DocuSign (DOCU -3.56%) has been growing rapidly as individuals and companies embrace digital processes. But despite existing for nearly 17 years, this e-signature pioneer has yet to post positive GAAP earnings. However, largely thanks to business and consumption changes spurred by the coronavirus pandemic, the company may soon reach a major turning point.
Early to the party
DocuSign has struggled to find a footing for years. Its vision for e-signatures seemed to arrive an entire decade before consumers were ready to embrace it. Early competition suffered similar hiccups: The most notable competitor was EchoSign, acquired by Adobe (ADBE 0.82%) in 2006 as a corollary to its document business, while others floundered in a sea of lackluster demand. But now, thanks to recent tailwinds created by pandemic countermeasures, DocuSign may finally find itself on the cusp of real success.
To stay afloat, DocuSign needed to rethink its strategy. It began expanding and exploring adjacent opportunities to pad out its value and convenience. No longer just offering e-signatures, DocuSign remade itself as a one-stop solution for the entire agreement process, launching the company's increasing -- if still unprofitable -- growth.
That approach seems to be paying off amid the coronavirus pandemic, which has accelerated the need for its services by making remote work and contactless business the new norm. Besides catering to increased traditional needs such as executing business contracts, DocuSign benefits from "new" digital agreement flows, like hospital intake processes, digitization of court documents, and more. It offers value beyond just e-signatures through these newer services and through digital integration with big-name companies, such as Google (GOOGL -0.21%), Microsoft (MSFT 0.13%), Oracle (ORCL 1.45%), and SAP (SAP -0.98%).
The e-agreement sector offers little differentiation between competitors -- but interestingly, DocuSign seems to have acknowledged that potential weakness and shored up its efforts to retain customers. It has worked to consolidate its first-mover advantage, mostly through acquisitions, at a time when consumers and businesses need its services most.
For example, DocuSign recently rolled out an agreement cloud program designed to automate and streamline the entire digital agreement process. To that end, it also acquired Seal Software, an analytics company that can help users understand potential risks and opportunities in their contracts, and Liveoak Technologies, a video-based auditable transaction company that will aid DocuSign in offering remote online notarization.
All these efforts are proactively widening DocuSign's audience and reach at a critical juncture in its history.
Untapped market offers ample growth opportunity
In its race toward profitability, DocuSign has actively invested in widening its customer base, as well as increasing its revenue per customer. But given its years of negative returns, DocuSign still has room for improvement. The company is growing, and now is the time for its management team to capitalize on its untapped potential. If current factors remain on a steady course, DocuSign could be positioned for a future home run.
DocuSign's revenue is unquestionably trending upward, laying a solid foundation for future growth. In the first quarter of its fiscal 2021, the company reported total revenue of $297 million, a 39% increase year over year. Four years before, it booked roughly $250 million in sales for the entire year.
Despite that increase in total revenue, the company still struggles to post positive net income. Net operating cash has increased 30% year over year, and free cash flow has been consistently increasing since 2018, suggesting that DocuSign can make enough money to maintain its operations. But a closer look at its financials reveals that the company invests heavily in itself and its own growth, which is keeping its net income negative. DocuSign has stated that it intends to keep up that spending; management believes it needs to keep expanding to stay relevant to its customers.
Those efforts may be starting to pay off, especially at the larger end of DocuSign's client list. While customers paying $300,000 or more in annual contract value remain less than 1% of DocuSign's client base, their ranks are growing more quickly than DocuSign's overall customers. Between fiscal 2013 and the most recent quarter, total customers grew approximately tenfold, from more than 65,000 to around 661,000. In the same time period, the number of highest-spending customers grew roughly 50% faster, from 30 to 473.
Furthermore, DocuSign still has ample opportunity for continued growth outside the U.S. Currently, the company derives only 17% of its sales from international sources, which leaves it with a largely untapped source for future revenue. That room for demand growth both inside and outside the country suggests there could be plenty of upside left for this company.
What might still go wrong
Overall, DocuSign's fundamentals, significant future growth opportunity, and subscription-based business model lay out a solid case for long-term growth. That said, a protracted pandemic-powered recession could spur client companies to cut costs. When the economy contracts, only robust companies have enough extra cash to invest in making their businesses more efficient.
If their finances get crunched, the smaller clients that constitute the majority of DocuSign's customer base may not see the value in switching to digital processes, or they may decide that old-fashioned paper is just fine for the time being. If DocuSign's customers stop finding it convenient -- or worth the cost -- the company may fall further behind on its path to profitability. Increased competition from other, newer upstarts entering the e-agreement market could also trip up DocuSign's ambitions.
However, DocuSign's successful approach to expanding its focus suggests that it has the vision and willingness to accommodate changing tastes. Although the downside risk remains, this forward-looking company has the means to stay in the game for the long haul. Investors should keep an eye on the company's GAAP profits; if and when the company's bottom line tips into positive territory, this stock could become an attractive buy.