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

All right. Good afternoon, everyone. Let's go ahead and get started. Last one of the day. Hopefully, everyone's had a productive day. My name's Rishi Jaluria. I cover software here at D.A. Davidson. I'm delighted to have with me DocuSign's CEO, Dan Springer. Any investors that want to ask Dan questions, please submit it through the chat function at the bottom, and I'm going to continue to monitor that as this goes on, or feel free to e-mail me directly rjaluria@dadco.com R-J-A-L-U-R-I-A@dadco.com. With that, Dan, thank you for joining us. And I'm not sure if this beard is a new quarantine look, but I'm a big fan.

It is. Thank you for having me, and we'll see how it goes. There's been some debate back and forth about whether it's time to lose the beard. It's about 3 months in the making.

Very, very cool. All right. Let's start kind of a high level, not that anyone needs to know what DocuSign is because we've all used it, but maybe starting to have a look at the evolution of DocuSign from being just a digital ink provider into this broader agreement cloud that you really become today.

Yes. Well, as you said it, right, when you say the word DocuSign, most people immediately respond with eSignature, and it's clearly what brought us to the dance, it's clearly what built over $1 billion in revenue. And we feel great about it. There's nothing but positive feeling we have because it's a fantastic ROI product for our customers. And that makes them happy to be customers, it makes our employees happy to be at the company where our customers love the products. So it's just nothing but goodness. And we talked about in the past, I think we could -- with an only eSignature business because the TAM is so significant, we could grow at substantial rates, as we have historically, just on the eSignature platform. But as you alluded to, Rishi, a couple of years ago, when I still recently newly joined, I joined about 4 years ago, started talking to customers, it became clear to me that they were asking us to broaden that. And what we ended up coming as an answer to that is what we call the DocuSign Agreement Cloud, and we now really squarely think of ourselves as the Agreement Cloud company. And in addition to signature, we've realized that the customers need more from us. They need a way to prepare agreements that are native to the signature workflow and process. So if somewhere down the process of someone going through that workflow, they want to edit or negotiate a term in an agreement. You don't have to cancel, start over again, go back to Microsoft Word or whatever where you created the agreement before to create a new one, put it back into. That's a long start over again. So that was a key step, and we're excited that we launched last year to prepare functionality. We also saw more and more demand for people who said we need to act on agreements once they've been memorialized, and so we've already had some pretty good API and integrations. We've really stepped that up again. Now 60% of all of our transactions actually occur, not with someone starting an envelope session in our web or mobile browser, but someone having an API call kick off a DocuSign envelope being set. So truly integrated, whether it's integrated into Salesforce or SAP or Workday or one of their other softwares that are integrated with us or in their internal system where they leverage the API library to build an integration. And then the last piece after the act-on phase taking actions was around manage. And increasingly, what we've seen has happened with the advent of the digital signature becoming so popular, people now have digital agreements, and they need a way to manage all of those agreements. So the managed phase is about a repository, it's about rules and obligations management for those. It's about search and being able to intelligently understand how to run your business better and manage your business better because you can access those agreements that you create. So that cycle, prepare, sign, act and manage is how we think about the components of the Agreement Cloud. And one of the things I always say, Rishi, and this is a long-winded answer, but I try to set up the whole piece script, when a seller goes out today to talk to a customer or to a prospect, they need to say, "DocuSign, we're the Agreement Cloud company. Let me walk you through how we prepare, sign, act and manage." And they give their little spiel. If a customer says back to them, "Hey, that's great, and it was really, really good to understand that foundation. But today, I'd like to buy some eSignature. That's why I called you." The only right answer is, "Yes, ma'am or yes, sir, we can sell you some eSignature today." And what we've seen their business today, eSignature's still a killer app here. It's still the killer piece people are going to want to enter the relationship with DocuSign, and there's no shame about that. Signature will be that leading franchise for us for years and years and years to come, but we do want to start every conversation with the Agreement Cloud position. So that's the vision.

Yes. All right. That sounds great. All right. Let's dive kind of into the current environment. So obviously, you've put up some really impressive numbers, billings accelerating twice during the current environment and Q2 often a really difficult compare. Maybe can you talk about what you're seeing, how sustainable do you think this boost is? Because arguably, you're the second biggest software beneficiary after Zoom, which is a lot of crazy things to think about. And I'm going to tie an investor question I just got into this one, which is: Do you see pent-up demand for products that's going to be unleashed once the pandemic's in the rearview mirror?

Yes, yes, that's an interesting perspective, and the last question, too. So let me give you the high-level view we have, we were off in Q1 to a great start, the first half of Q1, and we started February 1, beginning of our year. We were having a good year. When the pandemic hit, it absolutely accelerated. It created a tailwind and accelerated our business. It's not something you want to have accelerating your business. And obviously, we have struggled, as most other companies have, taken our 5,000 employees out of work, 100% remotely now. It's been very challenging onboarding new employees. We've hired almost 1,000 people since the pandemic started. So onboarding people, we never had a chance to meet them in person. It's not the easiest thing. But it has created a need for certain companies in a work-from-home environment to take some use cases around contracts, agreements, new hiring packages and things that they used to do in a manual paper-based process that they couldn't do because no one was in the office to get paper. And so that has definitely been a boost. If you look at the billings, I think it's the best indicator of that. See 59% in Q1. And 61%, as you said, off a tough compare, reasonably tough compare in Q2. A big part of that is definitely because we had that sort of boost. In terms of what happens going forward, I mean I don't think it's going back. So our perspective is nobody says, "Have this paper-based process of manual, and I route it around. It always takes a while to sign." And you know what? I miss that. Now I got the digital solution, but I really want to go back to that paper-based manual process because it takes more time, it's a less good experience, it costs more money. I mean what's not to like? So people aren't going back, and I know it's a big question for a lot of SaaS businesses right now we're very comfortable with. The question of how long will it continue and then the new one is will there be other pent-up demand to unleash, here's how I sort of think about it. I think we will continue to provide an increased guidance and Mike put out perspective and said, yes, we're going to see attractive growth rates in revenue and billings on good compares from the previous Q3s and Q4s, particularly Q4 is a very strong compare. So we obviously have confidence that the rest of this year, we're going to see good strength. We haven't provided any guidance into the new year, but I can tell you at a high level, we think that there's a lot of momentum that is built in the business. And a lot of people are starting to see that these digital transformation plans they have, they have in the distance, they just pulled forward. It wasn't -- these aren't things that weren't going to happen eventually, they're just happening a little bit faster now. And so I think we're going to continue to see that expansion and growth in the future, and the prospects for that signature piece are very good. In terms of pent-up demand, I don't know that I'd say there's a lot of pent-up demand for additional eSignature solutions. But if you go back to that agreement cloud and you think about things like CLM in that managed phase, we know there's a lot of companies that started talking to us about CLM in, let's say, February and March getting ready to make a purchase decision. The pandemic hit, and those transactions slowed. People said, "You know, I got all my people in different places. To put in a CLM, you need to do a statement of work, higher professional services of some sort, maybe it's the systems integrator, maybe it's your own people, maybe it's DocuSign for a server." There's a little more complexity to those. And I think we're going to see towards the end of this year and going into the new year, there will be some pent-up demand for those software products that we sell, that we'll probably see a little bit of a boost from this.

All right. I want to go to maybe some of the recent acquisitions that you've made to expand the platform, right? SpringCM, Seal and now Liveoak. Can you talk a little bit about traction with these acquisitions? And obviously, we can't read real traction to because that just happened. But kind of how you're thinking about that, and maybe philosophically, how do you weigh that build versus buy decision here.

Yes. So in terms of those 3, so SpringCM is almost 2 years old now. In fact, it's coming up on the 2-year anniversary of that deal, whereas we did the Liveoak, as you said, just weeks ago. And Seal, though, actually closed in the end of May. So that wasn't that long ago either. Keep in mind, Seal had been a partner. We had an investment in Seal software prior and we -- had we've been co-selling with them, so we knew them pretty well before we decided to buy the rest of that business. I think the way I'd position it is this way. I think SpringCM, now it's called DocuSign CLM, we've made some changes, we integrated into our business, it's going well. At the end of last year, we ended up telling people we were ahead of our plan. We actually were getting that adoption in the now being able to cross-sell that into our DocuSign base above our plans and expectations. That definitely slowed a little when we hit COVID and so because of that longer sales cycle I was describing, take some of that momentum. But we're starting to see that pipeline build through this period. And I think as I said, I think we feel that will be back on track as we get through these first stages in the pandemic. In terms of Seal software, we're already selling it jointly with customers, and I think we feel it's continued to have good momentum. Same situation with Spring. I think COVID definitely put some headwinds, and someone's making a big AI-type decision. They really want to be able to get their teams together, and it's harder to do that. So that has elongated some cycle, but we're also seeing a lot of momentum building there. So I think that same sort of space. With Liveoak, as you said, the key thing that we're doing is Liveoak had built its collaboration capability that we saw as interesting. But more importantly, we saw that, that, together with our electronic notary service, together will allow us to really deliver on the promise of remote online notary. And so that beta, and in fact, we just put together and sort of published the demo of what that beta is going to look like, that's coming out in a couple of months. And by the beginning of the year, we should have that generally available. So we think that won't really kick off until Q1 for us in terms of starting to see meaningful volumes, but it will be in customers' hands in Q4. And it feels like that development work is going great. And in terms of your strategy question broadly about build versus buy, at the highest level, I suppose I'd rather build versus buy only because then you don't have any integration questions, you don't have any integration risk questions with teams, et cetera. That's all known in your control. You don't spend as much money probably. But the way we look at it is we're trying to deliver on that Agreement Cloud vision. And if we see somebody has built something that is central to that vision we want to deliver to our customers, we think they have the domain expertise, maybe the starting of the business, it could accelerate our pace to get there in a significant way and it's not egregious as a cost, then buying is something definitely we're open to do. We feel -- we did this first deal of Spring, so we didn't want to do another one for a while. We really wanted to make sure we got the integration right. We build that muscle how we can successfully integrate companies. I think we did a really nice job. I think we had some initial, like we had to figure that out. We were kind of doing it for the first time as a company in many, many years, definitely under the regime of this leadership team. And I think we got pretty good at it, and that allowed us to make the decision to do Seal. Seal went very smoothly and allowed us to very quickly follow up with Liveoak. The Liveoak is a much smaller deal, small 25-person team in Austin. But still we wouldn't have been able to make that decision so quickly if we hadn't booked the Seal. The process we had to integrate Seal, I think I was going to go very successful.

And I'm sure you'll integrate Seal really well. Please don't stop giving out little stuffed animals, the seals. I think you used to give that...

Yes, yes.

A lot of those. All right. I want to think about -- going back to the API, as you brought that up, I think that's a really fascinating point that 60% of signature is happening through APIs. Can you talk a little bit more about that API strategy, and especially with the fact that you have like 100,000 developers getting DocuSign APIs today?

Yes, yes, 100,000 sandboxes now. Yes. The way we've thought about it is developers are going to be key to us in our ecosystem. And one of the things that's interesting about DocuSign in the history of the company, when we were private, it's quite unusual how many large software companies that all compete with each other or not only customers of ours and go-to-market partners but investors in the business. So that includes Microsoft, SAP, Salesforce, Google, Intel, I mean just sort of down the line, most of the big tech, and particularly in the software space companies were part of our ecosystem that way. So we spent a lot of time thinking about integration with that broader defined ecosystem. We have about 450prebuilt integrations with a leading software company, leading SaaS providers. And then again, as you said, we have about 100,000 developers who built their own, just leveraging our award-winning API sort of a set of tools. And I think the answer is we want to have both those strategies. We want to look at people who are getting successful where our customers are saying, "Hey, this is an important integration," and then we'll work with those companies to create direct -- bidirectional feeds. And then in the other situation, we want to let 1,000 flowers bloom, and a lot of our customers are doing those innovations. It's not about a third-party software. They're just hardwiring us into their own business systems. It's going to be homegrown software, and we think that's great. One thing we find is that those use cases are pretty sticky. When people build the integration, they tend to last longer, and then we grow with the customer. As their business grows, they just have more transactions with some of those platforms, and we get more growth. So we really like those aspects a lot. We just, last week, rolled out a new developer center, very slick. We kind of took it up, I'd say, from a level of good to a leading in the space. And I think that strategy is going to allow us to continue to be successful by continued investment in the developer community.

Got it. All right. I want to turn to international now. We've had some really strong international growth this past quarter and even before that. What geographies have you seen the most strength in? What changes in the international org should we expect now that Mike's taking over that and maybe alongside that Mike, someone that we all got to know really well as CFO? What should we expect now with Cynthia kind of taking over the reins as the CFO?

Yes. Yes. So let me start talking a little bit about the market, and then I'll come back and talk to you about the team and how we're thinking about the leadership perspective from that standpoint. So look, I mean you saw we bumped up from 18% to 19% of our revenue from international. A lot was pleased to get that extra point this quarter just to be frank about it, a company well over $1 billion in revenue. I believe software company like ours should have more than 19% of its revenue internationally. We were a little late to enter in the international markets. Some of that was going to be at a lot of success domestically, and the company just hadn't gotten around to it, quite frankly. But there's also some nuances about the core signature business. I'll just share with you to understand how it will play out. Most sort of countries, the vast majority had 1 or 2 models for agreements. It's common law or civil law. And the differences are specific to each country, but mostly there around how you identify someone in order to make an agreement and how the rule of law works there. So the common to all countries are the ones that you think about the real Commonwealth, the British Commonwealth. So that's the U.S., that's Canada, that's the U.K. and Ireland, it's Australia and New Zealand, countries you think about in that context. And those are the places we've done well because we launched in the U.S. and we had that framework in place and then into those markets. We came to basically all the other countries in the world, which are in the civil law model. So that's Germany, that's France, that's Brazil, that's Japan. I mean they're not part of the commonwealth, they tend to have the civil law structure. And we had to do some work on our core platform user to really be attractive to those markets. So we were slower in getting in there. And therefore, they're -- our level of adoption there is lower. So that's how to think about where we are in the markets, but I think the growth opportunities are -- France is just as attractive as a market for us as the U.K. is, just U.K. is bigger right now because we got an earlier start in the U.K. than we did in France. Think about that one. In terms of what to expect, I think you're going to see -- Mike is going to be aggressive and help us drive the giant growth opportunity. And I think we're going to see some work right now, the kind of 3 phases, as I've been thinking about it. There's some work on execution, as you guys maybe heard on the call. Mike started this role sort of playing a GM of Europe. We ask themed sort of look at coordinate across our functions there, and we got so encouraged by that effort over the last couple of quarters that we came up with this idea that we really should just make this senior executive responsibility and inevitably the all-in international opportunity. But the first phase is very much around getting us as a company to work effectively across each of these pieces, and I think that's good. I think that's a good opportunity for us to do that in the other regions. And so we're not done with that in Europe, but we're off to a great start there. We're seeing improvement already. We're going to see that in LatAm. We're going to see that in Japan. We're going to see that in APAC. So that will be Phase 1. Phase 2 is think about what are the other countries. We have this what we call focused 8 model. And we said we don't want to put physical presence. We sell digitally in 140 countries, but we want to be focused on our direct efforts in the core 8. Those focus 8 countries are U.S. Canada, Brazil, Germany, France, U.K., Australia or ANZ and Japan. And so those are the focus 8. The question, what are the next ones we should be going into? And when does that happen? So that will be a big secondary thing for Mike to dig in on. And so I think that's what you should expect. I think you're going to see even more rate growth coming out of the international business. Now in terms of Cynthia, I wouldn't have been able to promote Mike into that role and allocate his time to the international growth if we didn't have a fantastic CFO with Cynthia right there, and it was just a perfect set. I've been on the Board for a couple of years chairing our Audit committee, so working closely with the finance organization. Great experience both as sort of a strategist. She was a Head of Corp Dev for Twitter. She was a Morgan Stanley MD in their tech team there. So that was a fantastic background. And then she was the CFO of a public software company, Pivotal. So it's just kind of check all the boxes of the experience we want. And the fit, we just knew it was going to be fantastic, which is always one of these issues. It's harder to sometimes figure out while interviewing. So as the pieces came together, Pivotal got bought back into their ecosystem, the Dell system. And she is available. We saw the path of Mike, and it's just the pieces fell together really nicely. I think what you're going to see with her is a very strategic CFO, who is very straightforward. The nice things about Cynthia, you don't have to wonder if there's a -- in the same way Mike is, she's direct. And you're going to get a clear straight answer. She's going to tell you what she's going to tell you, and she'll also tell you she's not going to tell you. And you can ask her 19 times about some questions disclosing some perspective and if the answer was no the first time, it will be now the next 18 times too. You're all free to keep asking, it's your job, but she's going to be really disciplined in that way. And I think she's going to be just a fantastic add to our senior management team.