Electronic-signature pioneer DocuSign (DOCU 3.17%) disappointed investors with its fiscal first-quarter 2019 earnings report on June 6, mostly by revealing year-over-year billings growth of 27%. Though impressive, this rate marked a deceleration in recent billings expansion. Below, let's review three comments made by CEO Dan Springer during the company's earnings conference call that provide both near- and long-term context around billings and revenue growth.
1. Higher-quality sales slowed billings
Multi-product sales involved more complexity in terms of integration designs and related SOW [statements of work]. This very positive motion in our business also elongated some of our upsell cycles this quarter for existing customers wanting to deploy our expanded offerings. This extended sales cycle impacted our billings and dollar net retention in Q1.
As CEO Springer explained during the earnings call, DocuSign is transforming from a single-product organization (i.e., a seller of digital-signature technology) into a multi-product organization. With its purchase of SpringCM in September 2018, DocuSign is now able to offer a range of cloud-based document generation services under the broad umbrella of contract life cycle management (CLM).
The ability to offer a wider range of solutions not only elongates current customer upsell cycles; it also impacts new customer acquisition. Springer gave the example of a large European bank prospect in the first quarter, noting that if DocuSign were still only selling e-signature products, it would have likely closed the sale during the quarter. However, the bank expressed interest in the company's new CLM products, and the deal closed 10 days after quarter-end.
The extension of DocuSign's sales cycle will affect billing growth rates in the near term. But eventually, investors should be able to see a corresponding increase in annual contract value (ACV). ACV is indeed already ramping up as the company expands use cases for its software: Customers with ACV in excess of $300,000 leaped by 51% over the prior-year quarter to 324 in fiscal Q1.
2. The company is rolling out a specialized sales force
[T]he further rollout of specialized sales teams [is] focused on new customer acquisition, while others will focus on the installed base. This is something we tested with great success last year and rolled out more broadly in North America this year. We are already seeing a net increase in new logos, as well as the expansion of use cases within our existing customers.
DocuSign's rollout of separate sales teams for current and prospective customers is based partially on the idea that as the company chases new business, opportunities to upsell products to existing customers based on evolving use cases may get overlooked. Dedicating specialized sales personnel to isolate and close on these opportunities is a cost-effective way to improve revenue.
But the rollout also reflects a pragmatic decision on the part of management. As DocuSign attempts to procure larger clients through an expanded array of document solutions, it needs to hire increasingly specialized subject matter experts and software sales consultants. The "land and expand" model is time-honored among software-as-a-service (SaaS) companies. A big landing (i.e., securing a high-value initial contract) with a large customer will typically produce higher lifetime customer value than a small landing (i.e., a meager contract within a single department of the new customer).
Thus, it makes sense to dedicate one sales team to focus on increasing ACV with existing customers, while fielding another sales team with sophisticated capabilities to ensure hefty initial ACV from significant new corporate clients.
3. The company launched the DocuSign Agreement Cloud
In March this year, we [announced] the DocuSign Agreement Cloud, our expanding suite of more than a dozen products and over 350 integrations for digitally transforming how organizations prepare, sign, act on, and manage their agreements.
As I discussed earlier this year, DocuSign's growth strategy relies on organizations buying into the idea that they need formalized systems of agreement (SOA). DocuSign defines an SOA as a system that organizes the life cycle of an agreement, and the company breaks this life cycle into four easily remembered steps: prepare, sign, act on, and manage.
The DocuSign Agreement Cloud is meant to provide SOA architecture through roughly one dozen applications, accompanied by 350 integrations for existing programs and apps. These integrations provide the glue between DocuSign's SOA applications and products originating from partners such as customer relationship management (CRM) giant salesforce.com.
Acceptance by enterprise organizations of the SOA concept will increase DocuSign's total addressable market (TAM) well beyond the e-signature space. Management believes DocuSign's TAM could nearly double from its current estimate of $25 billion via an expanded product line rooted in SOA.
The company is investing heavily in document agreement technology to provide value to customers and thwart potential competitors. For example, in March, DocuSign invested $15 million in start-up partner Seal Software, which provides companies with artificial intelligence-driven insights through the mining of agreement documents.
DocuSign's agreement cloud also incorporates SpringCM's CLM technology, particularly in the prepare, act on, and manage life cycle phases. It's important for shareholders to understand that most of DocuSign's products going forward will likely exist within the agreement cloud and address one of the four document phases. The agreement cloud will provide structure for customers' systems of agreement, but it will also provide ongoing structure for DocuSign's research and development efforts, acquisitions, and ultimately, its revenue.