9/9/2022: DocuSign Reported Better Than Expected Earnings
Earnings and revenue topped estimates amid lowered expectations.
DocuSign( DOCU 0.00 ) reported earnings after the market closed on Thursday. Earnings for its fiscal second quarter came in at 44 cents a share, down 6% from a year earlier, but ahead of estimates for 42 cents. Revenue rose 22% to $622.2 million. Analysts had predicted revenue of $602 million. A year earlier, DocuSign earnings were 47 cents a share on sales of $512 million. Billings were $647.7 million, an increase of 9% year-over-year. DocuSign’s growth definitely slowed.
For the current quarter ending in October, DocuSign forecast revenue of $624-$628 million and billings of $584-$594 million. Analysts had predicted third-quarter revenue of $625 million and billings of $593.4 million.
Overall, it’s an OK quarter. The DOCU 0.00 stock did go up more than 10% this morning. I believe DOCU 0.00 is trading at a fair valuation. Its Enterprise Value to Sales ratio is ~5. Revenue growth + Cash flow margin = 22%+18% = 40%, which meets the criterion of rule of 40 exactly. Although their cash flow is good, their stock-based compensation expense is quite high: ~$140 million in the most recent quarter or 22.3% of their quarterly revenue. Their operating margin is actually negative if stock-based compensation is accounted for. High stock-based compensation becomes a big problem when the growth stalls. Stock-based compensation has always been a bit controversial because shareholders are being diluted. But the justification has always been that the company can keep more cash for growth and expansion. When growth disappears, stock-based compensation becomes unjustifiable and investors will stop buying into the Non-GAAP operating margin any more. We are seeing many (formerly) high-growth companies facing this issue as shown above and their stocks have been hit hard for good reasons.
DocuSign is still looking for a new CEO after the previous CEO resigned in June. I personally think DocuSign is a great product but they have a lot of competition. If the company dies today, I believe people can find ok alternatives. But that’s not the case for Salesforce or ServiceNow. People would be scrambling if Salesforce or ServiceNow are no longer available. That’s why I think DOCU 0.00 doesn’t warrant the same multiples as other high-moat SaaS companies. But I think their stock is not expensive and could be a pretty good takeover target by giant corporations.