DocuSign IPO seems ready for success


Image design by Janet Yuen for VCJ based on photo courtesy of Tashatuvango/iStock/Getty Images
Image design by Janet Yuen for VCJ based on photo courtesy of Tashatuvango/iStock/Getty Images

By Rohit Kulkarni, SharesPost

DocuSign is scheduled to go public this week, having recently filed an S-1 at an offering price ranging from $24 to $26 per share. On Wednesday, DocuSign raised its pricing range to $26 to $28 per share, implying a market cap of $4.3 billion at the high-end and a 40 percent premium to its most recent private valuation.

The San Francisco software company could raise up to $540 million in this offering. Selling shareholders plan to offer shares worth up to $146.7 million. DocuSign (Nasdaq: DOCU) will be the eighth cloud or enterprise SaaS company to go public this year. It appears, the time is right for cloud or enterprise SaaS companies.

Expect Healthy IPO Pipeline of Enterprise SaaS Companies: It’s been a fairly busy 1H:2018 for cloud or enterprise software investors in the private tech growth asset class. In addition to DocuSign, Carbon Black, Smartsheet, Pivotal, Dropbox, Zscaler, Zuora and Ceridian have filed S-1s.

Dropbox and Zscaler, are up 38 percent and 70 percent from their IPO price, respectively. We think this is a sign of things to come in 2018. At the same time, we believe mega consumer internet unicorns, such as Airbnb and Uber, will likely wait until 2019.

Rohit Kulkarni, SharesPost
Rohit Kulkarni, SharesPost

While large and successful consumer-oriented unicorns (such as Spotify) continue to get the bulk of media attention, the unglamorous enterprise cloud companies are the engines of the private tech growth asset class. These past several months have provided encouraging signs that other such workhorses in the cloud could deliver returns over the longer-term.

Private Tech Valuations Could Continue To Rise In Public Markets: Recent IPO activity among VC-backed tech companies has been encouraging. Cybersecurity firm Zscaler upped its IPO to $16 per share after an initial range of $13 to $15 per share. Zscaler’s IPO was effectively valued at 99 percent above its most recent private funding round.

Dropbox and Spotify have also enjoyed warm receptions on Wall Street. DocuSign’s proposed $4.284 billion valuation in the public markets (assuming the high-end of its IPO pricing range) would compare favorably to its $3 billion private valuation.

Because tech IPOs and rising valuations are a key indicator of investor sentiment, they are seen as a potential promising sign for the more than 200 unicorns waiting to go public. We could possibly see another wave of IPOs, as well as possible significant value creation for institutional and individual investors and employee shareholders.

Including DocuSign, we’ve tracked 27 VC-backed tech IPOs over the past 24 months. According to our data, 18 companies enjoyed IPOs that exceeded recent private valuations, while nine companies suffered down-round IPOs. Year to date, we haven’t had a down-round IPO.

Background: DocuSign was founded in San Francisco in 2003 by Thomas Gosner.DocuSign pioneered e-signature technology, allowing parties to sign, record and execute digital agreements in the cloud. It avoids the need for handwritten signatures on paper.

The company operates offices in the United Kingdom, France, Ireland, Israel, Australia, Singapore, Japan and Brazil. About a quarter of DocuSign’s 2,255 employees are based overseas. DocuSign’s top three shareholders include Sigma Partners (12.7 percent), Ignition Partners (11.5 percent) and Fraizer Technology Partners (7.1 percent). Google and Comcast are also major investors.

DocuSign boasts of about 375,000 customers worldwide, including Bank of America, Verizon, Nasdaq, Coldwell Banker, Walmart and Fed-Ex. The company also enjoys strategic sales partnerships with Google, Microsoft, Oracle, Salesforce and SAP.

From a valuation standpoint, DocuSign generated $518.5 million last year, a 36 percent increase over 2016 and a 52 percent jump over 2015. Assuming another 25 percent year-on-year growth in revenues in 2018, DocuSign’s IPO valuation implies roughly 6x forward revenue multiple, a reasonable valuation, in our opinion.

The Upside Scenario

More subscriptions, more visibility: Over 93 percent of DocuSign’s annual revenue in fiscal 2018 came from recurring subscription fees, which offers investors much more transparency in evaluating the company’s core business.

Gross margins getting fatter: Last year, DocuSign generated healthy, gross profit margins of 77 percent, compared with 73 percent in fiscal 2017 and 70.5 percent in fiscal 2016.

Getting closer to overall profitability: DocuSign has progressively lowered its overall operating losses by more than a third over the past three fiscal years. And, it reported positive free cash flow in 2017. In fiscal 2018, DocuSign reported an overall loss of $52.3 million. That’s considerably lower than its losses of $115.1 million in fiscal 2017 and $122.6 million in fiscal 2018.

Significant untapped potential in blockchain technology: DocuSign, which has spent $300 million on research and development over the past 15 years, is testing new blockchain/smart-contract technology. It is collaborating with financial-services giant Visa to simplify the buying or leasing a car. The technology would enable a consumer to complete the transaction, including document signatures and payments, without ever leaving the vehicle. DocuSign believes it can eventually apply the technology to financial services, healthcare, and legal proceedings.

The Downside Risk

Still early in international expansion: Less than 20 percent of revenue originates overseas, which means investors should expect the company to spend more cash moving into foreign markets.

Selling shareholders signaling effects: DocuSign has several institutional investors, including Sigma Partners, Ignition Partners and Google Ventures, looking to sell shares, which might drive down the ultimate IPO price. More than 20 percent of the offering, or 5.5 million shares, are such secondary sales.

Competitors include established players: DocuSign’s main competitor is Adobe, which acquired EchoSign in 2011 and now offers the technology as Adobe Sign. Other competitors include niche software firms, such as HelloSign, that operate in specific industries and geographies.

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

Photo of SaaS image design by Janet Yuen for VCJ based on photo courtesy of Tashatuvango/iStock/Getty Images.

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