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

[Audio Gap] you all know by now, I run enterprise software research here at Wolfe. I'm thrilled to be joined today by Cynthia Gaylor and Annie Leschin from DocuSign. Thank you guys so much for joining.

Thank you for having us.

The first few questions are going to be scripted just so you know. I've been asking them to everybody, and I encourage investors to participate, put questions into the Q&A if you are so bold, because just remember, everybody can see who is asking which question or if you're more shy, please e-mail them to me, and I will ask them for you. The goal of this is to be short, sweet but impactful and interactive.

So with that, the first kind of scripted question, the short, short version, Cynthia, because I think everybody on the planet, similar to Zoom, is familiar with DocuSign. But just go through the value problem. The question we always get is like why can't Adobe do this? Why can't HelloSign do this? Why can't EchoSign do this? What is the value prop? What is unique and special about DocuSign that is difficult to do and the value prop that you see the company delivering over the next year or 2?

Sure. Sure. Yes, it's a great question and one we get often, particularly from financial types, right, because we all use design and have been using it for years. But there are a lot of industries and a lot of companies and a lot of mom-and-pops and businesses around the globe that still use pen and paper for signature. I think when you think about DocuSign, the company has been around for quite some time. And we feel internally like we're just getting started, right? We have a $50 billion market opportunity. We just guided the street to $2 billion. And so when you say kind of what makes us special is that we are the leader in our space by a lot from a brand perspective, a trust and security perspective, our NPS scores. Customers love using us because their customers love that they use us, right? And so it's kind of very much a viral and network effect. But I think some of that brand leadership, some of the trust and security around our products that we can reach the smallest companies around the globe to the largest enterprises around the globe is pretty unique and not something that everybody else can do. So that's my cliff notes version, but we're happy to go into more detail.

For what it's worth, a very happy customer, having just a sizable real estate transaction all on DocuSign, it's almost too good because I ended up not reading that, but I just want to sign. So I guess, let's -- if you step back, one of the -- both the question for, I would say, for Zoom and for you within our coverage is the impact of the pandemic, right? Has it been a massive pull forward of demand that you would have accessed at a later point in time which actually makes it very difficult to grow off of? Or is it better to think about it as a kind of step function change of now you are able to sell on a much broader canvas going forward? And rather than a pull forward, it's more of a structural step-up to a level that you otherwise wouldn't have been able to deliver? So just walk through how you guys think about it internally, the impact of the pandemic on the company. And as we hopefully are looking over the bridge, so to speak, on the other -- to the other side, how are you thinking about it from a durability -- growth durability perspective.

Sure, sure. And that was a very insightful way to ask the question, so thank you for that. I think you phrased it very well. It's kind of a step function for us, right? I mean we've practically doubled our business in just over a year. So kind of the growth at scale that we're seeing is pretty rarefied, if you will, like there's not that many companies that are growing at our scale. But I think it's partly a testament to the opportunity in front of us and the untapped nature of the opportunity. And when we think about kind of where we play in the space and how we're maybe similar or different from others, certainly, the pandemic accelerated customer demand, particularly last year, right, when there was kind of an urgent need to sign things or get agreements done and nobody could meet in person, right? So doing it digitally made a lot of sense, but it definitely peaked urgent demand from our customers and from new customers who aren't using the product. But we view it as kind of a step function of scale and of growth, right? And we've said quite consistently since we started seeing kind of the demand curves, we're really pleased with the growth we're seeing, but we also know those peak levels of growth we saw a few quarters ago were not going to continue at the scale. But given the market opportunity, we just have a lot of runway, whether it's by customer size, by vertical, by geo, I mean we kind of cover the gamut. The other thing I would just say is, as we look across the landscape and where we're looking to go and folding in things around the Agreement Cloud, which I'm sure you're going to ask us about, we think it's just a broader canvas. And it really plays to kind of this anywhere economy. Like people are not going to go back to pen and paper once they've signed digitally or once they've been able to do agreements and the different components of agreements, digitally. And I think that's really a key differentiator from some of the other market dynamics you're seeing around kind of the pandemic, in particular.

Look, so I want to dig a lot deeper into many of those answers. But the first -- the next kind of scripted question, if you will, is how is the demand environment? Like right here right now, what does it feel like compare it to a quarter ago, 2 quarters ago and how we should think about it for the balance of the year?

Yes. So I mean, probably the best descriptive is the demand that we're seeing now is good, but it's certainly not as strong as what we're seeing in Q1 and Q2 of last year, right, in terms of that kind of urgent buying. So I would say from that perspective, that's probably the starkest comparison of when things shut down, customer demand kind of came through the roof in those first couple of quarters. So I would definitely say we see that urgency tapering as customers evaluate the landscape. Now that being said, we continue to post very strong metrics when you look at things like our net expansion rate at 124%, right? That's a good indicator, maybe not a perfect indicator of demand, but it's a good indicator of success on the platform and how customers are expanding their use cases or expanding their usage of our products. So I would point you to that metric as a really good indicator of kind of what we're seeing from a demand and an expansion environment because it includes the cohort from last year and how they're expanding, takes into account things like churn and folks who have maybe decreased their usage. So it kind of nets out. I think it's hard, Alex, to measure like quarter-by-quarter demand, right? Like we have our finger on the pulse of our business. But making those comparisons, particularly when you're undergoing such a macro -- macro events like this pandemic, I think, is a little bit shortsighted and probably wouldn't be particularly accurate in hindsight when we look at the trajectory of our business.

Got it. So I guess there are 2 elements I want to dive into that on the -- because it seems like there are 2 items that happened during the pandemic that were kind of tailwinds for the business that you're looking at the other side of now. The first was just the volume, the urgency that you just spoke about of transactions that went from physical to digital right away, right? So that's a volume, that's scale of things. And then there were also probably onetime in nature events or transactions, whether it was PPE, whether it was around vaccines or whether it was specific use cases that were temporary in nature. Can you separate -- first of all, if you take those 2 in combination, what was the tailwind that you saw? Like how do we think about that now, adjusting the growth for those 2 dynamics? And once we get through that, I want to just understand kind of the proportion of each one being bigger, the other smaller, half and half?

Yes. Yes, that's an interesting way to kind of to slice and dice it. We talked a little bit about this in Q1, just kind of like the type of customers we saw kind of coming to DocuSign or expanding with DocuSign during the peak of the pandemic, right, and how customers -- there were some customers who bought really conservatively or some who didn't expand when their renewal came up, so they did a flat renewal. And then there were others that were clearly COVID use cases. I think some of the lending platforms are probably a good example of that. But we had some COVID-only use cases, and we didn't bake in like those would continue forever. But I think for the most part, when you think about the long tail of our business and even the enterprise and commercial, a lot of customers are using DocuSign in multiple use cases. Or maybe they start with one, it's a land-and-expand strategy, and then they move into other use cases or they expand within departments, right? So we see a lot more of that type of behavior with customers because the time to value of using our products is very fast, right? And the ROI is pretty immediate. When you think about, especially pen to paper or nondigital methods to DocuSign, it's pretty hard once you've signed something to then go back to doing it the old way, particularly -- and believe it or not, like we still have to sign as a public company executive some things on paper, like they want [indiscernible] signature, and I got to get the thing printed and then I got to get to the FedEx and get the label and all of that stuff. So that is just not fun and it's not a good use of time. So we think DocuSign is a sustainable business process, right, across the Agreement Cloud. Signature is like the easiest to grok of that, but there's all different flavors and use cases of Signature that we're seeing even evolving as the pandemic persists. Like an example, vaccine verification, like we're using our products internally for that as we start to reopen our offices, like where that may be a requirement, particularly in the U.S. And so I think there are emerging use cases. And so I wouldn't necessarily bifurcate it the way you did, but I might pause there because there's a lot of different ways we can take that part of the conversation.

I was going to restate some of the things just to make sure I'm understanding that. But maybe just the first I guess, in aggregate, if you think about temporal tailwinds that we are now comping, what would -- again, I'm not asking for like a specific number, but from a dimensionality perspective, is that like low single digits percentage of the growth or revenue? Or was it more like a double digit? Like what's the right way to frame those kind of onetime COVID event?

No, I see what you're saying. Yes, I think it's hard for us to quantify, Alex, and we're not going to, on live broadcast or otherwise, give a new metric that we're following. It's not something that we're measuring that way. And I would think when you look at kind of our guidance in the mid-30s across various metrics, that's kind of indicative, right? Like we're off those peak type of grades. And at the end of the day, all of the things you're talking about run through our financials one way or the other from a commercial perspective.

And I guess, again, to restate what you're saying is like don't worry so much about the onetime use cases because a lot of the customers that use DocuSign for those onetime use cases are now adopting it for other use cases because they've got the trial effectively, that use case was a trial period and now they're standardizing or scaling to other much more durable use cases. Is that the right way to think about it?

Yes, I think that's a good way to think about it. I might phrase it even a little bit like to put a finer point on it. I think we have some customers who were DocuSign customers using our products, they maybe had onetime use cases and expanded. And now part of our job if that use case has gone away to find other places they could use our products and new use cases or departments that are developing within their organizations. There are, though, just to be clear, there are some customers who came to us for a specific COVID use case that they no longer have. And I think it's still TBD, like what is that next use case or how it will be. But we would expect to see some level of churn from those. But I would say that's the vast minority versus the majority of the motion. And again, pointing back to that net retention rate, now that we're -- we just reported Q2, so we're kind of like 2 quarters through comping last quarter's net retention in terms of that measurement period. So it's capturing those cohorts that were kind of during that peak period. And that's why I think it's a more moderating metric that kind of captures the ins and outs of the different dynamics you're describing.

Got it. And then now let's talk about Agreement Cloud because that's so key to the growth vision of the company. Look, if we now bifurcate in terms of -- and again, I'm not -- just to be clear, I'm not asking for specific metrics. But if we think about the business from core Signature versus incremental Agreement Cloud, whether it's CLM functionality, whether it's notary functionality, whether it's workflow functionality, what percentage of the incremental bookings growth is going to at a high level come from those higher-level activities versus core Signature over the next, you pick the period, year, 2, 3, et cetera?

Very, very small, right? I mean we've just seen such tremendous strength in Signature, right? The growth that we're seeing in Signature and the base of scale that it has it's going to be just -- it's going to be a longtime before the other things catch up, like the broader agreement products. Now that doesn't mean that they're not very important and that we're putting a lot of investment, right, because that's how customers grow with you, is you have them on a platform, where a horizontal platform, that serves many, many verticals and many geographies. But customers want kind of a broader piece of that Agreement Cloud -- what we call the Agreement Cloud, and we're going to provide it, but it's early days in that market. So we're encouraged by the growth we're seeing, but it's just off a very, very small base. And so the ability of that to impact the broader number is going to be quite some time before that will be, what I would call any less when I say this, meaningfully material.

Sure. Got it.

But I think it's a great -- it's just a good reminder, right? Like coming out of when after we first bought Spring, Alex, you remember that first year, right, after we introduced Salesforce, we exceeded the plan as we talked about, right? So we were super excited, then COVID hit, and everybody's life got turned upside down. So when we bought it, remember, it was a sub-$20 million subscription business, right? So it doesn't mean we haven't seen good strong results, as I said, after that first year, and we're excited as some of the pipeline builds again. But I think, again, relative to the massive e-signature, there's a lot of great things going on. I always equate it back to international that hung out in those mid-teens forever. It felt like it was no matter what we did, it couldn't quite get more visible. It was still growing faster than the total by a lot, right? So it just takes a little time.

Makes sense. And then another -- one of my favorite questions to ask, Cynthia, is if I look at the cohort of customers that joined during the pandemic, right? You -- I think, more than that, you tripled your kind of net adds over the course of the last 12 months. What are you seeing in terms of the expansion dynamics of that cohort? And does it parallel -- we just went through explaining why don't think about the during COVID period because there were a lot of nuances there about certain customer, both use cases and volumes. But is it fair to say that they are similar to pre-COVID cohorts as you look at the expansion dynamics of that massive customer set that you added during the pandemic?

Yes. Yes. So when we think about the cohorts, right, we haven't really seen like a shift of behavior of those cohorts or even the expansions, right? It's a land-and-expand model. And I think what you're seeing in that net retention number is the surge, if you will, of new customers buying new things and then expanding. But customers tend to start out pretty small, like even enterprise customers, and then they expand over time and in many ways, that's really the strength of our model. And so our job is to get new customers in the door, get them expanding over time. But when we look at the cohorts and the behavior of cohorts, even with some of the peaks and some of the valleys that we've had in the history of being a public company, we don't really see that much of a change of behavior or, what I would call, expansion economics. But we're quite pleased with the kind of the rate of expansion and where that dollar net retention rate is.

Understood. And then if I take a step out and ask you the next scripted question, which is, if you -- if an investor could see one of the metric -- like the metrics that you look at internally in the business, if you could show one of those to an investor, which one of those do you think they would be most excited about if they could see some of the stuff that you see?

Well, we report the most important metrics, we publicly report. We're a very transparent reporting company. So we -- I mean we publicly report the metrics that we're looking at. Now do we do other detailed analysis behind the metrics? And when we're looking at our models and how we're building our models into the future, we look at different things that we don't publicly disclose, but it all rolls up to the metrics that we publicly disclose. So I wouldn't say there's like some super secret metric that we're looking at. If it was not important, we would be publicly disclosing it. So I might leave that question there.

Okay. Maybe let me ask it a different way. When you think about what is the most exciting thing happening in the business right now, whether it's from a vertical demand, whether it's from a new product innovation, whether it's from a geographical perspective, what is the most exciting growth vector you're seeing in the business today?

Yes. Yes. I mean that is international, international for sure, right? When we talk about kind of our TAM and untapped market opportunity, we're in the early innings as a company, but international would be the singular biggest growth opportunity for us. We're in 8 core markets direct, and we're in 180 countries around the globe through our digital channel. But I think international is probably the biggest open frontier for us, and we're really pleased with the growth. We had north of 70% growth this quarter year-on-year in international and kind of low 20% of total revenue on international. And for a company of our size and scale, that's pretty low. So we think that's going to be a big opportunity. But it's important to operationalize those things as you go into new markets, right, because you can also -- I mean, you're a pro, Alex, like you convert a lot of cycles, if you don't do it properly and kind of scale and scale for growth. So we're doing it thoughtfully. And I think our challenge there is there's like so many things we could do, but making sure we prioritize and do it thoughtfully and then are able to operationalize it on the back end.

Well, one of the things I've noted in the past that I picked up about the company when I've done diligence is that the sophistication both from a technology perspective and a just awareness perspective of your sales team. Like they're pretty advanced. They're both operation -- there's an operational rigor, there's a tech rigor, but you're relatively new to kind of being in scans than the DocuSign machine day to day. What are you seeing as -- like, I guess, is that an accurate description based on other companies you've been present? Like what's the competitive edge, let's say, of your go-to-market force?

Yes. Yes, it's a good question and good observation. I mean the company, and Dan talks about this a lot, right? The company was born and bred on our commercial team, right? And so that really is the blood flow or the life flow of the company. But what makes it really special is kind of the digital long tail, how that feeds kind of the viral effect into the direct. And then enterprise, right, like being in some of the biggest enterprises around the globe and really having that industrial strength platform that can serve the needs of those big financial institutions all the way down to 2- or 3-person kind of mom-and-pop shops. So I think it's those pieces. But if I were to point to like one core piece, it's commercial, right? That commercial flow which is really where the company was founded.

Perfect. Well, I know, as we're getting to the end of our chat, I guess anything that I'm not asking you, Cynthia or Annie, that you want to make sure that you leave investors with as we kind of round out the session?

Alex, you are always quite thorough. So I think you've covered the gamut. I mean we're really excited. Thank you for having us, and always a pleasure to chat with you.

Thank you, guys. Thanks so much for joining and looking forward to doing more of this.

Terrific. Thank you.

Thank you so much.

Thank you.