Last week, DocuSign (NASDAQ:DOCU) reported fourth-quarter non-GAAP earnings of $0.12 a share, easily surpassing Wall Street analysts' $0.05 EPS expectations. The company recently made an acquisition of Seal Software, an artificial intelligence company for $188 million in cash. DocuSign also mentioned that the coronavirus situation has yet to affect results. 

Let's take a closer look at what else DocuSign management had to say about its latest earnings and the Software as a Service company's outlook for 2020.

Strong results for the fourth quarter

For the quarter, DocuSign reported revenue of $275 million, a 38% increase from the same quarter last year. Billings rose 40% year over year to $367 million. For the year, revenue increased by 39% to $974 million. The total number of customers rose 24% to 589,000. The company guided for $1.27 billion in revenue for this year, an increase of 31%.  

Keyboard with a digital signature key

Image source: Getty Images.

Lots of developments in 2019

Last year, DocuSign introduced the concept of Agreement Cloud, which automates much of the agreement process, including preparing, signing, and managing agreements. The idea of the program was to integrate all of a firm's agreements and contracts into a single space, which will be helpful when contracts span different departments -- for example, an offer letter which involves the affected department, human resources, and legal. Agreement Cloud is still in development mode and it did not affect current results. That said, the Seal acquisition fits directly with the Agreement Cloud concept, and will be key to upselling customers in the future. 

The Financial Services industry was one of the early adopters of digital signatures, which DocuSign specializes in. And, with interest rates falling precipitously in 2020, there has been an increase in home loan originations and refinancing agreements that have boosted the use of digital signatures.   On the earnings call, CEO Dan Springer said it has yet to see any lift from lower rates and increasing refinance activity, and management didn't include a reference to the change in its guidance. This may simply be because it's too early to say how it will affect things. The big drop in rates has only begun to drive refinancing volumes in the last month. Separately, the Mortgage Bankers Association recently increased its forecast for 2020 by 20%, so this represents upside to DocuSign's business this year. 

DocuSign in late February reached an agreement to acquire Seal Software, an artificial intelligence company specializing in contracts and legal software, for $188 million in cash. DocuSign had already made a strategic investment in the company, and the two have been partners for two years. On the conference call, Springer mentioned Seal Software and how he expects it to contribute to DocuSign's revenue totals. He cited a recent example of how it was put to use to enable an aviation company to review more than 25,000 agreements in just a few business days, something that would be impossible under a manual process and would have taken months. 

Looking ahead: Operating leverage kicks in and a bright future is forecast

In the earnings presentation, DocuSign introduced guidance for 2020 and gave enough color to create a back-of-the-envelope income statement. The guidance suggests that operating leverage is beginning to kick in, which is the key to growth stocks. In a nutshell, DocuSign is guiding that operating expenses, sales and marketing, and research and development will be roughly flat in 2020 compared to last year. As a result, with the increase in revenue, DocuSign expects to turn a profit for the year. Note that the midpoint of guidance gives earnings per share of $0.31 for the year. Wall  Street analysts are looking for $0.42 in yearly EPS in 2020.

Yearly results Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020
Revenue $701 million $974 million $1,274 million
Cost of revenue $192 million $243 million $268 million
Operating expenses $935 million $924 million $917 million
Operating margin ($426 million) ($194 million) $89 million

Note: 2018 and 2019 figures are actual, 2020 figures are guidance for the year. Source: Company filings

On the conference call, Springer discussed the road ahead. First, DocuSign should be entering the elite group of Software as a Service companies with more than $1 billion in yearly revenue. The first billion was driven by DocuSign's efforts with e-signatures. The second billion in yearly revenue will be driven by the company's efforts to incorporate the Agreement Cloud concept. Seal Software represents a game-changer in contract review (think of how many billable hours are spent on something that can now be automated). Operating leverage is kicking in, and the company should turn a profit this year.

DocuSign has critical mass in a field that will only grow based on convenience and value.