DOCU: narrative vs reality

Investment Analysis Clubs Saul’s Investing Discussions
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CFO on the CC: This very positive motion in our business also elongated some of our upsell cycles this quarter for existing customers wanting to deploy our expanded offerings.

This statement seems to have been the source of all the FUD following the CC last week. All the analysts on the call seemed to key on it, and the narrative seems to be that the elongated sales cycle is going to be a huge Nutanix-like problem going forward. But read it again. The “elongated” sales cycle is only on the upsell offerings. This is not a huge part of my investment thesis, as long as revenue is growing rapidly. I’d much rather it be growing because they’re adding new customers! (It is.)

Further evidence? In the CC, the CEO said: We have confidence in the rest of the fiscal year given the demand for our core eSignature offering remains strong and customers are expressing early interest in our expanded product offering. So even if the non-core products only help a little, it sure seems like they can’t hurt, and they don’t seem crucial to Docusign’s continued success. That’s much different than the narrative.

This is how I see it…

Narrative: The “Docusign Agreement Cloud” (DAC) is complicated and adoption will disrupt Docusign’s success and growth.

Reality: The DAC won’t affect sales of the core eSignature product, which have been really strong…even accelerating. Docusign’s revenue growth ticked up to 37% this quarter and they guided for 40% next quarter. They also added more than 23,000 new customers in the last 90 days.

The market seems to be pricing Docusign on the narrative, not the reality. I see a company firing on all cylinders, and actually accelerating. I added quite a bit on the drop.

Bear

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Docusign’s revenue growth ticked up to 37% this quarter and they guided for 40% next quarter.

I’m just getting the hang of this thing called math, so please help me out… Here’s what I see for next quarter…


	Q1	Q2
2019	155,808	167,044
2020	213,962	220,000
YOY	37.32%	31.70%

It seems that DOCU is headed from 37% growth (q1) downward to 32% for 2019Q2 (not 40%).

https://investor.docusign.com/investors/press-releases/press…

Am I mistaken?

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Not debating your key point - the market is misguided on importance of these stats. But they have to do a better job of controlling the narrative. If you have an earnings call and the goal is to lay out the game plan and stir excitement for your company, and people come out with the wrong idea, that’s your fault. Even if you said the correct information, you didn’t say it forcefully and clearly enough. In long run any false narratives will be weeded out as it is replaced by reality, but the CEOs who can tell a good story convincingly - with clarity, facts, figures and simplicity, with honest talk of obstacles/threats - earn higher multiples. And as we’ve seen with Nutanix as story gets harder to tell that complexity itself can be a red flag. Doesn’t seem like that’s the case here with DOCU though.

Broadway Dan

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It seems that DOCU is headed from 37% growth (q1) downward to 32% for 2019Q2 (not 40%).

Good catch, RoyGeeBiv. I mistkenly used 158.5m for 2018Q2 which was the subscription component only.

I guess it’s not true that revenue is accelerating. But it’s certainly not deteriorating. I still see a lot of strength here.

Bear

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See my previous post on DOCU:

https://discussion.fool.com/docu-quotsales-problemquot-are-a-bli…

The current system for an SoA is complex and time consuming.

It’s not a broken process but this is the first chance to automate it and save a lot of time and money. Nobody has ever done this before so the sales cycle will be elongated, but the rewards will be calculable and compelling.

Cheers, PB.

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PB:

I think we should all agree that this last earnings call, placed doubt in investors minds regarding lower billing growth rate and longer sales cycle.

But one issue not often as appreciated regarding DOCU’s moat is the following:

DocuSign offers its client more than 300 prebuilt integrations with a number of highly popular applications that are made by tech giants such as Microsoft, Oracle, Salesforce, and more. The company’s focus on seamless integration with other leading products makes its own software very sticky.

This was no easy feat and would be crucial to a SOA…cost DOCU $300 MILLION to do…I would argue…this is a LARGE moat…one that only the best capitalized competing companies could replicate.

So the SOA may be a longer sales cycles, but lock-in is likely to be enormous based on these prebuilt expensive integrations.

Based on their guidance and typical beat, they are likely to come in at another 36-37% YoY revenue growth next quarter…not the 27% some people fear.

However, the SOA is going to be hard, really hard…and where have we heard that kind of commentary before…PVTL? NTNX operating system?

Point being…it is pretty easy to see both sides here…the question in my mind, does the moat described above justify the risk of holding into the next earnings call…because once these companies sign up and reengineer their document management…they are likely customers forever…maybe that alone frightens some of them and slows the sales cycle more than otherwise.

The stock is down a mere 11% since earnings call…that is the damage done thus far from this uncertainty…makes me think people aren’t quite sure one way or the other as yet.

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“However, the SOA is going to be hard, really hard”

I’m assuming that you mean that it’s a hard sell, but correct me if I’m wrong.

I really don’t think that it is a hard sell, but just a longer sell due to the commitment that the stakeholders who need to sign off on signing up to a slicker and faster sign off process need to make. :slight_smile:

And the sell itself is not harder, just the number of customer signatories will slow the cycle initially.

So, somewhat ironically, the more customers that take more time to sign off things internally then the more benefits they will see from streamlining this process.

Hence there will be a flywheel effect which means that any future upgrade will be a lot simpler for the customer to sign off on than it was before.

It’s akin to Alteryx using their own software to analyse and decide where to spend their resources, and that seems to be working pretty well for them so far.

Cheers, PB.

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I’m assuming that you mean that it’s a hard sell, but correct me if I’m wrong.

I was referring to how complicated and nuanced the whole process is.

This white paper written by 2 executives at Docusign describes the modern SOA:

https://www.docusign.com/sites/default/files/resource_event_…

That is hard…really hard to do.

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The stock is down a mere 11% since earnings call…that is the damage done thus far from this uncertainty…makes me think people aren’t quite sure one way or the other as yet.

Yes, but this while the rest of the market boomed from Tuesday through today. Thus, with opportunity cost we are looking at 15, 20, 25%, maybe 30% or more crushing. In an ordinary market period 11% is just par for the course and no big deal. I don’t know my gains in the last week, but they may be more than 20%, the the maybe 30% or more opportunity cost.

I have no problem with Docusign as a company. They are probably well run, they have great brand recognition, huge customer base, etc. But they remind me Fitzpatrick, the journeyman quarterback who can come in and create some excitement for a few games but he will never lead the team to the Super Bowl. Why put so much effort into a Docusign when there are so many other companies that we do not need to speculate on their business momentum. I mean (sure, sure, things can turn around, fluke, etc.) but Anaplan for example has accelerating fundamentals as an example. No, I don’t own any shares there yet. No reason to do anything. But if I get some spare time to figure it out, Anaplan is on my list to try on, as is this new IPO Crowdsource. Probably just end up doing nothing but those are two that have excitement and increasing business fundamentals about them.

With Docusign you are betting on a product that will be a hard sell, in a company with no track record of having sold such a product, and with no information at all if the elongated sales cycle is the usual awful word, or somehow a positive thing - I don’t see how, but who knows.

I guess, perhaps I am using too much logic. That does not appeal to everyone. Everyone wants to find that undervalued pearl. But with Docusign we are not talking a FUD event, but real questions about fundamentals and no basis at all but speculate if Docusign can do what they above expectations or not. To date they have done what they said but below expectations.

Just does not make sense to me from a comparative investing framework.

Tinker

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Duma: However, the SOA is going to be hard, really hard…and where have we heard that kind of commentary before…PVTL? NTNX operating system?

Tinker: With Docusign you are betting on a product that will be a hard sell, in a company with no track record of having sold such a product, and with no information at all if the elongated sales cycle is the usual awful word, or somehow a positive thing - I don’t see how, but who knows.

Why are you guys equating this to a “bet the company” endeavor? Even with the elongated sales cycle for Agreement Cloud upsells, Docusign’s overall growth rate increased this quarter to 37%.

As I mentioned in the original post, the CEO said: We have confidence in the rest of the fiscal year given the demand for our core eSignature offering remains strong and customers are expressing early interest in our expanded product offering.

The expanded product offerings are not replacing eSignature – they are additive. The CEO explicitly states that they’re seeing “early interest” – that doesn’t sound like something they’re counting on. They see an opportunity and they’re addressing it. Why do you assume the entire fate of the company and stock hinge on whether or not the new Agreement Cloud immediately hits a home run?

Even if the Agreement Cloud plods along or falters, growth could accelerate or at the very least maintain, because the core eSignature product demand has stayed strong. This is entirely different from Nutanix or Pivotal where they were promising that the new product would replace the old.

This misunderstanding of the situation is FUD.

Bear

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Why are you guys equating this to a “bet the company” endeavor? Even with the elongated sales cycle for Agreement Cloud upsells, Docusign’s overall growth rate increased this quarter to 37%.

From what I gathered from some of the discussion on NPI in January, the consensus (led by Duma and Tinker) was that eSignature might be the steady albeit unspectacular performer. With already 70% of the market and the market reportedly set to grow 30% one can’t expect much more than growing with the market. However, SoA could potentially be the added x-factor that might push DOCU into the 40-50%+ grower category if it could sign up some larger enterprises and grow its use.

Some representative posts:

https://discussion.fool.com/while-its-nice-to-have-bert-on-board…

https://discussion.fool.com/update-on-docusign-34116243.aspx

https://discussion.fool.com/docusign-vs-others-34117397.aspx

If you can navigate the minefield of NPI there was plenty of discussion around that time. (Maybe just ignore the enthusiasm for NTNX at the time…)

So the way I see it, if what you are looking for is the 30% grower then DOCU probably fits the bill (a la PAYC, VEEV). But if you are seeking out top of the line revenue growth (as Duma seems to have espoused based on his P/S portfolio analysis) or simply wanting to concentrate one only the best as Tinker tends to do, maybe it doesn’t quite fit the bill.

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I said they are a good company. But if you want a great stock you need a company that outperforms expectations. The upside, the holy grail, as the CEO stated with many superlatives, the transformative product is Spring.

If you want to invest in their Esignature product, it is healthy and fine. But it is not the upside the CEO talked about nor what the market is looking for.

Like Saul, I’m not here to invest in okay businesses. W out SOA being a blow out success what you have is a steady business w no unexpected upside. SOA is the upside for DocuSign. Otherwise the stock would not have crashed w its reported 37% growth in the midst of the best stock week in some time.

That is my point. I am in no way saying the company lives or dies on SOA. Stock appreciation does however.

Nvidia is analogous. Dominant great GPU business. Went nowhere for a decade stock wise until the unexpected upside of AI. SOA is Docusign’s AI. IMHO.

tinker

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And the sell itself is not harder, just the number of customer signatories will slow the cycle initially.

When I was selling insurance the advice we got was: “If you haven’t made a sale by the second or third visit, don’t waste your time, find another prospect.”

Time is MONEY!

Denny Schlesinger

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Maybe I don’t see this as buying a car or computer. A new car model comes out with all kinds of features causing me to have analysis paralysis and hold off buying big while I figure things out. Others do the same and Billings go down with the expectation that I come back and buy an expensive Cadillac with all the bells and whistles versus the cheap basic VW beetle they were previously only offering.

But this is not buying a car. It sounds like a lame excuse. It suggests people are foregoing at least signing up for digital signature and form filling that docu offers now rather then upgrading later on as you get more signatures, approvals, talk to various department, whatever it is delaying.

It suggests SpringCM’s $20 million business is putting analysis paralysis in many of Docu’s $900million customers. That DOCU couldn’t even keep up its growth rates for long unless these customers figure things out on their end. That they’re not even willing to get up and running with digital signature for the time being.

That not enough of these customers were able to figure out SoA in a timely manner to offset the feet draggers to even it out. That it’s taking longer than 3 months for a good portion of new growth customers to figure out what they want to do with SoA. That none of the current Docu customers could sign up for SoA during the quarter to offset these confused buyers.

I have never heard of a company releasing new features causing Billings to go down.

It seems odd to me. It just raises alarms on the BS meter. Or, it could mean that Docu’s sales staff is so incompetent they are part of the problem.

It boils down to taking managements word for it or not.

We’ll find out in another quarter.

I have no intention of buying Docu for the time being but may if SoA takes off.

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Hopefully OKTA’s Billings growth does not fall off as they reach further into security with their recent ScaleFT acquisition and some of the other stuff they’re working on, lengthening the sales cycle. They even just acquired another company so their complexity is even higher.

That’s literally Docu’s excuse.

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I don’t know what more I can say on this topic, but an elongated sales cycle seems to be being conflated with a much harder sell insofar as the sales rep will be having to personally call on the prospective customer with a greater frequency than usual.

In my experience this isn’t the case since most of the follow up work after the initial presentation can be done by phone, so the rep can still call on as many new prospective or existing customers as usual.

Yes, more people will need to sign off on the purchase because the product affects lots more people working in the customer’s organisation, but this is perfectly normal.

We will see when DOCU announce their earnings next quarter but I am expecting (as opposed to hoping) for a significant beat and raise.

Cheers, PB.

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I sold my position yesterday in DOCU. I was a believer, I like the product and the business and I think it’s probably reasonable for an elongated sales cycle if the reps are selling more complicated and higher value products. I’ve managed large sales teams in very good businesses, new products, more sophisticated products take time. A couple of years ago I would doubled down on the market weakness because I would have believed it is a good company with a bigger TAM, that will take some time to see conversion. However this board has taught me (amongst many things) to dance with the most beautiful girl in the room. And right now their are far better looking ladies and I don’t have to learn a new language to ask them to dance.

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OakNorth—one of Europe’s fastest-growing financial technology companies—has selected the DocuSign Agreement Cloud to transform the systems it uses to prepare, sign, act-on and manage agreements.

https://www.finextra.com/pressarticle/78748/oaknorth-chooses…

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