of mid-market and smaller. That's where we see the primary demand there.
It's a large number of customers, but not our largest customers, is I think primarily where we'll see Negotiate be successful. To answer your question, yes, absolutely, we want to continue to develop that capability across other partners. Keep in mind that CRM, and specifically sort of the SFA portion, where people are really managing their sales processes and their Salesforce processes, that's one of the most important and obvious places where Negotiate is very helpful. We do think those are the partnerships where it's going to be most common, as a capability that people really want to add into their overall DocuSign Agreement Cloud solution.
Perfect. Mike, just a question on the favorite topic of billings. Obviously, different quarters, kind of different dynamics with both pushes and pulls of deals or durations. Anything that you'd comment on, either as a headwind or a tailwind for billings in the quarter? How should we think about, as you look at next quarter with the guidance, any factors that we should consider from prior periods impacting there as well?
I would tell you, Alex, that billings this quarter, I would say for next quarter, the dynamics are the same. There isn't any underlying changes in the business. If you look at Q1 to Q2 to Q3, you go 27 to 41 to 36, as we've talked about over time, doing the four-quarter rolling average really gives you a better view, I think if you look at our guidance, it's consistent with that. We'll continue to have that statistic subject to fluctuations that have nothing to do with growth, can have more to do with timing. I think if I look at Q3, it's a quarter where it was pretty consistent, in terms of impact of those kinds of timing factors.
Perfect. Thank you, guys.
Next question comes from Stan Zlotsky with Morgan Stanley. Please go ahead.
Hey guys, good afternoon. Thank you for taking my question. Wanted to come back to international because very impressive results there. Within international, which geographies are you guys seeing the most traction in? I have a quick follow-up for Mike.
Yeah, you know my perspective on international, it's actually been strong across the board. There are definitely areas where you'll see us talk more in the coming year about our investments and our focus areas, where you will see where we see that enthusiasm. But I think what you're gonna see is sort of the same strategy we've had in the past, which is we want to focus on a core set of countries. As you know, we initially had most of our success in the common law countries, like obviously the U.S., but the U.K., Australia, Canada. Now we're actually seeing in the civil law on top of that, so that's places like France and Germany and Brazil and Japan, that same sort of market traction. I think our view is it's consistent across the board.
I don't know, Mike, if you have any different perspective on it, but I think that's how we look at the international.
Got it. Mike, just a quick one more sanity check on our favorite topic of billings, following up on Alex's question. Was FX an impact on billings in the quarter and on net revenue retention? Very nice 117 result there. How should we think about net revenue retention heading into Q4 and beyond? Thank you.
Stan, on FX, no, not really any material impact or trending change on that. The 117 we're very happy with. I've mentioned a couple of the contributing factors. I also mentioned the range. As I said in prior quarters, I think right now where our business is at is we're going to continue to perform somewhere in those mid-teens. We can have strong quarters where it takes a bit up, quarters where it's a little bit less than that, overall, right in that range. We feel very good about it. I think it's a proof point for us that being able to offer this broader portfolio of products is starting to gain some traction for us.
Perfect. Thank you.
Next question goes to Rishi Jaluria with D.A. Davidson. Please go ahead.
Hey guys, thank you so much for taking my questions. First, just wanted to maybe ask a higher level in terms of the idea of verticalization of your solutions. You've obviously gotten a lot on the real estate and mortgage side, more as proof of concept than being a massive vertical in terms of revenue. Just wanted to get a sense for how you're thinking about future potential for verticalization to kind of increase your footprint in verticals that you may not have a massive footprint in today, and then I've got a follow-up.
I think first and foremost, Rishi, this is a horizontal software platform, it is gonna be a horizontal software platform at its core for years to come. That not is just specific to eSignature, but I think that really applies across the overall DocuSign Agreement Cloud. That said, you're absolutely right. We had certain verticals which have been very successful for us, and we've had certain verticals where we have done additional software development. Healthcare life sciences is a great example, where we've actually looked at opportunities to develop very specific use cases and specific software around CFR Part 11 for the sort of drug development side of that business.
I think in general, what you're gonna see us continue to focus on is how we go to market with verticals and how we build not so much additional separate software, but all the other components around go-to-market. That could be our services, our working with systems integrators to really bring broader solutions to the verticals. Then in terms of your question about sort of additional new verticals, we're pretty broadly placed in the market. To date, we talked a little earlier on the call about government as a vertical, and particularly federal, which is one that was not a large opportunity for us prior pre-FedRAMP and IL4. That would be an example of a vertical where we'd see, I think, additional growth opportunity that might be substantial relative to the piece we have today.
Again, I really would focus you on the construct of it's a horizontal platform, and that's how we really want to be building this business going forward.
Got it. That's helpful. I wanted to follow up on Pat's earlier question, just about on the macro side. Just wondering, in terms of customer buying behavior, we've heard a couple SaaS companies during this past earnings season, highlight that they've seen customers maybe shifting more to monthly versus annual. I know you disclose average contract length, and it's been typically in this 18-19 months on a dollar-weighted basis, so no changes from the numbers that we could tell on the outside. Just wanted to get a sense of, is that anything that you're seeing of customers preferring to not prepay more in advance or anything like that? Thanks.
Yeah, we really haven't. As to your point to the earlier macro question, believe me, it's something we talk about. We meet with our sales leaders. We try to understand if we see something in the marketplace that's different. I hope it's not that we don't have our finger on the pulse. I think we do, but we're not seeing anything of any significance. Specifically, as you said, when you look at the contract periods, they haven't changed in any significant way. At this point, Mike, I don't have anything else to add, but my view is we're really not seeing anything impactful to our business in the macro environment.
Yeah, just to summarize, I think that if you look at the underlying billing patterns in the business, they haven't changed. I do think that there are customers that would like to push for more monthly or quarterly billings. We don't really allow for that in the model, but for rare cases, and just as a reminder, where we do have multi-year deals, we still bill those out annually. The duration in the business has been pretty stable.
Great. That's helpful. Thank you, guys.
Next question comes from Karl Keirstead with Deutsche Bank. Thanks. Please go ahead.
Hi. A question for Mike. I'd like to ask you about the seasonality of billings. It is not uncommon for SaaS companies, when you start moving past $1 billion in revs, to start seeing a little bit more of a traditional 4Q skew. When I look at your billings guide for this year as a percentage of total year billings, it is like to the decimal point exactly the same, 32.6% as you put up last 4Q. I am just curious, I know you are not going to give us billings guidance for fiscal '21 on this call, but when we model the seasonality, similar, slightly different, bit more of a 4Q skew next year? Any comment, Mike?
I would say, Karl, nothing that would look like an inflection change. I think you're right. The natural tendency of a SaaS business over time is to have sort of a growing influence of the underlying seasonality, and we will probably see that going forward. But I wouldn't make any dramatic changes from what you saw this year.
Got it. Mike, could I ask you a follow-up? I'm sorry you went through it a little quickly, but do you mind going back to that 117% net retention number? Because I think that's significant and the highest number you've posted since you went public. Do you mind just repeating the factors that contributed to that and why that wouldn't be a leading indicator that we should be paying attention to?
I do think it's a very strong indicator. I wouldn't want you to think that it's not something to pay attention to. That's why we spend a fair amount of time discussing it. What I said was that really this quarter, it was strong. The biggest contributors to that strength is we were particularly strong in our upsells in North America, and in North America particularly in our commercial business, was just a very good quarter for us. In addition to that, as I mentioned, in the U.S. primarily, we also saw good continued traction increasing with upsells of CLM into the installed base. Those combined had it tick up.
I think just from an expectation standpoint, as you've seen in the last several quarters, we continue to reiterate that range of 112-119, and within that, you can have strong quarters or not as strong quarters, all fall within what we consider to be the norm. My view right now is the business, what we have visibility into is that it should stabilize somewhere in those mid-teen kind of ranges of performance, and we continue to believe that.
Okay. That's helpful, and congrats on that good upsell performance.
Next question comes from Kirk Materne with Evercore. Please go ahead.
Yes. Thanks very much, and I'll add my congrats on the quarter. Dan, were there any commonalities when you look across the customer base that's taking on the CLM product at this point in time? Meaning, any verticals that are maybe more willing to take that or more interest in that product today? I'd just be interested also within those kind of upsell opportunities or frankly, just sales opportunities, are you going in at sort of a higher level within the customer? Meaning, do those become more maybe C-level discussions or at least heads of business discussions maybe versus where you sell the eSignature product originally? Thanks.
Yes. A couple thoughts. I wouldn't say there's something dramatic from a vertical standpoint. We do see the demand across some of our big verticals, telecom, financial services, government. We really see a very broad-based demand for CLM capabilities. The place that it's different maybe than our broader eSignature mix, it does tend to be focused on people that have some sort of process, either in the sales process, which is probably the area we see most common. It's one of the areas with Negotiate, we did, as I mentioned earlier, build that out for the Salesforce ecosystem first because of their strength in CRM. It's, yes, it's less about vertical and more about that business process. To your second question about how we go to market and where we sell in.
I think it's very similar to the customer set that we would speak to about our traditional signature product. I think your insight about maybe being sometimes a little more senior can be the case because you oftentimes have to work with multiple groups. We've talked about this before, that the CIO might get more engaged because there's a bigger integration effort, or there could be, from a systems integration standpoint, a professional service component with an SOW, and that might involve an additional aspect of legal or CIO to be reviewing that. Because we get a little broader and talk to a few more people, I think that might slightly push us higher in the organization. I wouldn't want to give you a sense that it's significantly different.
I think it really is those core leaders of businesses, business units, or functions that are looking to modernize their system of agreement, and that's why they're talking to DocuSign.
That's helpful. Then Mike, one really quick one for you on just for cash flow and cash flow yield and maybe how we should think about that going forward. I realize you had the settlement in this quarter, should cash flow yield over the longer term mimic essentially operating margins for the most part? Is there anything, I guess, we should think about that would create a gap between that sort of progress on a year-over-year basis going forward? I know you probably don't want to be too specific about right now on next year, just anything we should consider as we start to think about next year and cash flow for next year. Thanks.
I would say that, just to reiterate what we've stated in the past, we think we're on track on a long-term target model of a 20%-25% operating margin. I think the way to think about cash flow is that over time, it should precede that, just because we are a SaaS subscription business, and we do bill, as we were talking about before, upfront. You would expect that there would be a lag on the operating margin, which is the legacy indicator off of revenue. Then the cash flow percentage should come in overall above that.
Okay. That's helpful. Thanks very much.
Next question comes from Bhavan Suri with William Blair. Please go ahead.
Hey, thank you for taking my question, and like everyone else, I'll echo my congrats on just a fantastic quarter and job there. I wanted to touch first on the analytics product. You've talked about using the data to offer analytics, and lots of SaaS companies have, but I'd just love to understand the timeline for the opportunity and potential use cases. How do you think about that? Actually more importantly, what does that do to your TAM? A couple questions there, and I got a quick follow-up.
Yeah. Let me start off. When we talk about analytics, to be clear, there's really, as your question indicated, multiple components of it. We have analytics offerings that are around what I would really say are reporting. These are not advanced analytics. This is helping people, the administrators that use DocuSign, understand their usage, understand where in their organization people are effectively using DocuSign, and that's a very operational component. We have opportunities where people start to say, "This information that's contained in my agreements is valuable for potentially running my business better." We have the opportunity for people to extract information about their agreements. Again, help them run their core business better. That's where we're getting now into what I would really call our analytics type products.
We do partner effectively with Seal, a company that we've made an investment in, to do what we would call advanced search capability or intelligent search capability, where people now have the ability, as they think about their overall system of agreement they're trying to manage with the DocuSign Agreement Cloud. That gives them the ability to say, "I can get very significant information about my business and about my agreements." One of the examples we like to use that's been very prevalent for some of our bank customers, if they had agreements that were done on LIBOR, they now realize they got to go ahead, and with LIBOR going away, go back and find all those agreements and recast them. This gives them an ability to really quickly and efficiently find access to that. That would be, again, a more advanced analytic.
We look at it across all of those different components. We think that increasingly our customers are saying there's tremendous value in getting knowledge about and information out of our agreements, and that will, I think, continue to be a growth area for us.
Got it. Yeah, that contract management and understanding what's in contracts I think is critical. There's a number of guys, Seal, obviously one on the legal side, RhinoDox on the manufacturing side, but thinking about these contracts and documents and what you have to do with them, your ability to pull that together is very powerful. One last quick one, maybe nitpicky on competition here. Any changes in competitive environment? Are you seeing more of HelloSign after the Dropbox acquisition? Just anything you're seeing over there that's changed or maybe different in the competitive environment? Thank you.
Yeah, we don't have anything new for you on competitive. Mike and I do a thoughtful review, well, all the time, but particularly before we get on this call so we can be thoughtful in giving you guys any indication of something different in the marketplace. As we talk to our sellers, we haven't seen any change really across the year. We continue to be very focused on trying to understand what we see competitors doing. In general, when we see competitive pressure, it's not about someone having a solution or an offering that's better than DocuSign. It's about people coming in at a much lower cost and trying to find folks that might be willing to flip for a dramatically lower cost. That's unchanged, and I would say that the competitive dynamics are very similar to how they've been throughout the whole year.
Awesome. Helpful, guys. Thank you so much. Congrats.
Thank you.
Next question comes from Kash Rangan with Bank of America. Please go ahead.
Hi. This is actually Jacqueline Cheng on for Kash. Thanks for taking the question, and congratulations on the quarter. I noticed that sales efficiency, as measured by sales and marketing over incremental revenues, have been in the 1.9-2.0 range for some time. This quarter, you guys actually improved significantly to 1.7. Can you talk a bit about what caused the improvement?
Yeah. Hi, Jacqueline. I think it is all the factors we've been talking about for some time, which is over time, of course, as our sales force improves down the learning curve of things like DocuSign CLM, for example, and some of these other new elements to the business, we're going to be driving better leverage in the sales organization. If you look at the fact that some of our markets, I mentioned before, our newer markets are going to be more weighted towards newer customers than upsells, just because we're earlier in those markets. Statistics like that will have a mix of various contributors depending upon how long we've been in a particular space or a particular product. I wouldn't want you to come away thinking that it is sort of this monolithic statistic that applies to everything equally.
That statistic will look a little bit better in a more mature market like the U.S. It will look a little bit earlier in markets like, for example, a Brazil or a country like that. Overall, our focus is on continuing to improve the productivity of our sales force through offering new technologies that they can bring in, them moving down the learning curve. All of those elements that I think combine to improve the leverage over time towards what we think that target model long term is a 35%-40% of revenue type model.
Got it. Awesome. Thanks so much.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Walter Pritchard with Citi. Please go ahead.
Thanks for taking my question. You added 5,000 commercial and enterprise customers in the quarter on the backdrop of a net retention rate of 117%, both of which look like all-time highs. Was there any change in the average deal size in the quarter on a year-over-year basis? Are these new customers landing at smaller ACVs? I have a quick follow-up.
I don't think there's anything at all significant in deal sizes. I think the reason we're hitting those records is that we continue to grow as a business. I think our expectation, as you think about the guidance for Q4, is that we will also continue to grow and have that kind of performance. I don't think there's anything that's different in the makeup there.
Yeah, I think in any particular quarter, anecdotally, you can have one quarter have a little bit stronger performance in larger enterprises, other quarters have a bit of a stronger performance in commercial. On a blend, I totally agree with Dan. If you look at our overall diversification among customers, we don't have a customer that makes up even 2% of our revenue. That continues to be true.
Thanks. That's helpful. Was SpringCM included in the year-over-year expansion figure, or is this pure eSign expansion?
It's included in both this quarter because this is the first quarter where we had it in fiscal 2019 numbers as well as fiscal 2020 numbers for Q3.
That's helpful. Thank you.
I will now turn the call over to management for final comments.
Thank you all very much for joining us. We'll look forward to seeing you out on the road and talking to you next quarter. Thank you.
This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.