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DocuSign's (NASDAQ:DOCU) Q1 Sales Top Estimates But Stock Drops 15.7%


Full Report / June 28, 2022
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E-signature company DocuSign (DOCU) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 25.4% year on year to $588.6 million. However, guidance for the next quarter was less impressive, coming in at $602 million at the midpoint, being 0.27% below analyst estimates. DocuSign made a GAAP loss of $27.3 million, down on its loss of $8.35 million, in the same quarter last year.

DocuSign (DOCU) Q1 FY2023 Highlights:

  • Revenue: $588.6 million vs analyst estimates of $581.8 million (1.17% beat)
  • EPS (non-GAAP): $0.38 vs analyst expectations of $0.46 (17.6% miss)
  • Revenue guidance for Q2 2023 is $602 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 $174.5 million, up 148% from previous quarter
  • Gross Margin (GAAP): 77.5%, 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' orginally 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 $469 million, to $588.6 million.

DocuSign Total Revenue

This quarter, DocuSign's quarterly revenue was once again up a very solid 25.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $7.86 million in Q1, compared to $35.3 million in Q4 2022. 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 17.6% year on year to $602 million, slowing down from the 49.5% 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 15.6% 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 77.5% in Q1.

DocuSign Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 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 $174.5 million in Q1, up 41.9% year on year.

DocuSign Free Cash Flow

DocuSign has generated $496.6 million in free cash flow over the last twelve months, an impressive 22.3% 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 Q1 Results

Sporting a market capitalization of $18 billion, more than $967.6 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.

DocuSign delivered solid revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. 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 were not the best we've seen from DocuSign. The company is down 15.7% on the results and currently trades at $66.5 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 we have other favorites, we understand the arguments that DocuSign is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And on top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

DocuSign's price to sales ratio based on the next twelve months is 6.8x, suggesting that the market is expecting more moderate growth, relative to the hottest 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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