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

All right. Good afternoon, everybody. Thank you so much for joining us today. My name is Stan Zlotsky from the Morgan Stanley software research team. And this afternoon we have the pleasure of hosting Dan Springer from -- the CEO of DocuSign. Dan, how are you?

I'm well. Thanks for having me.

Thank you so much for being here. So before we get started, please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures, or at the registration desk.

Dan -- so before -- as we dive in, right? Just give us a quick overview. DocuSign, you guys have been around for a very long time, but public so recently. Give us a quick recap of Agreement Cloud. What is Agreement Cloud? And how does the SpringCM acquisition play into the broader Agreement Cloud platform that you guys are building out?

Absolutely. I mean most people traditionally know DocuSign as the eSignature leader. And that, of course, is really where the company built the quality of the business. And if you think about going forward, the eSignature product line is the place where the majority of our revenue will come from for years to come. At the same time, our customers told us that they wanted a broader platform, and that's really what the Agreement Cloud is about. And the DocuSign Agreement Cloud has sort of 4 key components. Before people actually come to a signature, they need to create a document or generate an agreement, and there's the signing part that you're all very familiar with. And then people take actions on those agreements once they've been signed. That may be an API call that connects it to another software like salesforce.com or could kick off a payment, but there's some sort of actions that get auto generated from those signatures. And then finally, people now created the set of agreements that they need to manage. They need to store them, have a repository, they want to be able to search against those agreements to better run their business. So we think about that preparing agreements, signing, acting on and then managing the agreement. That really is the DocuSign Agreement Cloud.

Got it. And then last week, you guys announced the acquisition of Seal Software, very interesting deal. How does that -- how does it fit into the Agreement Cloud? And where within that entire Agreement Cloud does Seal Software fit?

Yes. It's a really interesting piece. And as some of you may have noted, we've invested in Seal previously. So we had a strong sort of inkling, this is going to be a strategic asset that we wanted to own. And then we just completed the transaction last week, which we're, obviously, thrilled about. I think you should think about Seal in 2 different ways. There's a stand-alone artificial intelligence product, where people are going to do things like intelligent search on their agreement, and we sell with them today. We're selling DocuSign and Seal, our field organizations, together because people want that capability in the manage phase. And at the same time, we think there's opportunity for the overall technology and the artificial intelligence capability that they have to be infused into each of those other components of the Agreement Cloud. So including the creation of agreements, the signing and the actions that people take. So it's kind of a 2 [ part ] -- we have a separate product line as well as enhancing our overall product.

Got it. That makes sense. The eSignature solutions, right, as just eSignature themselves, right? They very much fit into this bucket of digital transformation that almost every company out there is going through right now. What are you seeing in terms of digital transformation initiatives that your company, say, your customers and prospects into 2020? And how do you fit into those plans?

Yes. So one thing, I think, it's important to understand, as a preamble to answer your question, when you think about digital transformation, that tends to happen in enterprise customers that sort of launch digital transformation project. And what we would call the higher end of the commercial business, right? And those are the kinds of companies that have things like Chief Digital Transformation Officer, right? So large banks, as an example. Morgan Stanley has a person that's driving digital transformation in your CIO's department. But so that construct is half our business. The other half of our business are smaller businesses, and some of those come to us on the web, they may never actually interact with a DocuSign person. You can actually just go to docsign.com and sign up. Smaller businesses up to the medium businesses, they generally don't have digital transformation projects. They may be digitally transforming their business, they just don't have a bunch of MBAs that sat around and came up with cool names, like digital transformation project. I can say that because I have an MBA. No offense. So the construct for us around digital transformation, I think it was about 5 years ago that it really started to come into vogue. And I think it's accelerated over that period of time. I think most large corporations are going to have digital transformation for years to come. And I think it's going to be a phenomenon where DocuSign will play well into that. There's kind of 2 core things people try to use DocuSign for when they're driving their digital transformation. One is the efficiency play. Remember that cost, we talked about the ROI being so dramatic, where people are getting 30, 40x their investment back from hard savings like FedEx agreements, People's Time, sort of drive efficiencies in their business, changing their workflows and processes. And the other big benefit is for the customers. And so we have a lot of our customers that say, we want the experience to be better for our consumers of our business, and DocuSign enables that with the signature capability. So those are kind of the 2 main drivers that people are trying to achieve from the digital transformation. And I think it's going to actually accelerate at least over the next few years as an opportunity.

Got it. And when you think about the broader opportunity, right, for DocuSign. Remember, when you guys were going public, you were talking about an addressable market of $25 billion. As you really expanded the broader Agreement Cloud, up to now, $50 billion as an overall addressable market. Would DocuSign about to breach $1 billion of revenue, right, in this coming year? And obviously, you didn't provide guidance yet, but we can all play with the model.

We're in a quiet period, I cannot provide any guidance to that. So it would be hard to imagine at this guidance for this year that's...

Yes. We could all imagine. So how do you see yourself positioned to be able to really attack this big, big $50 billion opportunity?

Yes. I mean I think we think this is very early innings on the signature business, and even earlier on the rest of the Agreement Cloud, because while there is one very large player in signature in terms of DocuSign, and we think we're about 6 or 7x bigger than the next player in the space, which is the old EchoSign business that Adobe bought. When you get into the rest of the Agreement Cloud, there's not someone who has that strong leadership position. Recent Gartner report just came out on CLM, which is a key component you mentioned SpringCM, and had us as one of the 2 leaders in that space. This is our first year sort of being in that business. So we feel like there's a lot of opportunity for us to take our leadership that's been traditionally come from signature and expand and sort of really spread that across the rest of the Agreement Cloud. But even if we were to achieve that in the next few years, to your point about the TAM, there's a lot of years of significant growth ahead of us to grow into that TAM. And there's not any other significant competitors yet on the horizon, but we feel we're in the leadership position. But the good news is, and a lot of headroom.

So you mentioned Adobe now. And when we and investors -- right, when we do the due diligence, the channel work, right? The only truly credible competitors that come out would be like an Adobe -- like in [ acquiring ] signature, right, would be an Adobe and HelloSign, those purchased by Dropbox a little while ago. When you look back at 2019, have you seen any shifts in the competitive landscape that you guys are going after?

Really boring answer for you, but no, we haven't. And traditionally -- let's talk about signature first because I think it's different. In the signature space, we've taken more share. So Adobe did reveal, at some point, they were kind of in that -- in the low 20s in terms of growth rate that they were seeing in their signature business. They haven't given the exact numbers, but they shared that on the call a few quarters back. And we've obviously grown significantly faster this year. So we're taking more share on top of already, as I said, 600%, 700% higher share. We're that much larger. So we don't really feel that's changing. We don't feel the competitive dynamics are changing. To be clear, we think Adobe is a fantastic company. And we buy Adobe products, right? We're a customer. We think they're great. But we think we've got a really strong lead in this place. This is like 1% of their revenue, if that, and they just can't afford to put the focus on it that we do. We spend, I think, more in R&D in a year than they get in total revenue from the business. So I think we will be able to continue to maintain that leadership position there. And I think even expand and extend that leadership. And the only place we really see the competitive impact of some kind is on price, where they're doing, which probably a smart decision, trying to bundle in with other products, and heavily discount to try to find that really price-sensitive buyer that might be willing to do more with them there. But we haven't seen that change since even before our IPO.

What is -- for that price-sensitive buyer, right? What's the profile of that price-sensitive buyer when you think about -- because the reason it's slightly different. I mean, obviously, there are many price-sensitive buyers out there across software. But for DocuSign, specifically, there's such a strong tangible ROI of dollars, right? The savings that you can drive from adopting these eSignature solutions, how do you justify, hey, somebody is coming in with a lower price when the magnitude of savings is so huge? How do you justify kind of settling for a lower price of product?

I think it's hard to justify, right? I think it's situations where someone's just sort of stuck in their call, like they just don't want to have that cost, maybe it's a budget timing issue. And someone -- a salesperson has been created from the lower-priced company to say, we can help meet your budget needs and be flexible for you. Bundling, I think, is another component of that, which effectively is just discounting, but makes someone feel better. If someone has a strong product in one area, and they say, you're buying our leadership product over here, and we'll throw in our less leading product over here for a dramatically lower cost. And they got place to psyche sometimes of a buyer. But you really hit the nail on the head, [ Stanley ]. There just aren't a lot of people out there saying, "I'm trying to buy software and I'm looking for cheap software." I mean it's just the nature of the ROI tends to be so high for good quality software for leaders in the position that you can't really justify if you're getting 30x the ROI, if you think about it, even if the cost was 90% less. It would never pay out. So it's very difficult, I think, to sell on price in software. And that's one of the reasons we think that we've been able to continue to maintain that leadership position, and not be pulled into degradation on our pricing.

Got it. That makes a lot of sense. If we shift gears slightly to your -- the SpringCM side of the house for you guys. It was really interesting, I think, it was earlier last week, Magic Quadrant, Gartner Magic Quadrant. The first one came out for the CLM space. And you guys were very solidly positioned all the way up on the right in the leaders quadrant. What are you guys seeing in the competitive landscape for CLM space? And what are your thoughts, maybe just on the broader CLM Magic Quadrant, your positioning in there?

Yes. So obviously, we were thrilled, just 1 year in to jump to that leadership position. And we think it's 2 things. One, we think the Spring asset, while solid, it wasn't considered sort of a leader at that point, but there was a really good foundation there. And two, I think our development team just did a phenomenal job over the last year of doing 2 things. One, sort of industrial strength-izing, I make up a new word for you, the product, and we made it DocuSign. So when we started to increase the quality of the product to what people traditionally used to seeing from DocuSign signature products, and that sort of raised the profile. But the bigger piece is we don't really sell that as a separate CLM product, we lead our positioning around the DocuSign Agreement Cloud. And so it makes us so much stronger when we go in and someone else says, "Hey, feature-to-feature, we think we can come close to DocuSign CLM." And we say, that's interesting, but we're actually trying to solve your overall Agreement Cloud needs, and we've got clear leadership that's dramatic in the signature space. And now we think we have functionality that is equal to anyone else in the CLM space. So when you're thinking about that combined Agreement Cloud solution, what do you want to buy, where the company will grow into not the product that someone else is selling that you're going to need to grow out of. And that, I think, has been really what allowed us to get that very quick sort of anointment from Gartner as a leader. And importantly, on the dimension of value to customers, we were the highest ranked. So I think they're seeing that we're delivering more value to the customer.

Are there any competitors that you're actively tracking within that segment?

Well, the place, traditionally, if you look back 3 or 4 years, Apptus was a company that I think had a very strong leadership position. They have the CPQ and the CLM, maybe not everyone's familiar with that. But the 2 key components of software for customers that are really trying to build their solutions for managing their commercial contracts. That's how they quote agreements and then how they manage those agreements through their legal department going forward. And that, of course, Apptus was built on the Salesforce platform, Salesforce went off and bought SteelBrick, another company that creates Salesforce CPQ, and that really weakened. I think Apptus has hold on a lot of those enterprise customers. They got bought, they were a private equity firm, Thoma Bravo, and I think they've gone through some changes. And we've seen that's the single biggest change. If there's a lot of customers, particularly the large enterprise, that thought of Apptus is kind of the clear leader there. They've now fallen significantly in the Gartner Magic Quadrant because people are seeing for CLM. It's no longer about decoupling to their CPQ. And I think there's a real question of who could be that future enterprise leader, we think we're well positioned to take that spot from Apptus. But that's the place where we think, I think we're most aggressively sort of going after because of the change in the ecosystem.

Got it. Got it. Shifting gears slightly back to eSignature. Once again, going back to the addressable market at the time of IPO, everybody was looking at it. It was something around $25 billion. But the one area that I don't think wasn't really included in there was federal, right? And then we had the 21st Century IDEA Act that passed back in 2018. And -- which is, obviously, a really big opportunity for you guys, right? How are you thinking about your federal government business into 2020 and beyond?

I mean we're pretty excited about Fed. To be clear, to your point, just before we went public, Fed was pretty small. We had a reasonable state and local practice, but we hadn't really penetrated the federal business. For those of you that know that model, there's a couple of things that are important. You have to become what's called FedRAMP certified, which we were not, but now have become, and I think that's the big piece. And I think being FedRAMP certified, people call it kind of this license to hunt. A lot of agencies won't contract with you if you don't have that certification. But it turns out once you get FedRAMP certified, that's not the end, there's more steps to the process. We're now going through what, I think, is the most important remaining step for us, which is around what's called IL4, and that's particularly for the Department of Defense. They want you to have a set of infrastructure that's dedicated to federal government use cases. And so from that standpoint, we've just actually just put in our certification. We've been sponsor -- sponsored by an agency, the Army is sponsoring us. And we feel that will now give us the really complete sort of sets of skills. We've had some big wins, we announced last year with the Veterans Administration, like a nice solid win with the federal agency. But I would tell you this, the opportunity is huge. I think the growth is going to be substantial for us. We need to be patient. I went to the Pentagon for the first time earlier -- at the end of last year, it's a very different experience of being in Silicon Valley. And you just feel it that the pace of things is going to be more measured. And I think we want to be aggressive, but I think we have to be realistic that if we're going to support well these customers, the federal agencies, we're going to have to work at their pace and in their style. And to your point about the IDEA Act, it's a great example because I'm familiar with it, but the federal government came out and pass legislation that said every agency needs to have a plan for eSignature. So you almost want to call it the DocuSign Act where you think we have not been involved in the lobbying for that in any significant way. But we obviously got really excited about it. But if you read carefully, it says they have 18 months to put together a plan to have eSignature rolled out at some time in the future in their agency. That's a pretty wide loophole. So we don't think that there's a bunch of agencies that are going to come rushing to DocuSign. And so we've got to get this in place right away. We do think when we show up to speak to them about their business, and we talk about 21st Century IDEA Act, they're going to say, yes, I understand this is the future, and the government has made a choice to modernize and digitally transform their agency. So we feel good about that. But again, we don't -- we've disabused ourselves of the notion that it's going to happen overnight, and we realized that we should be patient, but aggressive in driving the big total opportunity.

Got it. And so you have this IL4 certification you're going through, what are some of the other investments that you're making to really prepare for this opportunity?

Well, I think the biggest thing, of course, is building a team, right? And so we, in the past, I think, to be fair, we've looked at this as another set of customers. And we had AEs, and we put them in Washington, D.C., that seemed like a pretty good place to put a bunch of them. But I don't think we really thought through building the capital -- the human capital to really work with the federal government. Some of that is around the go-to-market organization, the sales organization, but a lot of it is around the service and support. And we come up on issues like an agency that came to us and said, you need to drug test all of your workers, who could potentially be DBAs in contact with our data set. And most of our DBAs are in our tech organization in Seattle, which is in the state of Washington, which has legalized marijuana. So we have to go back and say, well, I guess, we can test our workers for marijuana, but what are we going to do if they test positive? Pat them on the back? I mean we can't really do anything about it. It's legal in this state. And so we started to realize, okay, we [ have ] the federal government. We're going to have to think through these issues and would we have to consider moving some jobs to different states. Thank goodness we didn't pick Colorado as the second state because that wouldn't have helped very much. But I think we're looking at those things and realizing that if you want to serve the federal government, you need a series of human capital investments you need to make to really be able to be successful in the long run. That's probably the next -- after the infrastructure of IL4, it's probably human capital as the next big one.

That's going to be challenging. It could start running out of states.

If I stay one [ set ].

Got it. Well, so FedRAMP certification, right? You guys already -- you're up to the federate moderate level. Do you feel like you also need to get up to that the highest authorization level of FedRAMP to really...

I think we have to [ move data ]. We'll be there on full FedRAMP in IL4, which will then take us, I think, to -- I mean, other than a very small number of intelligence community, which I don't think are the biggest -- quite frankly, not the biggest opportunity because they're very small use cases. Yes, I think with the IL4, we feel we have the full certifications we need.

Yes, because, I mean, that FedRAMP high authorization, that's really verified there. I mean there's only, I think a couple of software companies that are approved at that level, which have pretty meaningful differentiator for you guys?

Yes. Yes, I think it's a -- what we're seeing with our folks we joint sell with. We see this particularly with Salesforce, where they put a huge investment there. They have a lot of people who came from Oracle, and traditionally Oracle is one of the companies that did the most, I think, thoughtful investment to be able to serve Fed. And that's kind of the road map we're taking. We want to follow that map. Leverage our partners where we can, but there are a lot of situations where, to your point, there are certain projects, we will not be able to get without the highest level of certification. But we also want to be smart about it and make sure that we're not kind of overbuilding before we start to build the significant book of business. I think I feel pretty good that we got that balance about right.

Okay, great. Switching back to SpringCM, right? That was a really big focus area for your company in 2019 and well, your fiscal '20. Maybe give us a quick update on -- you've obviously -- you've told us how much you've spent on the R&D aspect and really brings SpringCM up into that leadership quadrant. But as far as the integration of SpringCM into the core eSignature product, how has that come along?

Yes. I mean that's the part that I think we really got most right. Well, I told you I was excited about what we did to harden that Spring product, the place where the magic comes in. And I think the magic of our selling is when we say it's one integrated DocuSign Agreement Cloud solution. So -- and we talked about this last year, we went to the development organization, we had 5 core things that we had for our last year, the year just finished fiscal year '20, calendar '19 that we need to get done, but they were not 5 equal. Number one was the integration of SpringCM into DocuSign. And I was very clear with our development organization. If they get that one right, and the other 4 don't happen at all, it will still be a good year. If they get the other 4 magnificently and we don't get that 1 done, it will not be a good development year. We got it done, shockingly. And I think that, that kind of focus is what we needed. I think you're going to see us do the same thing this year with Seal, where we're going to have that same orientation to say. In order for DocuSign to be able to build out the Agreement Cloud with acquisitions as part of our mix, we're absolutely going to need to be successful at integrating those products. Because if the Agreement Cloud just becomes a paper vision, and it doesn't become an actual product integration suite for the platform that our customers need to manage their agreement, we're really going to undershoot on the opportunity this company has to be the next big cloud software company. So that's exactly where you're going to see our focus this year.

Got it. And on the go-to-market side of SpringCM, right? SpringCM sale itself is a much more complex sale than just the core eSignatures, right? There's -- even the statement of work is a much more complex statement of work than to implement eSignatures. What kind of changes have you made on the go-to-market side around SpringCM to be able to really consistently sell those -- that product into your customers?

Yes. I mean as you know, last year, we learned a lot. Really, the year before, we learned a lot about that different sale process. And I think you hit the nail on the head, Stan. The single biggest piece is that when you land with eSignature, you can land a very small initial use case or set of use cases. And there's not a lot of integration work that's required. People can -- I mean, the software is pretty good. So you kind of turn it on, we have hundreds of thousands of web customers that just go to the web, sign up DocuSign and start doing signatures. But in CLM, it requires more integration. So the challenging news about that is the sales cycle tends to be longer because more people are involved, you do need to have, as you said, a statement of work. Often that times means there's a systems integrator, which, by the way, is a huge positive because we're now really getting on the radar of DSI. We're in the signature business alone. We just -- they love DocuSign as a company, but they just couldn't make enough money doing integration work on our business. So now with Spring, we can get there. But I think that from a go-to-market standpoint, we may -- I may say we may be underestimated a little bit how different that motion would be around CLM. But the big thing that I think we got right was figuring out to say, it's not a separate CLM versus signature sale, it really is an Agreement Cloud platform sale. And then here's the different products that we have within that overall platform that allows people to meet their business needs. And so I do think for some of those lands, they will be bigger and more complex sales processes. But I think we have a really good handle on what it takes now. And so our forecast ability and our understanding to really predict the timing is significantly better now that we've had a little over a year under our belt. So I think we feel pretty good about our ability to project the timing of those deals.

That's great. So I'm going to throw out one more question, and then we'll open up the floor to audience Q&A. So in as much as you've really done an outstanding job of SpringCM -- selling SpringCM into your customer base in 2019, fiscal '20, what kind of positive proof points that you had as far as how much bigger can those SpringCM deals be?

Yes. It's interesting because early on, we thought a lot about how to define that opportunity. And we've got a lot of requests from people that sort of say, what does it do to the average deal size, and we were struggling because the problem is, when you think about signature, there's such a range where we have some customers that are doing 1 or 2 use cases. And we have some like Microsoft that have over 300 use case. Right? And so when you say, what's an average customer, I mean, there really isn't an average customer. Whereas on the CLM side, you tend to get more of a sense of an average. So this idea of an attach rate, I don't really think is the right way to think about it. We really tend to think about it from a TAM standpoint. And we've sort of said, as you said, the overall Agreement Cloud provides that roughly doubling you referred to earlier, and we just think that gives us more and more years where we'll be able to grow at a substantial rate. From a standpoint of how we model it, I would say that fundamentally, the approach that we're taking at DocuSign is we want our field organization to have a quota. And we wanted to sell across the whole DocuSign Agreement Cloud, but we're not asking them to say, you need to sell 30% of this or 30% of that. We're saying, go meet your customers' needs. And we're not heavily concerned what that structure is. Is it one giant sale to one customer versus 5 smaller ones. Is there a lot of CLM in every agreement or even in one agreement? We're really going to have it 1,000 flowers bloom from that standpoint. I think what you're going to see is CLM deals on average will be larger as they mature over time than the signature deals. But there are fewer companies that will use a full bore CLM in almost, we think, every customer will be -- every company will be a customer of signature. And -- but many of them will buy things like our negotiate or our Gen products, they don't need a full-blown CLM. And so that's why I think it's kind of a little bit -- when you talk about the attach rates and the relative side, it's hard because there are kind of apples-to-oranges based on small business versus big business.

Got it. Makes sense. All right. Well, let's see if there are any questions in the audience. There's one upfront. If we have a mic.

Front row.

Just wondering if you could speak just to the competitive differentiation between you, Adobe and HelloSign. So Adobe is more around maybe the e-commerce or digital, is that the way to think about it, like the digital focus and you're more maybe broader, with like a broader signature thing? And so maybe just on a feature set standpoint, if you can explain that? Or whether it's more -- so each of the companies like Dropbox or Adobe are positioned in their own end markets?

Yes. So when we tend to think about the competitive advantage and where we see the differentiation. The first piece is, and this applies particularly to larger companies, the infrastructure that we've built, so we can deliver that 5.9 uptime with no maintenance windows. It's sort of unheard of in our space, for sure, but quite rare even across that software. So that's probably the first piece. And all the investments we've made around that infrastructure that we don't see anyone touching. In some cases, with some of the large enterprises or the Fed sectors you talked about. They almost can't qualify somebody else, which is great, and that's a position of strength for us. Second thing is, I mentioned before that our R&D budget is bigger than -- or approximately the same size as the revenue that a company like Adobe would have. And if you talked about HelloSign, if we're 7x bigger than the Adobe Sign business, the EchoSign business, they're 6 or 7x bigger than HelloSign. So this is a distribution that's quite dramatic in terms of the dynamics of the industry. So they just cannot build the product functionality we have. We have all sorts of functionality that's across our core horizontal platform. We've also built functionality specific to verticals. So if you're in the health care space, we have a software that we've built specific to signatures in the process for drug discovery. And so if people are trying to do drug discovery, we can accelerate that process for them, hugely high-value real estate, where we built functionality that other people don't have. That vertical is one that dramatically all of those folks come to DocuSign because of that. So the second big thing, I think, is that sort of functionality. We just have so much functionality that other people can't deliver. And then, finally, I do think there's a lot of value in the brand. And I think this is a little bit of that. People talk about DocuSign has become a verb. If you're out there thinking about who you're going to buy and you're going to buy someone other than DocuSign, you really have to justify it. And I think that is a significant competitive advantage, particularly for the smaller customers that come to us via the web. When they go out to search for eSignature, most of them don't search for eSignature, they search for DocuSign. So at the highest level, those would be probably the 3 biggest competitive advantages to point to.

All right. Well, Dan, thank you so much for your time. I apologize, we're out of time. But thank you so much for your time this afternoon. Super, super interesting discussion.

Thank you. Glad to be here.

Thank you.

Thank you.