Docusign (DOCU) - Why I like their future growth

Docusign (DOCU) - Why I like their future growth and some predictive growth metrics

Docusign (DOCU) currently makes up about 12% of my portfolio. Please note that the DOCU fundamental analysis follows at the bottom of this post (in case you care to jump straight to it). The first part of this post outlines the handful of criteria I looked at and always review for any growth company I consider investing in.

This is the 3rd in a series of posts on investing criteria I use. The first two posts can be found at the following links. (My apologies…as a finance guy, I’m still technically challenges on this board to add graphs and the proper formats here, but I’ll still keep trying :wink:

In these prior posts I’ve summarized all 20 fundamental metrics I utilize to assess the strength, performance and excellence of a high growth company like DOCU, in which I may choose to invest…of which only 10 great companies make the portfolio cut.

I would also add that I am incredibly grateful for the analysis, reflection and discussion that happens on this board to bring some of those companies to our attention and ferret out their pitfalls, future potential, and their fundamental performance. THANK YOU to all those who contribute regularly!

Today I will focus on just one of the criteria that I analyze:
“Future & Predictive Growth Indicators: Customer, product, sector, geographic & other growth indicators”

How can we predict the growth of a company? How can we see it BEFORE it happens?

Growth of a company comes in many forms. “Rapid Revenue Growth” is naturally the best known and most important criteria for any high growth company. I won’t discuss this here because for most investors on this board, it is the most obvious and first thing everyone looks at on the P&L. I do cover it in the very first link above along with the basics of the three financial statements, if you care to do a little review; HOWEVER, revenue growth is “backward” looking at the past 3 or 12 months of revenue and in typically in comparison to the year prior period…while it provides a nice historical perspective, it doesn’t necessarily coalesce into a clear picture of the future and is not predictive by itself.

How do we get an indication a company is accelerating its growth BEFORE they announce it in their earnings release? Is there a way to glean any advantage?

Indeed, many forward looking indicators can be assessed to get an early indication of future “revenue growth” because, let’s face it, without revenue growth, it is difficult or impossible long-term to continue to invest in the necessary R&D, S&M or G&A expenditures in order accelerate a company’s growth…and forget about attaining or increasing profitability (or positive cashflow), the end financial goal of every company. Sure, some companies will give us some future guidance, but last year many even stopped giving guidance…and even when they do, its almost always conservative and has to be taken with a grain of salt.

So how can we try to predict revenue growth? Rather simple, actually. I look at a company’s growth in a number of other organic (and inorganic) areas that are indicative of future growth and which the company actually tracks and provides us in various company presentations, earnings calls, and quarterly earnings releases, including the following:

  1. Number of total new customers and their growing customer base
  2. Growth of existing and larger (in particular) customers
  3. New products or offerings by the company
  4. Geographic growth outside of existing geography or customers
  5. Growth into new market segments
  6. Inorganic growth such as acquisitions of companies and/or competitors
  7. Growth of billings, backlog, deferred revenue and/or RPOs
  8. Employee headcount growth…especially in Sales & Marketing
  9. Growth in revenue from existing customers (measured using NDBRR)

This is certainly not an exhaustive list and there are no doubt many other growth factors one can track depending on the company, industry, etc. The most important takeaway here is to figure out what those growth factors and metrics are for each company and to analyze these LEADING indicators to get an idea of what direction a company’s revenue growth is possible, or likely, to go. It will give you critical advance notice of when a company’s growth is accelerating or decelerating…and in what direction. This in turn will help you make an educated decision if and when to invest; or whether to continue to hold, add to a position or, potentially, sell it. So what about Docusign!?

Docusign (DOCU)

DOCU is a perfect example of a company that is exhibiting predictive growth in almost all 9 of the areas listed above.

  1. 1 million total customers and 42% CAGR in customers since 2018.

  2. 136,000 enterprise(large) customers and 54% CAGR in customers since 2018.
  3. Three new product lines introduced beyond their primary “e-Signature” product include Contract Lifecycle Management (CLM), Insight, and Notary.
  4. DOCU had 84% q/q international growth last quarter, which now makes up 21% of revenues (i.e. plenty more room to grow). They are currently expanding into 8 new international country markets (many in Europe) directly and already have a presence in 180 countries!
  5. With their new product offerings (listed above), DOCU is expanding into legal contract management and analysis, as well as notary services. They are also becoming far more widely accepted across all industries (like mortgage and real estate transactions) since Covid-19 forced their widespread use.
  6. DOCU continues to grow both organically, as shown in these examples here , but also in-organically through precision acquisitions when necessary of technology including LiveOak Technologies most recently in July 2020.
  7. Billings grew annually more than 54% last year…an indication of future revenue to be recognized.
  8. Annual employee headcount last fiscal year increased from 4,281 up to 6,080…up 42%!
  9. Net Dollar Based Retention Rate (NDBRR) is roughly the increased (or decreased) average spending by existing customers in a year. I will cover it in my next post, but roughly, any number over 100% means you are not losing ANY average existing customer spend from beginning to end of year… in DOCU’s case, they are actually increasing their existing customers spend by 125% and even that number has increased VERY nicely in the past 6 quarters!!

(Darn it! I am sorry…I’ve included some great graphs from one of their recent presentations that I can’t attach here on this board due to editing limitations, but you can see them at my original post here:

It is absolutely no surprise then, when I consider the above growth factors altogether that both Subscription revenue and Total revenue growth have continued to ACCELERATE nicely every single quarter for the past 6 quarters (note that subscription revenue made up over 96.3% of total revenue last quarter):

Subscription Revenue Q/Q Growth:
Q4 2020 37.6%
Q1 2021 39.4%
Q2 2021 46.6%
Q3 2021 54.0%
Q4 2021 58.9%
Q1 2022 60.9%

And DOCU is not a spring chicken just starting out. Their “overnight success” started in 2001! (And most of our SaaS companies can add about 5 year’s experience, growth and adoption for Covid-19 in 2020.) DOCU has already grown into one of my larger SaaS companies with an annual revenue run rate exceeding $1.8B dollars and are STILL continuing to accelerate their growth at that incredible scale; many of the smaller SaaS companies we look at that are 1/10th the size can’t claim the same growth metrics!

Meanwhile, DOCU is absolutely NOT sitting on their haunches as they expand their customer base & size, their product lineup, their international presence & growth, their billings, their large (and small) customers….and, of course, their headcount to support all the past growth and, most importantly, FUTURE growth! This is the kind of company and growth acceleration I look for and get excited to invest in!! (Full Disclosure: I have owned DOCU shares for more than a year now and added a quite a lot of leverage in the form of call (leap) options in late May and early June 2021 when it dipped).

DOCU is currently my third largest holding and makes up about 12% of my portfolio of 10 companies (Stock and long term (LEAP) options combined in this number). CRWD and NET are the only larger company investments I own.

I hope this has been helpful and wish you all a great summer. The next investment criteria I will analyze and tackle (in a subsequent post) is what I have termed and refer to as:

Management “FLESH” : (F)ounder (L)ed, (E)xperienced, (S)hareHolder friendly, (H)onest.

Cheers! – Poleeko