DocuSign (NASDAQ: DOCU) posted its latest earnings report on Sept. 7. For the second quarter of fiscal 2024, which ended on July 31, the e-signature leader’s revenue rose 11% year over year to $688 million and beat analysts’ estimates by $10 million. Its adjusted net income jumped 66% to $150 million, or $0.72 per share, and also cleared the consensus forecast by $0.06.
Those headline numbers looked stable, but DocuSign’s stock still dipped after the report and remains 84% below its all-time high from September 2021. Let’s review the bear and bull cases to see if DocuSign can bounce back over the next few quarters.
DocuSign controls about 70% of the global e-signature market. It serves 1.44 million paying customers — including most of the top financial, healthcare, and tech companies in the Fortune 500 — and its services are used by over 1 billion users worldwide.
Between fiscal 2019 and 2023 (which ended in January 2023), DocuSign’s revenue rose at a compound annual growth rate (CAGR) of 37% as its billings grew at a CAGR of 35%. It experienced a growth spurt during the pandemic as more businesses relied on digital signatures, but lost its momentum in fiscal 2023 as inflation and rising interest rates drove companies to rein in their spending.
The bears will point out that DocuSign’s revenue growth cooled off over the past year as its billings growth stayed tepid. Most of that slowdown can be attributed to the macro headwinds, but DocuSign also faces intense competition from similar e-signature services like Adobe Sign, which is integrated into its Acrobat software and other cloud-based applications; and Dropbox Sign, which it bundles with its cloud-based storage and collaboration services.
Revenue growth (YOY)
Billings growth (YOY)
DocuSign expects that slowdown to drag on into the third quarter with just 6% to 7% year-over-year revenue growth and 1% to 3% billings growth. For the full year, it expects its revenue to rise 9% as its billings grow 4% to 5%. That would represent a significant deceleration from its 19% revenue growth and 13% billings growth in fiscal 2023.
During the second-quarter conference call, CEO Allan Thygesen — who took the helm less than a year ago — said the company was still “seeing continued macro pressures tempering expansion rates.” CFO Blake Grayson also told investors to “expect billings growth deceleration in the back half of the year” as those pressures persist.
Lastly, DocuSign’s insiders still haven’t bought a single share over the past 12 months. That lack of insider interest indicates it hasn’t reached its cyclical trough yet.
The bulls will tell you to focus on DocuSign’s stable margins, rising profits, and reasonable valuations. Over the past year, its adjusted gross margin held steady in the low 80s as its adjusted operating margin gradually expanded year over year.
Adjusted gross margin
Adjusted operating margin
DocuSign’s healthy gross margin suggests it still has plenty of pricing power in the e-signature market, while its expanding operating margin indicates its aggressive cost-cutting measures — which included laying off 9% of its employees last year and another 10% of its remaining employees earlier this year — are paying off.
For the third quarter, it expects to maintain an adjusted gross margin of 81% to 82% with an adjusted operating margin of 22% to 23%. For the full year, it expects to generate an adjusted gross margin of 81% to 82% with an adjusted operating margin of 23% to 24%. Analysts expect its adjusted earnings per share (EPS) to grow 26% for the full year.
DocuSign also turned profitable on a generally accepted accounting principles (GAAP) basis in the first half of fiscal 2024, with a net profit of $8 million versus a net loss of $72 million a year earlier. Those rising profits boosted its free cash flow (FCF) by 74% year over year to $184 million in the second quarter, which prompted it to expand its current buyback program by $300 million to $500 million. It already bought back $70 million in shares in the first half of the year.
With an enterprise value of $9.6 billion, DocuSign trades at less than 4 times this year’s sales. Dropbox, which is expected to generate just 7% sales growth this year, also trades at 4 times that estimate. Adobe, which is expected to grow its revenue by 10% this year, trades at 13 times that forecast. Therefore, DocuSign’s valuations might limit its downside potential until its growth accelerates again.
DocuSign’s profitability is improving and its stock looks reasonably valued, but I can’t recommend buying this stock until its billings growth stabilizes and its insiders buy some shares. Until that happens, I’ll stay bearish on this out-of-favor stock.
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