DocuSign's (NASDAQ:DOCU) Q4 Sales Top Estimates

E-signature company DocuSign (DOCU) reported Q4 FY2023 results topping analyst expectations, with revenue up 13.6% year on year to $659.6 million. The company expects that next quarter's revenue would be around $641 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. DocuSign made a GAAP profit of $4.86 million, improving on its loss of $30.4 million, in the same quarter last year.

Founded by Seattle-based entrepreneur Tom Gonser, DocuSign (NASDAQ:DOCU) is the pioneer of e-signature and offers software as a service that allows people and organisations to sign legally binding documents electronically.

The platform digitizes the whole signing process from preparing the agreement, making sure that the correct people receive it, to storing it after it is signed. DocuSign makes the overall process of signing a document a lot faster and significantly reduces error rates, and its integrations with many other software platforms (such as Google Drive or Salesforce) allow companies to generate and send new agreements to their customers at the click of the button. It is an interesting company to watch because it is profiting from the overall digitization of the economy as the product is useful to any company, large or small, across a wide range of industries.

The catch phrase "digital transformation" originally referred to the digitization of documents within enterprises. The growth of digital documents has spurred an explosion of collaboration within and between businesses, which in turn is driving the demand for e-signature and content management platforms.

DocuSign is competing with products like Dropbox’s (NASDAQ:DBX) HelloSign or Adobe Sign (NASDAQ:ADBE).

Sales Growth

As you can see below, DocuSign's revenue growth has been very strong over the last two years, growing from quarterly revenue of $430.9 million in Q4 FY2021, to $659.6 million.

This quarter, DocuSign's quarterly revenue was once again up 13.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $14.1 million in Q4, compared to $23.3 million in Q3 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates DocuSign is expecting revenue to grow 8.89% year on year to $641 million, slowing down from the 25.5% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $2.7 billion at the midpoint, growing 7.36% compared to 19.4% increase in FY2023.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. DocuSign's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 79.2% in Q4.

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still a good gross margin that allows companies like DocuSign to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. DocuSign's free cash flow came in at $113 million in Q4, up 60.7% year on year.

DocuSign has generated $429.1 million in free cash flow over the last twelve months, a solid 17.1% of revenues. This strong FCF margin is a result of DocuSign asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from DocuSign's Q4 Results

With a market capitalization of $13.2 billion, more than $1.03 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see DocuSign outperform Wall St’s expectations this quarter. That feature of these results really stood out as a positive. On the other hand, the revenue guidance for next year indicates a significant slowdown and revenue growth is slower these days. Overall, it seems to us that this was an ok quarter for DocuSign. The company is up 2.66% on the results and currently trades at $66.15 per share.

Is Now The Time?

When considering DocuSign, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of DocuSign we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates.

DocuSign's price to sales ratio based on the next twelve months is 5.0x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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