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

Welcome back to the conference. We saved one of the best for last with DocuSign. Cynthia Gaylor is with us. She was appointed CFO in September of 2020. She has more than 25 years of finance and capital markets experience. Prior to this, she served as a member of DocuSign's Board and was Chair of the Audit Committee. She also served as CFO of Pivotal. Prior to that, led Corp Dev at Twitter and was a Managing Director in Morgan Stanley's Technology business. Cynthia, thanks for joining the discussion and appreciate your time and your perspective on the company.

I think this kind of landing spot on eSignature now to what is this broader Agreement Cloud and this incredible opportunity you have had. I'm curious if you can just start at a 40,000-foot view. We've all gone through these experiences. I bought a car a month ago and the notary had to come to my house, and then she went to Stinson Beach after. And I said, "What happens if your car gets broken into, and they take the notepad and all my information and all that, like why aren't we doing this virtually?" And we've gone through this with financial services firms like they're sending us stuff. I mean it's just -- it still seems like there's a tremendous amount of opportunity and innovation that you guys can help drive. And I'm curious if you can just start with a 40,000-foot view, and what you're seeing in this opportunity set from where you sit.

Sure. Sure. And thanks, Brent, for -- thanks for having us, and thanks for the warm introduction. So yes, so I think, we think we're just getting started, right? I mean one of the -- and it feels like that. The company is 17 years old now. And one of the reasons I stepped off the Board to come into this operating role was when you think from a 40,000-foot view of our addressable market, it's a $50 billion market opportunity. We just guided The Street to just over $2 billion in revenue for the year. And when you think about kind of the market that we serve, 50% of that market, $25 billion is Signature and $25 billion is the rest of the Agreement Cloud. And in Signature alone, which is where the majority of our revenue comes from, we're the market leader by far, and we have a lot of runway. And that runway into the addressable market is really folks moving from manual processes, some of the things that you described in your notary experience to more automated ways of getting agreements done. So we really feel like we're just getting started, and we have a long runway, and we're kind of excited about what's ahead.

Many in the industry and software aspire to have the Rule of 40. You're hitting the Rule of 60 with 43% revenue growth and a 17% margin. I guess with that type of TAM in front of you, I would assume the sustainable revenue growth is really good. But many have asked, is there a little bit of a pandemic bump? Is this the true cruise altitude? How do you think about this overall great mix of great growth and profitability?

Yes. So we're excited about the results that we've posted. We're excited about kind of how we look at the second half of the year and the strong guide. Our growth rate is pretty phenomenal, particularly at scale. There's not that many companies growing at this rate at scale. That being said, we definitely saw a bump last year. And we've been really clear that we don't expect that level of growth at this scale to continue, but that doesn't mean that we won't have strong growth kind of for the foreseeable future. So our margin expansion as well has really demonstrated the durability of our business model, right? When you have top line outperformance, we have a ton of leverage in our model, and you could kind of see that. However, a big opportunity for us is to continue to invest for growth, and that's going to be really important. So I wouldn't expect that our operating margins would continue to expand at these rates. Last quarter, we hit the low end of our long-term target. It came down 1 point in Q2, but we're really looking to invest for growth to invest across the $50 billion market opportunity. And when we think about the Agreement Cloud, we're really at the forefront of defining the market which is just a really exciting place to be, given we're still in the early days there.

I've had 5 use cases that have come up, right? I get more excited about where you sit just in the last 3 months. And when you think about the Agreement Cloud, maybe walk us through kind of -- look, there's a lot of opportunity, but there's also kind of -- you want to stay focused. So how are you thinking about staying disciplined in ensuring that you're not trying to tackle that whole $25 billion overnight? Because I know, clearly, there's a lot you can do, but how do you think about the first waves of this? And maybe if you think about long term, how you're thinking about the waves that could come later?

Sure. So fundamentally, we think about it as kind of the Agreement Cloud and the process around it. Think about it as prepare, act, sign and manage is kind of how we think about the key components, of which Sign we think is a very big opportunity in and of itself. We believe we can get to $5 billion in revenue on Signature alone and kind of those tangential pieces around Signature. However, as you look at customers and the success they've seen on the platform, they want to do more with us. They want to see the ROI continue to expand. And that takes us into the prepare, act and manage parts of that -- of those pieces. And I think it's going to be a very organic conversation with customers, but we're seeing early traction with things like CLM, with things like Insights and Analyzer. Notary is a great example. We acquired a company Liveoak last year, which was really a product acquisition and kind of an expertise acquisition, but that enabled us to kind of accelerate our road map across the opportunity. So we'll look -- and we'll continue to look for areas to invest organically and inorganically. Building our sales capacity and understanding customers' needs across different use cases is going to be really critical as we move further into the Agreement Cloud. But as I said at the start of the meeting, we're really just getting started. And when it comes to the broader Agreement Cloud, it's going to be key for us to prioritize. That's probably like the secret sauce, right? When you're at this scale, there's a lot of different things we can do. We want to make sure what we're doing we're doing well and that we're continuing to grow at scale kind of as we move forward and address customers' needs, make them successful on the platform.

You noted some really significant CLM wins with large customers in Q2. What's opening? Why is this happening now? What are you seeing?

Sure. Sure. Yes. So I mean, we had some great wins in the quarter on CLM. It's still early days. Dan went through a couple of different customer case studies. We were also quite vocal that we've done a couple of acquisitions. Last year, during kind of the peak of COVID, customers had an urgent buying need, mainly around Signature. So they weren't chomping at the bit for the broader strategic discussion around what else they could do with us. And so Signature was one of the key focus areas for the company and for our customers, right? I think what we're seeing now -- with the changing macro environment, we're certainly seeing a shift in customer conversations, right? These customers who have been very successful with Signature, now looking to see how can they get easy wins and high ROI on different parts of the agreement, and so those conversations are shifting. I would also say though, on the Agreement Cloud, right, there is more change management required at the companies, right, depending on what the use cases that they're using it for. And so making sure we're having thoughtful discussions, understanding the customers' needs, their requirements and how the platform can get them to where they want to go is going to be really important.

And when you mentioned sales capacity, have you talked about that build out and what you expect to add? And we've had some friends that have recently landed there, and I think are really good sales reps, good people. So a good testament to who you're hiring. But can you -- is there any color around what you want to do there in terms of that build out of that direct quota-carrying sales team?

Sure. Sure. Yes. Last year -- I would say, last year, our demand certainly outstripped our sales capacity. And I would put sales and marketing in that same bucket, right, just given the way our business model works. So demand definitely outstripped capacity. We spent a lot of time in the back half of last year, making sure we were building enough sales capacity and go-to-market capacity coming into this year. And now that we're at scale and we're continuing to grow, it's really important to maintain discipline around making sure we're building out that capacity and serving our customers. The other thing I would note, Brent, is we have a land-and-expand model, right? And so the motion around landing a new customer and then expanding that customer over time is a critical part of that kind of capacity-based go-to-market model, and it is something that we're pretty focused on.

The Audi dealership in Southern California told me they -- I either have to go there and sign. I live in San Francisco, or I have to have the notary come. But when you think about like 18 states that's available, the ability to reach all 15 and even in like Southern California, like the fact that some of these dealers are saying it's got to be the old way. And it just seems like -- it seems unsafe and it seems like not a great solution set for customers. What's holding this back? Why?

Yes. So there are different regulations. 34 states have approved remote online notary or what we call RON. 18 state -- we're in 18 states thus far, which really opens up a lot of opportunities. I think though the differentiation in terms of what you're talking about. Right now, we're focused on first-party notary. So that's within an institution where they have their own notaries and then they're bringing their customers into that notary agreement, if you will, or a notarized process. Third-party notary is a little bit more, I think, what you're talking about. If there was like a mom-and-pop dealership, they may not have their own notary that could be a first-party notary, but that would be -- they're bringing in a third person into the transaction to be a third-party notary. So we believe a lot of the commercial opportunity is actually in first party, and that's the area that we're most focused on.

Got it. Makes sense. When you think about -- in Agreement Cloud, this need to manage, and I think we're all going through this, and I look at my own personal DocuSign library. I mean, it's diverse, and I'm like, wow, I didn't realize all these things even existed. So when you think about magnifying that at larger corporations, and ultimately, there can be common threads or themes or, in many ways, like ways that they can monetize these contracts in a different way. Like when you think about this kind of next phase of the Agreement Cloud, can you talk to some of the type of examples and excitement you're seeing that are on kind of a tail end. Once you have them on, they're signing and now you can do this analytics AI. It seems like there's an incredible base of gems hidden inside these documents that you could get to and you have the keys to unlock it.

Sure. Sure. Yes. And we do think it's a big opportunity. But I would say it's probably less in mining the data that's in the agreements and it's more about making the agreement process easier, more fluid and faster. And so we're not necessarily looking to monetize data in any way, if that's kind of the direction of the question. But I think what -- we think the big opportunity there is really helping the agreement process. So let me give you an example. Like on the sell side, right, when you think about the customer process, right? We think we lead kind of in that sell-side process of trying to get contracts done with customers, right? So sales leaders, AEs and reps doing that through a DocuSign platform is much easier and faster than having to route documents around multiple organizations and multiple teams within 1 organization. So that would be kind of a front-office example. A back-office example would be things around like obligation management is an area that we're quite excited about. Like how do you track renewals, track what your obligations are in contracts and make sure that you're doing what you're supposed to do when you're supposed to do it. I can speak as a user of our products, like when we have vendor renewals, keeping track of when the renewals are, what we -- how we're growing our footprint within different customers is much easier in a CLM-like product than trying to chase all these contracts just in like the data -- a database that you may store them in. So it's things like that more than mining the data within the contracts.

Makes sense. International, if you look at mature software companies, they're generating half their revenue outside. Today, I think your international is low 20s. Certainly seems like a big opportunity. Can you talk to the focus internationally and where you'd like that to be and ultimately kind of any key observations that you want to make on the international business?

Yes, for sure. So international is probably our biggest growth opportunity kind of across the company. And it really touches all parts of the company from the go to market to the product innovation that we're doing to really localize the various product sets and the platform around the globe. We're pretty uniquely positioned in that we have a digital channel that really helps drive and lead gen for our direct channel. And we're in 8 core countries in a direct fashion where we have folks on the ground. But we're in 180 countries, a little bit over that, globally, right? And so -- and that's through the digital channel. So we think digital kind of gives us an early look to where to go next from a direct perspective. And then I think partnering is going to be really important kind of as we continue to grow and scale, partnering in region. So all of that is kind of on the table. And when you think of the percents, we're growing international, we publicly disclosed. It was north of 70% year-on-year last quarter, and it is just over 20% of revenue. And so we think that number should be higher and that we're focused on continuing to grow that revenue set over time to make it a bigger and bigger portion of the revenue.

There was a client question just as it relates to -- what are the biggest areas of R&D and CapEx spend for you?

Yes. It's really around innovation. So on the innovation and R&D front, a lot of that is around hiring engineers to help build out the product suite. And then we do have infrastructure spend in that area as well, particularly as we increase our global footprint. There's different requirements kind of on the back end. But the vast majority of that spend is people spend.

Got it. And your back end in terms of how you're leveraging the technology stack, can you walk through architecturally how you're doing this today? Especially with the explosion of data volumes on your side up, how you're doing that through your own use or public cloud?

Yes. I mean we're using any and all, and scaling it as efficiently as we can. There are areas around the globe where we're kind of just seeding the market and so thinking thoughtfully about the infrastructure pieces of that. But it's in both on-prem and cloud that a lot of that stuff is based on.

There's been a lot of talk about the Microsoft-Adobe partnership and ultimately what that means. I think Microsoft was an investor in you earlier on as well. What's happening from Adobe's perspective? I mean they don't like being #2 in any of the markets they're in. I think this is the only market they're #2 and is in a market where you're #1. What -- we all realize the market is big and there's going to be multiple vendors, but ultimately, are you seeing anything different from Adobe or not?

Yes. So I would say -- I would say, from a competitive landscape perspective, we don't see a lot has changed, like the statements you just made have been true for a really long time. So I would just say that we're -- we think the market is big. We think there's room for other players, even the ones you mentioned. But we are really focused on investing for growth, investing for differentiation in our products, our product portfolio, and making sure we're innovating in a way that we don't think other companies are, right? And so we think there's always going to be competition. Competition is healthy. The market is really big. And our biggest competition is really kind of folks moving from pen and paper to a more automated way of doing things. And so we think there's a lot of greenfield opportunity.

You understand the business better than anyone, having been around for so long. But what is -- what's the most underappreciated thing you see and kind of breathe every day at the company that maybe we can't see? Is there a couple of things that you would draw out that we don't usually talk about on our side?

You're making me feel old, Brent. I think you said you've been around for a very long time.

No. That's not what I meant.

I know. I'm just joking. I'm just teasing you.

That was not the direction of the -- if anything, I'm a grandpa now. So yes, I can be self reflective of myself. But yes, no, from just the duration of being around the story, and you've been in tech for so long.

Yes. Yes. For sure. No, I'm just teasing you. So what I would say is that a big -- I think unique thing about our company is just if you think about our NPS score. It's one of the highest across tech, and it kind of competes with the best of the best on kind of an NPS score. So when you think about kind of customers and that value proposition from a customer perspective, whether you're a user or a signer, but the depth of that functionality, the integration into workflow that our signers may not see but our biggest customers see, right, as they go through these different use cases I think is really underappreciated, kind of the complexity of the product, but also the beauty of the simplicity, right? Customers love DocuSign. Our customers love us because their customers love them for using DocuSign. And it seems really simple, but there's a whole lot of complexity and investment we've made kind of in the back-end functionality, the security, the industrial strength of the product to go into the most scalable to the most simple use cases I think is something that as I've learned more and more about the company is pretty unique. I think the second thing that I didn't as fully appreciate and from covering software and Internet and mobile for so long is the durability of the business model, right, and the leverage that we're seeing. And you've kind of seen it the last few quarters, but really focusing on that operations at scale and how you continue to grow at scale and see that leverage in the business over time.

And from a partnership perspective, anything you're focused on around what's happening in here? I would assume as you grow in complexity, these partners become more vital to helping you in the field? How would you characterize the channel build out on the partner side?

Yes. So I mean we have a lot of different types of partners, right? So we have our API partners, I think, are one of our biggest differentiators, right? Incorporating DocuSign into existing workflows within companies is definitely an area and a big area of investment and one that you'll continue to see us invest in. Those are very important partners because it's easier for a customer if DocuSign is embedded in a workflow they already have. It makes it much more seamless and less friction to get up and running. There's also partners kind of on the SI side, right? We're really focused on regional partners right now who can specialize around our different products and the portfolio of products. And then I think there's partners from a geographical perspective, right, in-region partners who can help us gain traction early. And I think you'll be seeing us doing more of those type of partnerships to really seed markets in a different way than you've perhaps seen us do in the past.

Any common things you hear from the investment community that you think warrant attention or there's an overfocus on this? And I'm probably guilty of it as well. So anything you would call out that you think would require a little more thought than we're giving it to?

I would say, I mean, depending on investors that you're talking to, some are very short-term focused and some are longer-term focused. And we're focused on building a business for the long term. And as I said at the top of the call, we believe we have a long runway into our market opportunity to do that. And I think sometimes folks get up -- caught up in the quarter-to-quarter fluctuations of any 1 metric. And what we're really doing is when you look at kind of that trajectory over time, it's been very solid. And so in any event, I think sometimes getting caught up on the short term versus the long term. And remembering we're building a business for the long term, we think we're best positioned in the markets we serve, and we'll continue to invest for growth.

Thank you so much, Cynthia, for joining. Really appreciate it and appreciate Annie for supporting us as well. So thanks so much for joining.

Terrific. Thank you. Thanks, Brent.

Take care, everyone. We'll see you tomorrow for day 2.