I really liked DocuSign’s quarter. It wasn’t ZM - who is, really? - but I felt it met or beat expectations by more than just about any other company. While it still lacks the numbers of say CRWD or DDOG, I believe it firmly put itself with the OKTA’s and NET’s of the world.

It doesn’t get quite as much focus as some other names here, so I thought I’d post my write up a bit early. I would be curious to hear from others who either own it or have looked at it. Am I missing anything here?



DOCU – I was really curious to see DocuSign’s September 3 report. In last month’s recap I wrote, “I saw several promising trends in DOCU’s performance when I opened this position in June (…). We will see if any came to fruition when the company reports.” I am glad to say it seems at least a few of them did.

On the top line, DocuSign’s $342.2M in revenue was a strong beat and sequential acceleration from 39% to 45% growth. Subscription growth accelerated as well from 39% to 47% and accounted for 94.6% of total revenue for the quarter. Gross profit growth jumped to 45% leading to 78% gross margin. Subscription gross margin was even better at 83%. Those are excellent rates, especially for a company that just raised guidance to $1.39B in revenue for the year.

While I was happy to see those numbers, the top line was never my focus. When I first bought DOCU I mentioned, “What intrigues me more are [underlying] signs DocuSign may see accelerated business over the next few quarters.” I then outlined the trends that grabbed my attention. I have relisted them below adding this quarter’s results (this quarter bolded). Let’s see how DocuSign did:

  • Billings growth the last four quarters: 36%, 40%, 59%, 61%. Management guides for a pullback to 45% in Q3, but let’s not forget it guided for 36% growth this quarter before posting 61%. Either way, in FY21 DOCU will post its highest billings growth as a public company. The top end guide is 49%, meaning 50%+ is likely. Given FY20 finished at 38%, it seems billings are in a very good spot. I would also point out it was last year’s Q3 billings dip that caused the stock to pause before its 2020 rip. I’m not concerned in this area.

  • Growth in current contract liabilities: 34%, 33%, 43%, 55%.

  • DocuSign added roughly 27,000 customers per quarter for six quarters heading into the year. It added 68,000 in Q1 and 88,000 this quarter. Total customer growth the last three quarters: 24%, 31%, 40%. In total, DOCU has added more customers in the first half of this year than it did all last year. That is remarkable considering DOCU just reported 749,000 total customers.

  • Along the same lines, DocuSign added roughly 6,000 enterprise customers per quarter for six quarters heading into the year. It added 10,000 in Q1 and another 10,000 this quarter. Enterprise customer growth the last three quarters: 34%, 48%, 55%. That is also remarkable considering DOCU just reported 99,000 enterprise customers.

  • Growth in customers with an Annual Contract Value >$300K: 41%, 41%, 46%, 41%. 520 total. This appears to be right on track.

  • For the second quarter in a row, international growth impressed. In Q1 international revenue grew faster than domestic, finishing at 46% YoY and $55M total. This quarter was even better at 59% and $67M. The CEO stated on the call “every single geography that we have was above plan in the quarter.” DocuSign’s self-service option is available in roughly 150 countries, and the CFO was just promoted to President of International. Management clearly sees a large opportunity here and intends to take advantage of it. I say more power to them.

  • Net Retention Rate: 112%, 113%, 117%, 117%, 119%, 120%. A strong trend with a new record. ‘Nuff said.

When I first reviewed these trends, I wrote it looked “like a legitimate buildup of customers, contracts and NRR expansion that should positively influence future quarters.” That very much appears to be the case. In addition to the figures above, expenses were a record low 68% of revenues despite increasing headcount 44% to 5,000+ employees. That is a major investment, but I have no issue given it was driven mostly by the need to meet increased demand. The increased operational efficiency led to a healthy bottom line with DocuSign posting $33.7M in operating income (10% margin), $34.8M in net income (10%), and $99.8M (!!!) in free cash flow (29.2%). The dollar amounts and margins were all new records. Even better, I would expect at least a couple of these marks to fall again in upcoming quarters.

Overall, there is not much to nitpick here. DocuSign’s flagship eSignature business continues to flourish, and its Contract Lifecycle Management (CLM) platform continues to gain exposure. The CLM build-out is right on schedule and should be ready to fully contribute to revenues in 2021. The recent Liveoak Technologies acquisition adds e-notary capability, which DOCU expects to be in beta release later this year. The TAM for the notary module is estimated at just $1B but embedding it into DOCU’s eSignature ($25B TAM) and CLM ($25B) offerings should give it a differentiator in both markets.

On the call management noted strength not only in its traditional real estate and contract business, but also increased usage in areas like telehealth and government as COVID-19 has increased the need for remote transactions. Given the conveniences and efficiencies being seen in electronic administration, it is reasonable to think a considerable portion of this business will stick post-virus. Simply put, the world has been moving away from paper recordkeeping for quite some time, and DocuSign is leading the charge. As CEO Dan Springer stated:

“I spoke last quarter about how so many [customers] faced a sudden need to transition to remote work when the pandemic was hit. Today, that need has evolved from an initial crisis response to a business necessity. And because Agreements are central to doing business, the need to agree electronically and remotely has never been stronger. This is causing greater adoption of our offerings; something we believe will persist beyond the crisis, because in our experience it’s very rare to see anyone go back to paper on based on digital.”

When I opened this position, I estimated DocuSign had a chance to reset itself as a profitable 40%+ grower. I was mistaken. It appears to have reset as at least a profitable 45%+ grower instead. I don’t want to sound greedy but think it fair to point out a reasonable beat of Q3’s 45% top end guide could once again have DocuSign challenging 50% growth. Regardless of how it turns out, I believe DOCU has rebranded itself as a profitable company with an increasing TAM and accelerating prospects. As a result, it will retain a healthy spot in my portfolio.