DocuSign (DOCU 57.60, -5.50, -8.72%), which pioneered the electronic signature
software market, is trading lower after reporting Q2 (Jul) results last night.
Of note, DOCU made its IPO debut in April 2018, making yesterday’s results just
the company’s second earnings report since going public.
DocuSign offers the world's leading e-signature platform, providing convenient, integrated digital solutions for signature agreements common in everyday business operations, real estate transactions, and more. So pervasive is the platform’s presence in its market, in fact, that the company name is becoming a colloquial verb. It's possible that you have "DocuSigned" a job offer or purchased a home using DocuSign, or perhaps you have “DocuSigned” a lease for an apartment.
The traditional, paper-based agreement process is manual, slow, expensive, and error-prone. DOCU eliminates the paper and automates the process. By substituting out faxing, mailing, or shipping requirements associated with paper for an intuitive digital platform that can integrate readily with other business apps, DocuSign allows companies to turnaround an agreement in minutes rather than days. DocuSign’s customers range from large global enterprises to sole proprietorships, spanning across industries around the world. Within a given company, document signing technology can be applied broadly to various business functions: contracts submitted by sales departments, employment offers sent by human resources, non-disclosure agreements for legal teams. One of its customers has implemented the technology for more than 300 purposes across its enterprise.
This market is still early in its development. Agreements are foundational to business, as companies collectively enter into millions of agreements with partners, customers, employees, and other parties every day, but DocuSign sees that the agreement process has not yet been fully transformed digitally. The process continues to be fraught with friction and frustration -- with costliness, outdated methods, and unnecessary difficulties that slow down bottleneck steps in the agreement process -- and is therefore ripe for transformation.
Growth Strategy: DOCU believes the market for e-signature remains largely underpenetrated, and the company intends to take advantage of opportunities to meet market need. In addition to expanding to new customers and growing their presence within current customers, other target growth areas for DocuSign include growing internationally, as only 17% of the company’s FY18 revenue came from outside the U.S. Also, DOCU sees opportunities to extend across the entire agreement process beyond e-signatures. This is the central concept of its System of Agreement vision announced in June 2018, which includes support for aspects of the agreement before (document creation, collaboration, redlining, review, text search) and after (payment services) the signatures are executed.
Quickly turning to DocuSign’s Q2 (Jul) results, non-GAAP EPS rose to $0.03 from a $(0.05) loss in the prior year period. This was better than market expectations. Revenue rose 33.1% year/year to $167.0 mln, which was nicely above prior guidance of $157-160 mln. Subscription revenue was $158.5 mln, an increase of 35% year/year. DOCU also issued upside guidance for Q3 (Oct), seeing Q3 revs of $172-175 mln. Full year revenue guidance was increased to $683-688 mln from $652-658 mln.
The other big news was that DOCU completed its acquisition of SpringCM for $220 mln. SpringCM is a cloud-based document generation and contract lifecycle management software company. With SpringCM, DocuSign will accelerate customers' ability to modernize their Systems of Agreement: all the way from preparing to signing, acting-on, and managing agreements. With SpringCM, DocuSign says it will be able to bring the same simplification it brought to eSignature to the rest of the agreement process. With DOCU's much larger salesforce, DOCU thinks it can significantly expand SpringCM's growth.
Investors may wonder why the stock is trading lower despite the beat-and-raise. Our sense is that the main reason is because the size of the EPS beat was not as large as it was in Q1 (Apr). Also, the stock has been running quite a bit since its IPO debut, which priced at $29 in April and opened at $38. It closed yesterday at $63.10. Our sense is that expectations were pretty high heading into this JulQ report, and perhaps a more modest beat is causing investors to lock in some profits. But this was another good quarter for DocuSign, and the SpringCM acquisition seems like a nice fit for the company’s forward-looking targets.
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