DocuSign overview
Key stats
*As at 31st Oct 2020*
820,000 customers
70% market share
E-signature market estimate of $25 billion (just scraping the surface)
$42 billion market cap
The Business Model
DocuSign’s primary focus is solving the issue of getting documents signed in a more efficient way. Businesses of all sizes face the task of signing potentially thousands of documents every year, and with that – there is the potential for mistakes, added employee costs, time spent filing etc.
DocuSign’s e-signature service improves efficiency and reduces time for the user as it…
Cuts the cost of human delays and errors
Saves time, money and paper
Minimises delays to close more deals
Improves compliance
Improves customer and employee experience
Along with this main pull, DocuSign offer a suite of 12+ products under the bundle of ‘Agreement Cloud’, which handles the entire workflow for creating a contract. It also even integrates a bunch of really innovative technology sources such as artificial intelligence to automatically read contracts just as one example.
All of these services operate on a subscription basis which accounts for 95% of revenue. This is usually a good source of recurring revenue as long as the service is well maintained and they can keep their customers coming back.
Along with growing the customer base, another way to increase revenue is to increase the amount customers spend each month.
Market Opportunity
According to the latest filings from management, the market opportunity is large for DocuSign with an estimated Total Addressable Market of $25 billion for e-signatures, with the Agreement Cloud adding ‘substantial upside’.
With an estimated market share of about 70% and 820,000 paying customers (as of 31st Oct 2020), including 110,000 enterprise and commercial customers, compared to 560,000 customers and 65,000 enterprise customers as of October 31st 2019. This is a 46% and a 69% increase respectively.
All this is a good indicator of market penetration, the growth of the business and the potential for future business opportunities. And due to increasing awareness of the software suite, increased investment in sales + marketing and continuing to develop the product based on different business needs, DocuSign have expanded the diversity of their customer base to include organisations of all sizes across nearly all industries.
I think it would be fair to say at this point, a good portion of the growth we see here is somewhat fuelled by Covid, as work is moving to a more remote nature. However DocuSign are in a much better position to retain these clients than competitors such as Adobe or HelloSign due to the level of depth in the product which really does cover the whole of your agreement/contracting workflow.
Competition
Along with a host of smaller SaaS companies such as HelloSign, DocuSign faces stiff competition in the form of Adobe, the software giant. With Adobe Document Cloud currently being it’s largest direct threat, though Adobe’s market share here is roughly 5%.
That being said, Adobe we absolutely be looking to compete in this space – as the e-signature aspect of the company is the fastest growing part (22%y/y growth). In addition, Adobe will likely be in a good cash position over the next decade to really invest, innovate and aquire due to their solid cash balance. For example, DocuSign’s book value is currently 426 million whilst Adobe’s currently sits at about 13 billion.
Adobe’s main market isn’t e-signatures, however. Therefore I believe with the correct focus and strategy Docusign can keep their title as leader in this sector.
Financials/Valuation
*As of 31st Oct 2020*
TTM Revenue of $1.297 billion compared to 898.81 million the year prior (+44%)
Net Loss of £170 million for the 9 months ended Oct 31st , up 10 million Y/Y but down as a percentage of revenue (17% in 2020 compared to 23% in 2019)
P/S ratio of 32.69 compared to competitor Adobe’s 17.72
Fundamentally, DocuSign’s revenue path looks promising – with strong revenue growth y/y. Much of this will likely be attributed to the impact of coronavirus forcing the entire world to adopt their product. However, this type of growth isn’t far out of line with previous years (below). That being said, it will be interesting to see if they can keep this growth up in the near future.
Valuation-wise, it’s difficult to say DocuSign look anything other than expensive, all things considered. The market cap for the company is currently at $42 billion, and they are trading at a lofty price to sales ratio of 32.69 compared to Adobe’s 17.72.
Acquisitions
Part of what makes DocuSign stand out from the competitors here are the quality of the acquisition and what it says about their overall strategy and goal with the product.
Seal Software ($188 million)
Part of the parcel of improving the current product DocuSign offers involves the use of new tech such as AI. This is where the acquisition of Seal Software comes in. The Seal business contains assets which will enable features such as an AI reading through a legal document – which will significantly reduce time for legal reviews.
This is a great acquisition in my eyes as it adds real value to the stock.
Liveoak Technologies ($38 million)
With an existing relationship already in place, this deal makes sense. Liveoak brings together live video, collaboration tooling and identity verification that enables parties to get notarized approval as though you were sitting at the desk in front of the notary.
It adds another element of the contract workflow into the DocuSign ecosystem.
Risks
As expected, there are a whole host of risks surrounding this relatively young company in an industry that is expanding by the day. To name just a few:
Risk of not achieving profitability in the future.
Any decline in e-signature sales could severely adversely affect the results of operations
Operating in a new and evolving market. If the market stalls or does not develop as planned, business will likely suffer.
Customer base must continue to grow to increase revenue.
Recent rapid growth not indicative of future growth.
Negative reputation could drastically harm the business.
Not in as good a cash position as main competitor, so could hinder the ability to accelerate growth in an inorganic way.
Conclusion
Looks like I’m a bit late to the party on this one. Nevertheless, I still think there is plenty of opportunity to be had with this extremely exciting company.
There are huge secular trends pointing to the widespread adoption of the e-signature technology - net zero, remote working and more people using smartphones for work (just to name a few).
Acquisitions look promising and add value.
All in all, very exciting – and I will be keeping a close eye on this one in the near future.
Cheers,
Innovestor