DocuSign (DOCU) Stock Q1 FY2021 Earnings Results Review

DocuSign released their Q1 (April end) FY2021 earnings report on June 4. They delivered a strong beat and raise across all metrics. Following several software companies that moderated their full year revenue growth, it was encouraging to see DocuSign increase revenue targets for both the next quarter and full year. While much of this can be attributed to spend pull forward due to COVID-19 and associated remote work trends, in DocuSign’s case, it is hard to imagine these trends reversing. Companies will not go back to paper agreements once digitized. More compelling for the bull case is the emergence of the full lifecycle of agreement processing and programmatic integrations with systems of record and end-user applications. These use cases should continue to drive high demand for the DocuSign’s services into the future, particularly considering the TAM and largely greenfield opportunity. In this post, I review DocuSign’s earning results and other recent business updates. I also take a look at continued progress with agreement automation, the competitive market and future opportunities. For a detailed refresher on the DocuSign investment thesis, please see my full analysis  published in April.

Headline Financial Results (EPS is Non-GAAP)

• Q1 FY2021 Revenue of $297.0M, up 39% year/year. This compares to the consensus estimate of $281.1M, representing growth of about 31.4%. DocuSign beat estimates by about 8% of annualized growth. Q4 FY2020 revenue growth was 37.6%.
• Q1 EPS was $0.12 vs. $0.10 expected, representing a beat of $0.02. This compares to $0.07 in Q1 FY2020 and $0.12 in Q4 FY2020.
• Q1 Non-GAAP operating income was $23.2M, representing an operating margin of 8%. This compares to an operating income of $10.3M in Q1 FY2020, representing an operating margin of 5%. Q4 operating margin was 8%.
• Q1 FCF was $32.8M, representing a FCF margin of 11%. Q4 FCF margin was 6%. In Q1 FY2020, FCF was $30.4M for a FCF margin of 14%. Q1 FCF was impact by increased Capex spend due to leasehold improvements and scaling of the federal data center. Operating cash flow increased 30% year/year to $59M, versus $46M in the prior year.

• Q2 FY2021 Revenue estimate of $316-320M, representing growth of 35.3% at the midpoint. This compares to the consensus revenue estimate of $303M, or 28.6% growth. This represents a raise of about 7% of annualized growth.
• Q2 FY2021 Non-GAAP operating margin guidance of 3-7%.
• FY2021 Revenue estimate of $1.313-1.317B, representing growth of 35% at the midpoint. This compares to the consensus revenue estimate of $1.261B for growth of 29.5%. So, a fairly significant raise on annualized revenue, without much deceleration built in.
• FY2021 Non-GAAP operating margin guidance of 5-9%.
• Ended the quarter with cash, cash equivalents, restricted cash and investments of $898.3M.

Other Performance Indicators

• Q1 Non-GAAP gross margin was 79%, inline with Q1 FY2020.
• Q1 Billings were $342.1 million, representing an increase of 59% year/year. Billing growth in Q4 FY2020 was 40% year/year.

• Total customer count increased to 661K at the end of Q1, representing 30% growth over the prior year period. Growth in large customers (which represents those with over 10 employees and not landed through the self-serve channel) grew 49% year/year.

• Customer Highlights:
  • Global pharmaceutical company. Worked closely to accelerate its eSignature expansion to hundreds of use cases across 80 different countries.
  • Department of Labor in one of the largest U.S. states. New customer – DocuSign helped to transform its previously complex and lengthy process for handling emergency unemployment benefits. Supported by eSignature, the department distributed over $500M in benefits to more than 500,000 residents in less than one week.
  • Regional telecom provider. Used DocuSign Intelligent Insights, which is the contract analytics tool, to analyze potential pandemic-related risks in thousands of their supplier contracts.
  • Helped a European telemedicine provider issue e-prescriptions and online sick leave certificates by using the video identification capability to confirm the patients’ identities.
• Breaking down Q1 expenses by category, we see slight year/year reductions in relative percentage of S&M and G&A. R&D spend was roughly inline.
  • R&D = 14% (versus 13% in Q1 FY2020)
  • S&M = 48% (versus 50% in Q1 FY2020)
  • G&A = 9% (versus 11% in Q1 FY2020)
• International revenue grew over 46% year/year to $55M.
• Q1 DBNER of 119%, driven by strong eSignature expansions and upsells. DBNER had been 117% for the prior two quarters.
• Customers with ACV greater than $300K grew 46% year/year to a total of 473 customers.
• On the earnings call, management mentioned that they pulled forward some sales hires and expanded marketing efforts in the quarter. This was done to address current demand and prepare for future growth.
• The CEO discussed how the Agreement Cloud is becoming more sticky because almost two-thirds of the transactions that occur on the platform are through programmatic integrations. These are either the pre-built integrations with resource management systems, like SAP, Salesforce and Workday, or through direct calls to the platform’s APIs built using DocuSign developer tools.
• The CFO commented on the large billings increase and the sustainability of that revenue increase once the pandemic clears. The COVID-19 situation pushed DocuSign up the priority list for new implementations at companies which were already considering the solution. Leadership believes strongly that the usage increase will remain after the pandemic, as it would apply to either work-from-home or a return to the office.
• The large number of new direct customers were eSignature product wins. In the quarters ahead, these should cross-sell and expand into the other Agreement Cloud solutions.
• Along those lines, management emphasizes the pent-up opportunity to cross-sell Agreement Cloud to their existing 661,000 customers, who are mostly signature-only.

William Blair Growth Conference

On June 10th, DocuSign’s CEO participated in the William Blair Growth Conference. This call was packed with more insight into the broader opportunity for DocuSign.

• DocuSign is not just an e-signature tool, rather it is a platform for agreements. The platform encompasses the broader workflows that surround a business agreement, from contract preparation to managing the completed agreement over time. For example, after a signature, customers need to kick off other activities, like payments. Later, they may need to update the set of all agreements of a certain type to reflect a business change. The Agreement Cloud handles all of these use cases.
• E-signature is still the entry point for most customers, but they will later expand into adopting the rest of the lifecycle. Without signature, the other steps aren’t as relevant.
• TAM definition – for e-signature by itself, they estimate $25B. This number was generated by DocuSign internally and had a third party independently corroborate. With Agreement Cloud functionality, CEO thinks the TAM doubles. DocuSign’s penetration is still just 4% in e-signature, even though they have largest share of existing usage (the rest is paper documents). The other $25B TAM for Agreement Cloud is even less penetrated.
• Another expansion vector is the number of use cases for digital agreement workflows within larger enterprises. Microsoft, for example, has major adoption of DocuSign, with over 300 use cases. These span business workflows across many of their departments, sales processes, partner relationships, etc. On the other end of the spectrum, most customers have fewer than 5 use cases. The most common is one use case. This underscores the expansion opportunity within existing customers (will drive DBNER). Have 661K existing customers that could expand usage.
• What is the competitive moat? Why haven’t more start-ups entered the space? In terms of competitors in e-signature, DocuSign still has the largest share of market. For new deals, paper agreements are the norm. Still a greenfield opportunity. These are the competitive differentiators, from the CEO’s perspective:
  • Investment in infrastructure. DocuSign has very high uptime (99.999%) with no maintenance windows. To achieve this, they host their own data centers, mainly because public cloud can’t reach this level of availability. They need to be online 24/7 around the world.
  • Security. The data storage environment is very secure, with appropriate certifications. This is important for Fortune 500 customers. DocuSign is FedRAMP certified.
  • Partnerships. Have major tech company partners – SAP, Salesforce, Microsoft, Google, Intel. These all use DocuSign and have some sort of reseller partnership. They are also invested in DocuSign, from before the IPO. CEO thinks that if one of the big technology vendors created a new digital agreement offering themselves, that the others would try to shut it out.
  • CEO is more concerned about a completely new business process or model that might completely dis-intermediate the agreement process, than an existing company copying what DocuSign is doing.
• For DocuSign, two-thirds of all agreements are created programmatically, through API calls. Customers have built DocuSign into their internal processes or leverage the integrations built into their workflow and resource management tools.
• The CEO sees a future opportunity around “smart contracts”. For DocuSign, these refer to making agreement terms data-driven and managing the full lifecycle of a contract. For example, banks have to find and update all of their existing contracts to update references to LIBOR. DocuSign makes it easy to locate all of these and isolate the clause in each that refers to LIBOR. Another example DocuSign has demo’ed is with crop insurance. If the temperature rises above 90 degrees for a period of time, the smart contract could automatically generate an insurance payment.
• International growth – was 46% in the past quarter, which was higher than U.S. However, only 18% of total revenue is generated outside the U.S. Sees this as a big opportunity and wants to be closer to 30% share. DocuSign currently sells to 150 countries through self-service sign-up. Direct sales is divided between common law and civil law countries. Common law countries are easy to expand in, because the rules are largely the same – US, UK, AUS, CA, etc. Civil law countries all have different rules. Most growth has been in common law countries so far. Have put sales people in 8 countries, and established an EU sales hub in Dublin for all of Europe. Focusing on the biggest countries first.
• Integrations are driving more and more business. Salesforce users can send out a contract for several people to sign and then the status updates back in Salesforce. Once a contract is executed, the Salesforce billing workflow kicks off. Other customers are building custom integrations using the API, versus the pre-packaged integrations. Blend, which is a leading digital lending platform, is an example of a partner, integrator and customer. They have built a DocuSign business on top of their platform.
• SI’s are more engaged with Agreement Cloud. In the past, they couldn’t build a practice around just e-signature. Now, with the broader Agreement Cloud functionality, SI’s can support consultants and a practice around the full agreement process.
• Sustainability of growth – DocuSign is still aggressively pursuing growth opportunities. The CEO mentioned attempting to reach the “apex of growth”, which implies revenue growth rates might be higher. In Q1, they pulled forward some hiring in sales and marketing to meet increased demand. He is not sure if this is just a 1-2 quarter phenomenon, but will continue accelerated spend to drive growth if demand continues. CEO thinks this is less of a one-time spike in usage due to work from home, but rather acceleration of adoption that was planned, but not prioritized. This usage should be permanent – companies won’t go back to paper agreements.
• Getting some virality benefit – but not as much as other SaaS businesses. Only document senders are payers. Signers don’t get charged. There is an opportunity for some portion of signers to bring DocuSign to their companies, that then become future customers.
• DocuSign has become a verb. Forrester Research called DocuSign the “strongest brand and market share leader—the company name is becoming a verb.”

NASDAQ 100 Addition

After the market closed on June 12, Nasdaq announced that DocuSign will join the NASDAQ-100 index, replacing United Airlines. This will occur before the market opens on June 22. The NASDAQ-100 is essentially a basket of the 100 largest and most actively traded U.S. companies that trade on the NASDAQ exchange. It is widely regarded as a solid benchmark for the tech industry. From an investment point of view, many funds will allocate part of their portfolio to tracking indexes like this. This generates an incremental baseline of demand activity that is separate from interest in an individual stock.

DocuSign joins other progressive tech companies, like FAANG, PayPal, Zoom Video, Adobe and Tesla. The market reacted favorably to this announcement, driving up the stock price the following trading day, June 15, by 8%. It is further validation of the perception for DocuSign’s future growth and position in the industry.

Analyst Reactions

Following DocuSign’s Q1 earnings on June 4th, seven sell-side analysts provided updated coverage reports. They all raised their price targets, some up to 80% in reaction to the results. Five rated the stock at a buy equivalent, while two maintained their neutral rating. The average price target for these updates is about $154, representing a 10.3% increase over the closing price on June 5th of $139.64.

Date	Analyst	Rating	Price Target
6/5	JP Morgan	Overweight	Raised from $90 to $150
6/5	Piper Sandler	Neutral	Raised from $90 to $140
6/5	Morgan Stanley	Equal Weight	Raised from $122 to $133
6/5	DA Davidson	Buy	Raised from $90 to $161
6/5	RBC	Outperform	Raised from $150 to $170
6/5	Wedbush	Outperform	Raised from $140 to $165
6/5	Deutsche Bank	Buy	Raised from $90 to $160

Following the earnings results, RBC Capital set the highest price target, raising from $150 to $170. Analyst Alex Zukin provided the following commentary.

RBC Capital analyst Alex Zukin raised the firm’s price target on DocuSign to $170 from $150 and keeps an Outperform rating on the shares. The company reported a “very strong” Q1 with strong beats across revenue, margins, and billings, the analyst tells investors in a research note. Zukin adds that the pandemic outbreak benefited the quarter, the company’s demand trends look durable, and its pipeline appears “strong”.

thefly.com, June 5, 2020

Deutsche Bank raised their price target by almost 80%. Analyst Karl Keirstead similarly had positive feedback on the quarter’s results and the longer term opportunity.

Deutsche Bank analyst Karl Keirstead raised the firm’s price target on DocuSign to $160 from $90 and keeps a Buy rating on the shares. The company’s fiscal Q1 results reinforced the belief that adoption of DocuSign accelerated amidst the work from home phenom, as billings growth, net retention rate and net new customer additions “reached the highest levels we have seen ever or in years,” Keirstead tells investors in a research note. Even more encouraging is DocuSign’s messaging that the quarter was strong excluding the tailwinds from the pandemic and that new customers and expansions realized in this environment are here to stay, adds the analyst.

thefly.com, JUne 5, 2020

DocuSign Product Development Activity

On March 4, DocuSign released a new version of the Agreement Cloud – 2020 Release 1. This follows 6 new product releases in the past year. Understandably, much of this major release included incremental improvements to those products.

After such a fast product release cadence, this year the focus is on ensuring that each product is the best in its respective class.  The intent is to make each product easy to use and well-integrated into the complete Agreement Cloud process. The 2020 Release 1 included the following items:

• Agreement Cloud Editor. Facilitates the creation of agreement templates by allowing the user to drag Salesforce data fields onto the templates and map conditional content into the flow of the template’s text. As the agreement template progresses, the user can toggle between the template and a live preview with merged data. Generated documents are mobile responsive, automatically adapting to the displaying device’s size and orientation. The new editor will initially appear in the DocuSign Gen for Salesforce product.
• DocuSign Click Enhancements. These enhance the DocuSign Click product, which provides a one-click, no-signature-required method to capture customer consent to standard agreement terms referred to as “clickwraps” These might be Terms and Conditions, EULAs, disclosures, etc.  These enhancements respond to customer requests to address the following:
  • Record “decline/opt out” responses, which has been a top request from EMEA customers who must comply with GDPR requirements.
  • Customize the agreement statement above the “accept” button, providing more flexibility and control to customers who must use specific legal language.
  • Support multiple agreements, which is valuable for customers who want to bundle several standard terms in one clickwrap for a seamless customer experience.
  • Export responses to a CSV file, making it easier to search, analyze and report on clickwrap data
• ID Evidence. Businesses often need to verify the identity of the person electronically signing a document. To support that requirement, DocuSign launched ID Verification last year. The service can automatically verify a signer’s government-issued ID or European eID on any device.  ID Evidence addresses stringent identity verification requirements, like recording metadata from the ID used and storing a digital image of it. With ID Evidence, users can capture ID document information—such as address, ID number and date of birth—and retain a copy of the ID to support compliance requirements.
• Expansion of DocuSign Payments.  DocuSign Payments helps customers process one-time payments, such as rental deposits and donations, as well as recurring payments and future one-off charges, including monthly dues and late fees. This expansion extends payment capabilities to all countries and currencies supported by their network of payment gateway partners: Stripe, Braintree, Authorize.net, CyberSource and Zuora. Across these payment providers, they cover more than 35 countries and 135 currencies.

On May 1, DocuSign completed its acquisition of Seal Software. In February 2020, DocuSign announced this acquisition. 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 Agreement Cloud platform to power the Total Search and Intelligent Insights product offerings.

At the Morgan Stanley Technology Conference in March, the CEO discussed how he made the engineering team’s main priority for 2019 to fully integrate SpringCM into the Agreement Cloud. For 2020, he has repeated that prioritization for Seal Software. The addition of Seal Software’s technology will imbue the entire Agreement Cloud with intelligence capabilities. These provide the basis for future capabilities around smart contracts and observable agreements.

Competitive Activity

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 “the company name is becoming a verb.” The market isn’t wide open, however, and it is prudent to examine competitive activities.

Looking to the industry analysts, Gartner published a Magic Quadrant for Contract Lifecycle Management (CLM) in February 2020. This took into account DocuSign’s 2018 acquisition of SpringCM. Gartner placed DocuSign in the leader’s quadrant and they occupied the highest position in ability to execute. Gartner’s definition of CLM aligns well with DocuSign’s broader vision – systems that manage contracts from initiation through to termination.

The other two companies in the leader’s quadrant, Agiloft and Icertis, are privately held and don’t seem to be expanding their market share. In my full analysis of DocuSign, I identified two other publicly traded competitors to monitor. These were Adobe and Dropbox, who each had previously acquired a competitor to DocuSign. While their focus is primarily on e-signature, these competitors see the broader opportunity for CLM as well.

Adobe (ADBE)

Adobe offers electronic signature through its Adobe Sign product.  Adobe Sign is part of the Adobe Document Cloud product line, along with Acrobat, Reader, Send, PDF Pack and Scan. On June 11, Adobe reported their Q2 FY2020 earnings results (quarter end on May 29th). Document Cloud as a whole generated $360M in revenue in the quarter, representing annual growth of 21.6%. Document Cloud made up 11.5% of Adobe’s total revenue.

Adobe doesn’t break out revenue contribution at the product level, so we don’t have exact numbers for Sign. However, in the Q2 earnings call script, Adobe provided several updates on the performance of the Sign product.

• Due to the COVID-19 situation, leadership highlighted a “shift to remote work driving surge in demand” for the Document Cloud in general. They called out strong Adobe Sign adoption. Document Cloud benefitted from tailwinds associated with knowledge workers and communicators working from home.
• They cited usage of Sign increasing 175% since the start of the fiscal year (December 2019).
• This was a particularly strong quarter of driving new business for Adobe Sign, with net new ARR more than doubling year-over-year.
• Improved execution in the government segment, particularly for the Sign solution. The City of Seattle’s digital workplace division deployed Adobe Sign across its departments when the city quickly shifted to telework. The State of Utah is using Adobe Acrobat and Sign as part of its telework initiative to streamline communication across the state.
• As part of a strategic review of the Document Cloud business group, Adobe is increasing investment in Adobe Sign and their PDF services on the web. They are also making PDF functionality available through APIs to capitalize on the shift to remote work and digital-first document processes.
• Experienced shortened deal cycles for enterprise Acrobat and Sign customers, as the imperative to translate paper processes to digital accelerated across the globe.

Separate from earnings, Adobe made some product announcements related to Sign during the quarter:

• Announced an integration between Microsoft Sharepoint and Adobe Sign. Adobe and Microsoft already have a strategic relationship which involves Sign being the “preferred” e-signature solution for Microsoft products. This integration adds a number of useful features, including executing the signature within Sharepoint, tracking status of multiple document approvals and data synch.
• In early April, Adobe initiated their government rapid response program to enable agencies to rapidly transition to remote support capabilities. This program involved helping these agencies digitize many of their standard workflows for supporting the public. One aspect was to help them move document signing online through Adobe Sign. The state of Utah, Iowa and the California Department of Technology took advantage of this and moved some of their functions to utilize e-signature.
• Rolled out a free Adobe Sign trial offering with no commitment for 14 days.
• Announced a new integration with ServiceNow HR Service Delivery (HRSD) to eliminate paper-based processes around new hire on-boarding, code of conduct, policy acknowledgements, and other employee self-service signature needs. Adobe Sign already had an integration with other products in the Now Platform. This adds HRSD.

The extensive integration between Adobe Sign and Microsoft products is interesting. That could certainly represent a competitive issue. However, the DocuSign CEO provides Microsoft as a marque customer example with over 300 use cases for DocuSign internally. Also, Microsoft struck a similar agreement with DocuSign in 2014. Given these mixed messages, this relationship with Adobe is probably not too threatening.

Adobe Sign does seem very focused on small business. They provide two examples on the Adobe blog of customer testimonials for Adobe Sign. One example is for law firms and the other is a small marketing firm.

At the Morgan Stanley Technology Conference, DocuSign’s CEO claimed that DocuSign generates 6-7x more revenue than Adobe Sign and that Sign was growing about 20% year/year. With these new quarterly results from Adobe, it seems like Adobe Sign is experiencing significant growth. DocuSign reported a surge in new billings growth of 59% for its quarter ending in April. Adobe reported a doubling of new ARR for Sign for its quarter ending in May. These metrics are related but not directly comparable. What is interesting is the additional month of May that Adobe’s numbers included – meaning Adobe’s quarter accounted for a more complete impact of COVID-19 shutdown activity (March to May) than did DocuSign’s quarter (February to April). Assuming Adobe Sign isn’t directly displacing DocuSign, this extra month of growth for Adobe could bode very well for DocuSign’s Q2 earnings, which would span May – July.

Dropbox (DBX) – HelloSign

In January 2019, Dropbox acquired HelloSign for $230M. HelloSign was founded in 2011 and already had a relationship with Dropbox prior to the acquisition.  Currently, HelloSign 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.

With that said, HelloSign continues to expand their product offering. In February, they announced a number of admin and security features for enterprises. These included the following:

• A new administrative console that provides admins with an advanced set of security controls. Admins can set document and team level permissions and customize branding by sub-team. This allows different teams within an enterprise to use e-signatures based on their unique needs.
• Advanced form fields, including clickable links, conditional logic, and drop-downs, which give senders more flexibility when preparing documents for signature. It also provide signers with a more intuitive signing experience.
• Dashboards and detailed reporting that provide visibility into how an organization is using the e-signature functionality. Admins can generate detailed reports on usage, performance, and document status.

In February, Dropbox announced that HelloSign had been named a Leader in the Globe of Digital Transaction Management (eSignature) for 2020 by Aragon Research, Inc, an independent research and advisory firm for information technology.

DocuSign and Adobe were also named as Leaders, with DocuSign arguably occupying the highest position. Aragon provided the following commentary relative to the HelloSign offering:

HelloSign has continued to strengthen and invest in its partnership with Salesforce, which features HelloSign as part of its SMB partner offerings. Additionally, HelloSign added advanced team and admin functionality to further strengthen its position in the market. Now that HelloSign is part of Dropbox, the combined entity is beginning to rollout HelloSign as a complementary solution with Dropbox plans. The combination of HelloSign and Dropbox also changes the game for buyers, as they can now acquire a digital work hub and a full DTM platform in one integrated offering, creating a single point for document signatures, storage, and access.

Aragon Research, jan 2020

As part of its report, published prior to COVID-19, Aragon predicted that the market for Digital Transaction Management would grow at over 25% a year going forward. It is likely that this has accelerated further. They also call out the increasing scope of digital transactions beyond e-signature. “DTM is expanding beyond just the initial focus on the signature. Workflow and content automation and the rise of asset management are forcing providers to focus more on the document lifecycle of the content that it is tied to—or that comprises—the transaction.” This evolution of the market beyond e-signature into overall agreement asset management favors DocuSign’s holistic Agreement Cloud platform.

Future Opportunities

Beyond the e-signature business, DocuSign leadership has a much broader vision for the company’s product evolution. This is grounded in the strategy to address the full lifecycle of contract management (CLM) and the steps surrounding signature as encompassed in the Agreement Cloud.

Given this broader positioning, DocuSign has many future growth vectors, beyond just moving signatures into a digital form. This is where I think investors underestimate the opportunity for DocuSign. It is not simply a solution to put signatures on PDF files. A contract or agreement is at the core of many business processes, including on-boarding employees, forming new partnerships, establishing delivery terms with a vendor, agreeing to conditions for online services, etc. Surrounding the agreement itself are a number of business steps that are typically addressed, like collecting payments or handling renewals. With enterprises expanding their digital transformation efforts by moving most customer and partner business processes online, they will need an automated solution that creates legally binding agreements to embed in their applications. This is not a trivial coding exercise, involving dropping in some open source. Developers at these enterprises will turn to DocuSign for easily consumable services for digital agreement management.

DocuSign leadership has revealed that two-thirds of all interactions with the Agreement Cloud are now programmatic through API integrations. This creates strong network effects and opportunities for rapid scaling of usage as these use cases continue to expand. DocuSign’s growth is no longer tied to how many physical paper documents they can move into a digital signature. Rather, they can harness a wider ecosystem of preparing, executing, managing and tracking “agreements” more broadly. Just think of how many B2B workflows require some form of consent or binding contract.

As an example, 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 allows Procore’s construction project managers to quickly create, annotate and distribute 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.

Rather than providing an API as an afterthought, DocuSign built their API for developers from the ground up. They likely use 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. There are other customer examples of API usage listed in the DocuSign Resource Center.

In my previous analysis of DocuSign, I touched on some other future use cases as well. These continue to be reinforced by leadership. Decomposing agreements into programmatic, data-driven clauses is one opportunity already enabled by the Seal Software acquisition. Once agreement conditions are quantified, then programmatic logic can be applied to them. A whole system of monitoring agreement terms will emerge, replacing the human process of manually reviewing contracts periodically to ensure compliance and optimize for more favorable terms. Just like observability emerged to monitor application performance, “agreement observability” could be automated. This would make contracts and agreements organic, moving beyond a simple one-time solution for signature execution and storage into a whole system of agreement adjustments and enforcement. That represents the broader vision and opportunity for DocuSign.

My Take-aways

• Revenue growth accelerated by 2% sequentially from Q4. Billings growth stepped up further by 19% and could drive higher revenue growth rates for the remainder of the year. As compared to other software companies reporting this quarter, forward revenue guidance doesn’t imply much drop-off in demand, going from 39% Q1 actual growth to estimates for about 35% growth next quarter and the full year. We can assume further raises as the year progresses.
• DBNER ticked up to 119% and growth in large customers is strong. Additionally, overall customer growth in Q1 increased to 30% year/year, versus 23.5% in Q4.
• In parallel, profitability measures are improving. Non-GAAP operating margin grew to 8% from 5% a year ago. Non-GAAP net income nearly doubled year/year to $24M in Q1, compared with $13M in Q1 of last year. This combination of steady to accelerating revenue growth, coupled with increasing profitability should continue to support high valuation multiples going forward.
• The TAM for DocuSign’s products is large and leadership is positioning the Agreement Cloud strategically to capitalize on the migration of agreement workflows online. The high percentage of API usage also enables rapid scaling and customer expansion as business growth becomes automated.
• DocuSign continues to be well positioned competitively. The CEO still claims that paper processes are the biggest competitor and a lot of greenfield opportunity remains.
• In this past quarter, leadership pulled forward sales and marketing hires to address the higher demand and to prepare for future growth. The CEO implied on a recent analyst call that they haven’t hit the “apex” of growth yet.

Risks and Items to Watch

• While the competitive environment appears to offer a lot of opportunity for all players, Adobe is making significant progress with their Sign product. They plan to increase investment in the Sign business going forward. Their strategic relationship with Microsoft provides easy on-boarding of new Sign customers looking for a simple e-signature solution that is already integrated with most Microsoft business productivity applications. We will want to continue to watch Adobe’s activity in the space.
• While the emphasis on growth through API’s is exciting, customers will generally need to build software applications to consume them. These development projects might be delayed or slowed down in the COVID-19 spending environment.
• International penetration is still very low. The CEO intends to increase this significantly going forward. A new competitor that focuses on a particular segment of countries or regions might create expansion headwinds.

Investment Plan

DocuSign has a leading position in a large addressable market. With digital transformation and remote work trends accelerating, the demand for convenient, online and automated agreement processes will continue to be elevated. Looking into the future, as more electronic agreements are negotiated and executed online, they will need ongoing “monitoring” of 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.).

With the Agreement Cloud and an open, developer-friendly set of APIs, DocuSign is positioned to capitalize on these trends. Along with broad third-party system integrations and an expanding customer set, DocuSign will realize significant network effects and expand their competitive moat. While the Agreement Cloud brought several new product offerings, DocuSign continues an aggressive product development cadence. They have also demonstrated an ability to add strategic capabilities through acquisitions.

Q1 FY2021 earnings continued the momentum and lays the groundwork for further upside as the year progresses. DocuSign is demonstrating a powerful combination of high revenue growth and increasing levels of profitability, which will support favorable valuation multiples going forward. Leadership intends to continue investing in growth to pursue increased demand.

In April, I set a 5 year price target for DOCU of $245, when the stock was trading at about $100. As the stock is currently trading around $162, I think this long term price target is easily achievable. However, I will wait until the end of this year to update it. In the meantime, investors with a long term horizon would continue to benefit from an investment in DocuSign. Personally, I have increased the allocation to DOCU in my own portfolio.