A Docusign one-month update

[SaulR80683]

A Docusign one-month update

Back a month ago I wrote the following:

Docusign and Zoom got enormous pushes from Covid, with huge increases in adoption of their base products Docusign-ing and Zoom-ing, but where does their growth go from here?

No one is going to quit remote signing and go back to paper, with or without Covid, but again, Docusign has already had their big growth push, and while revenue won’t shrink, and while it will keep growing, growth will slow rapidly. Think of it this way: They’ve already signed up the low hanging fruit, and with Covid, most of the middle hanging fruit as well. What’s left now is mostly the high-hanging, hard to get to sign-up fruit. Data will keep rising exponentially but the number of people who will need to sign documents remotely is finite and will come to an end!

Docusign has some exciting sounding new products in the works, but its base signature signing business is so large, and growing, with a current run rate of $1.5 billion. How much can these new products move the needle, especially since they are just starting out and are not instant set-up like the signing product? The CEO and CFO say it will be a few years until their new products’ revenue gets big enough to move the needle so that it can be broken out (see below). If they get $5 million in new sales per quarter (not bad coming off a base of near zero), they only move the total revenue needle about 1%. To grow 50% next year will take $750 million in ADDITIONAL revenue! And over $1.1 billion in additional revenue the second year. Where will that come from? Sales of their platform business will REALLY need to accelerate, considering that they are at about zero relative to their total revenue currently.

And I quoted the CEO and CFO as follows (paraphrased and shortened)

Dan Springer CEO

And I think the big three for us will be CLM, the Advanced Analytics, and Notary over the next two years. And Notary will never have the total opportunity that CLM or Advanced Analytics have. It’s going to be, a more sort of specific set of use cases. And so it’s not going to have the breadth of growth, but it’s going to be a good growth opportunity for it that will play out over a few years, the other ones will play out over many, many years.

Now, in terms of needle moving, I think that will be the difference between good and great. They WON’T, in the next few years, just because of the size of signature, be in a position where we’ll be saying that this is an important part of our total business. So as an example, like, I think if you go to Cynthia and you say, Cynthia, when will you break out some of these other products? It won’t be in in fiscal 2022. It might be there in 2023, I don’t know, Cynthia, you’re more knowledgeable, about when that would be appropriate, what? I wouldn’t say 2022, would we say 2023 is possible? What’s your thoughts on that?

Cynthia Gaylor CFO

… I would say it’s probably, it’s likely to be further out than that , if you just think about the product suite, and how big eSignature is as a percent of the revenue today and how quickly it’s growing. The other pieces are growing, but just off of a much smaller base.

In the Needham Conference, this month, they were still saying essentially the same thing: (paraphrased and shortened) –

Earlier in the year, when the pandemic started, it did slow some of the buying around CLM, but it’s a very small percentage of the revenue.

We start our sale with the DocuSign Agreement Cloud and we talk to customers about what the platform can provide and the innovation across the platform and the products portfolio. However, if a customer then says “That’s all well and good but what I need is eSignature”, we say, “ Yes sir, we will give you eSignature”. I think some of that dynamic has been heightened by the pandemic. But by the same token in the last quarter or so we have seen good pipeline traction with the broader portfolio of products.

And I would just also say, we are growing at scale? We have $1.3 billion or so of TTM revenue growing over 40%. That’s a pretty big base to be growing off of and eSignature is the vast majority of that revenue.

So when you think of the revenue base in some of these other products, even if they may be growing faster at times, eSignature can dwarf them from a contribution of revenue. So it will take a while for the other products to become a bigger percentage of revenue, but we are certainly on that trajectory.

And remember eSignature is a $25-billion market opportunity on its own. We are the largest by far and earlier this year we just crossed the billion dollar mark of revenue. So we have a lot of runway, a lot of greenfield.

Okay, so what do we have here?

We have Docusign which has totally dominated the electronic signature field. They’ve got it sewn up with no effective challengers and about a 70% or more share of the market. They got a big boost from Covid, but no one who has used Docusign is going to go back to paper signing after Covid. No one!

Their eSignature business will continue to grow with more companies signing up, with the companies who are already using them using them for more things, and with more international expansion. But it is hard for me to see how that can continue to add 50% more dollars yoy for more than another year (at most). The size of the additional money needed just gets too big.

They have great ideas for a Contract Lifecycle Management (CLM) platform, really excellent ideas, but in contrast to eSignature, this has really not taken off yet. They are saying it was held back by Covid, but what happens after Covid remains to be seen. CLM is not really a going concern yet. They say enterprises are “showing interest” and “getting ready” to engage, etc, but that’s much different than DataDog or Cloudstrike, for instance, where modules are already being taken up in a big way.

Besides which, also in contrast to Covid, there is much more competition, and potential competition, in contract lifecycle management. Any competent major company in the field, or a related field, can develop a contract lifecycle management platform if they think it’s worth their while. On the other hand, no company in their right mind is going to waste their money trying to compete with Docusign in eSignature.

Thus we have management keep saying that, yes, CLM is growing, there’s interest in it, but it’s still very small, and not likely to move the needle any time soon, and eSignature is doing fine thanks, but growth will inevitably slow down, though it’s not clear when.

But you must understand that CLM has NOT taken off yet, so betting on it is betting on a hope. You have to be clear in your head about that.

So you can see both why I am keeping my Docusign position only moderate-sized (7% at present), rather than large (because of worry about the negatives), and also why I AM keeping a moderate-sized position at present (because of the positives).

Best,

Saul

A link to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”

[cfee2000]

Thanks Saul, that additional commentary is very helpful. Specifically on this comment…

"And I would just also say, we are growing at scale? We have $1.3 billion or so of TTM revenue growing over 40%. That’s a pretty big base to be growing off of and eSignature is the vast majority of that revenue."

Did they give any other hints in this context towards how to think about 2021 given eSignature revenue will still be the predominant force?

Here’s their guidance for Q4. The YoY numbers, even with the 4.1% average beat, would be down from 53%, 54%, and 67% YoY for total revenue, subscription revenue, and billings respectively in Q3. Still strong, but certainly you wonder about whether that continues to trend downward or can maintain at or near 50% through 2021…

+-------------------------------------------------+---------+
|                                                 | Q420    |
+-------------------------------------------------+---------+
| Revenue Guide (Total) (next Quarter)            | $408.00 |
+-------------------------------------------------+---------+
| Revenue Guide (Subscription) (next Quarter)     | $388.00 |
+-------------------------------------------------+---------+
| Billings (next Quarter)                         | $522.00 |
+-------------------------------------------------+---------+
| Gross Margin                                    | 80%     |
+-------------------------------------------------+---------+
| **Revenue Guide (next Quarter YoY) (Total)        | 48.42%** |
+-------------------------------------------------+---------+
| Revenue Guide (next Quarter QoQ) (Total)        | 6.56%   |
+-------------------------------------------------+---------+
| **Revenue Guide (next Quarter YoY) (Subscription) | 50.33%** |
+-------------------------------------------------+---------+
| Revenue Guide (next Quarter QoQ) (Subscription) | 5.84%   |
+-------------------------------------------------+---------+
| **Guide (next Quarter YoY) (Billings)             | 42.27%**  |
+-------------------------------------------------+---------+
| Guide (next Quarter QoQ) (Billings)             | 18.53%  |
+-------------------------------------------------+---------+
| Shares Outstanding Guide (millions)             | 210     |
+-------------------------------------------------+---------+
| Average Revenue Beat %                          | 4.1%    |
+-------------------------------------------------+---------+

I think the bull case on it would be this comment “And remember eSignature is a $25-billion market opportunity on its own. We are the largest by far and earlier this year we just crossed the billion dollar mark of revenue.”

-Chris

[Retirementdough]

I personally am a bit more bullish than you Saul.

When comparing to some of the other stocks followed on here. This numbers from first of this year (1.5 weeks ago) when I was comparing for evaluation in my portfolio.

DOCU Market Cap of ~41B, Sales of 1.3B with gross margin of 74.5% next quarter Y/Y at 50%

Compare that to

CRWD at MC ~47B, Sales of 762M with gross margin of 72.9%, next quarter Y/Y at 70%

or

DDOG at MC 30B, Sales of 540M with gross margin of 78.7%, next quarter Y/Y at 50%

DOCU growing at 50% on much higher sales level with similar margins. Seems to me that DOCU is a better buy? Would appreciate your thoughts on this line of thinking. Over simplified?

[junomean2]

Retirementdough,

I have become less and less bullish on Docusign over the past few months. The main reason is that their core business with all of the growth is the eSig. In order to continue with their revenue growth, which was arguably tied to COVID, they would have to expand their customers usage outside of their core business (CLM). This may very well pan out and be great, but it is a risk.

You compared them to CRWD and DDOG. These are both companies that are growing very quickly within their core business. This is a major distinction. With DOCU you are betting that all goes well with their CLM offering while with these other two companies, especially CRWD, their core business is growing like crazy and their increased offerings only supplement their core offering, instead of venturing off into uncharted territories.

I am in the same boat as Saul, this company has only given lip service that the demand is there for CLM but since the numbers aren’t reflecting that yet, I am currently not adding to DOCU while I am still adding to CRWD. Again, not saying this can’t be great story over the next 5 years, it just isn’t readily apparent at this snapshot in time whereas with CRWD, it is readily apparent.

• Junomean2
  Long CRWD, DDOG, DOCU

[bnh91]

Juno,

Docusign is also growing very quickly within its core eSig business line. How is this different from CRWD/DDOG? Growth is slowing at all three of these companies as revenue gets bigger, this is expected. Management is being conservative in their guidance as always with these companies. DOCU core eSig business has a TAM for $25bil. They are still just a small part of that so I expect future growth to remain strong, similar to DDOG/CRWD

The market is speculating that CRWD will have a bump in growth due to increase cyber-security spending due to recent events and bidding up the price. It is speculation that I agree with, but right now it is just that. There aren’t many companies without slowing growth that you don’t have to pay 50-60x+ sales for right now.

Long CRWD,DDOG,DOCU
Bnh

[n8larson]

DOCU growing at 50% on much higher sales level with similar margins. Seems to me that DOCU is a better buy? Would appreciate your thoughts on this line of thinking. Over simplified?

Last question first, I think responses as brief as this kind of discussion will almost always oversimplify. : ) So, compressing these 3 companies’ rounded metrics a bit for comparison,

Tick MC($B) Sales($B) Margin NextQ Y/Y Growth
~~~~ ~~~~~~ ~~~~~~~~~ ~~~~~~ ~~~~~~~~~~~~~~~~
CRWD  47     0.762     72.9%       70%
DDOG  30     0.540     78.7%       50&
DOCU  41     1.3       74.5%       50%

To my little mind, the oversimplification comes in assuming that DOCU’s ratios should be about equal to the other two. At this level of squinting at those numbers Gross Margin is the weakest differentiator, so Sales/MC is where I focused when deciding to comment. To that end, I’ll answer your first question with another: What is it about DocuSign that’s similar enough to the other two companies to suggest that Sales being “about double” (again with the high Squint factor looking at these data) should lead to a commensurately higher Market Cap? In other words, why should DOCU’s price be [very] roughly 2x higher, such that these 3 companies should have a similar MC/Sales ratio?

I am tending to agree with other responders that DOCU’s growth avenues could be a little weaker.

-n8 (long CRWD and DOCU, considering DDOG)

[rtichy]

I think all three are quite different from each other, but Docusign has the ability to increase productivity of more employees, directly, than the other two. How that exactly translates into a “TAM” like comparable number, should be discussed I think.

• Crowdstrike is very much a “protection racket” (in the positive way, of course) where companies will invest in protection to prevent themselves from being either held up (ransomware) or stolen from (IP). But at some point, each prospective client will attempt to quantify the value of what they can lose.
• DataDog is a productivity enhancer for IT personnel, and can save a company by making its IT staff more productive.
• Docusign signature is a productivity enhancer for many personnel and departments, and can save a company by making its AR, AP, IT, purchasing, sales and C-Suite personnel all more productive. CLM is future optionality, and we’ll have to watch and see how that plays out as both an R&D expense and as a product. It’s more complicated.

[SaulR80683]

DOCU growing at 50% on much higher sales level with similar margins. Seems to me that DOCU is a better buy? Would appreciate your thoughts on this line of thinking. Over simplified?

Hi Retirement Dough,

When I invest in Docusign, I know they will continue to grow their eSignature from here, but not at a rate which would satisfy me (or anyone on this board) long term. I am investing on the hope that their management platform starts to sell significantly. That is a hope and a prayer because what their CEO and CFO are saying is basically “We are noticing a lot of interest in…” which is C-Level for “Nothing much is happening yet but we hope it will”.

On the other hand Crowdstrike for example was growing at 86% last quarter (not 70%), and accelerating, and should be in approximately the same range next quarter, or higher.

In other words, Crowdstrike is already doing it, and with Docusign we are hoping they will (both of us are), but we don’t know yet.

Best,

Saul

[mtk76]

I am in the cybersecurity industry and know the technical market quite well. Obviously that doesn’t mean it has to translate to the investment future but just an interesting view:

My opinion:

• Crowd strike is a good solution but only on par with what Microsoft and Carbon Black Vmware offer

• Crowd strike used extremely aggressive pricing to ramp up the growth for their IPO. I am skeptical they will have positive price elasticity given the strength of the competition.

• Microsoft is a very dangerous competitor because they have a compelling vision of security that integrates device-identity-cloud-data into a simple comprehensive package. This is the key to enable integrated insight and simplicity. Many organizations are learning niche solutions are nice but intense to support.

Disclosure: Long Microsoft but not primarily due to this thesis.

[brittlerock]

Not to nit-pick this but I would point out that Datadog benefits extend quite a ways beyond the IT folks who are the primary consumers of the services. Datadog provides insight that enhances the end users experience. The response time of a web page is crucial to engagement. I don’t remember the exact statistic but I think it’s something on the order of 3 seconds is ab out as long as most folks will wait before abandoning the interaction. If you don’t keep your customers engaged that shows up on the bottom line, not just the IT budget.

[Iamnzane]

mkt76,
I am in general agreement on that there are many cyber security companies on par with CRWD detection. But I am not sure many are on par with the solution package. This is the cloud package edge that CRWD has. Also, serious security people will not solely rely upon MS to secure MS.

They need a belt and suspenders approach.

don’t we all

-zane

[LEGOABS]

Mtk76

opinion:
- Crowd strike is a good solution but only on par with what Microsoft and Carbon Black Vmware offer

- Crowd strike used extremely aggressive pricing to ramp up the growth for their IPO. I am skeptical they will have positive price elasticity given the strength of the competition.

Yet still, CRWD continues to take market share away from many security companies including those mentioned. CRWD grew 70%+ with all of them competing. If CRWD’s offering is not better, how do you explain this? It’s definitely not pricing pressure, since their margins are exceptional. The proof is in the numbers. MS has a great product, and it has the penetration already into enterprise customers, so yes, that’s an advantage which it can leverage - and it has. MS product just needs to be good enough to win, yet, CRWD flourishes in this environment. In the end, there will be more than one winners in this space and CRWD will be one of those with their unique cloud solution. Who would you call if there is a serious breach?

[SaulR80683]

Crowd strike is a good solution but only on par with what Microsoft and Carbon Black Vmware offer…

Hi Mtk76,

I guess that that is your opinion, but for a little reality testing you might ask yourself how come their subscription revenue has grown at an average of a rather amazing average of 89% yoy for the last four quarters. You might also ask why, after their breach was discovered, SolarWind immediately deployed Crowdstrike rather than either of the companies you indicated.

I am skeptical they will have positive price elasticity given the strength of the competition.

And as far as price elasticity, since they have a positive huge 33% average Free Cash Flow Margin for the same four quarters, I wouldn’t worry too much for them. It doesn’t seem that they had to cut their prices too much to attain their growth.

Best,

Saul

[bnh91]

Mtk,

To add to what Saul and others have said… I follow a sysadmin board pretty closely to monitor feedback they have on Crowdstrike and competitors. The consensus for the majority of discussion is the Crowdstrike product is the best product out there, but SentenialOne and Carbon Black are also good products.

The main complaint about Crowdstrike is that it is usually more expensive than all the other products. YET there is still alot of threads about them switching to Crowdstrike still and have been happy with it. This matches what we are seeing in Crowdstrike results. I don’t think your comment re: price elasticity for Crowdstrike is valid at all. Also I have seen no evidence the product has not been heavily discounted to “boost” sales.

Bnh

[RoyGeeBiv]

Comparing: CrowdStrike Falcon / VMware Carbon Black

Color me dense, but what has this to do with “A Docusign one-month update”?

🆁🅶🅱
post tenebras lux
For not in my bow do I trust, nor can my sword save me.

[n8larson]

Color me dense, but what has this to do with “A Docusign one-month update”?

Just a little thread-morph action, that’s all, and easily seen in “whole thread” view. Note that most of the replies on this thread so far are riffing on the third post, not Saul’s original one. That topic was basically, “cool, but why isn’t DOCU more like DDOG or CRWD?”. It was on to CRWD from there. Not ideal, but pretty normal, in my 30+years of bbs communication.

-n8 (now long all 3)