Is It Time to Worry About the Slowdown in DocuSign Stock?

There are a few things you should do once a year. Visit your doctor. Swim in the ocean. Climb a mountain. And check on your long-term stock investments. The current lull following the IPO gold rush over the last couple of years has given our MBAs some much needed time to refine their blunt-rolling skills evaluate our current holdings. For example, we told you why we’re not worried about the big plummet in C3.ai stock, as well as confirmed our confidence in the leading robotic process automation stock and a digital payments stock that is competing against one of the biggest names in fintech. The next checkup is with DocuSign (DOCU), a legaltech stock that until recently had been growing revenues like crazy.

But the latest quarterly results from the company show that revenue growth is slowing while losses continue to pile up. Is it time to worry about the slowdown in DocuSign stock?

Doing a Double Take on DocuSign Stock

In our May 2021 article on DocuSign, we found a lot to love about the company, which has developed a cloud-based platform called DocuSign Agreement Cloud that automates the paperwork process for agreements, contracts, and even virtual pinky swears (OK, we made that last one up). For one thing, nearly all of its revenue comes from software-as-aservice (SaaS) subscriptions. SaaS is an attractive business model because it usually comes with high gross margins, which simply means that it doesn’t cost a lot of money to make money. In the case of DocuSign, the company consistently clocks in with a gross margin of about 78%, which is in the top 10 of the 23 pure-SaaS companies found in our tech stock catalog.

This has become an important metric as tech company valuations plummet and investors demand at least some sign that profitability is coming. That brings us to Thursday’s earnings call with DocuSign management. Total revenue was $588.7 million, an increase of 25% year-over-year – but just little more than 1% compared to the previous quarter of $580.8 million. Total revenue guidance for the current fiscal year is between $2.47 billion and $2.48 billion, which hasn’t changed since the company issued its year-end fiscal statement earlier this year. 

What has changed is the expected growth in revenue. Last year, the company recorded total revenue of $2.1 billion, an increase of 45% year-over-year. At the high end of projected revenues ($2.48 billion) for this fiscal year, annualized growth would shrink to about 15% compared to last year. That’s not surprising given the $185 million drop, or 6.8%, in billings guidance. Since DocuSign bills customers in advance of usage and then prorates the revenue over the year, the “billings” metric is a leading indicator for revenues.

DocuSign revenues
Credit: DocuSign

Add in a huge swing-and-miss on earnings and widening losses, and DocuSign saw its stock price drop more than 20% on Friday. DocuSign stock is down more than 55% so far this year, about double what the leading Nasdaq-tracking index fund, Invesco QQQ ETF (QQQ), has lost during that time. The silver lining is that DocuSign stock is now reasonably valued based on our simple valuation ratio (current market cap/projected annual revenues) of about 5 (along with just about every other tech stock right now). A year ago, the number was about 22, with anything more than 40 considered too richly valued.

How Close is Adobe to DocuSign?

One key article of our faith has been the belief that DocuSign is the market leader in the electronic signature industry. It repeatedly claims a 70% share of a total addressable market (TAM) that it pegs at $25 billion. Trying to verify and compare that claim against competitors has been tricky. For instance, a couple of different analysts claim DocuSign owns anywhere from about 45% to 80% of the e-signature market. It’s generally accepted that its main competitor is Adobe (ADBE), which has its own cloud-based e-signature service called Adobe Acrobat Sign that is part of the Adobe Document Cloud suite. Last year, that business segment had revenue of $1.97 billion, representing 32% year-over-year growth. 

Adobe versus DocuSign
Credit: Gartner

In effect, DocuSign and Adobe Document Cloud are similarly sized businesses based on annual revenue – $2.1 billion versus $1.97 billion, respectively – though the latter represents only about 12.5% of Adobe’s total 2021 revenues of nearly $15.8 billion. Unfortunately, neither company breaks down their revenue by product, so it’s impossible to quantify e-signature market share, especially given the numerous other companies offering this service. While both platforms are basically cloud-based services for managing legal documents, they offer and emphasize different capabilities.

A Leader in Contract Lifecycle Management

Indeed, while DocuSign e-Signature and its various add-ons are the point of entry for customers, the company is also targeting another $25 billion TAM in contract lifecycle management (CLM). CLM software is pretty much what it sounds like: Automating management of an organization’s contracts from beginning to end. DocuSign claims to use artificial intelligence with two products connected to its CLM service:

  • Insight uses AI to search and analyze agreements by legal concepts and clauses. It can work across a large volume of agreements, both from DocuSign eSignature and from other sources.
  • Analyzer helps customers understand what they’re signing before they sign it. An add-on to Insight, Analyzer uses AI to analyze inbound agreements. It can detect the presence or absence of clauses by their type, score their risk, and extract key terms.

DocuSign got into the CLM business back in 2018 with the $220 million acquisition of Chicago-based SpringCM, followed in 2020 by the $188 million acquisition of another contracts software company called Seal Software. The latter acquisition is one of several startups we previously covered that use AI to automate and analyze legal contracts. Its capabilities are now baked into the CLM solution in the DocuSign Agreement Cloud. The company apparently did a good job of integrating the technologies, because it has topped Gartner’s Magic Quadrant for its CLM solution for the last couple of years:

Gartner’s Magic Quadrant for CLM solution
DocuSign is on the leaderboard for CLM. Credit: Gartner

Adobe also offers CLM solutions, but note that it’s not on Gartner’s radar. However, you’ll notice there is a company among the leaders that appears to be ranked close to DocuSign. Let’s learn a bit more about this (still) privately owned competitor.

A CLM Unicorn and Competitor

Founded in 2009, Seattle-based Icertis is another AI legaltech startup that specializes in CLM that we previously covered. The company has raised $371 million in disclosed funding from about a dozen investors, including prominent names like venture capital firm Greycroft, the SoftBank Vision Fund, and SAP, an enterprise software company. Icertis was valued at about $5 billion earlier this year following the SAP investment. The Icertis Contract Intelligence platform does it all, from setting up a contract to authoring, approvals, negotiations, and all other aspects of ongoing contract operations. It includes applications for specific businesses, from clinical trials to risk management, as well AI-based applications for things like negotiations. And it even uses blockchain … somehow.

Icertis contract management platform.
Credit: Icertis

Icertis claims to have managed more than 10 million contracts worth more than $1 trillion in 40-plus languages across 90-plus countries. Customers include Google, Microsoft, Daimler, Airbus, and Johnson & Johnson, among others. It is also reportedly eyeing an IPO later this year, which would give us some much-needed transparency into the numbers, including the company’s claim to have revenues “far north” of $100 million. 

Retention and Expansion By the Numbers

Revenues aside, DocuSign is facing strong competition from SaaS companies like Adobe and Icertis. Ironically, the easier these cloud-based document companies make it for customers to integrate and operate their platforms, the easier it is for these customers to choose or even switch solutions based on price or perks. This is where hardware companies have something of an advantage because of the capital-intensive nature of some markets. For example, Intuitive Surgical (ISRG) is far and away the market leader in robotic surgery at 80%, while its competitors (including big medical device and healthcare companies like Medtronic and Johnson & Johnson) have largely struggled.  

DocuSign 2022-23 guidance.
Credit: DocuSign

Back to our point: What is DocuSign doing to retain and expand its market positions?

Retention is weakening a bit. In this week’s earnings call, DocuSign said it achieved 114% dollar net retention for the quarter, which is “within its historic range of 112% to 119%” but obviously at the lower end. It did add 67,000 new customers in the quarter, bringing its total installed base to nearly 1.24 million. According to DocuSign, the 1.24 million install base reflects paying customers as opposed to those who solely take advantage of the free but limited DocuSign eSignature feature.

Featured integrations with DocuSign
Credit: DocuSign

The number of paying customers spending more than $300,000 on the platform grew 32% compared to a year ago to a total of 886 customers. In addition, more and more of the company’s more modest expansion is coming from international revenue, which now accounts for 25% of total revenue. It outpaced domestic growth, with a 43% year-over-year increase to reach $144 million in the first quarter. 

Latest Moves to Bolster DocuSign Stock

Those are mostly positive numbers, but what is the DocuSign leadership doing to strengthen the company’s long-term growth outlook?

Well, the management team is expanding its own numbers with a bunch of new hires, so we’re probably not going to see a drop in overhead there. One key hire is supposed to bolster the company’s international business, so we’re encouraged that DocuSign is keeping the momentum going on that front.

On the technology front, the company launched CLM Essentials, a “solution focused on faster time to value and is built specifically for growing organizations to centralize and automate the creating, negotiating, and secure storage of their contracts.” Sounds like DocuSign created a CLM light version with a lower price point to attract new customers to its platform or to expand their usage beyond eSignature. Of course, the company has continued to add new features to its flagship eSignature products, including an updated ID verification feature that enables signers to verify their identity via financial institutions like Bank of America, Chase, and Wells Fargo.

The value proposition for digitizing and automating CLM
The value proposition for digitizing and automating CLM. Credit: DocuSign

Its biggest public business coup is a recent expansion of its partnership with Microsoft, which will add new DocuSign Agreement Cloud integrations and capabilities across Microsoft’s business solutions. In addition, both companies pledged to spend more money on each other’s products for use within their own organizations. As we noted earlier, other cloud-based document management companies offer integrations, with Adobe being the most obvious example, so the magnitude of the deal is somewhat relative.

It would be most helpful if the company broke down revenues by product segment so we have some color around how fast their three main product segments are growing.

DocuSign product suite
Credit: DocuSign Website

For example, how much revenue is being realized from the online notarization service they launched following the acquisition of Liveoak in 2020? Adobe recently announced a partnership with Notarize, a startup that’s raised $213 million in funding. We already know about DocuSign’s success in eSignature, but we’d like to see some color around how the other two product segments are working out in terms of revenue growth.

Conclusion

DocuSign says it is shooting for $5 billion in revenue, but doesn’t offer any sort of timeline to achieve that growth or whether it expects to be profitable by that point. We believe the company can leverage its leading market position in the eSignature market to build its CLM business and prove that it’s not just another pandemic wonder stock with little resiliency when times get tough. In regards to whether or not we bought shares following today’s dip, that’s something Nanalyze Premium subscribers were alerted to earlier today.

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2 thoughts on “Is It Time to Worry About the Slowdown in DocuSign Stock?
  1. Dear Sirs,

    It would be interesting to understand the company’s cash flow, as it is more expensive to raise cash.
    In conjunction with the above, it is important to (N)analyse the stock based compensation policy: apparently the management team sees its stock based compensation package increase by 37% y/y and approximately 60% of DocuSign’s free cash flow is stock-based compensation.
    Thank you

    1. Hey Fabio. Good points of contention you raise here. They’re burning around $30 mill a quarter or so with $800 mill cash on the books. Gross margin is 78% so we’re not too worried about runway. As for stock based comp, we hadn’t looked at that but that’s typically only a concern if it creates dilution – unless of course you’re paying to C-level positions over $700 million in one year like Ginkgo did 🙂 That seems over the top.

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