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DocuSign's (NASDAQ:DOCU) Q2 Sales Top Estimates, Stock Jumps 15.5%


Full Report / September 29, 2022
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E-signature company DocuSign (DOCU) announced better-than-expected results in the Q2 FY2023 quarter, with revenue up 21.5% year on year to $622.1 million. The company expects that next quarter's revenue would be around $626 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. DocuSign made a GAAP loss of $45 million, down on its loss of $25.5 million, in the same quarter last year.

DocuSign (DOCU) Q2 FY2023 Highlights:

  • Revenue: $622.1 million vs analyst estimates of $602.2 million (3.3% beat)
  • EPS (non-GAAP): $0.44 vs analyst estimates of $0.42 (4.3% beat)
  • Revenue guidance for Q3 2023 is $626 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $2.47 billion at the midpoint
  • Free cash flow of $105.4 million, down 39.5% from previous quarter
  • Gross Margin (GAAP): 78%, in line with 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 year, growing from quarterly revenue of $511.8 million, to $622.1 million.

DocuSign Total Revenue

This quarter, DocuSign's quarterly revenue was once again up a very solid 21.5% year on year. On top of that, revenue increased $33.4 million quarter on quarter, a very strong improvement on the $7.86 million increase in Q1 2023, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates DocuSign is expecting revenue to grow 14.7% year on year to $626 million, slowing down from the 42.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 11.8% over the next twelve months.

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 78% in Q2.

DocuSign Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. This is 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. It is good to see that the gross margin is staying stable which indicates that DocuSign is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow 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 $105.4 million in Q2, down 34.7% year on year.

DocuSign Free Cash Flow

DocuSign has generated $440.3 million in free cash flow over the last twelve months, an impressive 18.8% of revenues. This extremely high FCF margin is a result of DocuSign asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from DocuSign's Q2 Results

Sporting a market capitalization of $11 billion, more than $994.7 million in cash and with positive free cash flow over the last twelve months, we're confident that DocuSign has the resources it needs to pursue a high growth business strategy.

It was good to see DocuSign outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company currently trades at $55.1 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. Although DocuSign is not a bad business, it probably wouldn't be one of our picks. 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 4.5x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that DocuSign doesn't trade at a completely unreasonable price point.

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