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Late in 2021, I concluded that I was warming up to DocuSign (NASDAQ:DOCU), not to be confused with myself being compelled to the shares, after the same shares essentially were cut in half overnight, as bookings growth slowed down unexpectedly.
DocuSign – Managing And Signing Agreements
DocuSign is a market leader in “agreements” as it removes paper to write down such agreements. This is not necessarily just an environmental play for that reason, but moreover speed, execution, and storage of such agreements become easier when signed online. This results in fewer errors and lower costs, as the strong platform, technology and APIs have been driving adoption of this software and technology with adjacent services as well. Of course, it is not all about signing documents, but it includes preparation, managing and acting upon these documents as well.
In December shares fell to $135 after the company warned for slower growth, while shares traded at levels around the $300 mark just weeks before. The company originally guided for 2020 sales at around $1.27 billion, up 30% compared to 2019 as billings and sales accelerated throughout 2020 following the pandemic, being a very clear driver for the business of course. Revenues came in at $1.5 billion, far ahead of the original guidance, yet a net loss of $243 million was posted that year. This GAAP loss was driven by a huge $287 million stock-based compensation expense. The company guided for continued growth, with sales seen around $2 billion in 2021.
After posting 58% sales growth in the first quarter of 2021 (fiscal year 2022) and 50% growth in the second quarter, the company hiked the sales guidance to $2.08 billion for the year, and billings were now seen at $2.42 billion. While billings growth numbers were similar to the revenue growth numbers in the first half of the year, the third quarter results showed a major discrepancy. While revenues rose some 42% in the third quarter, billings growth slowed down to just 28%, triggering the company into cutting the billings guidance to $2.34 billion as this is of course a forward-looking indicator for future revenue growth.
With 197 million shares still trading at $135 in December, the company was awarded a $26.6 billion equity valuation, equal to 12-13 times sales of around $2.1 billion. This felt like a steep multiple with growth slowing down quite a bit, although GAAP numbers came in around the break-even mark. Whether the pandemic would retreat, this model was here to stay, as was obvious to me, yet the valuations were still somewhat demanding from a fundamental point of view, as overall (technology) market valuations were still much higher at the time.
More Pressure
Since the bombshell report in December, during which shares were cut in half overnight, shares have fallen another 50% in the half year which followed, with shares now trading at $65 per share. This is actually ten dollar above the lows seen in recent weeks.
The softer trends in the third quarter of 2021 were prolonged in the fourth quarter as well, with fourth quarter revenue growth slowing down to 35% as billings were up 25% on the year before. Sales totaled $2.1 billion for the year, with billings coming in at $2.4 billion, largely in line with expectations. Despite these trends of softer growth, DocuSign has improved the bottom line performance with GAAP operating losses narrowing from $174 million in 2020 to $62 million in 2021.
The company guided for 2022 sales to come in between $2.47 and $2.48 billion, with billings seen at a midpoint of $2.72 billion. The company guided for adjusted operating margins around 17% of sales, actually marking deleveraging as the company posted 20% margins on this metric in 2021.
In June, DocuSign posted its first quarter results, and they were quite solid as revenues rose 25% to $589 million, with billings up 16% to $614 million, both ahead of the guidance issued at the time of the release of the annual results. While this is comforting, the company maintained the full year revenue guidance, but it actually cut the billings outlook quite aggressively to $2.53 billion, indicating sequential growth expected for the remainder of the year. This is especially noteworthy as the degree of the “cut” in the guidance has been large, all while the company has seen a strong first quarter already.
With 200 million shares now trading at $65, the market value has shrunken to $13.0 billion, or actually a bit less if we factor in a roughly $300 million net cash position. This woks down to a roughly 5 times sales multiple, of course the result of slower growth, yet there is the aspect of margins as well. The company has maintained the midpoint of the full year adjusted operating margin guidance at 17%. The company actually posted these margins in the first quarter, but the adjustments are quite substantial as first quarter GAAP operating losses essentially doubled to $19 million. Adjusted earnings fell as well, with the adjustments being largely driven by stock-based compensation expenses.
Later in June, CEO Dan Springer agreed to step down as this is quite an unexpected step with no permanent CEO ready to step into his role.
Final Thought
Truth is that DocuSign has been one of the poster child of the pandemic momentum run higher and growth had to slow down with the pandemic fading a bit, as the law of large numbers was showing up as well. One key component to all of this was that of competition from the likes of Adobe (ADBE) among others, yet it is too shortsighted to describe DocuSign as a one-solution product, as the suite of managed services is much broader, and therefore more difficult to replicate, although this entire suite of services is not used by all of DocuSign’s users.
Of course, there are many question marks, but at 5 times sales the valuation seems to have been de-risked in a major way, even as the company continues to post modest GAAP losses. The good news is that these are quite modest as the company has a substantial net cash position.
All of this also raises the question of a potential buyout, which is bound to happen in the wider technology sector given the valuation reset, but contemplating which names are on the buying list is mere speculation. That said, the purchase price seems reasonable for a pure player which DocuSign is, given its market share and name recognition.
Given all of these developments, a neutral position seems warranted here as the risk-reward has been reset favorably due to the negative pricing action in recent months as some wildcard could ignite some long-term potential again.
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