On September 5, electronic signature solution company DocuSign (DOCU) reported its fiscal 2020 second-quarter earnings results for the period that ended on July 31, 2019. The company reported revenue of $235.6 million, a YoY (year-over-year) rise of 41%. This result was $14.79 million higher than analysts’ consensus estimate. The company also reported non-GAAP (generally accepted accounting principles) EPS of $0.01, $0.03 lower than analysts’ consensus estimate. DocuSign’s GAAP EPS of -$0.39 were $0.13 lower than the consensus estimate.
In its second-quarter earnings investor presentation, DocuSign provided robust revenue guidance for the third quarter and fiscal 2020. The company expects third-quarter and fiscal 2020 revenue of $237 million–$241 million and $947 million–$951 million, respectively.
Yesterday, DocuSign closed at $46.25, 1.28% lower than its previous closing price. However, in the wake of its second-quarter earnings announcement, the stock was up 22.92% to $56.85 in the premarket trading session today.
DocuSign’s key growth drivers
On its second-quarter earnings call, DocuSign highlighted the importance of three key growth drivers:
- acquiring new customers
- cross-selling to existing customers
- introducing novel solutions
DocuSign had 537,000 paying customers at the end of the second quarter, a YoY rise of 25%. In the quarter, the company acquired 29,000 new customers, 4,000 of which were direct customers. Its direct customer base size was 64,000 at the end of the second quarter. At the end of the quarter, it had 370 customers with an annual contract value of more than $300,000. This total implied a YoY rise of more than 50%.
In March, DocuSign announced the launch of DocuSign Agreement Cloud. According to DocuSign’s second-quarter earnings call, DocuSign Agreement Cloud includes products and prebuilt integrations that enable the digital automation of a client’s entire agreement process. Strong customer base growth and increasing demand for DocuSign Agreement Cloud products led to a 47% YoY rise in the company’s billings to $252 million in the second quarter.
In September 2018, DocuSign acquired SpringCM. The deal added cloud-based CLM (contract lifecycle management) software. This software is emerging as a robust growth driver for DocuSign’s portfolio.
According to DocuSign’s second-quarter earnings call, its core eSignature Solutions and other DocuSign Agreement Cloud products are targeting an addressable market worth more than $25.0 billion. To learn about how rival Dropbox is also targeting the opportunity in the electronic signature space, read Is Dropbox Eyeing the $3.2 Billion Digital Signature Market?
Revenue mix and visibility
In the second quarter, DocuSign’s Enterprise & Commercial segment accounted for 87% of its total revenue—a rise of one percentage point YoY. The company reported a 31% YoY rise in its number of enterprise and commercial customers in the quarter.
Increasing sales of CLM software to SpringCM customers and DocuSign’s existing customers emerged as a key growth driver for the company. It guided for total billings worth $260 million–$270 million in the third quarter and $1.06 billion–$1.08 billion in fiscal 2020.
In the second quarter, DocuSign earned $221 million in subscription revenue, a YoY rise of 39%. Subscription revenue accounted for 94% of the company’s total revenue. DocuSign is mostly involved in long-term commitments with customers. In the second quarter, 84% of its contracts were for periods of longer than 14 months. It also earns 65% of its total dollars from contracts with an average length of more than 19 months.
In the second quarter, DocuSign reported dollar net retention of 113%. According to its second-quarter earnings call, the expansion of its product portfolio enabled its salesforce to improve upselling activity in its installed base. This expansion also helped reduce customer churn.
Margin and expense guidance
During its second-quarter earnings investor presentation, DocuSign guided for a non-GAAP gross margin of 78%–80% in the third quarter and in fiscal 2020. The company expects its non-GAAP sales and marketing margin to be 48%–50% in the third quarter and in fiscal 2020. It expects its non-GAAP research and development margin to be 15%–17% in the third quarter as well as in fiscal 2020. Finally, it expects its non-GAAP general and administrative margin to be 10%–12% in the third quarter and 11%–13% in fiscal 2020.
DocuSign expects interest and other income of $3.0 million–$4.0 million in the third quarter and of $13 million–$16 million in fiscal 2020. It’s guided for income tax provisions of $1.0 million–$2.0 million and $6.0 million–$8.0 million in the third quarter and fiscal 2020, respectively. Finally, it expects its non-GAAP diluted weighted average shares outstanding to be 185 million–190 million at end of the third quarter and 190 million–195 million at the end of fiscal 2020.
Analysts’ recommendations for DocuSign
The 13 analysts tracking DocuSign have an average target price of $64.58 on its stock. This target indicates a potential upside of 39.63% in the next 12 months based on the stock’s previous closing price.
On July 9, FBN Securities initiated coverage for DocuSign with an “outperform” and a target price of $60. On August 16, DA Davidson and Danske Bank initiated coverage on the company with “buy” recommendations and target prices of $52.