Key Takeaways

• Docusign is known as a “stay-at-home” name but we believe there’s a lot more to this company than meets the eye. We see a solid management strategy, sustainable growth a big runway.
  
• The company experienced rapid growth over the period of COVID-19 fueled by lockdowns and a decline in office attendance. However, the growth that happens from it’s B2B model is likely stickier than many might assume.
  
• The company can expect continued growth and accelerating penetration in it’s E-signature business, but its agreement cloud segment is responsible for half of the $50 billion TAM that management is predicting and it is just getting started.
  
• The company is doing well in the talent-war that is one of the most important dimensions for technology companies. It has high glassdoor ratings and half the employee attrition rate of competitors.
  
• With the veteran management team and the growing bench of top talent, we believe accretive acquisitions that could present immense opportunities are likely as it builds out its agreement-cloud solution to meet the needs of a variety of industries.

DocuSign (DOCU 1.31% ) is becoming a verb. You don’t E-sign something, you DocuSign it. While older companies like Xerox call the brand becoming a verb “genericide” and spend a lot of money trying to get people to use the term “photo-copy” as opposed to their trademark, in the technology industry where first-mover advantage is more important becoming a verb is a very sought-after outcome.

You may think DocuSign is a boring stay-at-home play that has already seen the benefits of the unique circumstances around COVID-19 pass. We suspect that the unique circumstances that accelerated the adoption of the product have resulted in enduring competitive advantage for the firm, although growth rates will of course normalize over time. However, as the company enters a period against the bountiful COVID comps, it is becoming clear DocuSign is likely much more than a one-pandemic pony.

Some companies, like Xerox fear and detest their brand being used as a verb because they think it erodes the product differentiation they have worked hard to achieve. So, any knock-off copy machine being used becomes less distinguishable than their product as in the consumer’s mind they are Xeroxing their documents either way.

In the high-stakes technology industry where being a first mover can quite literally be priceless, the logic is quite different. Being synonymous with a digital function has proven quite lucrative for a company that aimed to disrupt the yellow pages, for example. Microsoft even tried to compete with Bing, a name specifically chosen for its potential verbi-ness, in order to attempt encroachment on Google’s unassailable verbal status.

Like that company, DocuSign is by far the leading vendor in its chosen function. We also would point out that while the firm has only a little more than 1 million paying customers, it has had about one billion users. So, the ubiquity, ease and intuitive nature of its product is the primary driver for why it has become a verb. Integrations in key industries like finance and with key companies like SalesForce (CRM 0.55% ) are ensuring that verbal nature of this company will only continue to grow. Most E-signature competitors offer an E-Sig function as a way to keep customers in their eco-system, not the massively successful customer acquisition strategy that DocuSign has utilized the key function for.

It seems to us, that being a verb for these guys will be a huge benefit given the stickiness of its solution. The company has passed through a period of immense and unanticipated growth. The puppy has gone through the python so to speak, and from recent earnings the benefits for the company will be more enduring than many folks think. Not to mention the massive boom in demand for its services have given the company flexibility on where it can make accretive acquisitions and other key CAPEX decisions.

More Than Meets The Eye: Land and Expand

As you can see this company is continuing to grow at scale. Of course, some of the high growth from pandemic-specific functions (like PPE loans) will fall by the wayside as we progress from pandemic to living with endemic COVID-19. However, one thing that also grew significantly was the net-dollar retention which came in at 124% in Q2.

It was significantly lower pre-COVID and this key metric for SaaS businesses means that the company is getting more value per-customer than pre-COVID. We see no reason why high rates like this won’t continue given management’s intelligent approach to expansion. The massive influx of customers and the fact that people rarely go in reverse in the digital transformation likely means that COVID-19 was a positive game-changer for the firm, not an ephemeral boom.

DocuSign is somewhat unique for a SaaS solution in that it is often of great utility from the smallest mom-and-pop businesses to the largest enterprises in the world. It has become heavily used in the financial industry, one of the harbingers of the digital transformation. As the company started with common-law functionality in mind, this is where the growth was concentrated. It has built out its civil-law functionality recently and growth in markets like Brazil is showing that this investment paid off, and likely will continue to, quite handsomely.

Three key areas of future growth are Contract Lifecycle Management, Advanced Analytics and of course the primary driver of E-signature growth itself. The stickiness of the company’s product is becoming apparent from bottom-up analysis of the company’s actual clients. If a company starts using the functionality in the front-office it is usually not long until the back-office follows suit and vice versa.

The land and expand model will likely increase in pay-off as the company continues acquiring top talent and building out desirable functionality, which is often based on customer requests and feedback. Importantly, the company’s growth strategy is aligned with the success and savings of its customers.

There is a virtuous cycle occurring here that has likely just begun in earnest and the company is clearly a beneficiary of powerful network effects. It appears that the company’s land-and-expand, B2B model is a beneficiary of Reed’s Law for networks. This is part of the reason we think earnings will continue to outperform consensus expectations, just as they have lapped hard-to-beat COVID comps.

The NRR of the company shows that it is a major SaaS player and that a lot of the metrics you might expect to slow as scale rises are actually accelerating. The company has digitized an essential function for every business. Our company, for example, which is on the smaller side uses DocuSign and it has saved us a lot of time and headache around several processes.

The platform is intuitive, easy-to-use and generally very effective. This is what is fueling the adoption, not simply COVID-19. Did COVID-19 amplify and accelerate the digital transformation? Yes, it certainly did. As our own industry can demonstrate, once the you go up the ladder toward digital transformation, you don’t often go back down.

What The Paper Crunch Can Teach Us About DocuSign

Many may not know that one of the first episodes of the digital age occurred in our very own industry. Prior to the digitization of trading which most alive probably take for granted, trades had to be conducted in person and messengers would literally go up and down Wall Street transporting securities.

As stock volume increased, back offices responsible for documenting and setting trades became overwhelmed. This led to the Paper Crunch and for a period between 1967-1971 the market was often closed on Wednesdays, or even sometimes multiple days a week, to facilitate the back-office catching up. Millions and millions of dollars were lost to failed trades that weren’t settled on time. It wasn’t all terrible for Wall Street, many used the Wednesday hiatus to catch up on their golf-game. Organized crime, according to disgraced former Attorney General John Mitchell, also made off handsomely. He estimated they were able to steal $400 million in securities during the chaos.

12 million trades a day completely paralyzed Wall Street though and back-office problems caused very real consequences and failures of many firms. Today, with the aid of computers well over a billion trades are processed and tens of millions of derivatives contracts are traded every day. We would assert that once a company digitizes processes, it is very rare that they will go back to paper. The same reason Wall Street won’t go back to paper is the same reason many companies won’t!

Earnings Upside Is Supported By a Crack Management Team And Talent War Prowess

Outsiders looking in at Silicon Valley will usually focus on the product a company is turning out. However, the successful management equation in Silicon Valley is much more about acquiring and retaining the best talent. When the top people in their field want to be at your company in Silicon Valley, you are simply able to more effectively pivot and to capitalize on unexpected gifts like the accelerated adoption of DocuSign’s key E-signature product.

This is partially why we believe this company is much more of a solid growth play than many people focusing simply on their COVID-19 driven expansion would care to admit. In addition to the innovative Agreement Cloud being in very early innings and also being full of promise, the company has a crack management team and is focusing on building out infrastructure across multiple dimensions to make major commercial strides. It recently has finished security infrastructure that enables it to be used widely by Federal, State and Local government entities across the United States. There’s a lot of utility there and government clients have a plethora of uses.

More than that though, the company has high scores on Glassdoor.com and it has about half the employee attrition rate of competitors. It has recently acquired a lot of talent on both the sales and product development side and people are excited to be there, and just as importantly are staying there. Cynthia Gaylor, the company’s CFO is an absolute killer and she is a former partner at Morgan Stanley’s technology practice. We think having her mind at work on accretive acquisitions is a major ace-in-the-hole that less discerning analysts may be missing.

An Essential Piece of The “Anywhere” Economy With International Growth On Fire

If this were just an E-signature play we would concede that the days of high-growth and rapid market-penetration may be behind the company. However, this company has taken it’s lemonade and made a delicious cocktail for shareholders with multiple paths to growth as scale increases. While international business came in at a respectable but not immaculate 22% in the blockbuster Q2 2021 earnings it is growing at an incredible clip.

There are plenty of mechanisms and well managed initiatives that could provide additional growth as this company continues to evolve. Disrupting signatures might sound boring to some, but probably no less boring than disrupting the YellowPages may have sounded to previous generations.

Large parts of the civil-law following Western World present appetizing market opportunities particularly since many industries are a lot further behind in the digital transformation than on this side of the pond given the lower levels of competitiveness in many places across Europe. Then, the companies already using it extensively in its more mature markets are coming up with new and profitable use cases regularly. If the revenue growth wasn’t matched by significant NRR growth, we’d be more hesitant, but this company has a solid strategy, an effective product, great management and multiple credible paths for continued growth.

There are vertical and horizontal growth opportunities all across the customer-base. One recent blockbuster product has been e-Notary. We see a big future in the contract-lifecycle management (CLM) across multiple industries. We’re also excited to see how the company can expand and monetize these opportunities now that it has the quality and quantity of manpower to implement multiple projects with specialized and motivated staff. If the company was T.E. Lawrence in the famous movie Lawrence of Arabia, we’d say it’s the part in the story right after he seized Aqaba.

Risks And Where We Could Be Wrong

The largest risk for this company is probably that the multiple projects initiated to diversify its business and expand the commercial footprint don’t match the growth and success of the flagship product. The once-in-a-lifetime boon to brand value caused by the great pandemic could certainly be squandered by management, but if you hear the messaging discipline and tone of the CEO and CFO talking about their product it’s hard not to detect a ferocious optimism that is very hard to fake. This, along with the lower-than-industry attrition rate makes us optimistic that the company will deliver.

Another big risk is that the company has hired 3,000 employees who have never set foot in a DocuSign office. Kind of ironic right? Expansions and leveling up scale is always complicated and fraught with execution risk but given the simplicity and elegance of the core product (and also the key way to land in a company, so to speak), we feel comfortable with this run-of-the-mill risk.

The massive first mover advantage and market dominance that DocuSign has achieved, and which was accelerated by COVID, will be very hard for competitors to supplant. This is why we chose to highlight it in this column. Their competitive advantage is significant and we are convinced they will successfully pursue at least one or two of the high-growth initiatives before them. While slowing E-Signature growth may be a headwind as the world normalizes, we think it will likely be compensated by new trees that the management team is barking up.

There are about 30 million businesses in the United States alone and DocuSign only has approximately 1 million paying clients. Competitive advantage here is significantly bolstered by the considerable IP portfolio the company has acquired to build and continuously improve its core product. However, there is definitely incentive for a competitor to assail their dominant position. We wouldn’t say there are any major threats and would find it more likely that DocuSign will eventually eat Adobe’s lunch, rather than the other way around!

Price risk is of course another major risk with this name. It has seen incredible appreciation and if earnings reports begin disappointing instead of repeatedly beating expectations then multiple compression is certainly possible. Again though, this column focuses on fundamentals, strategy and management and we like all three. This makes a nice portfolio addition for those who may be overly concentrated in the cyclical/reopening trade.