Hi Fools:
Yesterday after the bell, Docusign released its Q1 FY20 results. By all measure the company had very solid quarter and continues to execute well against its business strategy. Here are some top-line results for the quarter: $214 million in revenue, an increase of 37 percent over the prior year. That is well ahead of the company’s own guidance and analyst expectations of $208.15 million in revenue. Net income of $13.5 million for the quarter, or $0.07 per share, came in ahead of analyst expectations of $0.04 per share. And finally, DocuSign finished the quarter with 508,000 paying customers, up roughly 27 percent over a year ago, when the company reported 400,000 customers. The company raised its full year estimates.
Any reasonable observer would think that with results like these investors would reward the stock with a tick up…but this is not what happened. Share price is down 18% in the aftermarket. Go figure.
As you will see later on in this report, during the conference call analysts seemed to struggle with and express some concerns about Docusign’s elongated sales cycle in the quarter. As most observers of the company know, Docusign recently introduced its new Systems of Agreement (SOA) Platform, also known as “Docusign Agreement Cloud,” in Q1 FY20. Because this platform is more complex, providing multiple solutions with in the agreement process, than the e-signature products the company markets, it naturally takes more time to both sell the platform of services and help enterprises integrate it into their business. This caused some sales to slip into the next quarter. It is worth noting that while this seems to be a concern of the analysts, this transition to Agreement Cloud sales is exactly what long term investors want to see, mainly because sales of this platform will have a much greater contract value than the e-signature products alone. It should also, over time, provide more opportunity to expand “landed” customer usage of Docusign products. If successful, this will show up as increased net expansion rates in future quarters. In my view, DOCU is on track in efforts to pivot to Agreement Cloud sales, it is causing a slight change in the company’s historic sales cycle, which in turn had a small impact on billings in the quarter and possibly on the net retention rate, and that is what is making some analysts and investors nervous.
Below are the key metrics I follow for DOCU. As I mentioned in my report last quarter, while the company continues to perform quite well in all areas, there are two metrics I want to keep an especially close eye on: Dollar Based Net Retention, which was reported at 112% for Q1, as it was in Q4 FY19. This is at the bottom end of DOCU’s goal of 112%-119% on a quarterly basis. Anything lower than 112% might suggest that the DocuSign’s land and expand strategy is not as robust as I would like. Additionally, over time I want to see year over year revenue growth re-accelerate as the company implements is strategy to implement its System of Agreement platform. You’ll not that that y/y revenues for this quarter grew 37%, as opposed to 34% for the same quarter, FY19. This is good news.
Here are the numbers:
Total Customers:
FY19 Q1 Q2 Q3 Q4
400k 429k 454k 477k
FY20 508k
Customers with annual contract value (ACV) >$300K:
FY19 Q1 Q2 Q3 Q4
215 246 285 310
FY20 324
*51% year-over-year
Dollar Based Net Retention
FY19: Q1 Q2 Q3 Q4
114% 115% 114% 112%
FY20: 112%
Revenue (rounded):
Q1 Q2 Q3 Q4 Sum
FY16 250
FY17 84 92 97 108 381
FY18 113 125 131 149 518
FY19 156 167 178 200 701
FY20 214
Revenue Growth (Y/Y):
2017 52%
2018 36%
2019 34%
2020 37%
Billings:
Q1 Q2 Q3 Q4
FY19 169 172 198 262
FY20 215
Gross Margin (Non-GAAP):
FY19 Q1 Q2 Q3 Q4
80% 81% 79% 80%
FY20 79%
Earning per Diluted Shares (non-GAAP):
FY19 Q1 Q2 Q3 Q4
$.01 $.03 $.00 $.06
FY20 $.07
Free Cash Flow (mil):
FY19 Q1 Q2 Q3 Q4
8.8 18 (-4.3) 23
FY20 30.4
Net Cash from Ops (mil):
FY19 Q1 Q2 Q3 Q4
15 23 4 34
FY20 45.7
Cash & Equivalents (mil):
FY19 Q1 Q2 Q3 Q4
270 819 1B 934M
FY20 937
Highlights from the Conference Call: https://www.fool.com/earnings/call-transcripts/2019/06/06/do…
On the Docusign Agreement Cloud
CEO SPringer: Now, let’s talk about the DocuSign agreement cloud, and our ability to automate and connect the entire agreement profit. In March this year, we just announced the DocuSign Agreement Cloud. Our expanding suite of more than the dozen products and over 350 integrations for digitally transforming, how organizations prepare, sign, act on and manage their agreements. The DocuSign Agreement Cloud includes our flagship e-signature product and several other DocuSign product offerings, as well as the recently acquired SpringCM offering for contract life cycle management and the hundreds of integrations to other applications involved in the agreement products, such as those from Salesforce, Microsoft, Google, Oracle and SAP. It also includes three new products that were announced after our last earnings call. So I’d like to take a moment to highlight them today.
The first is DocuSign Gen, designed for small to medium businesses, primarily in the Salesforce ecosystem. Gen enable sales rep and other users to automatically generates signature ready contracts, with just a few click. And do it directly from within Salesforce. This can result in faster deals, fewer errors and greater productivity. The second new product is DocuSign Click. It allows organizations of any size to capture consent to standard agreement terms on websites such as the privacy policy with just a single click. These so-called no signature required agreements, our new opportunity for DocuSign to replace in-house or custom solutions, which are costly to maintain and often lack DocuSign extensive auditability.
The third new product is DocuSign Identify. It allow the company to automate the verification of government issued IDs and European eID, for transactions that require them. For example, opening a bank account would normally required the sign or to physically present a photo ID. DocuSign ID verification allows this process to be digitize and automated, enabling signers to verify their identity on a mobile device from practically anyway.
So, when you put all this together, we believe that the DocuSign agreement cloud defined entirely new category of cloud software, one the complement the marketing sales, HR, ERP and other cloud categories that already exists, connecting them all into agreement process. To give you a customer example, one of the world’s largest companies is using several products in the DocuSign agreement cloud together, by using DocuSign signature, SpringCM, DocuSign for sales force and our integration with SAP. This system is now live in 43 countries and over $70 billion worth of agreements flow through an annually. It’s allowed the customer to cut the time it takes to get an agreement completed by about 80%, saving hundreds of millions of dollars as a result. We are seeing more and more examples like this all the time. And with the DocuSign Agreement Cloud, we are excited to have the product suite that can fulfill them.
On roll out of the Agreement Cloud
CFO Sheridan: First quarter billings increased 27% year-over-year to $215 million included in this growth with a strong starting customers’ purchasing multi-product solutions of e-signature together with document generation and CLM products. Multi-product sales involved more complexity in terms of integration designs and related SOW. 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 extended sales cycle impacted our billings in dollar net retention in Q1.
…,And a sampling of analyst angst regarding impact of roll out on billings, NRR:
Sterling Auty – JPMorgan – Analyst
Yeah, thanks. Hi guys. I wanted to dive into the comment about elongated sales cycles on the upsell opportunity. Can you give us a little bit more color. What is it specifically that’s causing as a decision process on the customer. What can you do to possibly shorten it again, and how is that actually also impacting subscription revenue (ph).
Daniel Springer – Chief Executive Officer
Sure. Sterling, I think, what happens is, if we are a single product company and we’re moving to a broader platform in a multi-product company, and so when we have the opportunity, which we’re excited about to sell people a broader suite. There are more people that are involved and give you specific example, so the large bank customer in Europe. And normally we would have had a more straightforward e-signature only. They were interested in also looking at some of the CLM capabilities Spring, and if we got to the – for the end of the quarter, we realized our normal sort of pasting and process would take longer and for deals it closed 10 days after the end of the quarter. But going into the quarter, we would have expected in a traditional e-signature sales cycle, a single product fewer signatures required et cetera. That will be better. So that’s kind of what we tend to see.
In terms of your question of making that go faster, I mean, I actually want to have more and more of our deals have the multi-product capability. I do think there’s an opportunity for us to continually improve on the enablement we do of our sales force. And remember, this is still new for a lot of folks, move from a single product to the multi-product model, but enable them to, one, be able to forecast better. But also to be able to accelerate that process. And from a standpoint in terms of the revenue growth, like you want to chat a little bit about that.
Michael Sheridan – Chief Financial Officer
Yeah, Sterling, in terms of subscription revenue, these product sets are pretty much all subscription products. So the timing of the – of the ultimate booking or billing will impact the starting point of the revenue, but in terms of mix and everything else that you have modeled it doesn’t really have any impact.
Sterling Auty – JPMorgan – Analyst
Okay, great. And then one follow-up question. The services revenue. I know it’s small in terms of overall. But second straight quarter that it’s up nicely relative to expectations. What’s driving the upside and services?
Daniel Springer – Chief Executive Officer
One of the pieces there, if you think about the new products that we’re selling, they generally require statement of work for implementation, because again the CLM capability. That software is fantastic, but it’s not honed and it’s easy to use and implement as a DocuSign e-signature capability which requires a lot less. So we do expect there will be some increases in demand there. I would like to point out that we are very committed to our partner strategy and one of our aspiration is to take a lot of that, that demand for services and to leverage the partner network. So I wouldn’t want to set the expectation that you should see some sort of exponential growth in our services revenue. We would still like to leverage the partner channel.
On international growth
CEO Springer: We continue to see growth in our international markets. In markets like the UK, France, Germany, Brazil, Australia and Japan, we are just beginning to tap the potential. And no matter where our customers are based, we believe there is significant opportunity to expand the use of e-signature into other department. As has long been in the case once companies experienced the speed, time and simplicity benefit of DocuSign e-signature, they are keen to replicate those results elsewhere in the enterprise.
And…more analyst angst on sales cycle
Karl Keirstead – Deutsche Bank – Analyst
Hi, thank you. Maybe I have got two on the same subject just around the sales cycles. So maybe the first one is for you, Michael. So the, in Q1 the reported billings was a little bit worst sequential growth and we saw in Q1 last year. And I’m sure it’s for the reasons you mentioned. If I take the high end of the July quarter guidance, it’s actually seasonally stronger than 2Q last year. So one might infer that the deals such as the one that Dan mentioned like maybe they spilled into 2Q and you’re banking on them closing. So fundamentally, we are talking about a 1Q to 2Q shift. Is there any credence to that? And then, yeah, maybe I’ll stop there and I’ll ask my follow-up once you’re done. Thanks.
Michael Sheridan – Chief Financial Officer
Yeah, Karl, I think that to the extent that, that we have a longer sales cycle, you would expect that in any quarter, some of those are going to shift out of quarter. I would tell you that it’s not a one quarter phenomenon, I think as we continue to be successful with these multi-product deals that same still cycle. We’ll also be relevant at the end of Q2 or at the end of Q3 over time. I think, to Dan’s point with enablement and other factors, we will continue to get a better and improved motion around these kinds of deals. But I wouldn’t look at it is just a factor at the end of a particular quarter. It will be time as we continue to – transition into these larger deals.
Karl Keirstead – Deutsche Bank – Analyst
Got it. Okay. And then maybe my follow-up is just clarity on what exactly customers are considering that’s causing the delays because, if what you’re referring to is, are the SpringCM deals, you’ve given us enough disclosures that we know that generally represents sub 10% of billings and maybe even sub 5% billing. So at first blush these additional SpringCM products don’t seem to be a large enough portion of the total deal conversation to cause a slip. But maybe there is a flow on that logic, if you could clarify. Thanks.
Michael Sheridan – Chief Financial Officer
Yeah. And I would first tell you that I agree, I don’t think we’ve had a slip. I think this is right in line with how we seen our business and how we are guiding it. But if you look at a couple of things, Karl, if you break this down into new customers and then expansion of existing relationships you can tell from our new customer growth that continues – that’s going to largely be e-signature business on these upsells what we’re seeing is customers that already have e-signature are looking to us to expand that e-signature relationship as they have in the past. But now they’re coming back to us at the level that we are actually very encouraged about is sort of the first full quarter of being integrated.
Coming back to saying, we’re really interested in your document generation technology, we’re really interested in your CLM technology. So these aren’t just pure deals of a new product, it’s the combination of the two, that if – I think Dan mentioned, if it – it remained just an e-signature, expansion deal well those pretty much closer to regular cadence when it expands into, yes, we want to do that, but we also want to consider now deploying these other products into our solution set, that combination is what’s causing us to, to take a little more time to bring into the closure Dan mentioned statements of work for example that would in a combined deal. Deal step in the process that’s a little bit different than if it was just a pure single product e-signature kind of transaction.
Daniel Springer – Chief Executive Officer
And another thing I would add to that filing is not exclusively SpringCM. If we talk about the overall DocuSign Agreement Cloud, there partner sale opportunities like Seal Software, or we just made investment in them. As you recall, Intelledox, some of other partners stories. So there is a broader set and then just the Spring component.
On Dollar-based Net Retention Rate
Justin Furby – William Blair – Analyst
Great, that’s helpful. And then Mike, just for you. The retention if you look at it on a gross basis in terms of gross churn across your business and a consistent. Any changes there. Thanks.
Michael Sheridan – Chief Financial Officer
Yeah, I think the only thing I would point to on the dollar net retention is obviously we’re talking about some of the upsell transactions, which affect that statistic. Otherwise, I wouldn’t see anything underlying statistics within the business that was out of the norm.
…
Stan Zlotsky – Morgan Stanley – Analyst
Perfect. Thank you so much for taking my question. And maybe just follow up on now on Justin’s question a second ago. As these larger, larger deals with SpringCM included start to close. Could we start to see net revenue retention start to trend up more toward the historical ranges that you’ve seen more in the 114% to 115% range as we go through the year.
Michael Sheridan – Chief Financial Officer
Yeah. So I see and I would tell you that – I would reiterate the 112% to 119% we’ve always talked about, but yes I think that there’s an opportunity for us to have that move into the more historical kind of mid-teens kind of range.
Fools, there is much more to read in the transcript (linked above), especially if you didn’t get your fill of analyst angst regarding the necessary changes to the sales cycle based on the deeper complexity of selling the Agreement Cloud Platform.
Q1 Highlights from the Press Release https://investor.docusign.com/investors/press-releases/press…
Fourth Quarter Financial Highlights
Total revenue was $199.7 million, an increase of 34% year-over-year. Subscription revenue was $187.6 million, an increase of 37% year-over-year. Professional services and other revenue was $12.2 million, an increase of 5% year-over-year.
Billings were $262.4 million, an increase of 31% year-over-year.
GAAP gross margin was 74%, compared to 79% in the same period last year. Non-GAAP gross margin was 78% compared to 80% in the same period last year.
GAAP net loss per basic and diluted share was $0.40 on 167 million shares outstanding compared to GAAP net loss per share of $0.20 in the fourth quarter of fiscal 2018 on 34 million shares outstanding.
Non-GAAP net income per diluted share was $0.06 based on 188 million shares outstanding compared to non-GAAP net income per share of $0.01 in the fourth quarter of fiscal 2018 based on 42 million shares outstanding.
Net cash provided by operating activities was $34.1 million, compared to $32.0 million in the same period last year.
Free cash flow was $22.8 million compared to free cash flow of $28.7 million in the same period last year.
Cash, cash equivalents, restricted cash and investments were $933.6 million at the end of the quarter.
Fiscal 2019 Financial Highlights
Total revenue was $701.0 million, an increase of 35% year-over-year. Subscription revenue was $663.7 million, an increase of 37% year-over-year. Professional services and other revenue was $37.3 million, an increase of 10% year-over-year.
Billings were $801.4 million, an increase of 34% year-over-year.
GAAP gross margin was 73%, compared to 77% in fiscal 2018. Non-GAAP gross margin was 80% compared to 79% in fiscal 2018.
GAAP net loss per basic and diluted share was $3.16 on 135 million shares outstanding compared to GAAP net loss per share of $1.66 in fiscal 2018 on 32 million shares outstanding.
Non-GAAP net income per diluted share was $0.09 based on 159 million shares outstanding compared to non-GAAP net loss per share of $0.43 in fiscal 2018 based on 32 million shares outstanding.
My take: This was a solid start to FY20 for Docusign. All indications suggest that this company is executing well against it business strategy and that the roll out of the Agreement Cloud and its pivot to a more complex set of products organized around a system of agreements is proceeded well and as planned. Mr. Market apparently dislikes change and has shown its displeasure in the AH market. If you are looking to start a position in DOCU, today might offer up an opportunity to do so. Shares are selling at an EV/S of 8.6X for a company growing well over 30% year over year. As a CMF, I can not give you advice on what you should do as an investor, each individual has to decide themselves if this offering is attractive to you.
For those of you who may be new to this company, here is a deep dive I wrote that provides detailed background:
https://discussion.fool.com/docu-deep-dive-34121285.aspx
Best, Swift…
Long DOCU