DocuSign, Inc. (DOCU) Earnings Call Transcript & Summary

All right. Welcome. Good morning, everyone. Thanks for braving 8 a.m. For those that are not familiar with myself, my name is Scott Berg and I lead our enterprise software and SaaS efforts here at Needham. Today with us, we have DocuSign and the company's CFO, Mike Sheridan. Mike, welcome. Thanks for being here.

Thank you. Thanks, Scott.

I guess, let's get started by maybe give a brief overview of the company for the 2 people in the room that aren't familiar with DocuSign.

Yes. We can give a brief overview. DocuSign is a company that was founded on eSignature. It pioneered technology that has helped companies digitally transform how they execute their agreements across over 1,500 use cases today globally. That business has grown to close to a $1 billion run rate. In more recent years, we have been expanding the value proposition that we offer to our customers to include functionalities that exist around signature, preparing documents, acting on documents, managing documents and so forth. We call all of that workload the System of Agreement and our first move to expand our offerings beyond signature is in what we call the prepare phase through our acquisition of SpringCM a year ago, September. Spring offers CLM technologies that we've now branded as DocuSign CLM. It is, relative to the size of our eSignature business, a relatively small portion. When we acquired the business, it was about a $17 million run rate. In the time that we have integrated those technologies into our offerings, we would look at this current fiscal year that's going to end this month as one of validation for us. We've seen good response from customers and their adoption of it, which isn't a total surprise to us given the fact that the reason we went there first was largely driven by customer feedback to us that that's where they thought we could be most relevant to help them solve a problem in a more extended way. So relative to the size of eSignature, it's still relatively small, but very important to us for us to continue to execute and succeed. Of course, we see that, that move and any others related to the System of Agreement is what I call moves towards signature; they're very integrated to that process. The signature market, we're about 5% penetrated in a $25 billion market. So the core of the business will continue to be one that looks to signature as a very significant and primary driver of our growth.

Got it. Yes. We're going to start with product in general. And I like the move from point solution to something more broader in terms of a suite or a workflow solution. But when I think of CLM, I've been around different vendors in the space for a while. And you might not know, I actually knew the founder of SpringCM, Greg Buchholz, 4 or 5 years ago. So I've known the business for a while. But when I think of CLM, I think about it having kind of 2 unique cases out there, both on the sales side and kind of on the procurement side. I look at the Agreement Cloud, and, correct me if I'm wrong, it's more of on that sales side for CLM. Do you see yourself extending into the use cases kind of on the other half of that mirror equation as customers are buying products and they're using a system like Spring to manage their own contracts?

Absolutely, yes. So CLM is absolutely a buy-side and a sell-side technology. If you look to signature and you look at those use cases I mentioned, they are back office and they are front office use cases and we would see CLM being relevant to those as well. If you look at where we're focused in terms of weighting those 2 today, our technology is probably a bit more weighted on the sell side. We certainly have buy-side capabilities, but we'll look to expand those over time.

Got you. And in terms of other new products you've been adding to this platform, you recently renegotiate -- or negotiated -- or, excuse me, released DocuSign Negotiate for Salesforce in November. Can you talk about that product and maybe any early traction that you've seen?

You bet. So if you look at what DocuSign has accomplished in signature in terms of the types of customers that we address, first of all, it's a very horizontal platform. And so across verticals, we've been successful. It's also a technology that solves problems to the very smallest companies out there through our self-service down to single person entities all the way up to the Fortune 10, with significant growth in small business, mid-market and what we call majors. So we sell across a wide platform of customers. And if you look at Negotiate, that is a product that is specifically targeted to smaller companies that don't necessarily need the full suite of all capabilities in CLM, but they absolutely need help in automation of their orders and so forth. So it's a technology, it's a product on the Salesforce Exchange, Salesforce platform that smaller businesses can use to access the benefits of CLM that are appropriate to their use cases.

Okay. So moving to go-to-market, you guys have an ROI statistic that I really like, and I'm sure you'll give the statistic, but -- and I like it because it's one of the few discernible ROI metrics that I've seen in a while. I think it's $36 on the eSignature side, but 40% revenue growth in the last quarter, at least, is certainly nothing to complain about. But with that ROI message, could the company actually grow faster someway? Or is this kind of a controlled growth rate?

Yes. The ROI is what gets reported back to us by our customers. And one thing that I've always really liked about our business is our ROI is intuitive if you think about the nature of the use cases that we address, whether it is in front office deployments where we're shortening the cycle to close, whether it's back office deployments where we're reducing costs of FedEx-ing documents, printing documents, all of the infrastructure necessary for a paper and pen world. So it's a very intuitive ROI and one that people understand pretty readily. However, in terms of growing faster than 40%, which was our most recent quarter, look, we're not unlike any other transformative technology. Businesses have to prioritize it. They have existing processes that work, albeit expensive and difficult. So working our way up the hierarchy of priorities of all of the other things that businesses need to do to improve and transform digitally. We're one of those very important ones, but we take a pretty realistic view of the world. And as we have said for a long time, our largest competitor is frankly paper, meaning existing processes that over time are being very successful and transforming, but we also have to be realistic that we fit into a broader set of needs of companies that need to transform as well.

Great. How should investors think about, kind of, in general, the growth profile maybe over the next 2, 3 or 4 years? You have a low penetration rate, high TAM. Theoretically, you could probably support 20%, 25% growth over an intermediate term kind of horizon. But how do you get comfortable with whatever the likely trajectory is?

Yes. So if you look at, say, the next 4 or 5 years, we talked about a target model where we leverage, we believe, a 20% to 25% operating margin business. And the reason I raised that in context of longer-term growth is that we look -- the way we look at that model is that in that period of time, certainly, we see that as a high-growth period, where we will continue to make investments in growth our #1 priority. By investments in growth, we talked about CLM, so new products; we talked about new verticals like Fed; we talked about expanding our capabilities within eSignature; international growth. All of those things are opportunities today that we believe we're at the early stages of exploring in terms of growth. So you'll see us continue to invest in that. And at the same time, you'll see us continue to improve our leverage responsibly over that period of time.

Okay. Now you've had -- Agreement Cloud has been GA since March, maybe what have been the biggest learnings that you've seen on the go-to-market side in the couple of quarters that you've had it out?

Yes. So first, just in terms of terminology, when we talked about Agreement Cloud, what we're talking about is our product suite of the various types of products. eSignature would be in the Agreement Cloud as well as CLM as well as others over time. And when we talked about System of Agreement, what we're talking about is that's more or less the problem statement when we talk about what are all of the elements of the signature or agreement process that need to be addressed and digitized. So in the Agreement Cloud, the newest addition, of course, is CLM. And as I had mentioned, I think we look at fiscal '20, we introduce to our sales force those technologies in Q1 of this year. And we've been very satisfied with the traction that we're seeing. We had set forth the plan for the year in terms of our internal projections and expectations and we're going to exit this year having outperformed our internal expectation, so that's really good. I think we've seen it both domestically. I was just over in Europe a few weeks ago before Christmas. I was pleased to see that we're also starting to see early traction in some of our international geographies as well.

Do you make any tweaks to that model after a couple of quarters having it under your belt, as you move into fiscal '21? Or does it kind of stay status quo?

In terms of how we go-to-market?

How you go-to-market?

Yes. So we, when we first acquired the technology, went through quite a bit of work in deciding is this structure best done as an overlay. Is it best done as just empowering individual reps? And what we decided and what has turned out to be the right model is to not use it as an overlay, but actually enable our reps to sell it directly. And so fiscal '20 was a year where there was quite a bit of work in ensuring that our sales force is capable and enabled. And I think part of that progress that we made in fiscal '20 is our teams have moved down the learning curve successfully, and we're getting better at it, moving from a single product to multiproduct. So going into fiscal '21, I think we build upon that. I don't see that we need to really change where -- I think we're on the right track.

Okay. Also on the go-to-market side, I know the company's spoken about some new opportunities with SI partnerships recently. I always like the opportunity to leverage SI partners because it can give you a low-cost model, obviously, leverage whatever that distribution strategy looks like. But how should we think about that opportunity maybe over the next couple of years?

I think it's different than when we were just eSignature. As an eSignature business, we had spoken about -- roughly, 5% of our model is in terms of top line is professional services that we have our internal customer success teams that drive adoption, drive deployments, do all of that work. And obviously, it's not a part of our business that we look to for growth and profitability. It's more to enable our customers to deploy, adopt and that spurs our upsells. SIs really weren't interested in eSignature alone because it's a pretty straightforward deployment. Building a business around those types of deployments didn't fit into their world very well. And if it did, we've been very honest that we probably would have built our business in that direction earlier. Now that we're moving into a broader product suite with CLM is sort of the first piece of that. We're seeing more engagement and more interest in the SI community and starting to take on work that has that type of product offering because it fits better into the types of complexity that they're good at solving. We're very early in those discussions and relationships, but we absolutely are in a place now where we're seeing more engagement and more interest.

When you think of the sales and marketing budgeting process, you're obviously coming up to a new fiscal year. Is -- does the company end up targeting a growth rate or maybe a revenue level or a payback item? Just trying to understand maybe the philosophy around targeting growth and targeting sales.

Yes. It's very bottoms up. I mentioned I was just in Europe, for example. I'll be in Asia in the near term. And those trips are largely driven by me going out as well as other members of management and trying to understand what the growth prospects are regionally, by vertical, by customer segment, whether it's our commercial business, our enterprise business and so forth. So we're not a monolithic business that's in one area. We're actually entering a lot of markets that are at different stages of development. So you have to kind of look at it down in the levels of detail to figure out what does growth look like in the eastern region of the U.S. versus Brazil, 2 very different questions with 2 very different sets of priorities in terms of how you invest in everything else. But our overall objective in doing that work is to identify what I call the apex of growth; what do we think we can realistically accomplish, and we'll invest in achieving that. Part of that is recognizing what can't be accomplished and not going at a market that isn't quite ready to deliver growth. I use, as an example, a market we're very interested in, we are invested in. We invest both in terms of technology and infrastructure, but it's earlier in terms of what we conclude is an opportunity for near-term growth, and that would be like Japan. There's regulatory, there's cultural issues in Japan that just have to be worked through, and we're doing that. We're actively doing that. It's a market that, ultimately, we think, will be a very exciting part of our business. But if you look at fiscal '21, that would be an example of something where we're not going to triple down right now because we don't think the market is quite ready for growth. If you look at other areas, like, I mentioned, Brazil, for example, it's a smaller part of our business. But Brazil is showing an ability to grow. Brazil has some unique issues around all of these things that we're doing and in terms of the level of corruption that they have to face is spurring them, I believe, to adopt some of these technologies more quickly to overcome some of the realities that they deal with in a market. So we will look at it that way. And in combination where we see that growth, we're going to invest in it.

How do your salespeople tackle pricing? When you move from a single product like on the eSignature side, I know it's priced on an envelope nature, but as you move in and expand Agreement Cloud, which has kind of some different components there, maybe it's seat based, maybe it's usage, you've got some different versions there, but how do you approach pricing maybe as you expand the product set?

Yes. So I would start with eSignature. You're right. It's -- we call them envelopes. Our customers' purchase capacity is a subscription and that capacity, essentially, think of it as an envelope as number of transactions that they have capacity to execute. But we have the ability, we have product SKUs that are based in seats for eSignature or based in users for eSignature. We've structured our pricing and packaging to appeal to that broad set of customers and how they like to purchase. The thing about eSignature is even customers that purchase it in terms of seats, for example, there are still reasonable levels of transactions that underlie those packages. And so it's still transaction-based in terms of capacity. So as you expand into CLM, CLM's not so much a capacity model, it's more of a seats model. But that doesn't really disrupt the sales process. Customers are able to see both as compatible in terms of a single order form. That really hasn't been an inhibitor for us.

So kind of with that evolution of the product suite and what's happening on the pricing side is how do you view underlying unit economics? I know, I think it was back in the Q1, sales cycles got a little bit longer or maybe it was Q2. And I don't think that bothers most people over time, if it's a small change there. But I think the interest is what do unit economics -- do they change product? I don't know what the early feedback has been like that.

Yes. So a couple of things. First, in terms of longer sales cycles, we had a phenomenon in our first quarter, which, as I mentioned before, was the first quarter that we offered CLM technologies; that is, we had renewals come up in that first quarter that were interested in expanding beyond just renewing their eSignature. They wanted to expand into CLM, and those were some of the extensions that we talked about. It's not a dramatically different sales cycle and it's not a dramatically different implementation cycle. But any time a customer is going from a single product that's just a renewal to something that they want to explore expanding our -- their relationship, that took a little longer. That's normalized because while that was a Q1 phenomenon of deals getting moved out of the Q1, when you move into Q2, we had deals -- those deals moving in and we had some deals moving out of Q2 to Q3. Those deals in Q3, we had those moving in and deals moving out of Q3 to Q4. So it's a normalizing effect. So it's not something I don't think that we need to have folks adjust their models or thinking about the business. That was just sort of the realities of introducing new technologies into the platform. In terms of unit economics, look, we're pretty early on. I mentioned the different scales of the 2 businesses. And so talking about things like attach rates and average deal sizes and how CLM affects eSignature, as I mentioned, this is a year of validation, but we still need some time to really start to get some data that would support some conclusions around how we see all that moving. In general, it's moving in the right direction, more products to sell, customers interested in it, deal sizes are going up. And over time, hopefully, we can be even more specific about that. If you look at how we look at pricing in signature, in particular, which is the largest part of our business, you had mentioned before the differential between a very significant ROI and pricing that, on average, is significantly below that and call it, the average $2 range per envelope kind of pricing. And so we get the question a lot, how do you think about moving that price up to take more advantage of some of that gap. Our view has been consistent, which is that we don't want pricing to be the method by which we grow. Of course, we want to keep it stable. I think we're responsible on renewals. We're always upticking it like any SaaS business. But overall, our differentiation -- first of all, our pricing today is supporting subscription margins in the mid-80 percentile, so it's very strong. But if anybody competes with this, typically, they will try to go after price is the method, and we don't want to introduce price as a discussion item necessarily in the sales cycles. We just don't see that as the right way to grow. We're much more interested in taking market share.

Lastly, on go-to-market, the company recently achieved its FedRAMP status, which I always think is interesting because that opportunity has -- over time, the opportunity is massively large, but how should we think about the -- maybe the near- or intermediate-term impact to that business?

Yes. So in fact, I think on the FedRAMP certification, that happened, I can't remember exactly, maybe a little over a year ago. So we've had that for a while. We also pursued the highest level. There's different levels of certification. We pursued the highest level, which gave us access to about 80% of federal agencies. And so that was an indication -- when I talked about investing in growth, an indication that we're also building out dedicated data center for Fed, which doesn't -- isn't a requirement for all federal agencies, but it's a requirement for some very important ones. And so we're making that investment. We're making those investments ahead of the growth because we believe they're important to position us uniquely to pursue that vertical in ways that others can't or certainly aren't prepared to or have a lot of work to get where we are. So those are going well. This was our first year of selling into Fed in a meaningful way. I used the word validation around CLM earlier, and so I'll use the same term for Fed. I think we're getting good validating wins in Fed like all of the various pieces of that fabric of growth that I'm talking about. I don't think anybody should expect the federal agency vertical to be an inflection point of our growth. I think it's a contributor to it. I think it takes time. Like any federal process, the bureaucracy is going to need time to transform. We talked about just in private accounts, what we talked about before, why isn't -- why aren't we growing faster? Well, the answer is going to be the same. The problem in federal agencies is the same as in private industry. So that's the horizontal part of what we offer. The time it takes for agencies to transform how they do things is going to be something that we build over time. But we think we're really well positioned, and we're seeing good progress.

Sure. You're -- moving off of go-to-market, maybe touching on net retention rate, which had an increase in the last quarter at least from the prior 2 quarters. What are kind of the puts and takes around that number? And was there a single contributing driver maybe in that particular quarter to drive that higher?

Well we had a good upsell quarter. That would probably be the primary contributor. Look, there's 2 things. It's upsell net of churn in its simplest form. So to the extent that we can mitigate churn and the extent that we can have customers expand their relationship with us, that statistic is going to reflect that. We give a range of 112% to 119% deliberately. We've had that range since we entered the market. Sometimes, we've been down around the 113% level. Recently, we've been up around the 117% level. And what I've stated is that as a business today, where we believe we have visibility is in those mid-teens. Everything that we're doing as a business and what we're investing in, CLM is a good example, is designed to continue to drive that expansion and pursuant to the highest level that we can accomplish. And so make no mistake about where we're invested and committed. When we talk about what expectations should be, we try to ground them in what's actually visible to us. Like any SaaS business, we are going to have moments of churn that are unexpected or unavoidable. We'll have quarters where upsell is not as strong as NewCo adoption, which will have impact. So that's why you need to have a range because all of those points can be healthy and normal in the normal course. But again, if you look at how we've structured the business and how we invest in it, our objective in that part of our business is to pursue growth like we do in NewCo as well.

Sure. With the evolving product strategy, I think in the last quarter was also the first quarter that SpringCM kind of got into the comparisons for that metric, you anniversary-ed it. But how should we think about that net retention rate going forward as you have more products to upsell into that versus just kind of usage upsell or improvements in churn?

Well, again, if you think about scale, the eSignature business is just so much bigger and primary contributors are going to continue to be volume increases and use case increases amongst our eSignature base. New products like CLM, you're right, this is the first quarter, Q3, that we included it because it was in the numerator and the denominator, so to speak, the prior year and the current year, and that's the only fair way to evaluate it and look at it. And yes, we expect and are focused on driving growth in that broader product suite to also enhance that statistic. As one of the contributors though, it would be a mistake to think that it could move fast enough to overcome the much larger base of business that we have in eSignature today.

Fair enough. Moving on to a couple of questions on margin at least is how do you look just generically growth versus margin? Obviously, the business has shown some pretty strong revenue outperformance recently. Do you allow those revenues or that excess profit to kind of fall down to the bottom line? Or do you think there's opportunities in the short term to reinvest that to keep the growth rate maybe at an elevated stage?

Yes. Well, if you start with what I had described before, if we're disciplined around our philosophy, if we believe growth is there, we've already invested in it. Do you always get that perfect? No. If we see some outperformance, while we see opportunities to expand the investment? Possibly, but the overall way to think about it is we want to be disciplined about our bottom line as well. We don't -- it's not -- it's a false choice to say you either grow or you're profitable. There is absolutely a discipline in terms of how you run a business where you should be able to make improvements in both without sacrificing growth. And I think we do a good job of that. However, if we saw an opportunity, let's be clear, that we really felt was important, let's take, for example, SpringCM, that did dilute our bottom line. They were a business that was much earlier in development. They had losses. That didn't concern us because the purpose of acquiring those technologies is it had such an important relationship to our view of long-term growth. And so that was an investment we were willing to make. So with all that said, when I talked about those 20% to 25% operating margins, it includes thoughtful decisions along the way in terms of how to invest in that growth. And we think that that's the right way to think about where we ultimately get the next 4 to 5 years.

That ramp to your 20% to 25% target operating margin, do you think that's a fairly linear relationship in time? Or is there some chunkier kind of step up functionalities to meet that?

Yes. I don't break it down by year. It's a little bit of a fool's errand for what I just mentioned, which is there's a lot of things that are going to affect it. If you look at the progress that we've made over the last few years, you'll see that we are absolutely making progress in that direction. And you should expect that. How much in any particular year to expect is something that I wouldn't, at this point, sort of break out. Yes.

Sure. Two more questions from me, and then happy to open it to Q&A with the audience. On the acquisition side, we've obviously touched on SpringCM. Kind of future thoughts on acquisitions is you have a strong balance sheet right now. You did spend a bunch of money on SpringCM. Do you look at future M&A to continue augmenting the platform kind of in a similar nature? Or is this more of a maybe it was a one-off opportunity?

Well, no, I think that we will continue to look at M&A as a viable area where we can enhance our offerings and our growth as appropriate. I think once we acquired Spring, we wanted to make sure that we could integrate successfully into our business everything from the infrastructure as well as enablement of sales force. We talked about all of that to make it successful. And I think more than a year later, we feel very good about the progress that we made in that regard. And so I think if we were to choose to do something today, we're in a very good position to do it. And I don't think that we would ever want to do something that would overwhelm us in terms of our ability to be successful with what we acquire. So that's just sort of a macro view of how we think about it. In terms of over the next years how to think about how we'll use M&A, look, I talked about the System of Agreement and there's a lot of elements to it that are outside of our direct expertise, which would lend yourself to say it would probably make sense over time that we'd be acquiring some of those capabilities as well.

Got it. Last one from me is on the ES&G kind of angle is the Agreement Cloud messaging and value proposition is really heavy and how it can save reams and reams of paper is -- does that message help in the current sales process at all?

I think it does. I mean, it's not our lead message. But certainly, it's a growing point of interest amongst our customers. And I think DocuSign value-add is directly applicable to concerns in that area. So yes, I do believe it's helpful.

So yes. Happy to take one.

Yes. Can you tell us a little bit about the difference in sales cycle for eSignature versus a greater e-agreement type of a relationship?

Yes. The sales cycles we've talked about before and where we're finding most of our customers today, although not exclusively, is in our installed base in our book of business. So a typical sales cycle when a customer is already in place and has deployed eSignature is pretty straightforward. They evaluate their volumes. They look at are there other use cases they want to expand into and you talk pricing and you close the renewal. That's pretty much a rinse and repeat activity in the business. If that same customer says, "Yes, we want to do that, but we don't want to have 2 separate processes; we also want to understand CLM, we think that could really be important in our business," it's not so much the nature of the technologies that will prolong it, it's the fact that they now have something else they want to explore that'll extend it. So I would say it's in the weeks. It's not in the quarters. Maybe it could extend into more than a month or so too, but it's not like a dramatic shift in terms of how long it takes us to work with our customers and close the deal. But any time that you're going to expand beyond just that rinse and repeat renewal process, it's going to take longer.

How does your marketing effort use influencers to drive adoption? That was one of the ones [indiscernible] consistently use DocuSign which we're happy to do, but we -- are they paying the full license? Or are they part of an influencer program or [indiscernible]?

Yes. No, we don't really vary our pricing on influence. We really rely upon the value that we will deliver. Law firms are an important part of our business. There's other verticals that affect our brand and awareness. Real estate being a classic example, where, if you look at real estate as a contributor to our top line, it's not one of our biggest verticals in terms of dollars. In terms of influence, it's an absolutely critical vertical to us. So we invest a lot of time and effort and resources to ensure that anybody who experiences what we do in that vertical comes away feeling like we are highly differentiated because that does have an effect on bringing it back to their offices and businesses and thinking about how they should be using it in their business. And I think for law firms, similarly, when they see what they're able to do in terms of their work with their clients, extending that out to their other clients to say, "I understand that you want to use paper, but we're just not going to do that," they're doing it not to benefit us, but they're doing it actually to benefit themselves. Yes.

I'm sorry. Right here. Next one from you.

Just a question more about competition, particularly competitive [indiscernible] more and more free space and there's potentially [indiscernible], so maybe just address that.

Sure. Yes. The competitive landscape has been pretty stable over time. Adobe has been in the market about 8 years now. They acquired a business called EchoSign back at that time. And Adobe has been the #2 player in the market. We estimate they have about a 20% market share. We estimate we have about 70% market share and everybody else has about a 10% market share. If you think about how we differentiate and compete effectively and actually, increase our market share, it's that if you looked at how Adobe approaches the market, they look at signature as a feature in their -- what they call their Document Cloud. If you looked at how DocuSign sells its product, it really relies upon the workflows and the integrations into the systems of record that exist in its installed base and our ability to integrate into those workflows. So it's not just a tagging process, but it's actually solving and improving the workflows within the business. That is the #1 reason in addition to some others, but the #1 reason why I think we're highly differentiated. So Adobe is an outstanding company. This is about 1% of their business. Our R&D budget is probably approximating about their top line. So this is everything that we do, and we're highly focused on it. And I think as we really do start to expand into other elements of the Agreement Cloud and the System of Agreement, that will just continue to differentiate the way that we're approaching signature.

Last one right here.

I was going to ask on that point, have you any test cases as to develop any of your system versus theirs in terms of a legal test case or in terms of trial or contested signature [indiscernible]?

So as we sit here today, we don't have any examples of any -- ourselves or them or any other competitor really having an electronic signature contested. If you go back in time, very early on, that was a pretty central question when we're getting into new customers. That's largely been replaced today. Yes.

Thanks, everyone, for coming. Good luck with your meetings.

Thank you.

Thanks, Mike.