When it comes to great businesses, one attribute investors look for is recurring revenue from customers who keep coming back. A company's strong and predictable source of revenue gives investors comfort and peace of mind that the revenue has been locked in far in advance. This is in contrast to order-book-based businesses that need to continually bid for and capture new business, using up vast amounts of manpower, time, and resources in the process.
With the rise of the internet and cloud computing, new businesses have sprung up that make use of cloud architecture to deliver their services. Great software-as-a-service (SaaS) companies are able to create strong customer loyalty and high switching costs.
Here's a look at three promising SaaS businesses that could potentially double over the next few years.
Image source: Getty Images.
1. Paycom Software
Paycom Software (PAYC 5.14%) is a leading provider of cloud-based human capital management (HCM) software that runs on a single database, eliminating the need for businesses and employees to replicate human-resource-related data among different services. HCM functions that can be run on the database include talent acquisition, payroll, and talent management. Paycom's software is easy to use and can be adopted quickly by employees, eliminating significant administrative burden and increasing overall employee productivity.
In terms of numbers, Paycom has seen very strong growth in revenue and net income. In 2014, revenue was $148.2 million, and this is poised to almost quintuple in just five years to $733 million for 2019. Gross margin has hovered around 83% to 84% for the last three years, while net income has nearly doubled from $70.4 million in 2016 to $137 million in 2018. For the first nine months of 2019, revenue and net income rose 31% and 28% year over year, respectively. The growth in revenue came from growth in customer accounts, as mentioned during the company's latest conference call.
Paycom had over 23,500 clients at the end of 2018, with a retention rate of 92%, up from 17,800 clients two years earlier. Such an impressive growth in the company's client base, plus the high retention rate, speaks volumes about the pain points the company is addressing. Though Paycom's share price has doubled from $120 to $259 this year alone, there are indications the share price could potentially double again as the company continues to grow rapidly.
2. DocuSign
DocuSign (DOCU 3.44%) provides an e-signature solution that automates the agreement process and eliminates the laborious and error-prone manual paper-based system of signing documents. DocuSign enables electronic signing, payment, and provisioning requests to be embedded inside customers' existing processes, creating a seamless experience and convenience for its clients.
Though the company is still loss-making, it continues to garner new customers at a rapid rate. Total customers jumped from 454,000 in fiscal 2019's third quarter to 562,000 in Q3 fiscal 2020 for a 24% year-over-year increase. Growth in revenue has also been astounding: Revenue for fiscal 2016 was $250 million, and by fiscal 2019 had more than doubled to $700.7 million. For fiscal 2020, revenue is on track to nearly hit the $1 billion mark. The business also started to generate healthy free cash flow in fiscal 2018 and continues to do so. For the first nine months of fiscal 2020, it reported free cash flow of $28.1 million.
In its 2019 annual report, the company states that its total customer base represents just 1% of its core target market, implying that there is significant room to grow. The company's growth has been driven by increased use among existing clients, the acquisition of new customers, and the development of new solutions that assist companies working to modernize their systems. These strong attributes will continue to power DocuSign's growth for many more years.
3. Salesforce
salesforce.com (CRM 3.60%) offers customer relationship management (CRM) solutions based on a subscription-based model. It has an integrated CRM platform that connects an organization's departments and allows them to have a common, unified view of every customer. Salesforce also offers customized tools to improve the client's marketing and sales functions.
The business boasts high recurring revenue that makes up close to 94% of its total top line. Revenue doubled from $6.7 billion in fiscal 2016 (ended Jan. 31, 2016) to $13.3 billion in fiscal 2019. Gross margin has been strengthening over the years, starting from 73.4% in fiscal 2017 to 75.4% for the nine months ending Oct. 31, 2019. The company has been generating very healthy free cash flows since fiscal 2016.
According to IDC, Salesforce is the market leader in CRM software with a 17.3% market share (as of October 2019), with Oracle and SAP in second and third place, with a market share of 5.5% and 5.3%, respectively.
Salesforce has been adding new divisions and/or making acquisitions for the past 20 years, including $24 billion in investments in just the past 18 months. Image source: Salesforce Q3 2020 presentation.
Over the years, Salesforce has been innovating and acquiring complementary businesses to bolster its capabilities, spending $24 billion on acquisitions in just the past 18 months. These investments should boost the company's top line over the coming years and increase its client base further. With a potential 23% year-over-year revenue growth in fiscal 2020, Salesforce could double its revenue again in the next four years.
