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This Company's Land-and-Expand Business Model Should Be on Your Radar

By Josh Kohn-Lindquist – Sep 1, 2021 at 4:26PM

Key Points

  • The company's eSignature product is beloved by its customers, offering free word-of-mouth advertising that makes it the cornerstone for future company growth.
  • With a growing 125% net dollar retention rate, DocuSign is seeing early success expanding beyond eSignature.

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DocuSign's go-to-market strategy is paying early dividends, yet the company is still in the beginning stages of its growth story.

Operating within an ever-increasingly digital world, DocuSign's (DOCU -2.69%) suite of cloud-based software has it positioned beautifully to capture long-term growth over the coming decades. Bolstered by the success of its well-known eSignature solution, the company looks to employ a land-and-expand business model to continue fueling its growth.

Founded in 2003, DocuSign is best known for its eSignature solution, which allows customers to digitally receive and sign documents using a subscription as a service (SaaS) model, offering various pricing options for specific functionalities. Speaking to this product's importance, CEO Dan Springer noted during the company first-quarter earnings call June 3 that "eSignature is the on-ramp to DocuSign for most companies." This highlights the company's go-to-market strategy of adding new clients through its eSignature solution and hopefully leading them into its all-encompassing Agreement Cloud, which is composed of four parts: "prepare," "sign," "act," and "manage." Thanks to management's focus on these adjacent services, investors could see similar growth rates to the 54% increase in revenues year over year for Q1.

Computers Connected to the Cloud

DocuSign's unique strengths

Starting from the top, CEO Daniel Springer has a 95% approval rating from his employees on Glassdoor and was named to Glassdoor's 2021 Top CEOs list, finishing in 30th out of the hundreds of large businesses that qualified . Having sold his previous company, a cloud-based marketing software and services company named Responsys, to Oracle (ORCL -0.66%) in 2013, Springer came to DocuSign with a strong knowledge of the SaaS business model.  

As the company looks to move beyond the eSignature solution it is famous for, the CEO has emphasized the importance of building on that solution's success, which has helped the company grow its operating margin from 11% in 2019 to 29% in Q1 of this year as it continues to scale. During the Q1 earnings call,   Springer explained, "DocuSign has become an indispensable part of many organizations' business processes." Simply put, DocuSign's eSignature product is vital to its customers, and it is up to management to build the broader Agreement Cloud off of this success.

Recording a Net Promoter Score (NPS) of 71 for its eSignature solution shows that this product is beloved by its customers. Ranging from -100 to 100, NPS is a useful metric used to rate a customer's experience with a product. The product's score of 71 essentially means that the vast majority of its customers are loyal promoters of the product and would recommend it to a friend.  For comparison, one of DocuSign's closest competitors, Adobe (ADBE -0.67%), received a companywide NPS of only 3.

Thanks to this strong loyalty, DocuSign not only sees recurring revenue from these happy customers but is also able to move them into trying out new product features, all while recommending the company's solutions to their peers.

Remaining growth runway

DocuSign is seeing early success in getting its customers to adopt new services within its Agreement Cloud. This is evident in its steadily growing net dollar retention rate, currently 125%. This rate is a simple way to measure a company's churn of lost customers versus its additional sales sold to existing customers. Generally, anything over 120% is great, so the fact that DocuSign's figure of 125% has improved from just 112% two years ago is a promising start for investors. Looking ahead, as the company looks to further build out its Agreement Cloud, this rate will be of the utmost importance to investors.

In addition to expanding its product functionalities to its more saturated markets, DocuSign also has immense international growth potential remaining, as it currently only generates 21% of its total revenue outside the U.S. These international sales grew 84% from Q1 2021 to Q1 2022 compared with companywide growth of 58%, highlighting DocuSign's early success testing out new markets. Hinting at the potential still ahead internationally, CEO Springer explained, "If you go back a few years to when the U.S. business is the size of the international business, they looked quite a bit alike." With DocuSign's international operations nearly doubling the growth rates of its domestic operations over the last four years, it could be just a matter of time before international sales become the main source of revenue.

An investor's next move

Overall, DocuSign has nailed the first piece of its land-and-expand business model, as its eSignature solution is beloved by customers across the world, which its NPS of 71 clearly shows. With this foundation in place, the company is well-positioned to upsell current clients and expand its customer base internationally. However, only time will tell whether the company can successfully expand its Agreement Cloud in a meaningful way, so it will be imperative to watch DocuSign's net dollar retention rate going forward. With second-quarter earnings coming up on Thursday, tech investors should get some new insights regarding these figures.

Josh Kohn-Lindquist owns shares of DocuSign. The Motley Fool owns shares of and recommends DocuSign. The Motley Fool has a disclosure policy.

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Stocks Mentioned

DocuSign Stock Quote
DocuSign
DOCU
$44.56 (-2.69%) $-1.23
Oracle Stock Quote
Oracle
ORCL
$80.85 (-0.66%) $0.54
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$326.78 (-0.67%) $-2.19

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