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  • Brett Schafer

Not So Deep Dive: Docusign Stock

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Show Notes

(Ryan) What they do: Docusign is a SaaS business that offers a few different solutions that span across the agreement process. The main service they offer is their eSignature solution, which allows an agreement to be signed electronically on pretty much any device and pretty much anywhere in the world. This is typically the first product customers are looking to get. But there several other products within Docusign’s “agreement cloud”. I’ll name a few: Contract Lifycle Management (applications that span the pre and post signature process of an agreement, help give users insights into important parts of a document and understand what they’re signing), Identify, payments, eNotary, and a few vertical specific solutions.

Docusign targets businesses of all sizes. Today they have 1.11 million total customers and 160k of them are enterprise level. Docusign’s go-to market model consists of direct sales teams, partner assisted sales (Google, microsoft, oracle, salesforce), and web-based sales. 70% of their employees are in sales, marketing, and customer success.

(Ryan) History: Docusign’s history page on its website is criminal. They go through all of the world’s most important innovations since the machine age, then end with them introducing their esignature product (which wasn’t even the first lol).

Docusign was actually started in 2003 by a Seattle native named Tom Gonser (3 years after the US legalized digital signatures). He started by acquiring a company called DocuTouch which had some patents and solutions around digital signatures, and then made their first sale in 2005. But honestly, their history is pretty uneventful. They’ve just gradually innovated and expanded, and they’ve made 3 fairly recent acquisitions all for ~$200M or less which all provide basically tangential products.

And Docusign made its debut to the public markets in 2018.

(Brett) Industry/Landscape/Competition:

  • E-signature market is only estimated to be in between $2 billion and $3 billion in spend right now

  • However, it is expected to grow at a 20%+ CAGR to $6.9 billion in 2025

  • Many competitors to e-sig (the core product is not too hard to replicate)

  • Most important competitors: Adobe Sign, Box, and Hellosign (Dropbox)

  • Management says they have a $50 billion TAM but that includes more than just e-signatures

(Ian) Management and Ownership:

  • Dan Springer is the CEO of Docusign and has been since January of 2017

  • He was previously the CEO and chairman of Responsys, which was sold to Oracle for $1.6 Billion in 2013

  • He started as a consultant at McKinsey and has largely worked as a software executive since then

  • He’s on the board of UiPath

  • Hefty stock awards for entire management team, based on performance, but fairly low bar

  • In FY 2021, Springer earned nearly $19mm in stock awards

  • Despite being a hired CEO, he has nearly a 1% ownership stake, sold quite a few shares in 2020 however

  • Vanguard is the biggest holder with over 7% of shares outstanding, but it sold nearly 17% of its stake in the last filing period

(Brett) Valuation:

  • Market cap $23.2 billion, ticker DOCU

  • EV is approximately the same as market cap

  • Going to use billings as the “sales” for Docusign since they defer revenue a lot

  • P/S of 10

  • P/GP of 12.3

  • P/OI of 53

  • 14 million total dilutive securities outstanding vs. 198 million current shares outstanding

(Ryan) Earnings:

  • Total Q3 billings were $565M, up 28% YoY

  • Revenue slightly behind at $546 million

  • Gross margin of 79%

  • And they generated strong cash flow margins in the quarter

  • $105M in OCF (19% OCF margin)

  • And $90M in FCF. They actually spend a fair amount on PP&E, I think due to their sales office buildouts.

  • Had a dollar based net revenue retention rate of 121%

  • Saw strong growth internationally. 68% rev growth YoY, now accounts for 23% of top line.

  • Total customer count grew 35% YoY

FY Guidance:

  • ~$2.34B in billings, a 38% increase YoY

  • Similar gross margins

(Ian) Balance sheet and liquidity:

  • $908mm in cash and investments

  • $901mm in debt

  • $171mm in leases

  • $50mm in convertibles due in 2023 (0.5% interest), paid off most of these with proceeds from 2024 calls and hit conversion price. ($71.50/share) (2018)

  • $690mm in convertibles due in 2024 (0% interest) ($420/share) (early 2021)

Anecdotal Evidence:

  • (Ryan) I sign whatever people send me and don’t really care what solution it is. If I had to pick a solution, I’d just price shop. And we already use Adobe, so the bundle would just make sense.

  • (Brett) Product seems good, but easier to add-on stuff with Adobe, Dropbox, etc. than taking this on as a separate subscription. Idk if I’d switch over though if I was an existing Docusign customer even if it was bundled with Adobe though if I was a business that used e-signatures frequently.

  • (Ian) It has worked fine for me, don’t use those types of services enough, but I don’t have any sort of preference for Docusign vs. Adobe.

Future growth opportunities:

  • (Ryan) I’m gonna go with the eNotary. This service was basically nonexistent until covid, and it seems like one of those areas that’s just bound to go primarily digital. They really harped on this in the CC, and Springer mentioned how big of an opportunity this could be especially for th real estate, insurance, and financial services sectors. Not available in all states yet either, so still some low-hanging fruit.

  • (Brett) Expanded partnership with Salesforce. This makes sense I think because people who use Salesforce may need a lot of things signed. It looks like Docusign’s strategy is to try and bundle in with other existing applications people use, which is smart as it is their big weakness when trying to win customers.

  • (Ian) Docusign analyzer: helps quickly go through contracts and pick out the key terms. Risk assessment and access to your pre-approved library of clauses. As part of their expansion plans they went from e-signature to agreement cloud. Now they are trying to expand into “smart agreement cloud.” Not sure what the demand/trust is for some of these tools. Sound good in theory, hard to execute.

Highlights and lowlights:

  • (Ryan) Highlights: It’s a better solution than analog signatures, so probably still some low-hanging fruit. They are also on the fence of being a verb, which I imagine is great for the web-based sales. Lowlights: Feels a bit strange that they’re investing heavily into a demand slowdown. Billings declined 5% quarter over quarter. Also, they said they already hit the LT margins they want to get to. Why?

  • (Brett) Highlights: Durable and growing industry spend, great margins, and decently high switching costs, especially for enterprises. Lowlights: Competitive dynamics and the “eh” feeling I get when looking at the product suite. Hard to find any lowlights though outside of just not being confident in the value of the industry.

  • (Ian) Highlights: Successful business to-date with a great product, starting to breakout into a multi-product business, but still early. Strong gross margins and generating FCF. Integrations: microsoft teams, salesforce. Lowlights: Seems like margins could be better, but they are ramping up sales efforts. 62% SG&A vs. 35% for Adobe? Hard to win that battle.

Bull case:

  • (Ryan) DBNRR stays above 115%+ for the next 5 years and they grow total customer count at least in the high single digits. And ideally, that DBNRR figure is from cross-selling solutions and not just capacity expansion. The more they can offer their existing customers, the higher the switching costs.

  • (Brett) If they keep growing revenue at 20%+ a year things will be just fine. I think you need to forecast fairly high growth though. Watch out for margins too I think this could be a 40%+ margin business but there is a lot of variance.

  • (Ian) The smart agreement cloud idea gains widespread adoption and Docusign captures a significant share of the market. ~20% growth in revenue, 25% FCF margins, 3% FCF yield = ~7.5% 3-year CAGR.

Bear case:

  • (Ryan) I think there’s a few ways this investment doesn’t work out. (1) Customers don’t expand across the product suite and the primary use case remains eSignature. I think that’d really limit potential pricing power. (2) These big sales investments they’re making don’t bear fruit, and demand is more saturated than I thought. (3) Or if any of their channel partners take this service in-house. Doesn’t seem too likely.

  • (Brett) It is hard to envision a scenario where Docusign doesn’t grow the top line over the next five years. However, I think you can lose money if growth is significantly lower than 20% a year and margins don’t materialize like you think.

  • (Ian) The industry does not grow as quickly as expected, and Docusign competitors, namely Adobe, begin to box it out of the space causing quickly decelerating revenue growth before margins get to similar levels.

Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get a discount on your first month of the service.

Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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