DocuSign To Acquire Seal Software For Contract AI Tech
Summary
- DocuSign said it will acquire Seal Software for $188 million in cash.
- Seal has developed legal contract machine learning technologies that improve contract review efficiencies within enterprises.
- With the deal, DOCU is bringing an investee company in-house to more widely apply its 'AI' technologies across its offerings.
- However, DOCU the stock appears richly valued given the firm's continued operating losses, so my bias is NEUTRAL.
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Quick Take
DocuSign (NASDAQ:DOCU) has announced the proposed acquisition of Seal Software for $188 million.
Seal has developed a machine learning-based contract analytics software system for enterprises of all sizes.
With the deal, DOCU brings in-house technologies it can apply throughout its offerings, increasing value for clients.
However, DOCU still hasn’t reached operating breakeven, so my bias for the stock is NEUTRAL until it makes a decisive turn in that direction.
Target Company
Walnut Creek, California-based Seal was founded to develop contract discovery and lifecycle management software solutions for businesses.
Management is headed by Chief Executive Officer John O'Melia, who has been with the firm since March of 2017 and was previously SVP Worldwide Services & Customer Success at Dell EMC.
Below is an overview video of Seal's solution:
Source: Seal Software
Seal’s primary offerings include:
Contract discovery
Data extraction
Analytics
Marketplace
The company has developed robust alliance and technology partner programs.
Investors have invested at least $58 million and include DocuSign, Toba Capital, and Tern.
Market & Competition
According to a 2017 market research report by MarketsandMarkets, the market for legal analytics was $451 million in 2017 and is expected to grow sharply to $1.86 billion by 2022.
This represents a forecast CAGR (Compound Annual Growth Rate) of 32.7% from 2018 to 2022.
The main drivers for this expected growth are the increasing use of machine learning technologies to improve service offerings and a desire by enterprises for greater efficiencies in risk management and procurement analytics.
Major vendors that provide competitive services include:
Wolters Kluwer (OTCPK:WOLTF)
Thomson Reuters (TRI)
MindCrest
UnitedLex
Argopoint
LexisNexis
Premonition
Analytics Consulting
IBM (IBM)
Wipro (WIT)
Other small firms
Source: Research Report
Acquisition Terms & Financials
DocuSign disclosed the acquisition price and terms as $188 million in cash.
Management did not provide a change in financial guidance as a result of the proposed transaction.
A review of the firm’s most recent published financial results indicate that as of October 31, 2019 DocuSign had $653.8 million in cash and short-term investments and $1.2 billion in total liabilities of which $458.6 million was long-term debt.
Free cash flow for the twelve months ended October 31, 2019 was $50.9 million.
In the past 12 months, DocuSign’s stock price has risen 55.3% vs. the U.S. Software industry’s rise of 22.6% and the U.S. overall market index’ growth of 4.3%, as the DOCU chart indicates below:
Source: Simply Wall St.
Earnings surprises versus analyst consensus estimates have been positive in five of the last seven quarters:
Source: Seeking Alpha
Valuation Metrics
Below is a table of relevant capitalization and valuation figures for the company:
Measure | Amount |
Market Capitalization | $15,490,000,000 |
Enterprise Value | $15,460,000,000 |
Price / Sales | 16.65 |
Enterprise Value / Sales | 17.20 |
Free Cash Flow [TTM] | $222,400,000 |
Revenue Growth Rate | 38.25% |
Earnings Per Share | -$1.32 |
Source: Company Financials
DocuSign has an Enterprise Value / Sales multiple of 17.20x. Compare that to a basket of publicly held software system firms derived from the NYU Stern School’s data, which shows an average EV/Sales multiple of 8.77x.
Commentary
DOCU is acquiring Seal to bring in-house a system it already resells as part of its Agreement Cloud.
As DOCU’s COO Scott Olrich stated in the deal announcement,
As the Agreement Cloud company, DocuSign is about digitally transforming the very foundation of doing business: agreements and agreement processes. We believe that AI will play a vital role in this transformation. And by integrating Seal into DocuSign, we can benefit from its deep technology expertise and its broad experience applying AI to agreements.
Using the “AI” moniker is really a stand-in for machine learning-based systems that use advanced algorithms to surface concepts that may be less visible to human analysis.
But by acquiring Seal, DOCU can more cost effectively integrate Seal’s technology in DocuSign CLM, its contract lifecycle management offerings.
The promise of an acquisition such as this is that it helps DOCU to make its clients more efficient in their workflows by automating processes with greater intelligence and accuracy.
By doing so, DOCU differentiates itself in the market, so the deal makes sense from a strategic viewpoint.
It’s hard to tell if DOCU is paying a fair price for the deal, which is likely mostly a team and technology-based valuation.
As for DOCU’s stock, the current valuation is not cheap, especially when compared to other publicly held firms.
However, DOCU’s revenue growth rate is still quite strong and its prospects are equally strong as enterprises continue to transition to cloud-based software delivery and demand greater efficiencies that machine learning applications promise to provide.
While the stock’s current valuation may be temporarily justified by the firm’s growth rate, I struggle to see a strong upward catalyst from here unless and until the firm makes a decisive turn toward operating profitability.
My current bias is therefore NEUTRAL.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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This article was written by
Donovan Jones is an IPO research specialist with 15 years of experience identifying opportunities for IPOs. He focuses on high-growth technology, consumer, and life science companies.
He leads the investing group IPO Edge which offers: actionable information on growth stocks through first look S-1 filings, previews on upcoming IPOs, an IPO calendar for tracking what’s on the horizon, a database of U.S. IPOs, and a guide to IPO investing to walk you through the the entire IPO lifecycle - from filing to listing to quiet period and lockup expiration dates. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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