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DocuSign (NASDAQ:DOCU) Q3: Beats On Revenue But Stock Drops 22.5%


Full Report / December 02, 2021
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E-signature company DocuSign (DOCU) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 42.4% year on year to $545.4 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $560 million at the midpoint, or 2.41% below analyst estimates. DocuSign made a GAAP loss of $5.67 million, improving on its loss of $58.4 million, in the same quarter last year.

DocuSign (DOCU) Q3 FY2022 Highlights:

  • Revenue: $545.4 million vs analyst estimates of $531.2 million (2.67% beat)
  • EPS (non-GAAP): $0.58 vs analyst estimates of $0.46 (25.3% beat)
  • Revenue guidance for Q4 2022 is $560 million at the midpoint, below analyst estimates of $573.8 million
  • Free cash flow of $90 million, down 44.3% from previous quarter
  • Gross Margin (GAAP): 78.7%, up from 74.4% 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 Covid pandemic has accelerated the digital transformation of how we work and do business and the e-signature products have been clear beneficiaries of it.

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 exceptional over the last year, growing from quarterly revenue of $382.9 million, to $545.4 million.

DocuSign Total Revenue

And unsurprisingly, this was another great quarter for DocuSign with revenue up 42.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $33.6 million in Q3, compared to $42.7 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

"Third quarter revenue growth of 42% year-over-year and operating margin of 22% exceeded our expectations. After six quarters of accelerated growth, we saw customers return to more normalized buying patterns, resulting in 28% year-over-year billings growth," said Dan Springer, CEO of DocuSign.

Analysts covering the company are expecting the revenues to grow 30.1% over the next twelve months, although estimates are likely to change post earnings.

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 78.7% in Q3.

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. Significantly up from the last quarter, 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.

Key Takeaways from DocuSign's Q3 Results

With a market capitalization of $45.4 billion, more than $818.4 million 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.

We enjoyed seeing DocuSign’s impressive revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results still seemed decent but it looks like there is a slight slowdown on the horizon. Considering the high valuation investors might have been expecting more and the company is down 22.5% on the results and currently trades at $181 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 think DocuSign is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from DocuSign given its price to sales ratio based on the next twelve months is 18.2x. There is definitely a lot of things to like about DocuSign and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $328.7 per share right before these results, implying that they saw upside in buying DocuSign even in the short term.

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