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DocuSign (DOCU +23%) is surging today following its Q3 (Oct) report last night. The e-signature/contract creation giant reported a fairly modest EPS beat as margins were quite strong. Revenue rose 7.8% yr/yr to $754.8 mln, which was also better than analyst expectations. DOCU also guided to upside revenue for Q4 (Jan). We think a strong billings number and early success of its Intelligent Agreement Management (IAM) platform is driving the stock today.

• In terms of the key operating metrics, billings is a closely watched number. Billings in Q3 grew 9% yr/yr to $752.3 mln, well above prior guidance of $710-720 mln. Following a fairly downbeat billings number in Q2 (Jul), we think investors were happy to see billings bounce back in Q3. Early renewals drove approximately one-third of the billings outperformance, with the remainder coming from better retention performance, digital growth, and early IAM contributions.
• As a reminder, quarter-to-quarter billings can fluctuate due to the timing of deals. Also, DOCU is known for lowballing billings guidance then reporting nice beats. However, after reporting in-line last quarter, this was a marked improvement in Q3. On margins, non-GAAP operating margin jumped to 29.6% from 26.8% a year ago. This was ahead of 28.5-29.5% prior guidance.
• Turning to IAM, DOCU talked a lot about this on the call. DOCU has described IAM as its most important launch in recent history. The Docusign IAM platform is a significant departure from its past approach of only offering standalone products. This platform combines current products (eSignature, CLM) with new platform services, including Docusign Maestro, its new agreement workflow builder which automates the creation of agreements without using code.
• Following IAM's launch in late Q2, DOCU saw encouraging signs of early traction with growing IAM deal volumes and customer engagement. IAM deal volume grew rapidly from Q2 into Q3 as its sales teams have embraced the opportunity as 80% of its reps closed 3+ deals, and nearly 60% have sold 6+. Also, in Q3, DOCU closed more than 10x as many IAM deals as it did in Q2, with deal volume increasing every month in the quarter.
• Early sales momentum has outpaced expectations. In Q3, DOCU accelerated the rollout of Docusign IAM and gained traction with small and mid-sized customers in the US, Canada, and Australia. DOCU is also seeing strong customer engagement with the IAM platform. Customers are increasing their usage of IAM applications, particularly Navigator, each month they are live on the platform.

DOCU's fairly modest Q3 upside and solid guidance do not seem to warrant such a big move in the stock today. However, DOCU's billings metric seems to matter to investors more than it does for other companies. Also, billings bounced back nicely in Q3, which is a sigh of relief. Finally, its IAM platform is still in the early days after launch in late Q2, but it sounds like it is off to a great start and that is getting investors excited.