DocuSign (NASDAQ:DOCU) has been a public company for only a little more than two years, but for shareholders it's been an amazing run, with the stock trouncing the market, up over 260% from its first day of trading in April 2018. This 17-year-old company just reached a key milestone of $1 billion in trailing-12-month revenue, but in many ways the company is just getting started.
Let's take a closer look at the business, its growth levers, and how the COVID-19 crisis is accelerating product adoption, and then we'll wrap up with why the best is yet to come for this e-signature specialist.
The business of e-signatures
Most are familiar with DocuSign's e-signature product through a real estate transaction or other document where your agreement was captured electronically. But what most people don't realize is that over two-thirds of e-signature transactions happen in other enterprise software tools where the function has been built in. The company has integrations with more than 350 applications, including from many of the major software vendors. When customers integrate an e-signature into their existing business process, CEO Daniel Springer explained in the most recent earnings call, "those [situations] are the ones that we get most excited about, because ... [they] are the stickiest."
The business has grown significantly, and its most recent quarter further highlights the popularity of the platform. Customer count grew 30% year over year to 660,000; revenue grew 39% to $297 million; and billings, an indicator of contract dollar value increases, grew an amazing 59% to $342 million. Once customers sign on, on average they increase spending every year. Over the last five quarters, DocuSign's net dollar retention rate has ranged between 112% and 119%, with the most recent quarter on the high end at 119%. Customers with annual contract values exceeding $300,000 grew an amazing 46% year over year to 473. The company is still not profitable, but that's because it is investing in its growth.
There are numerous ways to grow
DocuSign grows its relationship with customers over time with a "land-and-expand" model. Getting new customers started with the e-signature product is easy with a self-service model on its website. After the first user tries the product, adoption spreads as the productivity benefits are hard to ignore. As businesses begin to digitize their paper signatures, they might become candidates for contract management tools.
With its acquisition of SpringCM for $220 million in July 2018, DocuSign entered the life-cycle contract management space. Since then it's integrated the software, received a Gartner Magic Quadrant "leader" rating, and started to cross-sell this end-to-end contract management tool to its massive customer base. This powerful tool set doubles the company's addressable market to $50 billion annually.
The company has also recently acquired and integrated an artificial intelligence (AI) contract platform, Seal, into its Agreement Cloud product suite. CEO Springer explained in the most recent conference call how DocuSign used this product to help a regional telecom provider to "analyze potential pandemic-related risks in thousands of their supplier contracts." Even though this AI product's revenue isn't expected to be material in the coming year, this example shows how the pandemic is getting companies to think harder about their digital transformation efforts.
Coronavirus is accelerating the digital transformation
[Customers] knew at some point they were going to have to do more digital transformation to their business and COVID-19 has accelerated it.
Springer explained that the coronavirus is helping eliminate two of the sticking points it's had getting organizations to adopt e-signatures. The first was getting businesses to think beyond "the way things have always been done." Changing employee and organizational behavior is hard, but with many businesses dealing with work-from-home situations, it pushed people to think differently about how to get things done.
The second barrier is what Springer called "perceived regulations." Even existing customers may not have expanded usage due to embedded practices and a mindset that digitization couldn't be done for legal reasons. As the pandemic made gathering paper signatures extremely difficult, it forced customers to examine whether things were legally allowed. As customers discover the wide acceptance of electronic signatures, DocuSign is ready to help them transition.
The bottom line for investors
With a solid foundation of $1 billion in annual revenue, multiple growth engines, and customers looking to accelerate digital transformations, this e-signature specialist is just getting started. As it's only tapped a small fraction of its massive $50 billion addressable market, the best is still yet to come for this growth stock. For investors, it's not too late to consider signing on as a long-term shareholder.