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DocuSign (NASDAQ:DOCU) Q3 Sales Beat Estimates, Stock Soars


Full Report / December 07, 2023

E-signature company DocuSign (DOCU) reported Q3 FY2024 results beating Wall Street analysts' expectations, with revenue up 8.5% year on year to $700.4 million. The company expects next quarter's revenue to be around $698 million, in line with analysts' estimates. It made a non-GAAP profit of $0.79 per share, improving from its profit of $0.57 per share in the same quarter last year.

DocuSign (DOCU) Q3 FY2024 Highlights:

  • Revenue: $700.4 million vs analyst estimates of $690.1 million (1.5% beat)
  • Billings: $691.8 million vs analyst estimates of $674.6 million (2.5% beat)
  • EPS (non-GAAP): $0.79 vs analyst estimates of $0.63 (24.8% beat)
  • Revenue Guidance for Q4 2024 is $698 million at the midpoint, above analyst estimates of $693.7 million
  • Full year guidance raised across the board
  • Free Cash Flow of $240.3 million, up 30.9% from the previous quarter
  • Gross Margin (GAAP): 79.6%, in line with 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.

Document Management

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 mediocre over the last two years, growing from $545.5 million in Q3 FY2022 to $700.4 million this quarter.

DocuSign Total Revenue

DocuSign's quarterly revenue was only up 8.5% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $12.73 million in Q3 compared to $26.3 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter, DocuSign is guiding for a 5.5% year-on-year revenue decline to $698 million, a further deceleration from the 13.6% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 5.6% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 79.6% in Q3.

DocuSign Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. DocuSign's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that DocuSign is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. DocuSign's free cash flow came in at $240.3 million in Q3, up 566% year on year.

DocuSign Free Cash Flow

DocuSign has generated $751.5 million in free cash flow over the last 12 months, an eye-popping 27.6% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from DocuSign's Q3 Results

With a market capitalization of $9.62 billion, DocuSign is among smaller companies, but its $1.59 billion cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was encouraging to see DocuSign top analysts' billings and revenue expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates. Profits were also better-than-expected in the quarter, showing not only topline momentum but expense efficiency and leverage. For the full year, guidance was raised across the board. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 9% after reporting and currently trades at $51.7 per share.

Is Now The Time?

When considering an investment in DocuSign, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of DocuSign, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last two years, and analysts expect growth to deteriorate from here.

DocuSign's price to sales ratio based on the next 12 months is 3.5x, 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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