DocuSign (DOCU) Q3 Recap

DocuSign announced Q3 FY2021 earnings on December 3rd. The results were strong, with large beats on both revenue and EPS. Additionally, they raised Q4 and full year estimates by a wide margin. Annualized revenue growth continued to accelerate past the 50% mark in Q3 and appears likely to repeat the same for Q4. DOCU stock popped over 5% following earnings, after increasing 6% in anticipation the day before.

On the earnings call, the leadership team spoke to the significant opportunity for DocuSign beyond eSignature, highlighting continued growth in international, renewed customer interest in the full suite of CLM services, new AI-driven offerings and the introduction of Notary. These factors should maintain momentum in 2021, as tailwinds mitigate from social distancing mandates. In this post, I review DocuSign’s Q3 earnings results, customer activity and other business updates. I also dig into product enhancements, fueled by internal development efforts and the integration of thoughtful acquisitions. Finally, I revisit the competitive landscape and DocuSign’s unique position as the dominant player in a large addressable market. For additional information on the DocuSign investment thesis, interested investors can read my past quarterly updates and original deep-dive.

Headline Financial Results

• Q3 FY2021 Revenue was $382.9M, up 53.5% year/year and 11.9% sequentially. This compares to the consensus estimate for $361.3M, which would have represented growth of about 45%. Q2 Revenue growth was 45%, with Q3 delivering a strong acceleration.
• Q3 Non-GAAP EPS was $0.22 vs. $0.13 expected, representing a beat of $0.09. This compares to $0.11 in Q3 FY2020 and $0.17 in Q2.
• Q3 Non-GAAP operating income was $49.1M, representing an operating margin of 12.8%. This compares to operating income of $16.9M in the prior year period for an operating margin of 6.8%. Q2 operating margin was 9.8%, also demonstrating increasing profitability.
• Q3 FCF was $38.1M for a FCF margin of 10.0%. This compares to FCF of -$14.1M in Q3 FY2020 for a FCF margin of -5.6%. In Q2, FCF spiked to a margin of 29.2%, as a result of strong collections. On the earnings call, the CFO said that they expect cash flow to vary quarter-to-quarter due to the seasonality of the billing cycle and expenses.

• Q4 Revenue estimate of $404-408M, representing growth of 47.7% year/year at the midpoint. This compares to the consensus revenue estimate of $387.5M for 41% growth. If DocuSign beats the Q4 estimate at the same relative magnitude as Q3 (about 8%), they will once again deliver revenue growth over 50%.
• Q4 Non-GAAP estimated operating margin range of 9-13%. The Q3 range had been set at 5-9%.
• FY2021 Revenue guidance was raised to $1.426-1.430B, representing growth of 46.6% at the midpoint. This compares to the consensus revenue estimate of $1.385B for 42% growth. This translates to a raise of about 4.5% on annualized revenue.
• FY2021 Non-GAAP operating margin guidance of 8-12%, up from 6-10% set in the prior quarter.
• Ended the quarter with cash, cash equivalents, restricted cash and investments of $675.6M.

Other Performance Indicators

• Q3 billings were $440.4M, up 63% year/year. This compares to the consensus billings target set by analysts of $386.6M, for 43.5% growth, and the company’s prior estimate from the Q2 report for $385M at the midpoint. This represents a beat of about 20%. In Q2, billings grew 61% year/year, so billings growth accelerated slightly. Billings provides insight into future revenue streams.
• Q4 billings guidance is $512-522M, which would represent annualized growth of about 41% at the midpoint over Q4FY2020 billings of $366.9M. While on the surface, this appears to represent a deceleration, we should keep in mind that the Q3 billings beat was about 20%.

• Subscription revenue was $366.6M, up 54% year/year. Professional services makes up the other $16.3M in revenue and grew 43% year/year.
• Non-GAAP gross margin was 79%. This is inline with the rate from a year ago. Q2 gross margin was 78%. The full year target is for 78-80% gross margin.
• Breaking down Q3 Non-GAAP expenses by category, we see nice year/year reductions in relative percentage of S&M and G&A. R&D spend was roughly inline, reflecting continued investment in building out the product portfolio.
  • S&M = 43% (versus 48% in Q3 FY2020 and 45% in Q2)
  • R&D = 14% (versus 15% in Q3 FY2020 and 14% in Q2)
  • G&A = 9% (versus 9% in Q3 FY2020 and 9% in Q2)
• Ended the quarter with 5,364 employees, an increase of 44% over Q3 of last year. DocuSign had 5,008 employees at the end of last quarter for a sequential increase of 7.1%.

Customer Activity

• Total customer count increased to 822K at the end of Q3, representing 46% annualized growth and 9.7% sequential growth. This compares to 749K customers at the end of Q2, which had 39% annualized growth and 13.3% sequential.
• DocuSign has added significantly more total customers in the three quarters of this year over last year. They added 73k new customers in Q3, 88k in Q2 and 68k in Q1, as compared to 27k a quarter on average for the prior year. This large increase in customers in 2020 should translate into continued revenue growth in 2021, as DocuSign customers typically expand their spend after the 12 month mark.
• Enterprise and Commercial customers (which represent those with over 10 employees and landed outside of the self-serve channel) grew by 14k to 113k total in Q3 for 64% annualized growth and 14% sequentially. In Q2, DocuSign added 10k customers of this size, for 55% annualized and 11% sequential growth.
• These large customer adds are significantly higher than for corresponding quarters in the year ago period. This year, DocuSign has added 12.6k large customers each quarter on average versus 6k each quarter last year.

On the earnings call, DocuSign’s CEO talked about how the heightened demand trends that emerged in Q1 and Q2 continued through Q3. These have primarily been focused on the core eSignature product offering. Growth has been driven by both customer adds and expansions of existing customers into new use cases, departments and countries.

• Q3 DNER increased further to 122%, representing its highest point in over a year. This is up the prior quarter value of 120%. For the year before that, DNER ranged from 119% to 113%. DocuSign’s strong increase in customer adds (up 46% year/year) and DNER over 120% should combine to drive high sustained revenue growth.
• Customers with ACV greater than $300K grew 35% year/year to a total of 542. This is up 4.2% sequentially from the Q2 value of 520. The growth in this metric is trending down, from 41% year/year in Q2 and 46% year/year in Q1. Larger spend customers are tied to DocuSign’s enterprise products, like CLM. As customers in 2020 have reacted to social distancing mandates and are concerned about the macro environment, they have focused spend on eSignature and postponed larger projects involving the full contract management lifecycle (CLM). DocuSign leadership reported on the earnings call seeing new interest in the CLM business at the tail end of Q3 and expects this side of the business to pick up in 2021.

On the earnings call, DocuSign leadership talked about why customer spend growth is accelerating. Customers are underestimating their potential usage of DocuSign at contract initiation. DocuSign sells eSignature on a capacity basis, meaning the customer anticipates a certain volume of agreements to execute each month. Customers are hitting these capacity targets earlier than expected, causing them to request renewals at a higher capacity volume. This is being driven by customers moving more use cases onto electronic signature than previously expected, as a result of internal demand, as employees find new applications for eSignature.

While eSignature still remains the primary revenue driver, DocuSign’s leadership is starting to see demand for Agreement Cloud pick back up. As investors will recall from Q2, leadership discussed how customers were laser focused on enabling digital signature immediately and were not interested in the broader CLM process or the Agreement Cloud. In Q3, this started to change. While customers still maintain high demand for eSignature, they started looping back on consideration for the full contract lifecycle enabled by DocuSign’s suite of Agreement Cloud products.

After COVID sort of hit and halfway through our first quarter, we saw a fairly significant change. We saw customers coming back to us saying, “Yes. Long term, we want to be Agreement Cloud companies. But right now, we’ve got some critical use cases that we need to get up for signature.” And so we saw this dramatic acceleration on the signature side of the business and some slowing of deals and some slowing of those transactions of people who were working with us on the CLM side.

I think we’ve seen the same thing throughout the year. And in the last quarter or so, though, we started to see that coming back. So things like the Seal Software, things like CLM, those are now businesses that are returning to the levels we would have expected if it hadn’t been for COVID. And we think CIOs and other business leaders are fundamentally — had a reaction upfront, which was, “I can only work on my critical projects.” Remember, they were, just like DocuSign, having to go to a work from home setting and they weren’t in their offices.

And so larger and more complex projects that require a systems integrator or at least some sort of statement of work, those got pushed out a little bit. Now people are coming back and saying those are critical to our future. And so the Agreement Cloud is right back where we want it to be in terms of top of mind with our customers. And I’ll just give you a quick example.

I had a call this morning with a very large customer of ours. And they said, “Hey, we’re super excited to be now reaccelerating our plans to roll out CLM.” While they had been dramatically increasing their signature usage over the course of the year, they said, “Now is the time. We’re ready to reaccelerate with CLM.” And I think that’s what we’re going to see throughout the next few quarters.

DOCUSIGN Q3 FY2021 EARNINGS CALL

Another factor for investors to keep in mind is that the DocuSign sales team typically revisits customers after 12 months of usage. The one year anniversary provides a milestone to schedule an engagement review. At this point, customers have often experienced some ROI from their initial eSignature use cases and are open to suggestions for new ones. This often results in an upsell. With 3 quarters now of record new customer addition rates, this upsell cycle should drive expansion in the second half of 2021.

On the earnings call, the DocuSign CEO shared some customer wins and upsells from the quarter.

• International e-commerce customer. To ensure their business processes could keep pace with the growth driven by the pandemic, the customer deployed DocuSign CLM in Argentina, Chile, Colombia, Mexico, the U.K. and the U.S. By automating contract management for more than 1,500 different agreements with vendors and partners, they are lowering risks, costs and errors.
• Large U.S. public school district. They needed to adapt quickly to help tens of thousands of employees and over 300,000 students to teach and learn remotely. By partnering with DocuSign, the customer completed federal funding forms electronically and launched a virtual back-to-school program. And they’re now planning hundreds of use cases to support other future needs. 
• Large U.S. insurance customer. As part of their response to COVID-19, the company expanded into several new eSignature use cases, which drove nearly 100k additional transactions over just the past seven months. The insurer believes this will become business as usual going forward and that they won’t regress to paper-based processes after the pandemic clears.

Economic headwinds did have some effect on a subset of customers in impacted industries. As the COVID-19 situation clears, DocuSign could see benefit as these companies are able to ramp up their digital migration and accelerate the transition to electronic signature.

International

For a company as large as DocuSign, international business makes up a small percentage. In Q2, revenue from sources outside the U.S. ticked up to 19% of revenue, from 18% in Q1. For Q3, international reached the round number of 20% of total revenue. From the CEO’s perspective, this is still too small. He discussed this opportunity at a couple of analyst events in September, including the D.A. Davidson Software Conference and the Jefferies Software Conference. The CEO views international as DocuSign’s largest untapped growth opportunity.

This perspective makes sense and appears to be playing out. In Q3, international revenue hit $76M, for 77% year/year growth. This growth rate is up from 59% in Q2 and 46% in Q1. The growth rate for international was higher than the 53% growth DocuSign achieved in overall revenue for Q3. While it still makes up a small percentage of total revenue, this heightened growth rate in international should provide further support for maintaining high revenue growth overall, as we move into 2021.

On the earnings call, the CEO talked about international expansion moving beyond DocuSign’s “core 8” countries. As investors recall, DocuSign’s international expansion was initially focused on those English-speaking countries that adhered to common law practices. They later added a few of the larger civil law countries, based on size of opportunity. Currently, the “core 8” consist of the US, UK/Ireland, Canada, Australia/New Zealand, Germany, France, Brazil and Japan. DocuSign has invested people and sales support processes directly in these eight countries. However, with demand coming from countries outside of these eight, DocuSign is generating new sales through digital channels. This represents an incremental opportunity for DocuSign, beyond the growth in the “core 8”, as they consider adding local sales teams to serve these countries and land larger customer business.

Much of the success in international is being attributed to DocuSign’s former CFO, Mike Sheridan. Given the positive results from his initial focus on a trail basis to drive growth in Europe, Sheridan was promoted last quarter to President of International. He now runs the entire go-to-market effort for the international business. Given DocuSign’s low penetration internationally, there is likely a lot of low hanging fruit in new markets.

The DocuSign leadership team thinks the international business could eventually be as large as the domestic. This growth will be important for investors to monitor going forward, as accelerated revenue growth internationally will help offset any future deceleration in the domestic business, as the COVID-19 surge normalizes.

System Integrators

DocuSign has maintained long-time relationships with various partners. First, they work with the large enterprise software vendors to build integrations into their systems to allow users to pass data to the DocuSign platform and execute agreements within their user interface. These relationships have thrived during the COVID environment as usage of electronic signature has increased. DocuSign also has resellers that offer DocuSign products to their customers, while they are purchasing other IT equipment and services. These resellers have been benefitting from the surge in eSignature as well.

With large CLM implementations put on hold, activity with System Integrators lagged this year. However, as IT spending is picking back up, this is re-emerging as an important sales channel for DocuSign. Large customers will engage a systems integrator to assist with Agreement Cloud implementations. DocuSign has seen increased interest from these SIs, who are looking to build out a practice around Agreement Cloud implementations. Further, they are attaching Agreement Cloud and eSignature implementations to their existing Salesforce, Oracle, SAP and Workday practices, bringing DocuSign into customer deals as an extension of the use cases and workflows being addressed in those enterprise systems.

Government

DocuSign has built a business operation specifically to handle sensitive government activities and serves customers at the federal, state and local level. In the era of COVID-19, this offering has seen significant interest, as many government organizations have traditionally put off digital transformation. Yet, with mandated social distancing, they had little choice but to move standard form-based workflows online verified by a digital signature. By addressing this requirement, they have realized other benefits in cost savings and citizen engagement.

Some of the use cases that DocuSign has served with their eSignature and contract lifecycle management solutions for government entities include:

• Grants and lending
• Tax filing
• Government procurement
• Social services and program sign-up
• Permits and licensing
• Employee on-boarding and off-boarding

To address the government need, DocuSign built a dedicated Agreement Cloud for Government. This is physically separate from the hosting of the private sector Agreement Cloud. This cloud environment runs on dedicated servers that only contain government data, including access keys and agreement envelopes. This high-security environment is meant to minimize risks by segregating government data from private sector and consumer data. DocuSign has achieved DoD IL4 certification and FedRAMP authorization at the Moderate level, which is beyond competitive offerings. DocuSign services are available to government agencies as listed on the FedRAMP Marketplace.

On the earnings call, DocuSign’s CEO highlighted the government opportunity in response to an analyst question. He described this year as representing strong traction with government agencies, practically an “inflection”. DocuSign is focusing on positioning themselves as the primary enabler of online agreements for any government entity. They are focusing resources in marketing and business development to unlock these opportunities, particularly in the federal sector. Given that many agencies have a mandate to move processes to digital workflows, the CEO thinks that next year could provide an acceleration in government business.

Analyst Reactions

Following DocuSign’s Q3 earnings results, 9 analysts provided updated coverage ratings. Six analysts set a Buy rating and three have a Hold equivalent. Analysts without an outperform bias commented that the quarter was strong, but expressed concern that DocuSign might face a slowdown in 2021 after such a strong year. The average price target for all analyst updates is $277, representing a 14% increase from the closing price after earnings of $243 on December 4th.

Date	Analyst	Rating	Price Target
12/9	JP Morgan	Neutral	Set at $271
12/4	Citigroup	Buy	Raised from $257 to $282
12/4	RBC	Outperform	Raised from $275 to $325
12/4	Deutsche Bank	Hold	Raised from $225 to $235
12/4	Pritchard	Buy	Raised from $257 to $282
12/4	JMP Securities	Outperform	Raised from $261 to $276
12/4	Needham	Buy	Raised from $240 to $275
12/4	Goldman Sachs	Neutral	Raised from $229 to $251
12/4	Oppenheimer	Outperform	Set at $300

Following the earnings report, RBC issued the highest price target of $325. Analyst Alex Zukin provided the following commentary.

RBC Capital analyst Alex Zukin raised the firm’s price target on DocuSign to $325 from $275 and keeps an Outperform rating on the shares. The company posted a “very strong” Q3, with billings growth accelerating for the third consecutive quarter, the analyst tells investors in a research note. Zukin adds that DocuSign’s success was evident in its core eSignature business deals, and it was seen across geographies and verticals.

THEFLY.COM, December 4, 2020

Deutsche Bank was less optimistic for the near term and maintained their Hold rating based on valuation concerns.

Deutsche Bank analyst Taylor McGinnis raised the firm’s price target on DocuSign to $235 from $225 and keeps a Hold rating on the shares. DocuSign reported another record print with Q3 billings growth, net retention rate and net new customer additions reaching some of the highest levels we have seen, McGinnis tells investors in a research note. Even though management’s tone on pipeline activity and deal momentum remains strong, they are suggesting that the recent high-growth rates are likely not sustainable, adds the analyst.

THEFLY.COM, December 4, 2020

Product Development Activity

The DocuSign product and engineering teams were busy during the last several months. A lot of focus in prior quarters has been on absorbing DocuSign’s two large acquisitions to form the CLM platform and begin incorporating AI/analytics capabilities into products to create new offerings. These initiatives are progressing nicely. Additionally, the team is building out the Notary solution, which was bootstrapped by the LiveOak Technologies acquisition. Beyond acquisitions, the development team added numerous new features to the platform with the Agreement Cloud 2020 Release 3 in November.

As investors familiar with DocuSign know, in July 2018, DocuSign announced the acquisition of Spring CM, which helped companies generate, automate, manage and store documents in their secure cloud. Customers used Spring CM tools to create documents from pre-approved templates and populate them with data imported from outside systems. They could then automate the distribution and approval of these documents. Once documents were received, Spring CM tools facilitated red-lining and negotiation. Finally, after the documents were signed, they provided a central repository for document storage and retrieval.

All of these tools provided the foundation for DocuSign to extend its functionality beyond electronic signature into a new category called Contract Lifecycle Management (CLM). According to Gartner, CLM enables enterprises to automate the process of authoring, negotiating, approving and storing business contracts. It also facilitates contract compliance by making executed contracts easy to search, track and monitor over time for changes to terms. The Gartner Magic Quadrant for CLM from Feb 2020 puts DocuSign in the Leaders category, largely attributable to the additional functionality brought by SpringCM.

This led to the launch of the Agreement Cloud in March 2019. This was an enormous release. It formally expanded the DocuSign offering from just eSignature to address the full agreement lifecycle. With this launch, DocuSign divided the agreement lifecycle into four steps, with groups of product offerings under each – Prepare, Sign, Act and Manage. The release also included three new product offerings – DocuSign Gen, Click and ID Verification. To align it with the broader ecosystem of enterprise tooling, the Agreement Cloud release included hundreds of integrations with other enterprise systems.

The diagram below illustrates the various steps that are part of the full lifecycle of a typical contract. As you can see, signature is just one step in this process. The Agreement Cloud automates all of these steps.

This broader platform of tooling to address every step in managing agreements is important for investors to consider. This illustrates why DocuSign is not “just an e-signature company” and represents an important competitive advantage. While the majority of new business for DocuSign starts with digital signature, mid-market and enterprise customers eventually broaden their adoption of DocuSign products to include more and more of these tools to automate the full lifecycle of agreements.

To further bolster their capabilities in the Manage step, in Feb 2020, DocuSign announced the acquisition of Seal Software. The Seal platform uses AI/ML to add intelligence, automation and visualization capabilities to enhance the contract management process. Technologies from Seal have been incorporated into the DocuSign platform to power their Intelligent Insights product offering.

Intelligent Insights layers AI capabilities over agreements to automate the monitoring of terms and conditions over time. This replaces the manual, scheduled review process often employed by sales and legal departments to check contract status. Intelligent Insights allows for modeling and categorization of individual clauses within agreements, like renewals or SLAs, as discrete data elements with measurable values. This way, teams can generate conditional triggers to flag compliance issues, send events to outside systems or surface upsell opportunities.

Comparable clauses between agreements can be displayed side-by-side for review. This can highlight inconsistencies in older agreements that need to be updated. Finally, data gleaned from agreements can be categorized into relevant business concepts and then visualized into useful summaries. These technologies provide the basis for future capabilities around smart contracts and observable agreements.

These acquisitions and the new capabilities they brought underscore the evolution of DocuSign’s product strategy. DocuSign started with eSignature, which represented the most common use case of digitizing signatures. They then built features around the contract execution step to help large customers manage all aspects of generating and storing agreements. This formed the basis of the Agreement Cloud to address the full lifecycle of the agreement.

While steps in the Agreement Cloud are automated, humans still manually manage most of the agreement workflow – involving review, collaboration, approvals, search, risk assessment and compliance monitoring. The next phase of DocuSign’s product development will focus on enhancing these core capabilities with AI and machine learning to make human steps more efficient and contract management “smarter”. This represents the third wave of development and was highlighted by DocuSign’s CEO as a large opportunity on the Q3 earnings call. Major enterprises employ hundreds of personnel in legal, procurement and operations teams to manage thousands or millions of agreements.

In their Winter 2020 IR presentation, DocuSign included a slide summarizing their key product set (above). While all of this is encapsulated into the Agreement Cloud, it is interesting how they have segmented the landscape into these four key product offerings. Given that DocuSign has generated significant revenue traction based on eSignature thus far, with some nascent contribution from CLM, they now add two new product categories to the prior two. This includes AI-driven capabilities that make agreement management “smarter”, labelled as Insight/Analyzer. On the Q3 earnings call, the DocuSign CEO discussed the idea that Analyzer is just the first of many product offerings that will leverage the new AI capabilities from Seal Software.

Beyond AI/ML capabilities, DocuSign is launching a whole product category in Notary. While attached to the “Sign” step in the agreement workflow, it captures a new revenue stream associated with supporting signatures that require an additional level of review by a certified notary. DocuSign will be addressing this category two phases, with first-party notary actively testing with some customers currently. Third-party notary is targeted for second half of 2021 and will represent a much larger opportunity.

DocuSign Analyzer

On September 30, DocuSign announced a new product offering called Analyzer, which builds on the advanced ML/AI capabilities gained through the Seal Software acquisition. Analyzer focuses on the pre-execution phase of agreements. It streamlines the analysis and negotiation of new agreements when a company first receives them. This product is an extension of DocuSign Insight, which allows companies to search, analyze and understand the agreements they already have.

DocuSign Analyzer offers the following core capabilities:

• AI-based clause analysis for incoming agreements. Analyzer’s purpose-built contract AI capabilities break agreements down into their core components, delivering an interactive list of clauses for fast, easy review and analysis of agreements based on the legal concepts they contain.
• Risk scoring of contract content to guide faster action. Analyzer provides shareable, easy-to-understand “red-yellow-green” scorecards calling out terms of interest, based on the organization’s legal and business policies. Teams can configure multiple scorecards to address a range of use cases.
• Microsoft Word Integration. Analyzer can deliver its functionality via a Microsoft Word sidebar, enabling teams to easily review and edit agreements without leaving Word. Analyzer is also compatible with Word Online for cloud-based review.
• Pre-approved language. Analyzer makes it easy to edit existing contract text with pre-approved language from an organization’s legal team. Clicking in the sidebar adds recommended primary or fallback language from the clause library to the agreement text.
• Workflow and routing integration with DocuSign CLM. Analyzer both enhances and benefits from the robust workflows of DocuSign CLM, enabling intelligent routing to the right stakeholders based on risk analysis. Key Analyzer functionality can also be accessed directly within the CLM document preview.

DocuSign Analyzer was in a private beta with a set of existing customers prior to this release. Beta customers reported “saving thousands of dollars per agreement” due to efficiencies in document review, red-lining and negotiation. Over many agreements processed by a large enterprise, this tool could drive substantial savings, in addition to risk mitigation and better customer experience.

Following the beta testing period, DocuSign Analyzer is now available as a formal product release in the US, UK, Canada and Germany. This represents an exciting addition for DocuSign, which further extends the capabilities of the Agreement Cloud and full lifecycle of contract management. It underscores the competitive advantage that DocuSign is accumulating through a deep build-out of capabilities around agreement management and analysis. These are time-consuming processes that legal, procurement and sales departments in large enterprise customers allocate substantial resources to address through mostly manual, non-automated review. By making this process more efficient, DocuSign is creating significant value for enterprises. This goes far beyond facilitating digital signatures. Also, DocuSign’s continued focus in training their AI/ML models for legal agreement context with real customer data ensures that they will maintain a large lead over competitors that try to apply generic AI engines over unstructured documents of all kinds in an effort to catch up.

There are likely more opportunities around the creation of “smart contracts”. As investors know, the concept of smart contracts was popularized as part of blockchain and represents the idea of making contracts or agreements organic. This involves active monitoring of all contract terms and triggering automated actions when the conditions for a term are/aren’t met. DocuSign already has support for blockchain constructs built into the platform. They put further development on hold for lack of customer interest. As interest in blockchain and process automation resurges, DocuSign will be well-positioned to serve the need.

Notary

In addition to the Spring CM and Seal Software acquisitions in the past, DocuSign announced the acquisition of Liveoak Technologies in July 2020 for $38M in stock. The Austin-based start-up facilitates remote online notary and other assisted agreement types. Their platform leverages web-based videoconferencing, rich collaboration features, identity verification and other tools to help complete an auditable transaction. Primarily, this enables remote notary-verified agreements. DocuSign previously had a solution to support notarized digital agreements through its eNotary offering, but that solution still required visual proximity. Liveoak’s product enables a fully remote agreement process that meets the stringent legal requirements for notarization.

DocuSign had a working integration in place with Liveoak’s platform prior to the acquisition, so minimal incremental development work is required to enable this capability as part of the Agreement Cloud. This will be launched as a new product called DocuSign Notary with its own pricing structure. It will focus on remote online notarization (RON)—where audio-visual technology is used to complete a notarial act when the signers and the notary public are in different places. The product is already in private beta, with plans to offer an open beta by the end of this fiscal year (Jan 2021).

In the D.A. Davidson Software Conference, DocuSign’s CEO mentioned that he expects “meaningful volume” from the new product to hit in Q1 2021. This product launch has the advantage that Liveoak has a set of existing customers, including some of the world’s largest financial institutions. Similarly, several DocuSign enterprise customers were immediately interested in this new product once announced and are already participating in the private beta.

The first phase of RON will be for “first-party” notarized transactions. This is the case where the enterprise customer employs the notary and simply needs to bring that person online in order to execute the transaction. This phase is easier to spin up, as the customer is providing and authorizing the notary. DocuSign’s CEO estimates that this first-party business has about a $1B TAM and he expects DocuSign to capture a large share of it.

After launching first-party transactions, DocuSign will expand to third-party notary agreements. This market is much larger (estimated at $30B), but would be more involved logistically, as DocuSign would need to line up a stable of notaries by state and verify them. These could then be made available for any organization or consumer that needs a document notarized, similar to the process one might use at a local FedEx or UPS office. The CEO expects to have this available for roll-out in the second-half of 2021.

DocuSign leadership believes that DocuSign Notary will do for notarization what eSignature did for signing. It will enable a dramatically better experience for everyone involved from wherever they may be. They view this as a natural extension of their eSignature business. Like with digital signatures, once customers and end consumers use remote online notarization, they don’t expect them to return to the legacy process.

While a total TAM of $1B for first-party notary services is smaller than DocuSign’s current annual run rate of about $1.4B, if DocuSign can rapidly roll out the service to existing enterprise customers and capture a large share, it could become a meaningful revenue contributor in 2021 and beyond. The larger opportunity of third-party notary services would add to this over the next 2-5 years.

Agreement Cloud Releases

In addition to integrating and extending the AI/ML and online notarization capabilities gained through acquisitions, DocuSign continued to drive internal product development efforts. These have been substantial as well, demonstrating that DocuSign can grow effectively through a combination of organic and inorganic activity.

On November 12, the DocuSign product and engineering teams launched the Agreement Cloud 2020 Release 3. This follows the Agreement Cloud 2020 Release 2 on July 6. Release 3 was billed as the largest Agreement Cloud release to date. Given that it followed Release 2 by just four months, this represents a pretty impressive pace of development.

Investors can read through the entire Release 3 blog post for a full listing of all the changes. The release was packed with 12 new features for existing products eSignature, CLM and Click. These features improve the usability, efficiency and effectiveness of these products.

• eSignature for Slack. This features a chatbot that enables users to send and sign documents from directly within Slack, eliminating the need to switch between apps. Given the recent acquisition of Slack by Salesforce, this integration will likely layer over DocuSign’s existing deep integration with their CRM tools.
• SMS Delivery.  Signers can be sent real-time notifications directly to their mobile device. This will help speed up business transactions in a mobile-friendly experience.
• Agreement Actions. Allows administrators to configure rules to automate common post-signature actions. This includes the ability to archive completed documents to a cloud storage provider (e.g. SharePoint, Box, Dropbox, Google Drive), export data to Google Sheets and start workflows in CLM. 
• Drawing. Enables a sender or signer to upload an image to the agreement. Allow signers to leave free-form markups on the image—all directly within the document. For example, a car insurance company can request consumers to upload an image and highlight damages to their vehicle within the claim document. 
• Search enhancements to Organization Management. This feature helps users find the agreements they need. Admins can create custom search experiences using advanced filters based on agreement field data, as well as control which agreements are discoverable by specific user groups. 
• eSignature iOS App Updates. Includes an improved user experience and new features (e.g. drag-and-drop tagging).
• Manage a list of parties in CLM.  Allows users to create a list of parties, like vendors, and view agreement history per party. This is applicable for procurement users, helping streamline the procurement process and making it easier to find, organize and report on existing vendors and agreements.  
• Chart-based Dashboards.  Visualize the stages of contract workflows, providing users with a single view to manage important tasks and to identify high value activities.
• Localized CLM Experience.  Adds support for French, German, Dutch, Spanish and Portuguese users.
• Send Clickwrap Agreement via a URL.  In addition to embedding a clickwrap on a website or app, users can send a URL to another party with a request to agree to whatever terms are specified.
• Clickwrap Test Page. Test the end-user experience of a configured clickwrap before deploying it.
• Inline Clickwrap Language Editing. Prevents the user from editing outside of the app and then uploading changes.

Release 3 also included several new product offerings for the Agreement Cloud. These are substantial additions. I provided a detailed review of Analyzer above.

• DocuSign Analyzer. Provides an AI-driven tool for the pre-execution stage of agreements, streamlining negotiation and reviewing inbound contracts for risk.
• DocuSign CLM+. Embeds the AI-driven capabilities from Analyzer and DocuSign Insight into broader contract lifecycle management workflows.
• DocuSign Monitor. A service that monitors activity tied to a customer’s DocuSign accounts, looking for malicious behavior associated with login attempts, deleting envelops or accessing a broad array of documents. Alerts with user activity details can be sent to security personnel to review.

Future Focus

On the Q3 earnings call, the DocuSign CEO outlined R&D priorities for next year, in response to an analyst question. He identified three areas that should help drive incremental revenue, beyond momentum with eSignature and the rekindling of CLM project implementations.

• More AI Extensions. Building on the AI capabilities gained through the Seal Software acquisition, DocuSign plans to apply automation and AI to other aspects of the agreement process. From the CEO’s perspective, the Analyzer product release was just a first step and they plan to launch other products in the future that leverage AI, agreement monitoring and smart contract capabilities.
• Notary. As discussed above, DocuSign will add notarization to its offerings for executing agreements. The CEO thinks the Notary opportunity could be large for DocuSign, particularly once they go beyond first-party notarization to offer a third-party notary service to the public. While he estimated the TAM for first-party notary at around $1B, third-party notary services generate sales in the tens of billions of dollars.
• Platform. DocuSign has ambitions to position the Agreement Cloud as another platform that provides a foundational element for all types of business. This would be on par with other major enterprise software systems, like CRM, HRM, ERP, ITSM, etc. This platform would offer rich APIs that allow developers to easily integrate into agreement workflows.

Beyond R&D efforts to drive revenue through new product development, DocuSign has two areas in which their go-to-market focus should generate incremental revenue as we transition into 2021. These are supported by additional R&D work, but have largely been defined as products and will benefit from more focus on the sales and marketing front. These are international and CLM. Both were discussed previously but are worth investors keeping top of mind, as they aren’t dependent on development and beta testing to roll out fully.

CLM promotion is part of the existing sales process, which had been de-prioritized by customer IT leaders in favor of immediate COVID-19 work from home projects. This leaned into eSignature and provides the foundation for expansion conversations to the full suite of products around contract lifecycle managements going forward. International revenue growth has already been accelerating and has a large runway ahead for several years before it approaches the level of penetration of eSignature in the U.S. While eSignature domestically still has a significant growth opportunity, international markets provide more greenfield opportunities with use cases that we could view as low hanging fruit.

Competitive Activity

DocuSign broadly defines their addressable market as transforming the “foundational element of business – the agreement.” DocuSign’s opportunity goes far beyond the replacement of physical signatures on paper-based documents. If we consider the evolution of the execution of contracts, technology has had little influence up to now. A first step is obviously moving agreements off of paper documents and making the affirmation (signature) digital. But, there is so much more that can be done beyond signature.

And this is where DocuSign’s competitive advantage lies. Through both thoughtful acquisitions and internal development, they are rapidly moving beyond simply digitizing the signature. This is where I think some analysts underestimate the future potential for DocuSign. Digitizing a signature is a fairly straightforward product development effort – maybe requiring a small team of engineers for a few weeks/months. However, DocuSign’s platform is continuing to expand its capabilities, far beyond signature capture.

An analogy might be with CRM. When Salesforce (and their competitors) first defined the category, their solution primarily provided an online database where sales team could store and share customer information. This might be akin to capturing a signature and storing a contract. Over time, though, CRM vendors added many layers to address various sales workflows. They created integrations with a swath of other SaaS tools. They added automation to save time for salespeople and generate efficiencies in their work. They expanded into other types of relationships besides just sales, like customer service and loyalty. Finally, they applied AI/ML techniques to further enhance the value of the data stored and make the sales process more effective.

A similar evolution is happening with agreements. DocuSign started with business contracts. These were paper-based documents that needed a legally binding signature and someplace to store them. DocuSign digitized this simple workflow and moved it to the cloud, so that the information could be easily shared between parties. Over time, though, large customers kept asking for more.

The scope of the business contracts to be digitized expanded into anything requiring an agreement or consent. Customers expected integrations with all their business productivity tools, so that they could execute agreements without leaving that tool’s interface. They wanted help with the business workflows before and after an agreement was executed. These steps included preparation, collaboration, notifications, payments, storage, search and auditing. To make agreement management more efficient, DocuSign began layering on AI/ML capabilities. These can help contract reviewers flag risks and legal teams monitor the terms of thousands of agreements for compliance over time. Finally, as digital native customers began creating whole new online marketplaces, they expected to interact with an agreement service through open APIs.

As the DocuSign CEO alluded to in his identification of the main product development focus areas going forward, it is the building out of these extensions beyond eSignature that further contribute to DocuSign’s competitive advantage over incumbents and potential new entrants. Larger customers (the ones that will contribute the most to revenue) want to know that DocuSign can offer their organizations more than just an electronic signature. Some of these capabilities, which align with DocuSign’s product roadmap, include:

• A full set of tools that address all steps in the lifecycle of an agreement (CLM), from preparation to renewal management.
• Integrations with every popular business application, so that employees can remain in that interface to execute an agreement.
• Complete and well-documented API’s that support programmatic interaction with the platform for all steps.
• Support for agreement proof beyond signatures, like click capture and notarization.
• Application of AI/ML to make agreement review faster and agreement term management more efficient.
• High availability and compliance across multiple countries.

If we consider this full scope of agreement services, then DocuSign has the most complete offering. No other competitor can fully match them. New entrants would have considerable difficulty scaling up to point where they could displace DocuSign. Even if we consider large software vendors who could become future competitors, there are reasons in each case they haven’t done so, including investments in DocuSign pre-IPO, strategic partnerships or risk of integration lock-out.

This places DocuSign in a unique position to dominate the category, which they arguably have accomplished. By their own estimates, DocuSign generates many times more revenue than their next largest electronic signature competitor, Adobe Sign. While I won’t discount Adobe’s ability to peel off some customers, these tend to be smaller companies or adopted as a quick solution to get some electronic signature through bundling. However, large companies with thousands of agreements to manage eventually move to DocuSign.

Given their dominance of the category from a competitive perspective, it seems that DocuSign’s future opportunity will scale based on the size of the market. When DocuSign leadership first estimated the TAM for their offerings as part of their S-1 in 2018, they sized the market at about $25B. This primarily encompassed eSignature and some basic contract storage/search functionality. As part of the DocuSign Agreement Cloud announcement in March 2019, they doubled their estimate of the TAM to $50B, based on the expansion of their product offering and integration with other system of record applications like Salesforce and SAP. The CEO reiterated this estimate at a recent analyst event, sizing eSignature at $25B and all the tooling around contract lifecycle management (CLM) at another $25B.

While $50B would be considered a large TAM, Notary expands this further. As mentioned, the market for first-party notary services is estimated at about $1B, and DocuSign leadership thinks they could capture the majority of that, as many of their existing customers already perform internal notarizations. The market for third-party notary is much larger and has been estimated at $30B annually with over 1B documents requiring physical notarization in 2016. There are a handful of small players in this market, like Notarize. With DocuSign’s brand and cross-promotion from eSignature, they would likely grab a large share.

The DocuSign CEO acknowledged that eSignature represents the majority of their revenue at this point, but that CLM would steadily grow and eventually catch up. Their current annualized revenue run rate approaching $2B still represents a small percentage of their target $50B TAM. DocuSign’s primary competition for this spend is paper documents and offline contract workflows.

With that set-up, let’s take a look at Adobe Sign for competitive development in the last quarter. Interested investors can review my prior coverage of DocuSign for further examination of the competitive landscape.

Abobe Sign

Adobe offers electronic signature through its Adobe Sign product.  Adobe Sign is part of the Adobe Document Cloud business unit, along with Acrobat, Reader, Send, PDF Pack and Scan. Adobe doesn’t break out revenue contribution at the product level, so we don’t have exact numbers for Sign.

Adobe reported their Q4 (Nov end) and full year FY2020 results on Dec 10th. They achieved record quarterly and annual revenue. They also delivered strong profitability and free cash flow in Q4.

• Q4 FY2020 total revenue was $3.4B, up 14% year/year.
• FY 2020 total revenue was $12.9B, up 15% year/year.
• Q4 FY2020 Document Cloud revenue was $411M, up 21.2% year/year. Notably, revenue growth was 22.1% in Q3 and 21.6% in Q2 (prior two quarters).
• FY 2020 Document Cloud revenue was $1.497B, up 22% year/year.

For comparison, DocuSign delivered $383M of revenue in its most recent quarter, growing 53.5% annually. Revenue growth has accelerated from 45% and 39% in the prior two quarters. DocuSign’s revenue is fast approaching the total revenue of Document Cloud and growing at more than twice the rate. This by itself should indicate that Adobe is not generating a meaningful competitive threat to DocuSign.

The arguments for Adobe to displace DocuSign have hinged on their larger overall size, deep enterprise relationships and innovation. Yet, these factors have existed for several years, and certainly were in full effect during 2020. In spite of this, DocuSign continues to grow its business more quickly, even at the same scale. At this rate, DocuSign revenue (which is still largely eSignature) will pass Document Cloud in 2021, of which Sign is just a small component.

As part of their 2020 Financial Analyst Presentation published with year-end results, Adobe reported a 300% year/year increase in Adobe Sign transactions within Acrobat. While that is impressive on the surface, it represents growth within Acrobat itself and doesn’t translate into the same rate of overall revenue growth for Document Cloud. This is because Sign is tied to the Adobe Acrobat product suite. While it can be used outside of Acrobat, that isn’t the primary use case.

I would argue that Adobe Sign exists simply to enhance the utility of Adobe Acrobat and the tool’s generation of documents. The notion of documents are foundational to Adobe’s product positioning for the Document Cloud, the Acrobat product line and the PDF ecosystem. Sign is useful as a means to legally acknowledge the contents of a document. However, it doesn’t extend to the generic concept of an agreement.

And this is where DocuSign’s strategy with the Agreement Cloud diverges from Adobe’s Document Cloud product suite and the role of electronic signatures within each. DocuSign views the signature as an element of a business agreement, one of many elements constituting the terms and conditions of the agreement. DocuSign associates a data model with the agreement, allowing its components to be broken down into discrete clauses that can be assembled, analyzed, scored and searched. This data model approach to agreements further facilitates the application of AI/ML capabilities to the agreement components, adding intelligence and efficiency to the generation, review and management of agreements.

While Adobe has AI/ML capabilities, they are not being repetitively trained against a corpus of legal agreements. The context of DocuSign’s AI/ML engine is constrained to contract law and the elements that make up an agreement between parties. This focus will make DocuSign’s AI/ML training more effective and ultimately produce more reliable outcomes and useful assistance, than similar application by Adobe or other vendors across a broad class of documents. Investors can read through the use cases promoted for document processing with Adobe’s Sensei AI technology. These primarily revolve around identifying the structure of a document, like boundaries, images and form fields. There is no mention of legal context as it applies to agreement analysis or risk scoring, like what DocuSign has created in Analyzer.

These advanced capabilities become very important for large enterprises that have thousands or millions of agreements to manage. Small businesses may need an easy way to affix a legal signature to a document that they built digitally with Adobe Acrobat. This will provide a reliable growth vector for Adobe Sign and the Document Cloud. However, I would argue it doesn’t provide as much benefit to the large enterprise, with whole legal departments that manage contracts.

In this regard, I think that DocuSign’s focus on the Agreement Cloud, with all the steps in CLM, will appeal to enterprise customers. For some evidence, investors can compare DocuSign’s extensive customer case study list (which seems to scroll forever) to that for Adobe Sign. As more customer experiences move online, I think this difference will continue grow. Many digital innovators are constructing new concepts of agreements as part of their online workflows. These aren’t associated with moving from paper documents to digital, but have been conceived from scratch as part of a workflow within the digital marketplace. Most of these interactions are conducted programmatically through APIs, versus passing around the digital version of a document.

The DocuSign CEO often cites a metric that over 60% of all interactions with the DocuSign system are executed through an API interface, not a UI. The fact that this is so high is a testament to the completeness and quality of DocuSign’s API offering and appeal to developers. To date, developers have created over 100k sandboxes on the platform and DocuSign completed a major update to their Developer Center in May, which made the experience even better. DocuSign claims that thousands of businesses have integrated with their agreement platform through APIs, including T-Mobile, loanDepot and Alameda County, CA.

Procore Technologies provides a great example of API integration . They are a provider of SaaS applications for the construction industry, which allows customers to manage all aspects of a construction project online. One important part of the platform is a customer hub for processing service contracts, change orders and purchase orders. All of these need a legal agreement between the parties, as they involve financial commitments. Procore was able to use the DocuSign APIs to embed electronic signature functionality within their application. This allowed Procore’s construction project managers to quickly create, annotate and distribute these agreements for signature from sub-contractors. For each agreement, the project manager can track progress with a helpful status bar that turns green when all parties have reviewed and signed the contract.

In addition to its AI/ML capabilities and agreement specific API interaction, DocuSign has full CLM capabilities. According to industry analyst Gartner, CLM enables enterprises to automate the process of authoring, negotiating, approving and storing business contracts. It also facilitates contract compliance by making executed contracts easy to search, track and monitor over time for changes to terms. The Gartner Magic Quadrant for CLM published in Feb 2020 puts DocuSign in the Leaders category, validating the position of the Agreement Cloud. Their two largest eSignature competitors (Adobe and Dropbox) aren’t even included. This underscores the competitive advantage that DocuSign enjoys with large enterprise customers, as CXOs in those organizations would like to know they could tap into broader agreement management capabilities after digital signature adoption.

Of course, Adobe is a large company and could decide to pivot more resources towards agreements. However, given that their other mainstay businesses in the Advertising, Creative and Experience Cloud generate 88% of their revenue, I suspect that Adobe Sign and its place within the Document Cloud will remain on the same trajectory. This provides DocuSign with a reasonably unfettered growth opportunity from a competitive point of view.

Other Competitive Areas

As the business contract moves from a single paper document to a data-driven, fluid agreement system, the concept of a “smart contract” becomes achievable. In the future, we will likely see the paper agreement go away. We can conceive of future agreements simply becoming a collection of the inputs that adhere to basic contract law – an offer, terms, consideration, intent and acceptance. These don’t necessarily have to be structured in the paper document that we are all used to. These elements of a contract could be decomposed into a more fluid process of creating, negotiating and acknowledging an agreement. Moving beyond canned contract templates, future agreements could be “assembled” from a database of contextually relevant terms and conditions.

One might worry that a new competitive threat for DocuSign might come from a different area, like blockchain. On the surface, this seems plausible. Ethereum provides a decentralized, open source blockchain technology for enabling smart contracts. Smart contracts allow agreements to be “executable”, based on code. The concept has been aligned with blockchain technology and popularized by the Ethereum platform. In these cases, an agreement can be based on a set of conditions that may be fulfilled in the future. An example might be for insurance (no accidents in two years, get an automatic refund) or a performance bonus. The coding framework allows a developer to set the conditions of a contract, measurement criteria against them and the action to be taken when conditions are met. An agreement platform would provide the tools for constructing, testing, hosting and monitoring smart contracts. It would also handle validation of data sources and notification to all parties once conditions were met.

Similarly, blockchains make agreements viewable to the involved parties (or the public), including representation of the terms. They provide secure mechanisms for confirming identity. As blockchain technology matures and possibly becomes mainstream, an agreement platform would need to be flexible enough to incorporate these capabilities into agreement workflows.

DocuSign saw this opportunity early on and built in support for blockchain. In 2015, they worked with Visa to create one of the first public prototypes for a blockchain based smart contract. DocuSign is currently a member of the Enterprise Ethereum Alliance. At their Momentum user conference in June 2018, DocuSign announced an integration with the Ethereum blockchain. It allows evidence of a DocuSigned agreement to be automatically written to Ethereum.

While DocuSign is ready to support recording agreements on the Ethereum blockchain, customer demand hasn’t quite caught up to their capabilities. In an interview with Forbes in 2019, the Chief Product Officer discussed uptake by customers of this solution. He said “the pilot did not gain widespread adoption because customers already felt comfortable with DocuSign serving as a store of record.” Customers did not see a need for an independent audit trail beyond what DocuSign already provided. As blockchain becomes more mainstream in the future, customers may revisit this capability. Regardless, it is good to know that DocuSign is already well-positioned to pick back up this initiative once the market catches up.

DocuSign Take-Aways

As we review Q3 performance, the most exciting take-away is DocuSign’s accelerating revenue growth. They pushed past 50% annualized growth in Q3 and will likely do so again in Q4. While this growth benefitted from COVID-19 tailwinds around social distancing and the need to move away from paper documents, the macro environment created headwinds to the adoption of the broader CLM offering with large enterprises. As COVID-19 abates, uptake of other DocuSign offerings should balance any slowdown in eSignature.

Billings growth also provides assurance that revenue growth will continue at a high rate. Q3’s billings growth of 63% exceeded revenue growth and Q4’s estimate appears conservative again, after the nearly 20% billings growth beat in Q3. Interestingly, leadership attributed high sales growth to continued increases in their employee base. At end of Q3, DocuSign’s employee count had increased by 44% over the past year, and they plan to continue this expansion.

While revenue growth is accelerating, profitability is also improving. Operating margin jumped again in Q3, reaching 13% on an adjusted basis, up from 7% a year ago and 10% last quarter. Gross margins are holding in the 78-80% range and operational expenses are demonstrating leverage. Sales and marketing continues to trend downward as a percentage of revenue, while R&D remains at a reasonable allocation of about 14% to drive product innovation.

Customer activity is another highlight for Q3. Total customer counts have accelerated in 2020 over the prior year, adding almost 3x as many total customers on average in each quarter this year as compared to the prior year.  This rate of customer additions is particularly important, as DocuSign typically sees expansion after 12 months of usage.  Spend expansion by existing customers continues to grow as well, with DNER hitting an all time high of 122%.  This combination of new customer growth (40-50% increases year/year) and spend expansion (over 120%) should drive high revenue growth going forward.

The big question is how sustainable revenue growth will be for 2021 and beyond. Due to outperformance in 2020, comps will be higher. DocuSign has been lumped into the “COVID beneficiary” category, which has tempered the stock’s performance over the last few months as analysts expect a big slowdown once COVID clears. However, there are a few factors that will come into play to drive high rates of revenue growth going forward, separate from anything COVID related.

First, eSignature expansion is likely to continue. In many cases, new adopters of eSignature in enterprises have applied it to a couple of use cases or a single department initially. After proving the ROI, they generally expand usgae to address more workflows. As an example, the DocuSign CEO previously mentioned that Microsoft has over 300 use cases for eSignature, while most large customers start with just one. Penetration of electronic signature and adoption of digital agreements by digital natives is still relatively low.

Next, as enterprise IT spend recovers and can be applied to digital transformation and automation projects, we should see the eSignature adopters shift to considering the automation of their full lifecycle of agreement management. This is where the Agreement Cloud product suite would be harnessed. Customers can leverage more DocuSign tooling to help them prepare, manage, store, search and monitor their agreements in one platform. These types of project engagements tend to represent greater spend than eSignature by itself. They also have longer sales and implementation cycles, which explains why they were de-prioritized in favor of eSignature when COVID-19 first manifested. SI’s have shown interest in this business as well, which will drive adoption as they form practices around the Agreement Cloud. The DocuSign CEO provided evidence of renewed customer interest in CLM on the earnings call.

The new notary service offerings have major potential. Capabilities from the Live Oak acquisition are being quickly incorporated into DocuSign’s product suite. The CEO expects “meaningful volume” for Notary in Q1, as the initial use case of first-party notary services is already being tested with existing customers. While the TAM for first-party notary is estimated at $1B, DocuSign could rapidly absorb a lot of this. Third-party notary is targeted for second half of 2021 and addresses a much larger TAM.

International represents a big opportunity. DocuSign only generates 20% of its revenue from outside of the U.S. That is surprisingly low and the CEO acknowledges this as a major growth area. As opposed to other SaaS companies that might be lagging in international for other reasons, DocuSign’s lack of traction can be explained by the variety of legal frameworks in different countries.  DocuSign leadership is now focusing on the opportunity, which is primarily a go-to-market effort. Last quarter, they moved their CFO to focus exclusively on the international opportunity after success with a trial effort in Europe.  The results are playing out nicely, with international revenue growth accelerating to 77% year/year in Q3, up from 59% in Q2.

Finally, AI/ML capabilities gained from the Seal Software acquisition offer the potential for another layer of services over the Agreement Cloud.  Analyzer is just the start.  In the Winter IR presentation, DocuSign leadership highlighted their future evolution to the “Smart Agreement Cloud”.  This involves deepening the automation introduced by CLM with AI models and smart contracts.  This will make every step in the end-to-end agreement process more intelligent, efficient and effective.  As large enterprises have more digital agreements to manage with the same staff, these sources of automation will become increasingly valuable.

The competitive landscape remains favorable for DocuSign. They continue to dominate the market for both eSignature and CLM services. Adobe Sign is experiencing high growth, but is several times smaller than DocuSign’s revenue run rate. Similarly, on the CLM side, Gartner recently confirmed DocuSign’s leadership position on a product basis following the integration of Spring CM into the Agreement Cloud. DocuSign enjoys a fairly unique competitive position, as compared to SaaS companies in other categories.

These factors should allow growth to scale to the size of the addressable market. With an estimated TAM of $50-80B, DocuSign could increase their current revenue run rate approaching $2B by an order of magnitude. As they quickly move beyond electronic signature into defining a new enterprise system of record around agreements, DocuSign has the potential to emerge as software vendor on par with other category leaders in CRM, HRM and ERP. In the same way that Twilio is more than automated SMS, DocuSign is defining a new category around programmable agreements.

Investment Plan

When I initiated coverage of DOCU stock in April, it was trading at $100. Expecting growth, but in a tough economic environment, I had set a 5-year price target of $245. In early September 2020, DOCU shot up to $290 and recently settled back into the $240 range. The stock is now up over 200% for the year (3x its price on 12/31/19 of $74.11) and already cleared my initial price target. While I don’t think this velocity of share price will continue next year, I am still optimistic that DOCU will appreciate meaningfully through 2024. With last quarter’s results, I increased the 5-year target to $610. This represents about a 2.5x increase from current prices.

Given this optimistic view for DOCU, I am maintaining a mid-sized 16% allocation to the stock in my personal portfolio. It is currently my third largest holding, behind TWLO and NET. I plan to maintain this level of investment to DOCU going into 2021 and will continue to provide quarterly updates as the story unfolds.

NOTE: This article does not represent investment advice and is solely the author’s opinion for managing his own investment portfolio. Readers are expected to perform their own due diligence before making investment decisions. Please see the Disclaimer for more detail.