Disruptive tech firms often observe the identical journey. It begins with sturdy income progress which represents one thing being disrupted and market share being captured. Then, they set up some gross margin cadence which displays the longer term potential for profitability. Lastly, they begin realizing constructive working money flows which pave the best way from progress to worth. An organization with excessive gross margins (80% or increased) and constructive working money flows that sells merchandise/providers to over one million shoppers could be very enticing. Why? As a result of they’re a sustainable franchise with established gross sales channels that can be utilized to upsell and cross-sell. That’s the enchantment of as we speak’s firm, DocuSign (DOCU).
Issues With DocuSign Inventory
You can not have disruption with out sturdy income progress. What’s sturdy? We take into account double-digit progress to be a minimal, which is why DocuSign has us fearful. It’s been virtually two years since we revealed a chunk titled, Is It Time to Fear In regards to the Slowdown in DocuSign Inventory? That was adopted by extra issues voiced final 12 months round dismal SaaS metrics, three of which we mentioned had been most essential to look at. From final 12 months’s piece:
Income progress: Later this 12 months DocuSign will announce subsequent 12 months’s steerage, maybe on the similar time they launch this 12 months’s actuals. Any disappointments right here will underscore our issues.
Internet retention charge: Has now dropped for eight quarters in a row. That is our largest concern – current clients discover growing spend with DocuSign as non-obligatory.
# of Shoppers over 300K: Massive shoppers are spending much less, and there needs to be a correlation between this quantity and the web retention charge.
We concluded, “If they will’t enhance two out of three by the tip of this 12 months, we’ll need to search for LegalTech publicity elsewhere.” Right here’s what occurred.
Horrible Horrible SaaS Metrics
Let’s overview every of the three metrics which we’ll use to resolve if DocuSign ought to keep or go.
1) Income Progress
DocuSign noticed almost 10% income progress final 12 months which beat steerage of 8% (good) however they’re guiding to a midpoint of 5.8% progress this 12 months (unhealthy). Even hitting the excessive finish of their tight steerage vary means simply 6% progress which factors to a transparent decline. DocuSign’s quarterly revenues present the expansion pattern will likely be damaged for the primary time, even when the corporate hits the highest finish of this coming quarter’s steerage.
One purpose revenues aren’t rising is as a result of current clients are spending much less over time.
2) Internet Retention Charge
Gross retention is a metric we use to see if shoppers are transferring to the competitors. We’re instructed in Q1-2024 that the corporate doesn’t present this metric, then most lately, we’re instructed “gross retention was flat year-over-year in This autumn throughout the direct e-book of enterprise.” Not overly helpful data. Transferring to web retention charge (NRR), we’re instructed it’s now 98% which implies shoppers are spending much less over time – a giant crimson flag.
The corporate tries to color a prettier image. “We’re inspired that the tempo of year-over-year decline slowed considerably,” no matter which means, and the approaching quarter, they anticipate NRR to be “flat to down barely.” What we have to see is an NRR that’s above 100% which exhibits that they’re efficiently upselling and cross-selling.
With their common contract having a lifetime of 19 months, it means they’re probably negotiating contract renewals at lower than what they obtained earlier than. Usually, salespeople will speak up new and added options to justify a value enhance. On this case, shoppers are most likely pointing to explanation why they need to pay much less. Since eSignatures clearly add worth, they’re most likely discovering cheaper options from competing options. This could begin placing strain on DocuSign’s gross margins, however they appear tremendous for now, hovering round 82-83%.
We absolutely anticipated that DocuSign could be utilizing all of the startups they’ve invested in to seek out new avenues for progress. Primarily, we’d prefer to see them cross-selling adjoining choices – like AI contract negotiations – after which breaking these out in income segments so we will see progress. As an alternative, they appear centered on profitability metrics and level to worldwide revenues (27% of complete) as a key progress space going ahead. Sadly, that’s muted by the reducing spend in the USA, which brings us to our final metric.
3) # of Shoppers over 300K
Having shoppers spending much less over time helps clarify why the # of shoppers spending over $300,000 dipped as seen under.
This metric seems to be resuming its upward climb, although it must clear the earlier excessive (1080 shoppers) earlier than we put this matter to relaxation (and resume the upward climb, after all). Within the newest earnings name, we’re instructed “This autumn bookings for purchasers with complete contract worth over $1 million elevated by greater than 50% year-over-year.” With out benchmark numbers this data doesn’t imply a lot. What number of clients are spending over $1 million, and is that this quantity – not bookings however the precise quantity – growing over time?
Revisiting Our Authentic Thesis
Simply over 4 years in the past, we visited Estonia’s Pactum AI to study their AI algorithms that negotiate contracts with 96% of the method being automated. Certainly one of their traders, DocuSign, claimed that “DocuSign Analyzer” was able to the identical factor, making us surprise if DocuSign was utilizing their very own know-how or Pactum’s. Our follow-up piece titled A Pure-Play LegalTech Inventory for FinTech Traders checked out how DocuSign had a 70% market share in eSignature performance with Adobe trailing behind at 20%. That management place together with their fast progress and obvious utilization of AI made us resolve to maneuver out of the World X Fintech ETF (FINX) and into DocuSign. We hoped their progress would proceed whereas they upsold their 1.5 million shoppers extra AI-powered providers. Metrics inform us this isn’t taking place.
ARK exited their DocuSign place in 2022 and shortly afterwards started the relentless decline in web retention charge. Did ARK see one thing we didn’t? The principle drawback is that current clients are spending much less cash. Assuming they’re not bailing completely (we don’t know as a result of we’re not given gross retention charges), they’re most likely renegotiating contracts for a platform that gives a commodity service – eSignatures. DocuSign ought to have been growing adjoining choices to shore up their providing which is what all that AI fuss was about. Their latest acquisition of Lexion – an settlement administration firm – looks as if too little too late. It’s been three years since we examine all of the issues they had been doing with AI, however income progress tells us a unique story.
There’s a temptation right here to have a look at DocuSign’s giant buyer base, money stream era potential, and wholesome gross margins as a help stage. Certainly the inventory value received’t crater that a lot as a result of some non-public fairness agency will swoop them up. (Rumors have been circulating.) It’s the identical type of hopium wanted to imagine there’s some nice turnaround story ready to occur. DocuSign may be the one agency left on the market blaming their shortcomings on COVID, and we suspect that isn’t the actual drawback.
Conclusion
With an earnings name days away, it’s essential to have our geese in a row. Is there any purpose to imagine subsequent 12 months will see a resumption of double-digit progress when key metrics indicate in any other case? The fast acquisition of Lexion in time for earnings looks as if a Ginkgo transfer. Look, we’re doing AI now! Drawback is, we’ve been anticipating DocuSign to have been utilizing AI for some time. No matter they’re doing, it’s not cross-selling and upselling. Until we see a dramatic change in these developments, it’s laborious to see a superb purpose to maintain DocuSign in our portfolio. They appear to have switched from being a disruptor to being disrupted themselves.
