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

All right. Thanks, everybody, for joining us again here continuing the afternoon. I'm Walter Pritchard, software analyst at Citi. And happy to have with us DocuSign and Dan Springer, the CEO of the company representing. Dan, thanks a lot for joining.

Great to be here.

Thanks. So we're going to -- I'm going to go through some questions I prepared, and there should be -- for everybody that's joining in on the video, there should be a tab off to your left that says question -- questions, and you could click that tab and submit a question if you want to get me a question that I can incorporate into the discussion here. So feel free to do that at any point in the discussion. So Dan, I guess it's been quite a year for DocuSign. Probably not the way you thought the year would proceed, but the company is definitely capitalized on the opportunity and shown some strong growth. Maybe you could just sort of step back and help us understand. I think digital signing is somewhat intuitive as a beneficiary of all this in this environment. But in what areas have you seen the most strength and accelerated adoption of your technology given the COVID environment?

Yes, absolutely. In fact, it's interesting. At the beginning of the year, our fiscal year starts February 1. Beginning of the year, we were off to a really good start. We were quite pleased. And then about halfway through the quarter, we actually saw a significant increase in demand and acceleration of demand due to COVID. And what we saw is that a lot of companies that were existing customers as well as a lot of folks that are good prospects in discussions with us very quickly wanted to get onboarded with eSignature and the core eSignature use cases, ones that you would expect, where people felt that they were doing things with paper and manual processes that were okay in an office environment but in a work from home weren't going to cut it. Sales contract was a common one. People used to, both from their own standpoint, sending out contracts, routing them around before they sent them. But then they had to send them to an office where maybe 2 or 3 people needed to sign something and normally that get routed around. Now there's no office where the customers are sitting, so they needed to do those things electronically. We also saw a lot of people with internal use cases like -- people are still hiring people. DocuSign, we've hired 1,000 people since COVID. We have to get offer letters out to people, and there wasn't a way to sort of send them someplace, have them get sent back and processed because no one was there to receive them. So those are kind of use cases where people kind of urgently needed them to put in place. And the other big area was there's a lot of COVID-related use cases: health care, small business administration, PP programs where people needed to -- it just didn't have a model for what they would do in that scenario. So we saw quite a good acceleration in the business. That's why we had -- Q1, we had 59% billings growth. Pre-COVID, we'd only once been above 40% billings growth, so it was bigger than Q2. We just announced a 61% billings growth. And some of that is our business is strong, and some of it is definitely because of COVID. And then on the flip side, the only real sort of headwind, I'd say, Walter, is we had this phenomenon where some of our small businesses are really being put into an existential dilemma. Can they survive? And so we could see that on the small business exposure be something -- both today and in the future, could be problematic. And then certain industries. So if you're in the travel hospitality industry, as an example, you're feeling really challenged. And so some folks there that were either existing customers looking to expand or prospects looking to come on, we see some slowness from those verticals. But the net of the kind of tailwinds were significantly stronger than the headwinds, and so we did see acceleration in the business.

And then you give the -- you give customer metrics and you give metrics around the dollar-based net expansion. And we've seen an uplift in both. I think probably what it's looked like to me is more upside around the customer numbers. And can you talk about sort of how that's played out with -- have you had existing customers who were starting on eSign and dramatically accelerated, and that's just sort of buried in the dollar-based net retention? Or has it really been the new customers that have -- from your purchase of the company, you've seen sort of come in, in a major way?

Yes. It's been both. I think you actually hit the 2 best metrics I like to talk about, Walter, in terms of trying to describe the impact. So put numbers for the folks that are not as familiar with the DocuSign story. But our dollar net retention rate has historically been between about 112% and 119% when we went public. That's what we kind of guided the way we thought we would be and where we have been historically, and you're pretty much right about the middle of that. And then actually, even before COVID, that started inching up a little bit, and then we hit the 119%. We were pleased, this last quarter, we went above that. So outside of that range we'd experienced at 120% and we think that's going to continue to be a strong metric for us going forward. And I think that's indicative of what you described with our existing customer base just growing more with us. But on the new customer add side, you're also right. If you look at the first half of last year, we were adding 3,000, 4,000 customers, new customers for direct customers, not counting the web and mobile. But these are the ones that come and have a relationship directly with the sales rep at DocuSign. That was 3,000, 4,000, and now it's been, in the last 2 quarters, 10,000 each quarter. So that's a fairly substantial impact. But from an impact on our financials today, those net new customers don't add that much of an impact relative to the size of a tripling, more than a doubling, almost the tripling there because we tend to have that land-and-expand model. So they're initial contracts and oftentimes be relatively small. And then with the 120% net retention rate, we grow them over time. So from a dollar impact in the short run metrics, it was very evenly weighted between the new acceleration, the new versus the acceleration in the base.

Got it. And then, I guess, relative to the U.S. and international markets, there's been some legal differences in how the systems are set up, and you had seen much stronger business in the U.S. historically than in international markets. But could you talk a little bit about how the impact has differed in those 2 general theaters?

Yes. So I think the answer is not very different. We haven't seen a lot of difference from a COVID impact on our international business versus our domestic business. Our international business has been growing a little faster than the domestic business. I mean domestic is going at quite a clip right now, too, so international is trying to take share. It's hard to take share when the base business is growing as fast as it is. But if you look at this last quarter, our total revenue growth was 45%, and the international was about 60%. So it is growing faster. I don't think that's particularly COVID-related. I think that was already happening prior, and a lot of it is just growing off a smaller number. So it's easier to have the higher rate. 80% -- 81% of our revenue still is domestic, and just the 19% international, which is a big focus area for us, and it's why we obviously announced that Mike Sheridan, our CFO, is going to move into his key role, as the President of International for us to really drive that international growth. We think it is our single biggest growth opportunity on top of all the things we're doing well today, and when we see opportunities to do more, that's the single biggest one I see. So thrilled to have Mike leading that effort to try to accelerate even faster outside of the U.S.

And on that end, I mean, e-signature in the U.S. is something I think -- it started to become sort of a accepted technology. DocuSign has a brand. There's sort of a network effect. Can you compare sort of how you're thinking about the network effects internationally, how COVID is -- has driven that? Realizing when I say international, it really is country by country, and so wanted to hear you incorporate that in.

Yes. Well, to your point, there is some global business that does go across border, for sure. When we look at our transactions, the dominant component is within a country, to your point. So I would say that the COVID impact, I don't think, again, has been super strong in driving international disproportionately. But I think what's happening is because the brand, as you said, was so strong in the United States, we were well understood because people are now finding themselves in situations in other countries where they're work from home and they need to find a solution, is driving more people to find us. So we're closing some of that gap on our brand recognition in other countries vis-à-vis where it is in the United States, and so I think, over time, that will help us close that revenue gap I was describing, where our penetration outside of the U.S. is smaller than we'd like to see it. So I do think COVID will probably accelerate a little bit that establishment of the DocuSign brand in additional markets.

And how are you thinking about -- we had Kelly Steckelberg, who's the CFO of Zoom, on earlier today, and we were talking about some of these sort of effects in their business, which I think these are 2 companies that have seen just quite a dramatic impact. From a sales and marketing perspective, marketing and brand awareness and this sort of general sort of overhead, you kind of air cover activity that you've done a lot of in the past. What have you done to reallocate or, if at all, marketing and sales spending, sort of accounting for the fact that you're now getting this sort of uplift and recognition from kind of more organic processes?

Yes. Well, actually, interesting. We see so much extra demand that we're actually looking to double down and pull forward growth spending, whether that's hiring reps, whether that's more online marketing and advertising spend. We're saying we want to do more because we just see that demand has accelerated forward. So we want to meet that demand. And we feel good about how it played out in the first half, and we want to look for that opportunity to do more of that in the second half as well. Talking about Zoom, interestingly, I had a conversation with Eric Yuan about this the other day. And one of the things they're seeing, the same thing we're seeing is more opportunity in that direct business, the digital direct business or e-commerce business because people are seeking us even more than we need to seek them. And some of those things are like Google Search and online advertising, and some of it is around building the brand, as you described. So I think we'll see an opportunity. I don't think we'll get as much of a percentage as Eric has of his business in digital, but I think we see it as an opportunity for us to have a bigger portion of our business. And we are definitely going to double down on that marketing more to people who are, again, out looking for, in this case, an e-signature solution. But it'll be true for the overall DocuSign Agreement Cloud overall. It's just that the entry point most companies have into the DocuSign Agreement Cloud is still eSignature because it's such a high ROI. It's so fast to implement and get value that, in times like these, it's the place that most people will start.

Got it. And just as you sort of think about the sales and marketing strategy, you're obviously having a lot of business come to you right now. As you look out a year from now, 2 years from now, how do you expect to adjust sort of the way you're going to market given what you've seen in terms of a massive amount of awareness over the short-term here? Is it just get back to kind of business as usual? Or do you think there's an adjusted playbook that you'll put in place over the long term?

Well, I think it's interesting. There's a lot of things. It's funny. When you think about the work-from-home world, I don't think it's ever going to go back to the old normal. I think there'll be a new normal. We don't know exactly what it is. When we look at our own business, we've realized there's a bunch of jobs we thought needed to be 100% in the office that we're saying, wow, they're working pretty well outside of the office. So it's changing our view. So I don't know exactly what the new normal will look like. But my instincts are telling me that we will not be the way we used to be, both the way we operate our company or the way we sell and market, but we'll be somewhere in between where we are today and where we used to be. And I think from a standpoint, again, for us, we look at that increment as an incremental growth opportunity. And so we're looking to spend, quite frankly, more aggressively than we were spending. We're still getting improvement in our margin because the top line is growing faster. But we're not thinking about this as, so do the same thing. We get a onetime bump that falls to the bottom line. We're saying how do we reinvest that surplus to set up many years to come of higher growth than we would have otherwise had.

And in the customer count, which has been substantially higher than we had modeled at the beginning of the year, you mentioned revenue contributions there are modest at least upfront from those customers. But as we -- and so hopefully, you get to see the benefits of those upsell over the next 12 and so forth months. But as we think about we get into next year and so forth and even the second half of the year, how do you think about any of the dynamics that you've seen so far that's maybe pulled forward some of those customers versus not? And just trying to sort of set expectations around how we should think about modeling that, even though we understand, I think it doesn't drive a lot of in-period revenue.

Yes. Well, so 2 thoughts. First one is want to get sort of quantitative. Mike put out a guidance for the second half, and the nice thing about this quarter is you end up getting both a third quarter and a fourth quarter number by getting the third -- the next quarter and the end of the year. And now Cynthia, of course, fantastic new CFO that we're so thrilled to have in this role, and it's hard to replace Mike Sheridan, but I think we found someone that can absolutely do that, which I think is awesome for us. I think you're going to see her talking a lot about the same concept that Mike has always spoken about. We're giving guidance to what we can see, where we have visibility. Sometimes that will appear to be conservative because we'll say we're not going to guess, but that's what we can see. We're giving you the visibility we've got. And we got that feedback from this last call. But there's a lot of uncertainty right now in the world. And again, we talked about the headwinds that we'll also get for some of our small businesses, so it's hard to understand how that'll play out. So from a quantitative standpoint, we've put out the guidance in the second half that we see. It's still significant increases from where we were before, not at the same growth level we had at the first half, which is sort of unprecedented levels that we've had. Going forward, I think you're going to see more of the same. I think we're saying that the people that have pulled forward those use cases that they probably would have done anyway, we believe there's plenty more use cases behind them. So it's not a situation that we think they pulled forward and now we're going to have a gap. Next year, we're all -- all the getting that was gotten is done. And one of the reasons we feel really strongly about that, as we look at this from a TAM standpoint, kind of if we think about the construct -- we see about a $25 billion global TAM for eSignature alone and then about another $25 billion-ish for the rest of the Agreement Cloud opportunity and you look at where we are, we'll do in the $1.3 million, $1.4 million revenue this year, both of that being eSignature, it's still a tiny penetration. So we're very early days even in our most mature markets, and we feel like the growth potential here within our base is substantial. So from that standpoint, we think we're going to continue to operate at this new, sort of, higher level, and it's not going to be any giveback. And the thing I think some industries in work from home or in a tricky spot right now is if people stop working from home, will people go back to the old system? We don't believe in the signature-centric world or the Agreement Cloud world. People are going to say, "You know what, now that I'm back in the office, I want to start doing paper-based contracts. I want to FedEx some to the people. I want to wait a week to get them back. I want to have all of those other challenges." They're not going back. The savings are significant in time, in money. There's a better customer experience in the process. So we really don't think anyone's going back to paper once they switch, and we think it's just going to empower them to see the benefits they've gotten and the ROI they've gotten to want to do more. So we're pretty bullish on that stand.

Got it. One question that came in that's -- I think the last one for now on eSignature because I want to talk about some other topics, but there's been -- you've seen volume growth. You've -- I just want to understand. You have customers that have certain sort of volumes contracted on an envelope basis that are in their agreements with you. To what extent have you seen customers come back and early sort of upped their volume commitments? And then pricing as well. I guess I'd expect in any market where volumes are exploding, the pricing continues to come down to drive more volume. But what's been the sort of impact of pricing in this environment?

Yes. Yes. So 2 things. One on the first piece around the volume, we have seen dramatic increases in volumes. But remember, we actually price on capacity, so we go to a customer and say you're going to use this level of capacity for 1 year or 2 years or 3 years, whatever the length of their contract is, and they -- we come to an agreement. If they start to go way over, we'll come back to them and say, "Hey, you're using way more than you're contracted to. Let's renew your agreement early and get you the right set of volume." If someone's a slight bit above their volume, we just wait until the contract comes to the end and do it. We don't go back and try to charge overages in most situations. So from that standpoint, if people are going over by a little, it doesn't have any change in the impact. It gives us a nice setup for their renewal because they're very well utilized. We actually love it when people are using all of their volume. Our gross margins are high. The incremental cost of volume is not so high to us. So it's not an overage model when we get that extra [ usage ]. But it is an opportunity then, as you said, if they're dramatically over, to early renew; and if they're a little bit over it, just sets up for a strong renewal. So that's kind of the first piece. In terms of pricing, we have not seen any real changes in our pricing. And we review -- we do it on a quarterly, [ this thing ], right, before our earnings call. So if we get these kind of questions, we can give people a thoughtful answer. And we look at it by geography. We look at it by size of customer. We do very detailed analysis. And frankly, we've seen very little change in our price characteristics. I think the value that we get is high. And I think, quite frankly, we're priced at a place where the ROI is very, very high. The other alternatives are not nearly as good relative to the price point we charge, so we're not getting a lot of price pressure from that standpoint. We do see price pressure in competitive deals because the only thing other people can really do to try to compete with DocuSign is to come in and bundle or if you wait for free sometimes but try to dramatically lower price. And we just see most of our customers look at it and say it's just not an attractive option. And it's not that surprising, Walter, because if you think about software, there are very few companies who have actually been successful saying, "Our software is going to be not as good as someone else's, but we're going to make it cheaper. And then people are going to buy it." People tend not to buy software with that mindset of how do I buy cheaper software. It doesn't mean they don't beat up on their vendors to say they want to pay less, but they don't really make a lot of switching cost for a lower-priced player if they think the higher-priced player has better software because, again, the ROI tends to be pretty high. The value proposition is pretty high. It's not worth giving a 20% lower price, that sounds like a lot, if it degrades the value, the implementation and the software. And then the last piece is even in a SaaS world, people still embed us. They use our APIs to connect in with their processes. They integrate with their other software. They use our integrations with 350 software integrations like SAP with SuccessFactors or Ariba or Salesforce for their CRM tool. So we've built -- Microsoft with their CRM tools. We've built these connectors, and so people get integrated with us. It tends to not be a thing where they want to come back and say, "We're going to threaten to leave if you don't give us 15, 20, 30, whatever, percent cheaper." So our pricing therefore hasn't had to change very much.

Got it. And on -- so moving to the Agreement Cloud, which you've mentioned a couple of times. If I go back 1.5 years ago or so, I mean, you had acquired SpringCM. You'd start to roll that out. I think there was a quarter even in the mix where you -- the business overall had slowed down because you pushed pretty hard on the Agreement Cloud. Where are you in terms of sort of trying to push the broader messaging around Agreement Cloud into customers? How are you sort of carving that up into pieces that are easy to consume so they can do it in a more natural way? And you talked about COVID as, for sure, had to focus on eSign for now but help us put into perspective the broader context.