Gary Parker
Obtaining signatures for business documents doesn’t seem like much of a business, but highly valued startup DocuSign Inc. believes it represents a $25 billion market.
DocuSign DOCU, +0.00% which enables companies to provide forms to customers and obtain their legally binding electronic signatures on the documents, filed for an initial public offering in March. If DocuSign indeed goes through with the process, it will test an IPO market that’s been kind to other enterprise-tech companies, including Dropbox Inc. DBX, -0.97% and Zscaler Inc. ZS, -1.09% both of which went public in March.
Read more on the Dropbox IPO and Zscaler IPO
Morgan Stanley and J.P. Morgan are the lead underwriters on the offering for DocuSign, which reportedly fetched a private-market valuation of $3 billion in 2015, according to The Wall Street Journal. DocuSign has yet to disclose how many shares it will sell through the IPO or what their expected pricing range would be, though the company did say that it plans to list on the Nasdaq exchange under the ticker DOCU.
Here are five key takeaways from DocuSign’s IPO prospectus.
On a mission
As far as unicorn mission statements go, DocuSign’s isn’t as corny as that of, say, Dropbox, which wants to “unleash the world’s creative energy by designing a more enlightened way of working.”
DocuSign, rather, is “transforming the foundation of doing business: the agreement,” the company said in its prospectus. The company believes that facilitating electronic contracts is about more than just obtaining signatures, as its solution can interface with various legal and human-resources systems that firms already use. DocuSign said that while companies have made technological advancements in other areas of their businesses, there have yet to be big evolutions in the process of cementing business agreements.
Growing revenue, shrinking losses
Though DocuSign’s revenue growth decelerated in its most recent fiscal year, the company also posted steeper losses than it did a year earlier. Revenue rose 39%, to $485 million, for the fiscal year that ended in January. The company also cut net losses in half and snapped its string of nine-figure losses. DocuSign lost $52 million in the latest fiscal year, whereas it lost $115 million the year prior and $123 million the year before that.
As is typical of tech unicorns that file to go public, DocuSign warned that it had “a history of operating losses and may not achieve or sustain profitability in the future.”
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Most of DocuSign’s revenue comes from subscriptions, which gives customers access to DocuSign’s platform and technical-support teams. “We typically invoice customers in advance on an annual basis,” DocuSign said in its filing. “We recognized subscription revenue ratably over the term of the contract subscription period beginning on the date access to our platform is provided, as long as all other revenue recognition criteria have been met.” Advanced plans let businesses collect payments and request attachments like drivers’ licenses.
A smaller portion of revenue is derived from providing “professional services” including “fees associated with new customers requesting deployment and integration services.”
Competition in the market
DocuSign said its biggest competitor is Adobe Systems Inc. ADBE, -2.21% which acquired EchoSign, now called Abode Sign, in 2011.
“Adobe has a longer operating history, significant financial, technical, marketing and other resources, strong brand and customer recognition, a large intellectual property portfolio and broad global distribution and presence,” DocuSign said. If competitors offer cheaper prices, DocuSign said it might have to lower its own, which would crimp margins.
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Some competitors, like Vasco Data Security International Inc. VDSI, -0.39% are using DocuSign’s IPO buzz to generate interest in their own businesses.
“DocuSign’s impending IPO is bringing well-deserved attention to the e-signature industry, estimated at $25 billion, and its leaders, including eSignLive by VASCO,” that company’s CEO, Scott Clements, said in a statement sent to MarketWatch.
DocuSign mentioned “potential” competitors in the e-signature business broadly but didn’t specifically discuss the prospect of tech giants like Microsoft Corp. MSFT, -2.33% Amazon.com Inc. AMZN, -3.20% or Alphabet Inc. GOOGL, -2.20% launching products that would directly go up against it. Right now, DocuSign works nicely with Microsoft Word and Google Docs, but it’s conceivable that these companies could more seriously consider tapping the business-document market if they find it attractive.
A warning on security issues
As investors fret over the fallout from Facebook Inc.’s FB, -1.34% Cambridge Analytica scandal, DocuSign’s discussion of security in its risk factors isn’t the most encouraging.
“Our operations involve the storage and transmission of customer data or information, and security incidents have occurred in the past, and may occur in the future,” the company said, and such incidents could result in regulatory action or bad publicity.
DocuSign discussed an incident in May 2017 when a bad actor gained temporary access to “a separate, noncore system used for service-related announcements that contained a list of email addresses.” The company “took immediate action to prevent unauthorized access to this system, put further security controls in place and worked with law enforcement agencies” as a result. Still, DocuSign warned that future security incidents involving it or rivals could harm the business.
A possible loser in any trade wars
One interesting risk factor in DocuSign’s prospectus concerned Trump’s position on global trade agreements. “The Trump administration has been critical of existing trade agreements and may impose more stringent export and import controls,” the company said. “While we take precautions to prevent our solutions from being exported in violation of these laws, including obtaining authorizations for our encryption products, implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws.”
Any such violations, according to DocuSign, could result in criminal punishments for involved employees or fines. The company also said that future policy changes that involve imports and exports could potentially lower usage of DocuSign’s products.