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

Great. And thank you for joining our session this afternoon. We'd like to welcome management from DocuSign for a fireside chat. Joining me from the company is DocuSign's CFO, Cynthia Gaylor. Cynthia, welcome.

Thanks, Rob. Great to be here. Thanks for having us.

Nice to see you. So I think most people in our audience are familiar with using DocuSign and we have called it the next proprietary eponym. I don't think people asked to eSign, I think they asked to DocuSign. But I think most of the application has been for a loan or simple transactions. So I'd love for you to shed some light on kind of pervasiveness of DocuSign and really where that broader opportunity is and why you feel it's still early in the story.

Sure, sure. Yes. And I think DocuSign is becoming more and more pervasive, but we also feel like we're just getting started. When we think about the market opportunity for the company, we talk about a $50 billion market opportunity. And we just guided for the year to about $2 billion -- just over $2 billion of revenue for the year. So if you think about DocuSign, of the $50 billion market opportunity, $25 billion of that is eSignature. And we're just scratching the surface with, again, a guide of about $2 billion of revenue for the year. And we're clearly the largest player in the market with a very recognizable brand. So that kind of first-mover advantage, we think, is playing to our favor with customers. But also when you think about our products and the investments we've made over -- in our products over a broad period of time. I think another way to kind of look at that opportunity is we just crossed the million dollar -- the million number of customers last quarter. And when you think about how many businesses there are in the U.S. alone, it's over 30 million. And so if you think of the number of opportunities or untapped companies out there, there's still a long way to go. So even though in the financial sector, a lot of people are very familiar with us because that's one of our stronger sectors; but also in our business, a lot of folks use a more digitized way of signing documents. There's still a lot of untapped use cases out there.

And if we look just at the eSignature side where you've seen that success, especially throughout COVID, what do you think the differentiators are between you and other just eSignature solutions? If we're just talking velocity in eSignature [ in these signatures ], so why is DocuSign in them? What else does it bring to the table?

Yes. So I think we have a really comprehensive solution. So people sometimes think of when they -- a simple use case, as you said, when you sign a loan document or you sign your house documents. But there are so many use cases across industries. So when you think about basic eSignature, there's really a platform and a portfolio of products around eSignature and use cases outside of just signing a contract, right? Some companies, including our own, we use it for different workflows within the company. If you think of kind of the front office and signing customer contracts or in a procurement department in the back office, signing different agreements from that perspective, there's a lot of different use cases. And I think we've also seen people think about onboarding employees, like think of a different department like HR, onboarding employees used to be a very manual process for a lot of companies, where you would send documents to people's houses. Or when they came in for onboarding, they would sign documents. And now a lot of that is being done in an automated way. And so we're pretty excited about those opportunities. but it's not as pervasive as you might think, just given some of the numbers.

Sure and understandable. And if you look within the base of 1 million, understanding you don't have the opportunity to survey 1 million customers, but how far penetrated into that base do you think you are relative to the potential usage?

Yes. So if we look at our customers -- and remember, at DocuSign, we touch -- our customer base touches the smallest mom-and-pops up to the largest enterprises. And within each of those segments, particularly in kind of commercial and enterprise, where you think of like are you just scratching the surface, how many -- how penetrated are you into those organizations, we are in the early innings even within those use cases. And I think a really great example of that is just our net expansion rate, our net retention rate, the 124% that we posted for Q2 shows that customers are expanding their use cases and expanding their usage of our products within the core platform. And so that's one way we kind of look at that measurement. But I would say even within our largest customers, it tends to start in one department. It's a land-and-expand strategy. It moves from usually a very small purchase, which sometimes is through our digital channel, and then moves into direct as it expands over time. But it's very much a land-and-expand story, which, I think, also underscores the fact that we're still in the early innings with many of our customers.

Sure. And it's been about a year since you took the CFO reins and Mike moved into the international realm. So within that last year, and it's been quite the crazy ride, I think, for all of us and DocuSign in particular, what's been the biggest challenge for you as CFO?

That's a really -- it's a good question, Rob. I mean it's been a really interesting time, I think, for everyone, as you said. I think for me, personally, I was on the Board for a number of years prior to taking the CFO seat. So I feel like I really got to know the management team and the company. But being a Board Member and Chair of the Audit Committee is different than being an operator inside the company. I think one of the great things that continues to happen here at DocuSign is we're growing at scale, right? And so there's always challenges operationally as you're growing at the pace we're growing and making sure operationally we're continuing to invest in the right areas to grow for scale. So I wouldn't necessarily put that into challenges, but I think it's one of our opportunities to kind of continue to prioritize, invest for growth and invest for scale. And that's one of the reasons Dan brought me on board.

So in terms of that invest for scale, your sales and marketing spend was up 34% last quarter, a lot of new headcount. Where the heck in this environment are you actually finding people and some of the challenges associated with building capacity?

Yes. So we are -- we do have a capacity-based sales and marketing model, as you know. It's really important to help drive our growth that we're investing in our sales and marketing capacity. We've actually grown the company quite a bit over the last year or so. And since we shut down our offices, I think we've hired close to 3,000 people who have never been in a DocuSign office. So that's across the company, not just sales and marketing. But from a sales and marketing perspective, sales and marketing, and I would say, kind of product development are the 2 core areas where we're really prioritizing our investments and making sure we're growing headcount, but we're also prioritizing the areas where that -- those people will be focused. And so we're facing the same kind of war on talent that other companies are facing. But we think DocuSign has a great brand, a great story and a lot of runway and is a really exciting place to be right now. So it's definitely a challenge, but it's a really important focus area for us to make sure we can kind of continue to grow at scale.

Yes. And to speak to Mike's departure from the CFO role and taking over to international, I think it was 2 years ago, international and the business were growing about the same pace. We've seen a massive acceleration, especially over the last year, 70-plus percent growth, if I recall correctly. So tell us about the development of international from a go-to-market perspective and how you've accomplished this reacceleration in these theaters.

Yes, yes. So I think part of it is focus, right? When you're trying to do a lot of things well, sometimes you get unintended consequences. But I think for international, in particular, it's become more and more of a focus for us because if you think of going back to your first question around, are we in the early innings or the late innings, in international, that's one of our biggest growth opportunities, if not the biggest growth opportunity. And for a company of our size, with international growing so well, north of 70% last quarter, it still only comprises kind of the low 20% of our revenue. And for a company of our size, like we'd like to see that at a higher percentage with a 3 in front of it. So we're still kind of investing, prioritizing where to grow, but it's a big growth opportunity for us.

And pre-COVID, it really felt like -- at the Analyst Day, you had introduced the Agreement Cloud as that next big opportunity in that second act and understanding that took a little bit of a back seat to people moving home and working in a remote fashion. So now that we've hit this new normal, I guess, and it does feel like that Agreement Cloud contract life cycle management portion of the business are starting to reaccelerate. Help us understand via the elevator pitch, what it is, who uses it in particular.

Yes. So maybe backing up to kind of our market opportunity. I talked about us having a $50 billion market opportunity. $25 billion of that is eSignature, the other $25 billion is the Agreement Cloud, right? And so when you think about DocuSign and how do we get to $5 billion, given the vast majority of our revenue today comes from eSignature, we believe we can get to $5 billion of revenue on eSignature alone, with Agreement Cloud contributing but not being a meaningful contributor. The $25 billion is even more early stage than the $25 billion related to signature. So Agreement Cloud is in the early innings. It is a pretty fragmented market, where different companies and -- are either building practices or new companies kind of developing around the space. And we think we're in a great position because of our strength of signature, it's a natural extension of what companies are doing with us. However, it does require more change management and process workflow across like how does an agreement get prepared, acted on, managed and signed in that process, right? So we think we're very well positioned to capitalize on that market, but it's very early stages. And as you mentioned, when the world shut down, that was maybe not as urgent a need as some of the other signature types of things that we were doing with customers. But now that folks are kind of moving to a new stage of growth and opportunity, thinking through, hey, we were really successful with DocuSign on the signature products, what else can we do at comparable ROIs. It's a natural conversation around the strategy around the Agreement Cloud and what else they can be doing. So we're pretty excited about that. But I would just caution, it is very early days in terms of building out the product portfolio. We're pretty encouraged by what we're seeing kind of in the beginning part of this year as folks have now moderated their priorities and like thinking through what else they can do with us. But it will be a while before, from a revenue perspective, we're seeing larger dollars out of there.

And I understand. But you did note in the recent quarter that it was a driver of NRR outperformance. So would love to just touch on how you think this ramp plays out. Is this really a calendar '22 type of thing before you started seeing it have much of an influence on the model?

Yes. I'm not sure, Rob, that we commented on that, specifically. We did have a lot of case studies that we talked about during the call. And that Dan pointed out, just like the types of things that where we're seeing traction and how we're seeing traction with customers. We've had some global customers who are eSignature customers really look across their enterprises and roll out the Agreement Cloud on a global basis, but the dollars are still relatively strong. So I would say on the net retention, I just want to be clear, most of that is driven by signature, but that doesn't mean -- some of it is not driven by Agreement Cloud, but the vast majority of it is coming from signature.

Great. And can you talk a little bit about the federal opportunity? And I know it's been a meaningful driver in the past and you've built out a lot of capacity from a federal data center perspective. So as we're in the federal fiscal fourth quarter, there's a lot of fs in that, maybe you could speak to how big it's been in the past and what you're seeing from the government in both the domestic opportunity as well as the international opportunity.

Yes. So federal has been an investment area for us. Over the last year or 2, right, we've made a lot of investment in the FedRAMP, as you noted. Public sector has been particularly strong, which really goes beyond federal, but a lot of the state and local governments that have some of the same requirements. But as you know, federal is a slow ramp, if you will, no pun intended right, of how you go to market there, how you need to partner, all the different requirements. And I think the great thing about DocuSign is we've made those investments in the technology pieces and in the tech stack and the infrastructure, but also now as we move into kind of the go-to-market efforts. So as you noted, Q3 is a big federal quarter. I wouldn't expect anything unusual out of our Q3 that's different than what we've seen in the past. But we believe over time, that's a big area, and we've made the investments that are required to be successful there. But it's still very, very early days.

And have you achieved FedRAMP with both the eSign capability as well as CLM products?

I don't want to misspeak there. We have it for the eSignature. And I believe on the Agreement Cloud, it's still a work in process.

And as you think about that opportunity, what you've seen historically within U.S. fed, has it mainly been eSignature? Have you started to see Agreement Cloud be pulled along with it?

We've seen some, but it depends on the specific requirements of the agency, right? And so depending on what they're looking to do, but I would say we've probably seen more traction there on the eSignature side with early discussions across the Agreement Cloud.

Great. And you mentioned public sector in general, state local education, the SLED market. Do you use the same team relative to public sector? Or do you split that out in terms of federal opportunity and SLED opportunity?

It is split in terms of just like core capability. But what I would say is we have a vertical focus and then a geo focus. So as you know, when you get to, I think what you call SLED, it's fragmented by regions. And so we're covering that from a geographical perspective as well as kind of a vertical.

Got it. And the opportunity for international governments as well, has it been mainly a U.S. focused? Or are you starting to see some of the international governments participate?

Yes. We have seen a little bit with international governments, but I would say it's early, it's very early. Because each has -- each -- whether it's a country or a state or fed, they each have their own requirements. And so we're kind of working through that, and we're opportunistic in those areas outside the U.S.

Sure. And then operating margins are up to 20% in the fiscal first half of '22. Looking back over the last 3 years, you've seen massive scaling of these operating margins. Obviously, business has been growing very rapidly throughout COVID. So talk about the move up from here. And what's kind of rationale as we think about you coming down the backside of the demand curve from COVID? And as we stated earlier in our discussion, some of the sales and marketing leaning in and some of the spend that you have. So how should we think about that margin opportunity moving forward?

Yes. I mean we've seen quite a bit of leverage in our model. And so I think the key takeaway on our margin, and we've talked about this a lot on the last several calls, is the durability of the business model. We've seen top line outperformance and it's really difficult. It's a nice problem to have, but it's really difficult in quarter and year to invest at the rate of outperformance that we've been seeing. We wouldn't expect that level to continue as we've been very clear about, particularly given the scale that we're now at. That being said, I think it does show the durability of the business model. But our #1 job is really to invest for that untapped market opportunity, right, $2 billion of revenue across a $50 billion market opportunity. There's still a lot of runway. So our biggest challenge is making sure we're investing for growth, we're prioritizing for growth and that we're prioritizing across those initiatives to set ourselves up for really good execution. And so what does that mean for margin? We're kind of -- Q1, we touched the bottom end of our long-term range. Q2 was 19%. You saw the guide. We're expecting that to come down. So I wouldn't anticipate the same type of expansion you've seen over the last year or so given the opportunity to invest for growth. And so I would expect that to be within the guide range, but also going forward, not to expect the same bump year-on-year that we saw.

Sure. And then if you could touch on billings a little bit. Now your billings number has been very strong, but there has been a little bit of volatility at this scale. And is this the best leading indicator for investors? Or would you have us triangulate around some other factors if we're thinking about forward demand and health in the business?

Yes. And our billings number has been quite strong. We look at revenue growth. I know investors tend to triangulate on a lot of the different balance sheet metrics and then some of the off-balance sheet metrics that we disclosed. But as a reminder, billings, we encourage folks to look at trailing 4 quarters. That tends to take out the volatility in any one quarter. And if you look at the trajectory since the company went public of the trailing 4 quarters' billings, it's kind of up and to the right. And you have kind of that volatility around it if you do a regression line. So we think trailing 4 quarters, if you're going to look at billings, is probably the way to go, but we've been quite pleased with how that's been performing. We just don't want folks to over-rotate in any one quarter because timing of deals, timing of renewals can impact that metric on a spot basis.

Sure. And I guess the last topic I'd love to touch on would be M&A and kind of your philosophy of buy versus build over the last couple of years. You've had a lot of nice tuck-in acquisitions really to build out that Agreement Cloud. So maybe walk us through your thinking in terms of buy versus build decision and things you might be looking for or your philosophy in where you're going.

Yes, sure. I mean I come from a pretty deep M&A background. I was an investment banker and a partner at Morgan Stanley for many years. And so quite familiar with kind of the buy versus build decisioning process. I think the company has done a really nice job of finding product capability that can be integrated into the platform and really customers can start to see the value of the Agreement Cloud. I think anytime you think about buying versus organically building, there is that kind of concept of time to market, right? Like how long is it going to take us to hire the people and build something. And I think in an area like Agreement Cloud, there's also this, it's a very nascent industry, and in many ways, DocuSign is defining the industry, right? So how can we continue to evolve the product and do it at pace. And sometimes acquisition is the fastest way to do that. But you also have to be very mindful at the scale, like how do you integrate and how do you set those up for success. So I would expect us to continue to do the types of acquisitions that you've seen us do. I think Liveoak is a great example of kind of notary of accelerating or notary road map in the sense that we were able to get into GA with customers much earlier this year than we were anticipating. So it's only been a quarter or 2. But I think that's a really great example of a company we acquired last year, and we're able to start shipping product this year, which accelerated that road map. Clause.io, which we announced a quarter or 2 ago, that was more a team and talent type of acquisition with very specific product expertise in the clause piece of an agreement, right, and so if you think about differentiators of the product and how you can kind of accelerate a road map. That was an area that we were quite keen to get working on faster. So I think those types of acquisitions, I would expect us to continue to do, but be thoughtful about it. And the reason we're doing it and then how do we integrate it quickly to get the results that we're driving towards.

Great. And I'll sneak one more in because I think we've got about 2 minutes left. Anything new from a competitive perspective that you guys are seeing? And obviously, you've seen a lot of M&A into the space with the acquisition of smaller players. But just curious if there's anything on the competitive front that has sprung up in the last year, either in terms of competition, pricing, anything of that nature?

Yes, nothing notable. We spent a bunch of time on this on the earnings call. I think there's nothing notable. I mean there's always competition, right? And so what we're really focused on is making sure we're differentiating our products, that we're addressing any competition that we have. But there always will be some level of competition, and our job is to make sure that we're staying at the forefront of that. But there's nothing -- there's no real notable changes over the last quarter or 2 that I would highlight here.

Great. Well, Cynthia, thank you for your time today and best of luck.

Thanks so much, Rob. Have a good day.