DocuSign: COVID Or Not, E-Signature Is Here To Stay

Seeking Alpha2021-12-31

SummaryManagement missed billings guidance coming into Q3’22, resulting in market reaction.E-signatures are still going to be used even when businesses are slowly returning to offices due to its ...

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Comments

JorgenS
2022-01-03
JorgenS
Ok
hotwheels
2022-01-02
hotwheels
E-signature has become part of legal Agreement
Vivianchia
2022-01-01
Vivianchia
Agree
- canoboi:
  like
Ronz
2022-01-01
Ronz
Yup here to stay
kaikk
2021-12-31
kaikk
Like and share pls
wintomoon
2021-12-31
wintomoon
Latest

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Following its Q3'22 earnings release, there was a market reaction that resulted in a 40% drop in stock price. Let's look into the results to assess whether the drop is warranted.Q3'22 FinancialsWe will be looking at only subscription revenue as it is the reflection of the strength of DocuSign's product offerings, comprising ~97% of their revenue. The management is looking to gradually move all its professional integration services to partners so that they can fully focus on improving & selling their products.Source: DOCU's SEC FilingsDocuSign achieved a record $529 million in subscription revenue in Q3. However, the YoY growth rates have been normalizing back to pre-Covid levels.Source: DOCU's SEC FilingsBillings are the amount invoiced to customers in the quarter. It includes both current and future quarter revenue since customers usually pre-pay for annual contracts. Hence, this metric will give a partial glimpse into future quarters' performance. Due to the variety of contractual terms and customer usage patterns, there's bound to be quarterly fluctuations, thus management always advises to view it from a trailing twelve months basis.However, by just looking at Q3'22 billing YoY growth, it seems to be one of the negative factors affecting investors' confidence. Q3'21 is the period where companies are starting to resume normal operations digitally, as lockdowns begin to loosen after the initial shock from COVID. (This phenomenon was also reflected in Airbnb's (NASDAQ:ABNB) Q3'20 booking numbers as shown in our previous article.) Thus, it created huge demands for e-signatures, even if companies might not know the full extent of use cases yet.For Q3'22 to show such a large deceleration in growth, there can be two reasons: 1) Companies bought excessive capacity in their initial buy just to prepare for any downturns in events, and have not consumed all. 2) Companies bought small capacity, and have already renewed with larger contracts in the subsequent quarters. Either reason reflected a slowdown in consumption patterns.Additionally, there was a slight sales execution issue causing this as mentioned by CEO Daniel Springer in the earnings call. From the onset of COVID, they were very focused on rapidly capturing the demand up till now. This shifted their focus away from educating customers on the extensive use cases, which they used to do as part of their \"land & expand\" strategy.We stopped doing that as people just need more and more volume for their existing use cases, right? And so I think that's the gap in our execution. And as Cynthia described, a huge portion of our field has joined since pandemic began because we've been growing at such a rate. And we haven't done the job we need to do at enabling them at the traditional DocuSign sort of land and expand processes.Source: Winter 2021 Investor PresentationDespite the slowdown in revenue & billings growth, Net Dollar Retention (\"NDR\") rates are still looking healthy. It should be noted that NDR rates were still being driven by the expansion of e-signature use cases, as the application of Agreement Cloud is still in the early stages (more on it below).Management GuidanceSource: Earnings CallsManagement had initially expected their COVID demand to die down from the start of Q1, thus guiding full-year billings growth of only 31% during Q4'21. Due to the unexpected growth for the first 2 quarters, the management optimistically adjusted their guidance. The slowdown in growth then happened in Q3, missing the guidance, which might have surprised them. As a result, they lowered their Q4 guidance. These moves seldom go well with investors, sending the stock down 40%.COVID Stock?A mention of \"COVID Stocks\" brings to mind Zoom (NASDAQ:ZM) and DocuSign. Both businesses enable remote working through video conferencing and e-signature respectively. A look at Zoom's revenue growth clearly showed how COVID impacted their business.Source: Zoom's SEC FilingsDespite showing similar growth profiles, it would be unfair to project such a massive growth deceleration for DocuSign. As users start returning to offices, it's more likely for them to switch back to in-person meetings than returning to manual mailing processes to close agreements. In-person meetings still have intangible benefits that video conferencing can't provide. On the other hand, e-signatures are simply cheaper, faster, and more accessible, providing a clear Return On Investment (\"ROI\") for users that have switched.Agreement Cloud ProgressE-signature has become part of the larger Agreement Cloud offering from DocuSign. The remaining components such as Contract Lifecycle Management (\"CLM\") require a more extensive rollout as enterprise software needs to be integrated, lengthening the whole sales cycle to about 3-4 quarters. Thus, the initial sales traction gained from pre-COVID was put to an abrupt stop when customers chose to focus on the more mission-critical e-signature. The immediate ROI and ease of implementation digitally also played a part.As per CEO Springer during Q1'22 earnings call:\"Now we see those starting to come back. And so we see the pipeline starting to build, as we did actually starting in Q4 start more aggressively there. So those are demonstrably coming back, and I think those will be larger deal sizes that we will see.Interest in Agreement Cloud is starting to pick up again as businesses adapt to the new way of working. And basing it on the estimated sales cycle, the growth should be back on track. Agreement cloud has the potential to put DocuSign above the other e-signature providers, albeit only showing insignificant revenue for now. Readers do have to note that this is still considered a greenfield opportunity for the company, and it will be up to the management to effectively market its value proposition.Customers' ReviewsThe company interviewed users from Unilever (LON:ULVR)(NYSE:UL) and Snowflake (NASDAQ:SNOW) during their 2021 Analyst Day.One of the highlights was that Unilever had already been using SpringCM and Seal software when they were still independent companies. Both were then acquired by DocuSign as part of Agreement Cloud products. According to Lim Wei Ling, Unilever's Global Supply Chain General Counsel:And so primary driver was to find ways to give time back to our colleagues, give time back to our business partners, so that they can do even more value-add work and also to create capabilities that will generate data-driven insights for them that they can take action on. And so it was with this in mind that we wanted to take advantage of the contract automation, the contract building capabilities and the contract analytics capabilities in the Agreement Cloud.This validates the whole Agreement Cloud concept, showing that it's not just a bold vision from the management team.In addition, Snowflake chose to use DocuSign over other providers as they offer a future roadmap. This fits into the company's \"land & expand\" strategy - from introducing e-signatures to gradually utilizing the different components of the whole Agreement cloud - allowing users to achieve more ROI as they explore more of the use cases.Looking at the reviews from G2.com&Gartner, DocuSign's e-signature is at a premium pricing above the rest. Despite that, it's still the undisputed leader in the e-signature market. The strength of its brand, its integration to many enterprise software, and potential extensions to other value-adding software certainly justify the costs.Source: Winter 2021 Investor PresentationValuationSimilar to our Q2'22 article, we will use a 5 year Discounted Cash Flow (\"DCF\") valuation method to determine a fair value for DocuSign, and bring it back to its present value.We have shared how we derived the variables such as Discount Rate, Dilution, and Exit Price Multiple. The variables and the assumptions made are the same, except for the drop in year 1 revenue growth rates. Using the recent quarter growth rate, we brought down the revenue growth from 50% to 40% to give a more conservative estimate.Source: Author's estimates with DOCU's SEC FilingsWe derived an intrinsic per-share value of $219. As of 28th Dec'21 closing price at $152, there's an implied upside of at least 40%.Using the same assumptions (except year 1 growth rate) and working backward from the closing price of $152, the market is expecting a drastic growth slowdown and year 5 revenue of USD 5.7 billion.Source: Author's estimates with DOCU's SEC FilingsThe management indicated during their Analyst Dayt hat the near-term goal of USD 5 billion will still be mainly from e-signatures. This means that at current prices, the market is not pricing in any growth from the Agreement Cloud in the next 5 years.Insider BuyingDespite the Q3'22 results which caused the share price to drop 40%, something that caught our attention is that CEO Springer bought $5 million worth of DOCU's shares after the drop.Source: SEC Form 4 7th Dec & 8th DecWhen asked about his buying decision during a UBS investor conference on 8th Dec, he mentioned:I'm very confident. I'm making a good investment. And as I've said openly, if the stock doesn't react over the coming days, weeks, months and doesn't get sort of more in line with where I think it should be, I'll continue to be a buyer.As an insider with full knowledge of the pipelines and daily operations, this move displayed huge confidence in DocuSign's prospects.ClosingThe pandemic had made e-signature a mission-critical software for businesses to operate in today's \"Anywhere Economy\". DocuSign is positioning itself by being more than that, as e-signatures get commoditized. By tapping on its industry-leading brand presence, the company is leading customers into its larger value-adding Agreement Cloud.Current prices seemed to only factor in the growth of e-signature. Even though the whole Agreement Cloud segment is still small, there are already customers utilizing specific products. As DocuSign gradually gets embedded into customers' workflows with more products, its software will become stickier. With increasing sales traction, the Agreement Cloud has the potential to become a game-changer and key revenue contribution for DocuSign in the near 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has become part of legal&nbsp;Agreement","listText":"E-signature has become part of legal&nbsp;Agreement","text":"E-signature has become part of legal 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