High-growth SaaS business - Docusign (DOCU)

Founded in 2003, Docusign is now the worldwide leader in the e signature market

38% market share; well ahead of Adobe, Hello Sign etc. which have 12-13% market share or lower

The business has 100s of millions of users worldwide - 454,000 paying customers; out of which 53,000 are commercial customers

Total customer count has grown by 47% CAGR over the past 5 years and enterprise/commercial customer count has grown by 60% CAGR

18 of the top 20 healthcare companies, 10 of the top 15 financial companies, 7 of top 10 technology companies are customers

Major customers include Verizon, T Mobile, FedEx, Unilever, Visa, Bank of America, Dropbox, Stripe, Workday, Stripe, Berkshire, Deutsche Bank etc

Company claims that its TAM is $25 billion

Docusign’s software is already embedded in widely used business applications from Microsoft, Oracle, Workday, Salesforce, SAP etc

Business has offices in 15 nations, 2,900 employees (24% international), 2 proprietary data centres and 2 third party data centres

Company is pursuing the classic Saas model with recurring subscription revenues and ‘land and expand’ strategy

The business is growing rapidly at scale and demonstrating strong operational leverage

Company’s YOY revenue is growing by 36% and its billings are up 39%

Recurring subscriptions currently account for 94% of revenue, professional services makes up the rest - average contract length is 14 months

Docusign offers a capacity based subscription model - Single User, Multi-User, Business Pro, Enterprise Pro and Platform

Company’s net retention rate currently stands at 114%

The top 100 customers’ life-to-date purchase multiple is 5.3x - evidence of ‘land and expand’

Currently, 285 of its customers have an annual contract value in excess of $300,000. This represents a 9x increase when compared to 5 years ago

At present, 83% of revenue is domestic and just 17% is derived from the international markets

The e signature market is strong but the company is now focusing on its ‘Systems of Agreement’ solution

The ‘Systems of Agreement’ solution will allow enterprise customers to prepare, manage, sign and store documents digitally within Docusign’s platform

Company is now both operating cash flow and free cash flow positive

Management team is experienced - Dan Springer is the CEO with 30 years experience in the SaaS space (MBA from Harvard). Previously, he was Chairman and CEO of a business which was acquired by Oracle in 2013 for $1,6 billion. The CTO (MBA Kellogg) is very experienced and previously held prominent positions at Paypal, Salesforce and Charles Schwab. The CFO has 18 years experience in high-growth tech companies and was previously, CFO at FireEye for 4 years.

The Board is strong with independent Directors from Bain Capital Ventures, HP, IBM and GoDaddy

According to independent research, the e signature market is likely to grow by 34% CAGR over the next 4-5 years. Therefore, as the industry leader, it is probable that Docusign will at least be able to generate industry-level revenue growth (30-34% CAGR until 2022-23)

The stock got listed in April 2018 and it doubled within 4 months but the recent stock market downtrend has caused it to decline almost 50%

The stock has been building a base since its mid-November intra-day low and it has now surpassed its December high; which is a positive sign

It is notable that the stock (unlike the broad market) did not decline to a new correction intra-day low in December and stayed above its November level (another positive sign)

In terms of valuation, the business is trading at a TTM EV/revenue multiple of 9.3 which is reasonable given dominant market position and growth profile

The company has $1.1 billion in cash and its debt is $443 million (net cash of $657 million)

In terms of competition, Adobe seems to be the biggest threat but on a positive note, it has recently raised prices for its Document Cloud (home to its e signature offering). This move lends support to the idea that the e signature space won’t be subject to a nasty price war anytime soon.

In summary, Docusign appears to be a hyper-growth market leader in the SaaS industry (e signature space). Its management team is solid, the business has a healthy cash position, its growth profile is strong and its valuation seems to be reasonable.

Given the above factors, I’ve recently initiated a starter position in this company (4% of my portfolio).