E-signature services soared in popularity during the pandemic when even industries that had stubbornly avoided the convenient technology had little choice but to adopt it. DocuSign (DOCU -0.26%) emerged as the clear leader. The company now has nearly 1.5 million paying customers, and over a billion people worldwide use its software.
DocuSign faces intense competition in its core e-signature market, from upstarts as well as from established software companies like Adobe and Dropbox. Other than name recognition, it's not clear whether DocuSign has a competitive advantage. While the global e-signature market is still growing rapidly, DocuSign's growth has nearly stalled. Revenue expanded by just 9% year over year in the third quarter, and the company's growth rate will contract to 6% in the fourth quarter.
The company's plan for years has been to diversify away from e-signatures by becoming a contract lifecycle management, or CLM, provider. Instead of providing e-signature services only, DocuSign would offer a platform that can handle all things contracts and agreements. DocuSign's Agreement Cloud can handle contract creation, collaboration, negotiation, workflow automation, contract management, and analytics on top of e-signatures.
Little progress
DocuSign doesn't disclose much information about its Agreement Cloud, but all signs point to the product being negligible at this point. The Agreement Cloud isn't new. DocuSign first launched the platform in March of 2019, so the company has had nearly five years to make it work.
During DocuSign's third-quarter earnings call, an analyst asked CEO Allan Thygesen when contract lifecycle management would become a meaningful part of the business. "It seems like you've been talking about the potential for that product suite for a few years," the analyst noted.
Thygesen gave a non-answer, saying that the product was heavily focused on the enterprise and that the company would start going after a broader set of customers over the next few quarters. Contract lifecycle management is certainly a market ripe for disruption, and DocuSign values the market opportunity at $25 billion. But the company has already been trying to grow this business for nearly half a decade.
The CLM business is growing faster than the e-signature business, according to Thygesen, but that's not a surprise given the CLM business is likely tiny at this point. The company will share its product roadmap during a user conference in April, which will include a broader agreement management platform aimed at customers of all sizes. But it's unclear what demand will look like outside of the enterprise.
Some good news
While DocuSign struggles with a slow-growing e-signature business and a CLM business that has yet to gain enough traction to matter, the company has successfully become far more efficient. DocuSign turned a GAAP net profit during the third quarter, and free cash flow soared to $240.3 million on $700.4 million in revenue. Even if you were to back out stock-based compensation, free cash flow would still be squarely positive.
The problem is that DocuSign is valued at around $9.6 billion, or about 3.5 times expected annual sales, while its growth story is highly uncertain. The e-signature market will likely continue to expand, but competition will be eating away at DocuSign's market share. Meanwhile, the company's CLM business remains a non-factor nearly five years after launch.
DocuSign's growth rate continues to decelerate as competition and a tough economy pressure the company. Dollar-based net retention was just 100% in the third quarter, meaning that existing customers aren't expanding spending on average. Worse, the company expects this metric to be lower in the fourth quarter.
DocuSign deserves credit for turning around its bottom line, but the company's growth story just doesn't look compelling.
