Docusign (DOCU) Stock Analysis

Docusign is a leading provider of agreement services. While most investors are familiar with their eSignature solution, they have recently expanded their product suite to address the full lifecycle of contract management. As digital agreements become a common step in enterprise workflows and online marketplaces, DocuSign is well positioned to meet the demand. For developers, they offer an open platform and broad set of APIs. Large customer additions have been strong, driving 39% revenue growth over the last year. In this post, I will dig into the company’s history, financials, product portfolio, addressable market and competitive landscape. While the stock has enjoyed a 35% gain year to date, for investors with a long term perspective, DOCU represents a solid choice.

History and Technology Foundation

The idea for digital signatures originated from a now defunct Seattle start-up, called DocuTouch. DocuTouch launched their product for creating and authenticating legally binding documents in 2000. That solution was originally a plug-in for Microsoft Word. It allowed the user to mark parts of a document for digital agreement and then stored a copy of the document remotely on DocuTouch’s servers. Users could “sign” the signature block of the document by acknowledging their agreement. Since e-signing laws were nascent at the time, DocuTouch addressed the legality and enforceability of the process by sending a notary to the user’s location to sign a general binder agreeing that documents stored by DocuTouch were legally binding.

After the dot-com crash of 2001, the founders of DocuSign acquired the assets of DocuTouch, which included several patents on the digital signature process. They founded DocuSign in 2003 and set out to make digital agreements mainstream. Initial use cases focused on enabling the digital signature of physical paper documents. In this case, the paper document was scanned, uploaded to the DocuSign site and annotated for the location of signature blocks. The user then clicked to apply their signature.

As a replacement for paper document signature transmission, DocuSign was useful, but not earth shattering. The value proposition was to save time and cost in printing, signing and faxing paper documents. The process was replacing common scenarios where one would normally print a document and sign it, like with NDAs or offer letters. However, with the rise of SaaS and the movement of all kinds of standard enterprise operations online, the need for legally binding digital “agreements” exploded. As users navigated consumer apps and business portals online, it didn’t make sense to send them offline in order to physically sign a contract. This needed to be done digitally. Additionally, the rise of new business models, like the sharing economy, gig workers and digital marketplaces further increased the number of agreements that users had to legally acknowledge. These factors all drove demand for DocuSign’s services.

Digital signatures are legally enforceable in the United States as a result of the Electronic Signatures in Global and National Commerce Act, signed into law in 2000. It facilitated the use of digital signatures for interstate and foreign commerce by ensuring the legal enforceability of contracts entered electronically. It stipulates that a contract or signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” This means that digital agreements are as valid as their paper equivalent. The consumer must apply affirmative consent that they agree that their digital signature is binding, in lieu of a paper agreement. Each state similarly passed laws validating electronic signatures for activity within that state.

The Electronic Signatures Act established that a business must retain a record of the transaction that meets the following criteria:

• It accurately reflects the original record in an unalterable format
• Is accessible to the parties who signed it
• The record can be reproduced into printable form at a later date
• Is retained for the period required by the type of agreement (usually indefinitely)

In order to meet these criteria, DocuSign uploads executed documents to its servers and creates a unique hash of the file contents. This is a cryptographic function that maps a text file into a fixed length string of characters. It is a one-way function, meaning that you cannot recreate the original text file from the hash. You can only compare one hash to another. If the two hashes match, then the original text input is the same. This is generally how user account passwords are stored and verified.

Using the hash storage method, DocuSign can determine if the original executed document has been changed. This fulfills the first requirement of the Electronic Signatures Act. For the other three, Docusign stores the original document in encrypted form on its servers. They control access to the documents through user accounts on Docusign, with mappings between users and shared documents. Each agreement has associated envelop information, which captures metadata about the parties that signed it, timestamps, identity methods, etc.

Financial Overview

DocuSign went public on April 27, 2018 under the symbol of DOCU. It closed the first day of trading at $39.73. It peaked around $70 in August of 2018, but was range bound for the following year. On Sept 5, 2019, DOCU released Q2 FY 2020 earnings, which were a blow-out. The stock surged 22% from $46.25 to $56.27 the next day. This began an upward trajectory to the present price around $100.

Q4 and FY 2020 Earnings Report

On March 12, 2020, DocuSign released earnings results for Q4 and fiscal year 2020. The results exceeded expectations across the board. The stock closed up 12.6% the next day at $77.32. This occurred during the deep downturn in most stocks as a result of the COVID-19 situation.

Here are some highlights from the earnings release (EPS is Non-GAAP). I will present top-level financial metrics and focus the majority of my coverage on product, competition and market opportunity.

Financial Metrics (EPS is Non-GAAP)

• Q4 FY 2020 Revenue grew 37.6% year/year to $274.9M, versus the analyst estimate of $266.5M. The original estimate would have represented 33.4% growth, so DocuSign outperformed by about 4.2% on an annualized basis. Q3 revenue growth was 39.9%. This represenets a slight deceleration, but better than the year ago period of 34.2%.
• Q4 FY 2020 Billings grew by 40% year/year to $367M.
• Q4 FY 2020 EPS of $0.12, beating the analyst estimate of $0.05 by $0.07.
• Q4 Non-GAAP operating income was $21M, yielding an operating margin of 8%. This compares to 4% in the the prior year period.
• Q4 FCF was $15.5M, yielding a FCF margin of 6%. This compares to 11% in the same period last year.
• FY 2020 Revenue grew 39% year/year to $974M. FY 2019 Revenue growth was 35.2%.
• FY 2020 Billings grew 38% to $1.1B.
• FY 2020 EPS was $0.31. This compared to $0.09 in FY 2019.
• FY 2020 Non-GAAP operating income was $47M, yielding an operating margin of 5%. This compares to 2% in the prior year period.
• FY 2020 FCF was $44M, yielding a FCF margin of 4%. This compares to 7% in the same period last year.
• Q1 FY 2021 Revenue guidance of $280-284M versus $275.7M consensus. At the midpoint, this would represent year/year growth of 31.8%. Note that Q4 year/year growth was 37.6% with outperformance of about 4.2%.
• FY 2021 Revenue guidance of $1.272-1.276B versus $1.19B consensus. At the midpoint, this represents year/year growth of 30.8%. The original FY 2020 revenue guide from March 2019 was for $910-915M, representing growth of 30.2% at the midpoint. Actual FY 2020 revenue growth was 39%, after successive beat/raise quarters through the year.
• Cash, cash equivalents, restricted cash and investments were $896M at the end of Q4.

Other Notes

• International revenue grew over 40% year/year to $49M (17.8% of total) in the quarter and $171M (17.5% of total) for the year.
• Customer count grew by 27k in the quarter to 589k total. Customer count a year ago was 477k, representing year/year growth of 23.5%.
• Customers with ACV greater than $300k grew 41% year/year to a total of 437 customers.
• Non-GAAP gross margin for Q4 was 79% compared with 78% a year ago. For FY 2020, gross margin was 79% compared with 80% in FY 2019. Subscription gross margin was 84% in Q4, compared with 85% a year ago. For FY 2020, subscription gross margin was also 84% compared with 86% in fiscal 2019.
• Confirmed DocuSign is still tracking for a long term operating margin target of 20-25%. FY 2021 will have positive operating margins, but should still be considered an investment year.
• DBNER of 117%, at the high end of their target range. Last quarter was also 117%.
• 65% of contracts by dollar value weight are less than 12 months in duration.
• Highlighted a new feature in eSignature, called auto-tagging. This applies AI to automatically place the tags for signatures, dates and other fields in an agreement, supplementing the manual process for annotation.

On a Rule of 40 basis, DocuSign passes. Q4 revenue growth of 37.6% + FCF margin of 6% = 43.6%.

Analyst Coverage

For analyst recommendations made in 2020, DOCU has 3 buy ratings and 2 neutral ratings. DOCU stock is currently trading at about $100. The average price target for these recommendations is $88.80.

Date	Analyst	Rating	Price Target
4/16	Wedbush	Outperform	Raised from $90 to $115
3/27	Goldman Sachs	Neutral	Lowered from $82 to $77
3/13	Morgan Stanley	Equal Weight	Raised from $76 to $77
3/13	RBC	Outperform	Lowered from $93 to $85
3/11	Deutsche Bank	Buy	Raised from $80 to $90

In terms of analyst commentary, the recent Wedbush recommendation provides a check on DocuSign’s status during the COVID-19 situation and reflects general momentum.

Wedbush analyst Daniel Ives raised the firm’s price target on DocuSign to $115 from $90 and keeps an Outperform rating on the shares. Based on his recent checks in the field, the analyst continues to believe DocuSign’s deal flow is holding up well/stronger than expected in this COVID-19 pandemic environment as the solution set and e-signature platform is being prioritized by IT decision makers as it serves a clear key need for remote workers at home during this lockdown. Further, Ives believes the brand awareness of DocuSign is unparalleled in the market from what he hears from customers/partners and has enabled the company to further penetrate existing/new customers as many companies of all shapes and sizes have been caught flat footed by the virtual workforce dynamic which changed overnight by this pandemic and could shape a new reality for CIOs looking forward.

Briefing.com, April 16, 2020

Product Overview

Most investors are likely familiar with DocuSign’s electronic signature products. All of us have clicked through on a scanned paper document to affirm our agreement and “sign” it. If that were the extent of DocuSign’s offerings, I wouldn’t be very interested. However, in the last year, they have significantly built out their platform offering to address the full lifecycle of digital agreements. This includes document preparation, signing, follow-up actions like payment collection and managing multiple agreements. These services are openly accessible through APIs and other programmability features. Additionally, they are decomposing the elements of contracts into discrete objects and leveraging AI to surface risks, sales opportunities and monitor terms.

While the growth thesis for DocuSign around the elimination of paper documents is sound, I think a bigger opportunity lies in driving the agreement workflows that are part of every online marketplace for goods and services. Take Etsy or Airbnb as examples. In order to sign up as a seller or host on one of these marketplaces, one needs to complete an online form and “agree” to a set of terms. These agreements can all be automated, as it would introduce significant friction to the process if the interested party needed to print, sign, scan and email a paper document back to the marketplace. As more and more commerce is moved online, this workflow is becoming increasingly common. This agreement flow would apply to gig economy staffing, exchange of services, telehealth, etc. Essentially any consumer or business process that is moved out of a physical location to an online equivalent will no longer have the benefit of the physical person signing a document or screen to acknowledge agreement to some terms. This process needs to be replicated online.

As a developer, it is possible to mirror a basic level of agreement functionality through custom code. This represents simple “click” capture features, like when you acknowledge privacy and cookie use terms on a site. In these cases, the software records your IP address, timestamp of click, etc. A signature capture is harder to replicate. These wouldn’t meet all the requirements of the Electronic Signatures Act nor have the audit trail in place to prevent fraud.

For example, if your sharing economy marketplace rented out boats, (or cars, RVs, apartments, etc.), you would have a series of agreements for the renter to approve that covered rental terms, appropriate use, liability and insurance. If the renter agrees to these terms, takes out the boat and then has a serious accident, it would be very important that your application captured all agreements in a regionally legal way, to allow your company to prove that the renter agreed to all terms (Believe me, I have been there).

Additionally, while a click framework might work for simpler agreements in the U.S., that might not be case internationally. Each country has their own laws around requirements for electronic signature. For example, the EU passed the eIDAS regulation in July 2014, as a means to facilitate secure and seamless electronic transactions within the EU. Member states are required to recognize electronic signatures that meet the standards of eIDAS. This set of regulations includes the notion of an advanced electronic signature, which adds an electronic certificate from the signatory. A developer at a marketplace with global aspirations would have to take these requirements into account for EU customers.

As you can see, the ability to outsource the automation associated with digital agreements becomes a valuable platform service for developers to consume as they build next generation online businesses. In a prior post, I reviewed the technical and business criteria needed by a software solution provider to extend towards a platform offering for the developer community. As I will discuss below, DocuSign addresses these as part of their Agreement Cloud solution.

Agreement Cloud

The DocuSign Agreement Cloud enables the full lifecycle of digital agreements. It consists of a portfolio of 12 individual products, backed by an open platform with over 350 integrations to other business process applications. These integrations reduce copy/paste actions and allow deal tracking to progress in the native system with automatic data synchronization. The platform also includes an array of APIs and workflow builders to support customization and programmability. These capabilities enable developers to embed agreement functionality into their applications, without forcing users to switch over to a paper process.

DocuSign views the broader enterprise software landscape as consisting of three types of systems:

• Systems of Engagement: Applications used by customers and employees for digital interactions between themselves and a company.
• Systems of Record: Applications that manage authoritative sources of data, such as employee records, sales or inventory.
• Systems of Agreement: Applications used for preparing, signing, acting on and managing agreements.

As expected, DocuSign provides the Systems of Agreement. This model may overstate the role that Systems of Agreement play, but it is useful to provide perspective on DocuSign’s vision and the target market for their solutions. Also, Docusign contends that Systems of Engagement and Record have already benefitted from significant investment historically. However, the growth of Systems of Agreement is just beginning.

Enterprises started automating agreements by applying electronic signatures to digital forms of standard documents. This at least replaced the process of printing, signing and scanning the document. However, steps before and after the signature were still manual. Before a document can be signed, it has to be prepared. This often means manually copying terms from one system into the document. For example, a sales contract might have a list of products or services, cost and delivery terms. After the document is signed, follow-up actions like generating an invoice and collecting a payment occur. Finally, as signed digital agreements accumulate, they need to be stored according to retention rules and made available for future search and retrieval.

A modern system of agreement automates all of these steps, beyond the digital signature. It includes applications that handle each of these flows, along with integrations for data exchange with popular enterprise tools to prevent rekeying of information and to enable complex workflows. A complete system of agreement should address the following considerations:

• Unique legal requirements by type of document, parties involved and geographic location.
• Connectivity to other business systems of record and engagement.
• Ease and flexibility of configuration, testing and deployment. Developer and admin-friendly posture.
• Ability to leverage newer technologies as they emerge – AI/ML, blockchain and smart contracts.

DocuSign has built a compliant, flexible and robust system of agreement, encapsulated in the Agreement Cloud. At a high level, the Agreement Cloud automates four steps in the agreement process – preparation, signing, acting and managing. Individual DocuSign product offerings represent applications within this framework. These are supported by integrations with over 350 other business systems and an open API framework that allows for programmatic data exchange and business logic control. Let’s dig into each step in the agreement process a little further.

Prepare

Features associated with agreement preparation revolve around gathering the necessary information, inserting that into some sort of legal framework, allowing for back and forth negotiation and finally confirming that the agreement is ready for signature. DocuSign offers preparation features through a stand-alone product and also an extensive integration within the Salesforce application.

Generation of the agreement document is the first step. DocuSign supports this within the Salesforce interface with their Gen for Salesforce product. Gen is a Salesforce native application, built using their Lightning app framework. It allows the Salesforce user to select an agreement template and import deal-specific terms like customer, product and pricing to replace tagged fields in the template. Content inclusion can also be made conditional, like a special phrase for a particular state.

Once the agreement document has been generated, DocuSign Negotiate allows the parties involved to send the agreement back and forth to modify terms and conditions. All changes are tracked and stored in version control. This process is often called “redlining”, which literally involved marking up a document with different colors of ink (or text in a word processing document). Negotiate also supports hierarchical levels of review and approvals for the redlines. This workflow can be configured through a drag-and-drop interface.

Sign

Once the agreement document has been negotiated with all reviews and approvals completed, it is ready for signature. Activities around the sign phase involve collecting signatures in a legally compliant manner.

Before a signature can be executed, digital agreements first require that the identity of the parties be verified. The simplest form of verification is email account access. If a party of an agreement can access the email account to which the agreement email is sent, then it is assumed they are the actual recipient. Of course, this is a pretty light verification. DocuSign’s Identify product allows for varying levels of verification for the document signer. At the base level, these include automated SMS or voice call with access codes. It also supports supplemental knowledge base checks, like pre-selected question/answer combinations. The most sophisticated feature of the Identify product is an automated ID verification. Through a mobile app, the user is directed to take a picture of an identifying document (government ID, driver’s license, passport) and the software can automatically perform legitimacy checks on the document. It can read the name and other identifying information from the document and match the name to that on the agreement. Finally, if an in-person document check is required, DocuSign can coordinate that through a third party.

I can attest to the usefulness of this capability. At Boatsetter, we have to collect this level of identification information for renters of boats, given the liability. Airbnb has a similar requirement to collect a photo of the user’s government identification card. Previously, these photos had to be queued for human review, blocking the user from proceeding with their transaction until completed.

As part of the eIDAS regulation, EU Advanced and EU Qualified Signatures require certificate based signing. This means that a third-party has to issue a digital certificate to the signers, usually the business generating the agreement. DocuSign’s Standards-Based Signatures product handles this. It offers several options for the third-party certificate authority.

Once identity has been established, the execution of the signature is processed by DocuSign’s eSignature product. This provides a lawful and court-admissible contract, with full audit trail. The storage environment meets security and privacy requirements. It also handles complex rules for routing the agreement to multiple parties with varying roles like reviewer, approver and signer. Signer order can be set if needed. As each party completes their portion, a central status monitor is updated. The product provides a detailed receipt of all actions taken, including how users were authenticated, when/where they signed and any other relevant contextual information.

Finally, for agreements that don’t require a signature, but rather a less rigorous “I Accept” affirmation, DocuSign offers a clickwrap product, called Click. This can be applied to capture user consent to standard terms. Examples of applications are common internet acknowledgements, like privacy policies or terms of use. The DocuSign Click solution includes intuitive configuration and user interface set up. It provides a code snippet that can be embedded into a web site or mobile app. Click consent actions are easy to audit and legally compliant across all regions.

Act

Once an agreement has been executed and signed, the system can be wired to kick off a set of follow-on activities. These might include collecting a payment, updating customer data in another system, like the CRM, or triggering new workflows, like customer on-boarding or product delivery.

As part of DocuSign’s Contract Lifetime Management tool (CLM), the user can model the workflow that occurs after an agreement has been executed using a drag-and-drop interface. They select a task from a pre-configured list of actions, enter specific instructions and then drag that task to the appropriate position in the workflow sequence. Actions can be functions triggered in other business management tools, like CRM, ERP, HRM, etc. They can also be communications, like an email or SMS.

If the agreement involves a payment, DocuSign offers a specific Payments product that enables the customer to pay with a credit card, debit card, Apple Pay or Google Pay. The payment action can be bundled into the agreement envelop, blocking further actions until payment has been remitted. The payment record is then included in the agreement’s audit trail. This is a big benefit, as it further automates the customer onboarding process. While a developer could collect payment separately, it is convenient to have payment bundled into the agreement process. DocuSign executes the payment through popular third party payment gateways, including Stripe, Braintree and Authorize.net. Customer payment details can be stored for future or recurring transactions. This is all done securely and in compliance with the PCI Standard. DocuSign claims to have processed over $100M in payments thus far.

Manage

After agreements are completed and paid for, DocuSign offers solutions to store them, make them searchable, generate summary reports and flag risks. These allow enterprises to meet retention requirements and efficiently locate past agreements.

The storage capabilities are built into the CLM product. These enable the user to tag and organize agreements in a central repository. Permission controls are available at a granular level based on user account. This allows the admin to configure the system to separate access by unique business requirements, like only sharing sales contracts within regional sales teams. Additionally, the tool can track contract metadata, like duration, and be set to prompt the user in advance of contract expiration.

For agreement search and location across multiple document storage tools, DocuSign offers its Total Search product. Document locations can include multiple DocuSign eSignature accounts within an enterprise and external document storage resources, like Box, Dropbox and Sharepoint. Document search goes to the full text level, making it easy to find a past agreement using a couple of keywords.

Total Search can also index scanned documents using OCR technology. Search queries can utilize keywords, phrases, wildcard characters, proximity matching, boolean logic, etc. Indexed content includes both the full text of the agreement and its metadata, like execution date, location, parties, etc. The indexing process applies search best practices, like de-duplication, grouping, stemming and synonyms.

DocuSign layers AI capabilities over agreements with its Intelligent Insights product. Intelligent Insights drills into the individual clauses within agreements to ensure compliance and reduce risk. Comparable clauses between agreements can be displayed side-by-side for review. This can surface inconsistencies in older agreements that need to be updated and surface opportunities for upsell. These capabilities go beyond what is available in Total Search by automating the review of large sets of agreements using AI to surface potential risks or new revenue opportunities. Finally, data gleaned from agreements can be categorized into relevant business concepts and then visualized into useful summaries.

Total Search and Intelligent Insights are powered by capabilities from Seal Software, which DocuSign acquired in February 2020. DocuSign had already been reselling Seal Software’s products as part of the Agreement Cloud. DocuSign intends to integrate Seal Software’s AI technology more deeply into the Agreement Cloud experience. This has been called a top priority for the engineering team in 2020 by the CEO at a recent analyst event.

Cross-cutting Capabilities

Legality. Agreements signed with DocuSign eSignature are legally binding in 180+ countries. Users can sign agreements in 43 languages and send them in 13. These comply with regional and industry specific regulations for electronic signatures and identity verification. Agreements have a full audit trail that is admissible in court if contested.

Integrations. DocuSign has over 350 pre-built system integrations. These include business applications and resource management systems from major providers, like Microsoft, Salesforce, Google, SAP, Oracle and Workday. These integrations allow for several critical interactions:

• Signature actions can be injected into the tool’s workflow, allowing the user to leverage DocuSign without leaving that tool’s interface.
• Customer data can be imported into DocuSign agreements automatically. This allows the user to quickly assemble an agreement in the DocuSign CLM tool during the Prepare phase. It also prevents data entry mistakes.
• Once an agreement has been executed, DocuSign CLM can send data updates back to other systems of record and kick off next steps.

All of these integrations are enabled by DocuSign’s rich set of APIs.

Security and Privacy. Agreements often contain sensitive customer and business information. Therefore, security of completed agreements and access controls are critical. DocuSign has achieved and maintained certifications in the most rigorous industry and regulatory compliance programs. These include ISO 27001, SOC 2 and PCI DSS, HIPAA and TRUSTe. DocuSign also recently achieved FedRAMP status, which allows it to sell to government agencies.

Future Systems of Agreement

DocuSign is preparing for the future evolution of agreement technology, by breaking down contracts into discrete clauses and applying AI to improve agreement outcomes.

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.

I don’t have an opinion on cryptocurrencies, but from a technical point of view, I think the concept of smart contracts is very interesting. Once a business agreement has been executed that stipulates certain future terms or conditions, humans have to periodically check on the contract status and manually notify parties if terms are not being met. Automating these checks would be very helpful and save a lot of time. A parallel can be drawn to observability solutions in infrastructure monitoring (like DDOG). In this case, we are applying “observability” (monitoring and context) to legal agreements. This could be a huge future opportunity for DocuSign, as more of this agreement execution workflow is pushed online, decomposed and automated. Providing a full featured development environment for managing “observable agreements” could be the next stage of the Agreement Cloud.

Pricing

The primary pricing model for DocuSign’s products hinges on eSignature usage. This makes sense, as the signature is the common step in all agreement workflows. DocuSign offers three levels of self-service pricing, which are geared towards small businesses and have a limit of 5 users. To go beyond 5 users requires communication with the sales team. The self-service motion at least provides a quick way for small businesses and test users at enterprises to get started with low friction.

Additional users or access to other products outside of eSignature puts a customer into the Advanced Solutions category, where pricing is determined directly with the sales team. Advanced Solutions includes all the features of Business Pro, plus access to APIs, integrations, embedded signing (in the customer’s app), custom branding, advanced authentication, higher usage limits and enterprise level support. Advanced Solutions also provides access to the other product offerings in the prepare, sign, act and manage phases. These include CLM, Negotiate, Gen, Click and Intelligent Insights. Finally, Docusign offers packaged pricing tiers for real estate agents specifically.

Openness, APIs and Platform Approach

One of the tenets of the Agreement Cloud is its openness. Customers are encouraged to “embed, extend and connect DocuSign applications with your own applications, workflows and processes”. This is meant to be accomplished through a full set of well-documented APIs. These can be used for two primary functions. First, they enable integration between DocuSign products and enterprise software systems of record for data exchange. DocuSign currently has 350+ of these integrations in place, including big players like Google, Microsoft, Salesforce, SAP, Workday, etc. Second, APIs allow developers at completely separate internet enabled businesses to embed DocuSign’s agreement functionality into their applications for their end customers to use. These could be SaaS applications, marketplaces or e-commerce sites.

DocuSign provides a gallery of API customer examples. Use cases primarily revolve around facilitating contract assembly and execution of electronic signature. Procore Technologies is a provider of SaaS applications for the construction industry. Their platform allows customers to manage all aspects of a construction project. 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.

The DocuSign eSignature API supports REST and SOAP protocols to request and manage electronic signatures for documents. Users can verify themselves through multi-factor authentication, track signature status and download completed documents. The API reference is thorough and provides fairly granular controls, mirroring all the functionality included in the hosted eSignature product. To help jumpstart their work, developers are provided with guides, code examples and SDKs in a number of popular languages like C#, Java, Node.js, PHP, Ruby and Python. For help, there is a support center, with a dedicated Stack Overflow community site, live technical support and periodic webinars. The DocuSign blog has a developer category.

The API has its own pricing plan, which scales up based on expected usage and features. The sign-up and provisioning process is automated, allowing developers to get started quickly. There is a Sandbox account available to developers, which they can enable for free, prior to purchasing a paid plan. These have all features enabled and do not expire. Beyond experimentation, this account would be used for testing.

Rather than providing an API as an afterthought, DocuSign clearly built their API as a first citizen product and likely uses it to power their own front-end applications and mobile apps. They claim that over 100,000 developers have leveraged the API to generate over 550M transactions to date. The API’s usability is noted by customers as well, including a testimonial from the VP of App Dev at online mortgage processor loanDepot.

I think that API usage by other internet-first companies that are moving multi-party marketplaces and transactions online represents a big opportunity for DocuSign. In a press release from mid-2018, DocuSign called out a few stats for API usage.

• Almost 60% of transactions on the DocuSign platform were coming through the API.
• Over the prior year, DocuSign experienced a 50% increase in the number of apps that integrate with the API.
• There were 80,000 individual developer sandboxes on the API platform.

These stats reflect heavy usage of DocuSign’s programmability features and are much higher than for typical SaaS companies, where customers often just want to consume the end product. This platform opportunity cannot be understated, as agreement workflows need to be included as part of most digital transformation projects.

Product Development Velocity

In the two years since DocuSign went public in April 2018, the product and engineering teams have been busy. Here is rough list of major product announcements:

• May 2018 – Launched Developer Center. This provides new tools, code examples and documentation features for developers to make API utilization easier. Also, DocuSign worked to expose all internal APIs as part of the offering.
• Dec 2018 – Winter ’19 Release. The main deliverable was the integration and launch of the SpringCM Contract Management feature. Spring CM was an acquisition closed in August 2018. It provided the basis for the CLM product offering discussed previously. Also included in this release were some enhancements to DocuSign for Salesforce and treatment for highly regulated industries.
• Mar 2019 – Launches Agreement Cloud. This was an enormous release. It formally expanded the DocuSign offering from just eSignature to the full agreement lifecycle of prepare, sign, act and manage with product offerings under each. The release also included three new product offerings – DocuSign Gen, Click and ID Verification. Finally, the Agreement Cloud release included the hundreds of integrations with other enterprise systems.
• Sept 2019 – Introduced DocuSign Rooms for Mortgage. The Rooms product is a purpose-built solution to facilitate mortgage closes. It provides a secure, digital workspace for all parties involved in a mortgage contract, including the lender, buyer, seller and title agent.
• Nov 2019 – Extended Agreement Cloud for Salesforce. This adds DocuSign Negotiate to the Salesforce AppExchange. It also launched DocuSign CLM as an AppExchange offering.

Acquisitions

DocuSign has made two notable acquisitions since going public. These have both added substantial functionality to the DocuSign product suite. Absorbing and integrating the technology platforms of these two companies occupied substantial development focus. At the recent Morgan Stanley Technology Conference, the CEO discussed how he made the engineering team’s main priority for 2019 to fully integrate Spring CM into the Agreement Cloud. For 2020, he has repeated that prioritization for Seal Software.

In July 2018, DocuSign announced the acquisition of Spring CM, which helps companies generate, automate, manage and store documents in their secure cloud. Customers can use their tools to create documents from pre-approved templates and populate them with data imported from outside systems. Then, they can automate the distribution and approval of the documents. Once documents are received, Spring CM tools facilitate redlining and negotiation. Finally, after the documents are signed, they provide a central repository for document storage. All of these tools formed the basis for the CLM functionality in the Agreement Cloud. They also allowed the launch of Negotiate and CLM as new apps in the Salesforce AppExchange.

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 are being incorporated into the DocuSign platform to power the Total Search and Intelligent Insights product offerings. These technologies also provide the basis for future capabilities around smart contracts and observable agreements.

Total Addressable Market

DocuSign broadly defines their addressable market as transforming the “foundational element of business – the agreement.” While this leaves a lot of room for interpretation, I think it is a fair characterization. DocuSign’s opportunity goes far beyond the replacement of paper-based signatures. If this were the investment thesis, the opportunity would be mediocre. However, DocuSign’s Agreement Cloud is addressing a large swath of opportunities, essentially covering any use case that requires contractual agreement between two parties. They can fairly argue that many foundational functions within businesses are based on just that.

What makes this opportunity particularly acute now in my mind are two trends. First, digital transformation itself is driving many mainstream businesses to review all of their business processes with an eye towards automation and ease of use. Moving agreements online that can be executed seamlessly in a legally compliant manner would logically be a necessary part of most digital transformation projects.

Second, many new businesses are being formed that move a whole industry ecosystem online. I previously mentioned sharing economy marketplaces – Airbnb, Uber, Lyft, Turo, Boatsetter, RVShare, etc. These all involve some sort of user liability and therefore require agreement to terms of service. These marketplaces are essentially facilitating contracts between buyers and sellers of goods and services online. The same argument applies to the rise of freelancer marketplaces and on-demand workers – Upwork, Fiverr and TaskRabbit. Finally, the proliferation of B2B SaaS platforms, like the example provided by DocuSign of Procore, illustrate the point. All of these businesses have some form of agreement in their buyer and seller on-boarding processes, as well as for each transaction.

In the future, we will likely see the concept of a paper agreement go away. I 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 common 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”. Online platforms with visual drag-and-drop, collaborative interfaces represent the technology advancement that will drive digital agreement processing in the future.

DocuSign’s Agreement Cloud is well positioned to capitalize on these trends, particularly with the addition of the contract lifecycle management capabilities surrounding the electronic signature. These components provide the basis for agreement assembly, negotiation of terms, legal execution, electronic distribution and storage. The Intelligent Insights product already recognizes discrete contract clauses as it uses AI to scan agreements for risks or opportunities.

I think this view of the market opportunity is critical for investors to understand. DocuSign isn’t purely a coronavirus play, as some analysts have pointed out, because it circumvents face-to-face meetings to sign contracts. Rather, it provides a necessary technology service component for any multi-party business application. Because DocuSign’s Agreement Cloud is open to integration and programmable with public APIs and SDKs for developers, it is well-suited to ride the digital transformation trend and blossoming of online marketplaces.

In terms of monetary value, Docusign took a first pass at estimating the total addressable market in their S-1, published in March, 2018. They initially sized the market at $25B.

We believe that companies of all sizes and across all industries will continue to invest heavily in e-signature technology, as well as systems that help them unify, automate, and accelerate the agreement process. As such, we estimate the TAM for our platform to be approximately $25 billion for the fiscal year ended January 31, 2017.

Docusign S-1, Mar 2018

DocuSign calculated this value by generating a count of all companies globally in their core markets and applying an estimated ACV to each based on company size, industry and location. This approach to TAM calculation is often used by other niche software providers, where a direct calculation isn’t provided by industry analyst firms.

As part of the DocuSign Agreement Cloud announcement in Mar 2019, they doubled their estimate for 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.

Given that DocuSign’s revenue estimate for this year is about $1.2-1.3B, they would make up about 2% of this expanded TAM.

Competition

DocuSign is in an enviable position relative to their addressable market. By their own claims, they generate 6-7x more revenue than their next largest competitor. The brand is synonymous with electronic signatures. In their S-1, they reference a 2016 Forrester report that states “their company name is becoming a verb.” The market isn’t wide open, however, and it is prudent to examine competitive activities and future plans.

First, we should consider the process that DocuSign is replacing. At a recent JMP Securities Conference, the CEO mentioned that paper processes should be classified as a competitor. While we can all anticipate that paper contracts will go away eventually, his point was that some companies have delayed migrating to an electronic signature solution because their paper process was adequate and they wanted to focus on other IT initiatives. However, he said that over the next two years, and in particular with the coronavirus fall-out, these companies are prioritizing digital agreement migrations. Also, he feels that digital transformation projects in general provide a reliable driver away from paper agreements.

Looking to the industry analysts, Gartner published a Magic Quadrant for Contract Life Cycle Management in Feb 2020. This took into account DocuSign’s 2018 acquisition of SpringCM. Gartner placed DocuSign in the leader’s quadrant and they occupied the position furthest up and to the right. The other two companies in the leader’s quadrant, Agiloft and Icertis, are privately held. Interestingly, Coupa (COUP) made the visionary quadrant as a result of their acquisition of Exari in May 2019. The goal of that acquisition is to give Coupa customers contract management capabilities as part of Coupa’s business spend management (BSM) platform. Investors will want to keep an eye on developments here, because Coupa is another next generation, rapidly growing software provider.

Interestingly, Gartner started the report by stating “By 2023, artificial intelligence (AI) will enable 30% faster contract negotiation and document completion processes in organizations that deploy leading contract life cycle management (CLM) solutions.” This underscores DocuSign’s recent acquisition of Seal Software and their AI solutions to facilitate and track contract progress.

This is Gartner’s first magic quadrant report on the CLM segment. They define CLM as you would expect – applications that manage contracts from initiation through to termination. Previously, the CLM vendor landscape was fragmented, with providers focusing on one customer segment, like legal, purchasing or sales. Newer solutions (like DocuSign) are spanning all agreement types and all phases of a contract’s lifecycle.

Also, previous attempts at CLM did not include the electronic signature solution. They facilitated contract generation and storage/retrieval of completed documents, but left a gap in the middle for execution. This caused a natural segmentation in offerings as contracts would be printed, signed and scanned back into CLM solutions. With the emergence of electronic signatures as a viable mechanism for gaining agreement, the full lifecycle of the contract could be realized in one toolset and kept online.

In their commentary, Gartner acknowledged that DocuSign’s CLM solution was grafted from the acquisition of SpringCM in 2018. They offered the following strengths and cautions for DocuSign’s CLM offering:

• Recognized for its strong integration with CRM systems, notably Salesforce. Called out the Gen and Negotiate products for Salesforce.
• High marks from customers for overall experience and supporting customers through the evaluation process.
• Received positive reviews for completeness of product features. For CLM, these included requesting a contract, managing the negotiation, redlining, auto approvals, configuration and templating.
• Received low marks for the product’s ability to provide reports and advanced analysis. Product lacks risk scoring and compliance reporting. Interestingly, these are capabilities of Seal Software, so this feedback should change in 2021.
• Some search capabilities were scored lower on the spectrum. Again, Seal Software will help with this, as well as ongoing development.
• Product doesn’t work as well for organizations with less-mature business processes, as the inherent cost and complexity of automation may be more than is needed.

Of the other two companies in the Leader’s quadrant, they appear to be older, smaller companies. Agiloft was founded in 1991 and has 150 employees. It also sells ITIL and ITSM products. They have about 600 customers. Icertis was founded in 2009 and has 900 employees. Their 170 customers are large enterprises with over $1B in revenue. For comparison, DocuSign has over 500k paying customers, albeit most are SMBs, using eSignature. DocuSign has over 3,900 employees and more than $1B in revenue. For the purposes of competitive analysis for the bigger opportunity around digital agreements, I don’t think either of these players represent a real threat.

When asked about competitors (besides paper and inertia), the CEO of DocuSign points to Adobe and Dropbox (Hellosign).

Adobe (ADBE)

Adobe offers electronic signature through its Adobe Sign product. This is part of the Adobe Document Cloud, which also includes Adobe Acrobat DC and Adobe Scan. The description for Document Cloud is to “get digital documents created, reviewed, revised, and e-signed faster and easier across your whole enterprise.” While Adobe doesn’t brand the Document Cloud as a CLM solution, the feature set parallels that offered by the DocuSign Agreement Cloud. On the whole, the Agreement Cloud appears to provide a more complete solution for some features, but the Adobe Document Cloud offers other advantages due to its integration with the rest of the Adobe product set and cross-sell opportunities with a huge stable of enterprise customers.

The Adobe Document Cloud includes the following features:

• Provides a workflow tool, that allows users to configure a set of actions and conditions for the routing of documents for approval. These include roles, routing order, multiple participants, reminders and notifications.
• Configure re-usable templates for agreements.
• Includes the same breadth of legal coverage in all global regions as the DocuSign eSignature solution.
• Has an identity verification capability using government issued documents.
• Maintains an extensive list of integrations with other enterprise applications, including Salesforce, Microsoft, Google, SAP and Workday.
• Interestingly, competitive CLM solution providers, like Icertis, Apttus and Conga are listed as Adobe Sign integration partners. This provides some perspective on the Adobe Document Cloud positioning. They seem to be taking a coopetition approach to CLM, while DocuSign’s CLM product puts them in direct competition. This is further underscored by the fact that Gartner didn’t include Adobe in its CLM magic quadrant.
• Offers an API solution for developer integration. The API is well documented. The breadth of API functionality for Adobe Sign doesn’t appear as extensive as DocuSign, but is comparable for the major functions. Adobe Sign has a developer section with some starter documents. This isn’t as deep as DocuSign’s developer support. Also, I couldn’t find SDKs. There was some sample code for common features that would access the API. This is written in Java, but not other popular languages.
• Adobe Sign offers a payment service, but it is only integrated with Braintree, a service offering from PayPal. Braintree is functional, but not as widely adopted as Stripe. DocuSign’s Payment product works though Braintree as well, but also offers integration with Stripe and Authorize.net as payment gateways. This is a big gap for Adobe’s payment solution.
• Adobe Sign has a number of marquee customers. Of course, a lot of this is likely bundled with Document Cloud, but they do offer several Sign specific customer success stories, including PGA Tour, Golden State Warriors and Amway.
• Has a deep integration with Salesforce, which makes sense, given the broader ecosystem of Adobe products. Customer highlights include Groupon, NetApp and Diners Club.
• Solutions work across all devices, including a dedicated mobile app.

Beyond this feature comparison, Adobe Document Cloud has a very strategic partnership with Microsoft 365. This is worth particular consideration for investors. There is a video dedicated to this partnership on the Adobe site. In the video, the GM of Office 365 Partner Marketing states that Adobe Sign is the preferred eSignature solution across the Microsoft portfolio. It is integrated into Sharepoint, Office 365 and Dynamics. Adobe reciprocates by making Microsoft Teams the preferred chat based workspace across all Adobe cloud services. The purpose of the Office 365 / Adobe Sign partnership is to 1) automate enterprise document workflows 2) make eSignature capabilities available everywhere and 3) speed up the creative process. Microsoft is also embedding intelligent document automation across their workflows. Given how extensively Microsoft is planning to penetrate enterprises with their Microsoft 365 solutions, this partnership could certainly give Adobe a leg up.

Another strategic consideration is Adobe’s influence over the PDF document standard. Many agreements are currently stored as PDF formatted documents. While the PDF standard is open, Adobe has built proprietary extensions to it. They might create extensions in the future that favor use of Adobe Sign.

Adobe Sign has two pricing options for businesses. The first, called Sign Small Business, provides electronic signature capabilities for 1 to 9 users. This is priced at $29.99 / license / month. It appears comparable to DocuSign’s Standard plan at $25 / user / month for 1-5 users. The next level up for Adobe Sign is Business & Enterprise, which offers a complete electronic signature solution to support integrations, API access, workflows, advanced authentication and additional admin features. Pricing for this level requires contacting sales.

At the Morgan Stanley Technology Conference, the DocuSign CEO downplayed the competition from Adobe. He claims it isn’t an area of focus for Adobe and that DocuSign spends more on R&D than the Sign product generates in revenue. He mentioned that as a whole, DocuSign represents 6-7x more revenue than Adobe Sign. Also, he said that Adobe disclosed the growth rate of Adobe Sign a couple years back as 20%, versus DocuSign’s consistent revenue growth of nearly 40% in the past year.

While I think the CEO knows his business and is rightfully optimistic about DocuSign’s relative competitive position, I wouldn’t completely discount the threat from Adobe, vis a vis Microsoft, over the long term. Microsoft 365 for Enterprise is labelling itself as the “global productivity cloud”. Adobe Sign has a preferred partnership and position as part of this, which could encroach on DocuSign’s opportunity in competitive deals, particularly where Office 365 is already licensed by an enterprise. At minimum, this bundling generates noise in the marketplace.

Dropbox (DBX)

In January 2019, Dropbox acquired HelloSign for $230M. HelloSign was founded in 2011 and already had a relationship with Dropbox prior to the acquisition. It was a launch partner as part of Dropbox’s extensions offering, which allows users to access third-party functionality from within the Dropbox environment. Interestingly, Adobe Sign and DocuSign were also launch partners. With the acquisition, Dropbox made electronic signature a part of their business offering.

However, today HelloSign still appears to be run as a separate entity, with its own web site. The main Dropbox Business site highlights HelloSign as part of a long list of app integrations, amongst DocuSign and Adobe Sign. Even Dropbox’s electronic signature feature as part of their Productivity solutions lists all three electronic signature partners and doesn’t give preferential treatment to HelloSign.

This treatment seems very odd to me, given that HelloSign has been a Dropbox company for over a year. My interpretation is that Dropbox customers are using the other electronic signature services and insist that those be given the same treatment as HelloSign. This means Dropbox has little leverage with customers to influence their workflow activities outside of Dropbox’s core document storage functionality.

In the same analyst conference that the DocuSign CEO said that Adobe Sign was 6-7x smaller than DocuSign, he further stated that Dropbox HelloSign was another 6-7x smaller than Adobe Sign. If DocuSign generates $1.2B in annual revenue, that estimate puts Adobe Sign at $200M and HelloSign at $30-40M.

The HelloSign product has many of the same features for electronic signature as DocuSign and Adobe Sign, but they don’t appear as complete. Users can share files and request signatures directly from their Dropbox account. The product has support for multiple signers and tracking progress. It supports templates, custom branding and reporting. HelloSign has the same security and compliance certifications as DocuSign.

One area where HelloSign shines is in their API. It is clearly designed by developers for developers (as they say). Customers seem to appreciate this. There is a quote from a Product Manager at Instacart – “we wanted an API built by a team that valued user experience as much as we do.” G2 Crowd also ranked HelloSign highly for API ease-of-use.

However, even with an extensive API, the number of integrations to other enterprise applications appears limited. HelloSign lists the Google Suite and Salesforce, but only Microsoft OneDrive. I don’t see SAP, Workday or a number of other second tier CRM, HRM and ERP systems. They try to sidestep this by featuring a large number of integrations through Zapier, which is a popular third-party data connector service. However, Zapier integrations work best for asychronous functions, like sending an SMS notification after a trigger action has occurred, so this wouldn’t address having a real-time integration embedded into the user interface of another enterprise tool.

Given the seemingly absent promotion by Dropbox of its own electronic signature product and low integration adoption by most third-party systems, I don’t think HelloSign is aggressively adding new customers. The HelloSign site doesn’t have a dedicated customer section. They list the following customers on the Enterprise section: Dropbox (well, of course), Instacart, StackExchange and Vivial. Even with the Dropbox parental relationship, I don’t think HelloSign will pose a meaningful threat to DocuSign.

Customer Adoption

DocuSign lists some impressive top-level stats related to customer adoption of their products:

• More than 500,000 paying customers and hundreds of millions of users in over 180 countries.
• 7 of the top 10 global technology companies.
• 18 of the top 20 global pharmaceutical companies.
• 10 of the top 15 global financial services companies.
• 800 federal, state, and local government agencies, FedRAMP authorized

As part of their Q4 FY 2020 earnings results, DocuSign reported 24% annual growth in total customers. Enterprise and commercial customer count grew more quickly at 33% year/year. These are defined as customers acquired through sales efforts (not the self-service channel). Enterprise customers represent those in the Global 2000. Commercial customers are mid-market and SMBs outside the G2K.

As a result of the large number of customers on-boarded through the self-serve channels, DocuSign does have a large percentage of revenue generated from short term contracts or month/month. The percentage of longer contracts should go up over time as more enterprises engage in expanded relationships across the Agreement Cloud. This doesn’t need to go to 100%, as it is beneficial to have a portion of revenue generated through self-serve channels, since these require less sales overhead to land.

DocuSign provides an extensive customer showcase on its site. Here are a few highlights:

• Expedia. Fully automated the hotel onboarding process to make contract execution digital. This replaced a print/sign/fax manual workflow that wouldn’t scale. Expedia can now onboard hundreds of international properties a week. Contracts also stipulate pricing rates, special offers and other conditions. I imagine performance goals and incentives are included in some cases. This would be a future candidate for an agreement observability solution to automate the disbursement of incentives.
• LinkedIn. Streamlined the contract creation and distribution process through an integration with Salesforce for customers of LinkedIn’s Talent Advantage product. A LinkedIn salesperson can assemble an agreement in Salesforce by selecting specific contractual clauses and dropping them into a DocuSign template. Then, the system automatically populates customer and product metadata to create the final contract. This is routed to customers to execute and is stored. Also, agreement terms are tracked programmatically, so that payment collection can be triggered during the contract lifecycle.
• Comcast. DocuSign was utilized as part of a digital transformation effort by Comcast Business Services, the ad sales group for Comcast. They needed to modernize their custom CRM solution with a tablet-native app for salespeople to take out into the field. This app was integrated with DocuSign to enable an ad sales contract to be assembled on the fly and then executed while on site with the customer. After execution, the CRM system kicks off ad provisioning processes in other back-office systems. Making the contract agreement process digital raised close rates as salespeople didn’t need to pause the sales process while they prepared contracts for signature offline.

In addition to customer adoption, the Agreement Cloud is creating new traction with system integrators (global SI’s). DocuSign highlighted this in a June 2019 press release, in which they announced that three large SI’s have formed consulting practices dedicated to helping customers implement the capabilities of the Agreement Cloud. ATG, Simplus and Spaulding Ridge were recognized in the press release. The Partner Directory on DocuSign’s site now has over 100 SI’s listed with various specializations. In the Gartner Magic Quadrant for CLM, they also called out Accenture.

This trend of piquing SI interest by expanding into a platform play with programmability capabilities has been noted by several software companies recently. I covered this in a prior post about platform plays. Examples are Okta with the recent launch of Okta Platform Services and Zendesk with their Sunshine Platform, or even Alteryx’s strategic relationship with PwC. DocuSign capitalizes on the same trend, as SI’s can build implementation expertise around contract lifecycle management and include DocuSign products in generalized digital transformation projects for their clients.

Leadership

None of the original founders of DocuSign are part of the current executive team. Given that the company was founded in 2003, that would be a stretch, but I can think of several examples of founder/CEOs from even earlier who are still in place (Jeff Bezos for one). The CEO chain has also been long:

• 2003 – 2007: Co-founder Court Lorenzini.
• 2007 – 2010: Matthew Schiltz
• 2010 – 2011: Steven King (not the writer)
• 2011 – 2015: Keith Krach. Co-founder and CEO of Ariba.
• 2017 – current: Dan Springer. After Keith Krach announced his intent to step down in 2015, it required almost 2 years to find his replacement.

Dan Springer has a long career in leadership positions at a variety of software and technology companies. His most significant achievement was at Responsys, where he was CEO from 2004 – 2014. He joined Responsys in start-up phase and grew it to a leading cross-channel marketing platform. Responsys went public in 2011 (MKTG) and was later acquired by Oracle in 2014 for $1.6B. He tells a funny story about the short transition to Oracle at a recent analyst event. Short version is he was told by his new Oracle boss that one is either a lifer at Oracle or gets cut loose immediately. Given his transition to DocuSign, I would say he made a good choice.

Springer doesn’t have a technical foundation, but has obviously been working in the software industry for a long time. I generally prefer founder/CEOs with an engineering background for the CEO role at my favorite software stack companies. Examples are Shay Banon at Elastic and Jeff Lawson at Twilio, and of course, Jeff Bezos at Amazon.

Beyond the CEO, here are some comments about other members of the executive team.

• Scott Olrich, COO. Focuses on vision, strategy and enablement globally. Worked for Springer at Responsys. Background is in sales, marketing and some product.
• Michael Sheridan, CFO. Joined DocuSign in 2015 and shepherded the company through the IPO in 2018. Prior to DocuSign, he was the CFO of FireEye (FEYE) from 2011 to 2015. Other CFO experience was gained at SonicWALL and IGN. He was also briefly the CFO at Facebook from 2006 – 2007.
• Kirsten Wolberg, CTO. Joined DocuSign in late 2017. Prior to that, she held a number of technology leadership roles at PayPal, Salesforce and Charles Schwab. Background seems more skewed towards IT operations versus software engineering.
• Lambert Walsh, SVP Customer Success. Joined DocuSign in 2016 after spending 9 years in VP/GM roles at Adobe.
• Loren Alhadeff, CRO. Started as Director of Sales at DocuSign in 2008, and worked his way up. No notable experience prior to that.
• Rob Giglio, CMO. Just joined DocuSign in March, after spending 10 years at Adobe. He was SVP, Digital Media Go-to-Market & Sales at Adobe where he was responsible for Adobe’s Creative Cloud and Document Cloud products and solutions. This seems like a great hire.

Springer brought some other execs over from Responsys, including Steve Krause (SVP of Strategy and Product Marketing) and Joan Burke (Chief People Officer)

Overall, I have mixed feelings about the leadership. There are a few stand-outs, who can bring meaningful prior enterprise experience to the table, like Springer, Sheridan and Wolberg. It is interesting that two members of the exec team joined recently from Adobe. This will certainly help with product positioning and strategy. I am concerned that the CEO brought over several team members from Responsys. My personal experience using the Responsys toolset at a company from 2017 – 2018 was terrible. The tool was unfriendly, cumbersome, unreliable and costly. We had to eventually migrate the team to Salesforce and SendGrid. However, this was several years after the Oracle acquisition of Responsys, so my experience could have been a reflection of Oracle’s influence.

Take-aways

DocuSign (DOCU) has a large opportunity and is benefiting from market tailwinds. The Q4 and FY 2020 earnings report was strong and FY 2021 prospects will continue the momentum. In considering DOCU for an investment, I think these factors stand out:

• The proliferation of online marketplaces and SaaS products is driving greater demand for digital agreements. I think we are just in the first phase of this transformation. Future phases will add assembly and programmability to agreement frameworks. Smart contracts will require agreement observability tools to monitor contract terms and take actions as they are achieved. As the leader in systems of agreement, DocuSign is well positioned to evolve the Agreement Cloud to enable these future use cases.
• DocuSign has a strong developer motion with a complete and easy to consume set of APIs. Their supporting documentation and starter code in popular languages makes the adoption of platform capabilities frictionless for developers. The API offerings have a separate pricing tier and automated provisioning with a developer sandbox. These capabilities will ensure that DocuSign’s agreement services are integrated with other enterprise systems and incorporated into new stand-alone multi-party marketplaces.
• The DocuSign brand is trusted and firmly established in customer’s minds. Additionally, their current size advantage relative to competitive offerings is significant.
• Revenue growth has remained in the high 30% range since the IPO, with FY 2020 revenue almost 4% higher than FY 2019. Many other software companies are experiencing gradual revenue deceleration.
• Large customer growth is strong. Enterprise and commercial customer count growth of 33% year/year is higher than the total customer rate. Customers spending over $300k annually grew 41%.
• Profitability is improving. Operating margin increased year/year. FCF margin remained positive.

While DocuSign is executing well, there are a few areas that investors should watch:

• Competition from Adobe and Microsoft. They likely foresee the expansion opportunity with document automation and contract management. Microsoft 365 and the Productivity Cloud could encroach upon DocuSign business, particularly with larger enterprises that already have a relationship with Microsoft or Adobe. Coupa’s acquisition of Exari should also be monitored, but for now, that appears to be focused on facilitating business spend, versus addressing the whole agreement ecosystem.
• DBNER of 117% is reasonable, but not best in class for growing software companies. New customer adds seem to be driving the majority of revenue growth. The expansion motion should kick in with the broader product offering of Agreement Cloud and expanded use cases within enterprises. If DBNER declines, this could be an indication of a growth ceiling.
• International revenue is only 18% of total revenue currently. For now, this represents a growth opportunity, but if not addressed, could be a limiter or gap for a competitor.
• The CEO role has been a revolving door. Dan Springer seems committed and passionate, likely eager to make his mark and push DocuSign for a long time. He also brought a team over from Responsys. If he were to leave, the company would lose momentum.

Investment Plan

DocuSign has a leading position in a large addressable market. With digital transformation efforts and whole new marketplace businesses springing up, the demand for convenient, online and automated agreement processes is accelerating. Looking into the future, as more electronic agreements are negotiated and executed online, they will need ongoing “monitoring” for renewals and terms fulfillment. These smart contract requirements will launch a new set of “observability” capabilities for agreements, similar to the explosion we have witnessed in infrastructure monitoring (DDOG, etc.). Legal, compliance and procurement teams may be the new consumers of observability solutions.

With the Agreement Cloud and an open, developer friendly ecosystem of integrations, DocuSign is positioned to capitalize on these trends. The competitive landscape is currently lagging, but there are broader initiatives around “productivity clouds” (witness Microsoft 365) that may encroach upon some of DocuSign’s core capabilities in contract lifecycle management. In spite of this, it is likely that DocuSign will further its lead in defining the agreement ecosystem for some time to come. As developers are pressed to continue cranking out new applications for enterprises pursuing digital transformation efforts, they will look for ready-made services to plug into their apps to facilitate legal, multi-party agreement workflows.

DocuSign has ridden this momentum to deliver consistent revenue growth in the high 30% range. I think this will continue for several years. DOCU’s current EV is $18.3B with an EV/Revenue ratio of 18.7. I estimate that DOCU can maintain 35% revenue growth over the next 2 years, and then gradually drop to 28% in 5 years. This would yield $3.84B in revenue for FY 2025 (calendar year 2024). With rising operating margins targeted at 20-25%, I think an EV/Revenue ratio of 12 would be reasonable at that point. This yields a target EV of $46B in 2024 or 2.45x today’s value. That gives me a 5 year price target of $245.

DOCU’s stock trades at $100 today. It has enjoyed a nice run over the last couple of months, up 35% year to date. This recent growth tempers the return somewhat for my 5 year target, but I think there is still ample upside for a new investment with a long term horizon.