DocuSign (DOCU)

E-signature company DocuSign (DOCU) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 7.6% year on year to $763.7 million. Guidance for next quarter’s revenue was better than expected at $779 million at the midpoint, 0.7% above analysts’ estimates. Its non-GAAP profit of $0.90 per share was 10.5% above analysts’ consensus estimates.

Company Overview

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 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.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, DocuSign grew its sales at a 10.8% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, DocuSign reported year-on-year revenue growth of 7.6%, and its $763.7 million of revenue exceeded Wall Street’s estimates by 2.1%. Company management is currently guiding for a 5.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

DocuSign’s billings came in at $739.6 million in Q1, and over the last four quarters, its growth was underwhelming as it averaged 6.4% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

DocuSign is extremely efficient at acquiring new customers, and its CAC payback period checked in at 14.8 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like DocuSign, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

DocuSign’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 79.3% gross margin over the last year. That means DocuSign only paid its providers $20.67 for every $100 in revenue.

In Q1, DocuSign produced a 79.4% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

DocuSign has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 7.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, DocuSign’s operating margin rose by 5.7 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, DocuSign generated an operating margin profit margin of 7.9%, up 4.7 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 30.2% over the last year.

DocuSign’s free cash flow clocked in at $227.8 million in Q1, equivalent to a 29.8% margin. The company’s cash profitability regressed as it was 2.9 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts’ consensus estimates show they’re expecting DocuSign’s free cash flow margin of 30.2% for the last 12 months to remain the same.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

DocuSign is a profitable, well-capitalized company with $948.7 million of cash and $132.9 million of debt on its balance sheet. This $815.8 million net cash position is 4.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see DocuSign beat analysts’ revenue expectations this quarter. We were also glad its revenue guidance for next quarter slightly exceeded Wall Street’s estimates. On the other hand, its billings slightly missed and guidance for next quarter and full-year billings also fell short. This is weighing on shares. The stock traded down 12.4% to $81.50 immediately following the results.

Updated: June 12, 2025 at 10:05 PM EDT

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

DocuSign has some positive attributes, but it isn’t one of our picks. Although its revenue growth was weak over the last three years and analysts expect growth to slow over the next 12 months, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

DocuSign’s price-to-sales ratio based on the next 12 months is 5x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $88.08 on the company (compared to the current share price of $75.82).