M&A Announcement

Aug 1, 2018

Press Release

Welcome to the DocuSign Conference Call. This call will be recorded. At the end of the call, we will be conducting Q and A. Then they can turn it over. We will now turn it over to Annie Leshin, Head of Investor Relations. Thank you. You may begin. Thank you, operator, and good morning, everyone. Joining me on the call today are DocuSign's CEO, Dan Springer and CFO, Mike Sheridan. The press release announcing our intent to acquire Spring CPM was issued aftermarket yesterday and is posted on the Investor Relations section of our website. Before we begin, let me emphasize that some of the information discussed on this call, including the anticipated timing and potential benefits of the acquisition, are based on information available as of today and include forward looking statements that involve risks and uncertainties. Actual results may differ materially from those made in such statements. For a more detailed discussion of these risks and uncertainties, please review the forward looking statements disclosure in today's press release as well as in DocuSign's SEC filings. You should not rely on forward looking statements as predictions of future events. They are based on assumptions that we believe to be reasonable as of this date. I'd now like to turn the call over to Dan. Dan? Thanks, Danny, and thank you all for joining our call. Over the last several months, we've been talking to you about our systems of agreement vision. It's about broadening our solution beyond eSignature to the rest of the agreement process from preparing to signing to acting on and ultimately managing agreements. That's why we couldn't be more excited to talk to you today about our intent to acquire SpringCM. With the addition of SpringCM capability in areas of document generation, redlining, advanced document management and end to end agreement workflow, we are taking a big step forward in making our system of agreement vision into a reality. SpringCM is a leading cloud based document generation and contract lifecycle management software company based in Chicago. It has been it has more than 600 commercial and enterprise customers worldwide, including ADP, Aetna, Facebook, Hilton, Lenovo, Spotify and the U. S. Department of Agriculture. The company's top industries served are high-tech, financial services, business services as well as public sector, where like DocuSign, RingCM is FedRAMP authorized. As you know, DocuSign pioneered the e signature category, and we have built a strong SaaS business around that capability. We've also started to offer solutions that connect and automate the entire agreement lifecycle. We've begun to do this with SpringCM as a partner across hundreds of joint commercial and enterprise customers. And we have many more DocuSign customers asking us to provide document generation, redlining and more advanced workflow capabilities natively as part of our platform. That's why we believe our acquisition of SpringCM makes such great business sense. To be a little bit more specific, let me share the 4 main product capabilities that SpringCM natively bring to DocuSign. First, before the signature, SpringCM has capabilities for automated document generation. This allows you to create an agreement from a library of approved templates and legal clauses, then connect it to other systems like salesforce.com to automatically fill in the field with customer and product information. Compared to having employees create agreements from scratch, then rekey data that's already in other systems, this automated document generation saves a lot of time and it prevents a lot of error. Other big thing that happens before the signature is collaboration and negotiation, like when a signer wants changes made to an agreement that is sensitive. For this, RingCM enables document redlining, versioning and activity tracking down to every single change made to the agreement. After the signature, RingCM provides a central repository for agreement that makes them searchable, even when the documents are only images of text, like PDF. RingCM also has capabilities for adding tags and other metadata to further enhance searching. Whereas DocuSign has always been able to store signed agreements, SpringCM is bringing new capabilities to organize and search those stored agreements. Finally, SpringCM offers comprehensive end to end agreement workflow. This allows you to automatically move an agreement through a series of activities before, during and after signing. These activities can be within SpringCM and also within other systems, including DocuSign eSignature, which is already integrated, as well as others like Salesforce. That was just a quick outline of the 4 main product capabilities that SpringCM brings to DocuSign. We also have a host of SpringCM customers that currently have DocuSign core e signature products integrated, and we're already seeing the benefits of our combined offering today. For example, using SpringCM and DocuSign together, Uber Eats generates electronically signed and then manages tens of thousands of agreements with their restaurant partners. Other joint customers use SpringCM to collaborate with customers on complex negotiated agreements, which are then DocuSign. We are confident that for every existing joint customer like these, there are many, many more DocuSign customers and prospects that can achieve similar benefits from the SpringCM and DocuSign combination. So to summarize, this deal is about accelerating and deepening our ability to modernize organization systems of agreement. It will also further differentiate our core e signature offering with the ability for customers to easily add the SpringCM component as desired. And at the same time, we will continue to maintain an open platform with the most integration options to other systems like Salesforce, SAP, Microsoft, Google, Oracle, Workday as well as hundreds of more specialized players. Now let me pass it over to our CFO, Mike Sheridan, to talk more about the terms of the transaction before we open the call to questions and answers. Mike? Thanks, Dan. As Dan mentioned, SpringCM's products bolster our pre and post agreement offerings, help to build out our system of agreement platform beyond eSignature and expand our TAM. Under the terms of the definitive agreement, DocuSign will acquire SpringCM for $220,000,000 in cash and we expect the transaction to close in the Q3 subject to customary closing conditions and regulatory approvals. SpringCM sells its products on a subscription basis primarily to mid market and enterprise customers. In calendar 2017, SpringCM had subscription revenues of approximately $15,000,000 to $20,000,000 and generated non GAAP operating losses of roughly $13,000,000 to $15,000,000 These estimates are currently under audit and will be finalized prior to the transaction closing. We will provide more details and update our guidance for the remainder of fiscal 2019 on our earnings call in early September. And with that, I'd like to open the call up to questions. Thank you. At this time, we will conduct our question and answer Our first question comes from Sterling Auty with JPMorgan. Please state your question. Yes, thanks. Hi, guys. Curious if your intention is to fully integrate, so you're only getting this set of solution if you get the e signature capability or will for some period of time will you continue to operate and sell this as a standalone contract management solution? So Sterling, this is Dan. I'm here in Chicago actually for sessions today with Spring team and we'll be sharing with them the same message. We believe it's about customer choice And we think there are some customers who will, in fact, only continue to use us for e signature and some who may look at the new capabilities that we have with Spring and say they only need those pieces. In fact, there may be some folks that are integrated with a different e signature provider. And over time, we believe they're going to see the benefit of having all those native apps into one platform. But we're going to have an open platform and it's really up to the individual customer to choose which components make the most sense for managing their overall system of agreement. And one quick follow-up is you look at diagram that you guys have shown with all the different pieces of pre agreements, agreement, post agreement, etcetera, how many of the boxes do you think does this acquisition check and how quickly could you continue that process either organically or through acquisition to fill out the other boxes? Well, I think the real answer is different levels, right? So if you think at the highest level of that, we are where we talk about the 4 major pieces, you have the pre agreement or the prepare, then you have the core e signature, you move into the act phase and then you have the core manage. Right, to some extent, we've always said we're a little bit in each of those phases today with the vast, vast majority of the DocuSign capability is in the signature. What's interesting about when you start delving more deeply into each of those areas, you see that there's a lot of software that you can build across each of those. I think it's really important when you think about Spring to focus first on the Prepare piece and look at all that functionality around document generation. If you remember from our IPO, we talked about that was the area we were probably going to go first in terms of moving aggressively outside of e signature. So that's probably the most important piece to think about. Remember, it's not just the document generation from the standpoint of the lightest generation. It's also all the redlining and other negotiation phases that are really important to think of that phase. So we think we're very excited about that piece. And the second piece, I think, when you have to look at the in the post agreement areas and you think about the actions, that's where sort of the traditional CLM space has been, helping people both think about the workflow and then as well as moving into the managed phase and the storage and the searchability of those contracts. So it's really 3 separate areas that I think you see Spring really adding a lot. But I don't want to suggest that now we're done. Because as I mentioned, a lot of these areas were only just beginning in enhancing the software capability. So I wouldn't look at it in your metaphor as we've checked off those boxes and they're completely done with us for development. Rather, we're expanding our small capability outside of signature that DocuSign had and really beefing it up in that core CLM area as well as the DocGen. So that's how I'd really think about it. Got it. Thank you. Thank you. Our next question comes from Stan Zlotsky with Morgan Stanley. Please state your question. Hey, guys. Good morning and thank you so much for taking my question. So just on the technological integration side of the business, how much how different are the underlying technology platforms and how much work is going to be required because you guys already it sounds like there is already some integration between the two systems. And as much as there is already integration there are joint customers, how much customer overlap is there? And then I have a quick follow-up. Yes. So a couple of those. So first on the stack, we're already, as you mentioned, very integrated. We don't think as we think about our overall system agreement, there's any significant challenges for us in bringing our business together on that front. And in fact, to the second part of your question, if you take a look at the set of Spring customers, over 75% of them already have an integration into using DocuSign. So we think that the big side of this opportunity is take the wonderful software technology to bring us and bring them more broadly to the DocuSign customer base. So that's one of the areas we're really most excited about, and we believe that the technology integrations that we have already will allow us to do that very easily. Got it. And then just to follow-up on Sterling's question, maybe just to draw a slightly finer point on it. From a go to market perspective and how you expect to be selling this new solution, how are you looking to make any changes to your sales force, their sales force as far as distribution of the joint solutions? So first of all, obviously, we have to get to the closing period. So we won't be doing any integration until we get to the close. But I think our perspective is that our organizations are very, very similar in our go to market. It's funny when we have conversations with the leadership at Spring about how they think about the market and going after it, we finish each other's sentences. Sentences. I mean, we are really aligned. And so I think it's going to be quite easy to integrate the businesses. The long term goal will be to have one deal sales organization. And exactly how many months it takes us to get there, we haven't done that integration planning because we haven't closed yet. But our view is, over time, we want to bring one system of agreement platform to the marketplace and we want to have the various different apps that are native within the overall DocuSign solution in an integrated way for them. So our go to market will reflect that and we will completely integrate the businesses over time. Perfect. Thank you so much. Thank you. Our next question comes from Alex Zukin with Piper Jaffray. Please state your question. Hey, guys. Thanks for taking my question. I guess, my first question is I wanted to ask about the deals for SpringCM. Given how horizontal their product is, are the deals usually licensed for the entire company? And what is the average deal size for Spring compared to DocuSign? And I've got one small follow-up. So I think you see Spring has a different customer relationship structure just like we do. If you think about our web and mobile business is obviously very different than you think about our sort of commercial and enterprise. And they have some smaller customers who might just be using them for document generation. And maybe accessing them through the salesforce.comappexchange. And it's a very straightforward and I would argue limited use of the total functionality. When you get into their core commercial and enterprise type customers, you tend to see them using that broader CLM capability. And if they're using DocGen all the way through, then they use that whole piece. So I think there's a variety. I think the majority of their customers are leveraging that broader CLM capability. We talked about a front to 600 customers at that core, the bulk of them have that broader relationship. Got it. And then maybe one for Mike. I guess, can you maybe give us help us with the size of the CLM and maybe document management TAMs, given kind of the revenue levels in 2017, I'd be curious what you think kind of the limitations have been for spring in this market thus far and kind of how you feel like together you can maybe unlock or accelerate that growth trajectory? Yes. What I would say, Alex, is first with regard to the TAM, we do think that this is a significant increase in our TAM that the Corie Signature product doesn't address. So, we're very excited about that. Not something that we can quantify today, but certainly something we're studying. In terms of what unlocks it in a way that hasn't been unlocked in the past, I think the e signature has been that key as we've talked about. We kind of pioneered that piece of the landscape and it has been the bottleneck for the automation of the full agreement. So, we think that combining in the way that we are combining their technology with our technology is what's really going to be the driver to open up that TAM in a way that it hasn't been opened in the past. Got it. Thank you, guys. Thank you. Our next question comes from Walter Pritchard with Citi. Please state your question. Hi, thanks. Product question first and the numbers question. On the various functionality that you highlight, document generation, redlining, storage, etcetera. How many of your customers on the commercial and enterprise side do you think are employing commercial solutions today in those areas versus doing those pieces on a kind of manual ad hoc basis? I think the vast majority of our customers are not yet using a sort of modern, in what we would call a modern system of agreement functionality for that. I think most people are still in a system where they're probably building some ad hoc system of their own, where they are actually literally just emailing around the documents and storing them in different disparate systems. So we think that the penetration of the core CLM capability in, I think, a modern version is very, very small. We're just getting started in that space. And the reason we've talked about in the past, I think e signature has really unlocked this capability where people now say, I have my documents online and signed. It's just so obvious to move into those active managed functionalities afterwards. So we think this is really we're excited to say we believe DocuSign has unlocked this opportunity to accelerate and the folks from SpringCM point to that as, yes, as a real turning point in their business, the availability of eSignature. And then question for Mike, just on the numbers. Thanks for the disclosure 'seventeen numbers. How do you expect in closing Q4 or Q3, say Q4 and then into next year, talking about the contribution that these products may be delivering in the business? Yes. Good morning, Walter. We're going to go into depth on that when we have our call in September. I'm just aligning the timing of the updated guidance for the core DocuSign business along with what we see as the impact of bringing Spring on board. So we'll give you more insights into that in a few weeks. Guess, philosophically, though, do you expect to help us with the contribution of these products? Or do you expect to talk about being kind of one half point? Yes. No, no, no. Well, certainly, at the outset, when we're initially providing you insights, I will give you thoughts on them as separate pieces. Going forward, once we're combined, obviously, probably not. But at the outset, yes, we'll help you guys understand them. Okay. Thank you. Thank you. Our next question comes from Justin Furby with William Blair and Company. Please state your question. Thanks guys and congrats on the deal. I guess just going back to the TAM question, maybe asked a different way, Dan. If there's a customer like an Uber Eats using you on the e signature and using Spring on the CLM side, if they're paying you $1 I mean, could you give any sense for what they might be paid spring? Is it $0.10 Is it $0.50 Is it more than they're paying you guys? Any kind of feel for that would be helpful. And then just to be clear, is the intent to rewrite this native into DocuSign? Or is it just to better the existing integration that you have in place today? Yes. So on the TAM side, it's difficult to think about it on that sort of incremental basis because it is a little bit apples to oranges to your point. The way I think about it is if you go back to the roadshow, we talked about the overall TAM and we said on the e signature side, we think about it as about $25,000,000,000 of conservative estimate of what we're doing. When we talked about the thought of the broader system of agreement, we say that could be a doubling or tripling of our TAM. And if you go back to think about the core components here and that wheel of the 4 chunks, we think this is significantly opening up at least a couple of those additional pieces. So from a TAM standpoint, broadening out our system agreement, we think is dramatic. It's a significant opportunity for us to go after more. From a standpoint of average revenue per customer, again, you get into the segment discussion. I think you'd say, in general, a DocuSign customer is commercial and direct customers on average spending more than a SpringCM customer. But I wouldn't judge from that the sense that says it means that the opportunity is bigger. Keep in mind that DocuSign has reached scale sooner than spring. And so as that business continues to mature, I wouldn't be surprised back to the TAM guidance we gave you. I think that, that total opportunity is even bigger outside of Signature than it is within Signature. So that's kind of how I'd probably direct you to think about Got it. And then just on the second part in terms of are you rebuilding it? Or is it will it say some separate stack? Yes. So I think in a technical integration, over time, you'll probably see we do more and more things to sort of bring CRM into our data centers where we think we have opportunity to support a dramatic scaling of the business. From a core software standpoint, while there will clearly be points of increased integration, we believe the quality of the software is very high at SpringCM. And so we don't think there's a need to sort of rebuild the software. We think we will just enhance the integration. Got it. Thank you. Our next question comes from Karl Keirstead with Deutsche Bank. Please state your question. Thank you. One for Dan, one for Mike. Dan, I'm just curious how this acquisition creates any further distance from your chief rival in the e signature space, Adobe. I'm just curious whether Spring's product capabilities are things that Adobe doesn't offer and hence widens the differentiation or not? And then for Mike, just wondering if you could put this deal in the context of your broader M and A strategy. Would you characterize this as sort of one off? Or now that DocuSign is public, is your intent to make these kinds of several $100,000,000 acquisitions sort of once in a while? Thank you so much. So on the differentiation piece, I mean, I think it's important to understand, we've already, in our minds, pretty strongly differentiated ourselves, both at the level of the e signature functionality question, but even more importantly around the system of agreement. And that's the place where we don't see anyone else really even playing the same game that we're playing. I think this dramatically enhances our position and is more proof point to the customer set that we're very serious about the system of agreement and that we're going to continue to invest for continued dramatic differentiation across anyone else trying to compete as any signature provider. I'll let Mike take the second piece. Yes. So, Carl, I think the way to think about it is, obviously, this is a very what we consider a very strategic move for us. Our first priority, of course, is to make this acquisition successful, focus on the integration, focus on the go to market, really get it running. I wouldn't say long term this necessarily is the one and only deal we will ever do. I think we'll be very thoughtful over the long term to continue to look for opportunities to enhance the system of agreement. But I think as a business, we're going to make sure that as we make moves like this, we move at a pace that allows us really to integrate it effectively and make it successful. Thank Our next question comes from Shankar Subramanand with Merrill Lynch. Please state your question. Hi. Thanks for taking the question. I have a question on your organic R and D versus the M and A. In the past, I'm assuming you've already invested some amount of time developing some collaboration features, redlining features and so on. So, as you think about how you're investing in your internal R and D versus acquisition, how should I think about that going forward? And does this acquisition kind of off some R and D results that you already invested, maybe put it in something else? So help us understand how you're thinking about that. Mike, do you want to talk to the R and D maybe from a financial standpoint? And then I can talk a little bit about philosophically how we think about that question. Yes. I think that, obviously, Spring is bringing on board for us some critical R and D assets. I think to your point, one of the things that we're in the process of evaluating and we'll continue to evaluate is how best to look at the investments that we were going to make as a standalone business and are there opportunities to affect those investments in a way that drives the whole in a better fashion? So that's the ongoing work we're going to continue to do. Look, our overall strategy remains the same, which is we are a growth focused business and we're going to continue to invest in R and D as a category very aggressively to ensure that we continue to differentiate our technology. And I think with this expansion of system of agreement, we're just going to have a lot of opportunity to do that. You'll see us continue to invest at the levels we've been doing historically. Yes. I think that's right. And then from the sort of strategic standpoint, I'd say the things that there are some overlaps on, I'll give you an example, as we think about document generation, an area where we are building capabilities. I mentioned on our last call how we were excited about strikethrough, but we hadn't yet done redlining. So I think there's an opportunity where we will combine the different components where strikethrough wasn't a focus of SpringCM because of our strong real estate presence where they didn't have the customer overlap as much there. But my sense is not that we will have a dramatic duplication. This is additive capability. So the core plans that we had from DocuSign standpoint won't dramatically be changed. This is an additive capability. You. Thanks. Our next question comes from Sterling Auty with JPMorgan. Please state your question. I'm back. I just had a couple of quick follow ups. So any sense of how this solution competed against more traditional contract management solutions, whether it be, I guess, the SideQuest or an Ariba, if they actually did compete against those? Yes. And I think if you talk to the Spring folks, this is a modern CLM sort of approach. And I think what we're seeing is increasingly the traditional providers there are struggling. And I think they're struggling because they weren't sort of, if you will, really native to sort of the modern system of agreement solution like SpringCM. And my sense is they're taking share and growing dramatically from that space. And I think it's a space that, as we mentioned before, pre the e signature sort of capability and that the revolution that, that provided, it was easier for people that had, quite frankly, more paper based mindset as opposed to digital mindset to be the strong players. So we think this is pretty clear. This is the class of companies like Spring are the winners, and the combination is going to be really attractive from standpoint for our customers. And the other thing that I would just emphasize is you see a lot of the traditional folks being very focused on what we tend to call the back office functions and what we think those are important. And as we talked about in our roadshow, 20 5% of all of the use cases and the volume we have at DocuSign are back office, 75% is front office and Spring has really brought that the concept of the contract lifecycle management as well into the front office space. And I think that's where you don't see some of the traditional players being affected. There are no further questions at this time. I'll turn it back over to Annie Lachin for closing remarks. Thanks so much everyone for joining us and we look forward to speaking with you at our earnings call in early September. Thank you. This concludes today's teleconference. All parties may disconnect. Have a great day.