After DocuSign, the leading name in e-signatures, came to market in April 2018 at $29 per share, enthusiasm over the company's leading position in this emerging industry sent shares as high as $68 last August. However, after its latest earnings report, DocuSign fell 12% to roughly $48 per share, about halfway between the company's IPO price and its 52-week high.
While not cheap by conventional valuation metrics, DocuSign's current price-to-sales ratio of 10 ranks favorably against other cloud software companies, and the company did actually generate positive operating cash flow and non-GAAP net income last quarter. So should investors take advantage of the post-earnings sell-off?
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The culprit: decelerating billings
The sell-off may seem odd at first, since first-quarter revenue and non-GAAP earnings per share came in ahead of expectations. But as is usually the case, the culprit was DocuSign's relatively weak guidance, which forecast only slight quarter-over-quarter growth in both revenue and billings. Still, those figures would equal 38.8% year-over-year revenue growth and 27.8% billings growth, which is certainly not bad, though it's a bit lower than the 50%-plus growth some other cloud software-as-a-service companies are currently posting.
Since enterprise subscriptions are often paid up front and recognized ratably over time, analysts often prefer the billings metric -- revenue growth plus the change in deferred revenue -- in assessing the health of subscription-based software companies. That appears to be the issue, as even the current quarter saw perhaps more deceleration than the market expected. Here's what recent billings growth has looked like:
|
2017 |
2018 |
2019 |
Q1 2020 |
|---|---|---|---|
|
49.3% |
38.6% |
33.8% |
27.3% |
Data sources: DocuSign S-1 and press releases.
However, the company had an explanation for decelerating billings, which could actually be a positive indicator for DocuSign over the long term.
New products take more time
Most of DocuSign's business comes from its core e-signature offerings, which digitizes the traditional physical signature process; however, DocuSign has been investing in many new products that fit adjacent needs for its customers. These include the new DocuSign Agreement Cloud, which expands DocuSign's solutions from just e-signature to managing the entire enterprise document life cycle. Other innovations just in the first quarter include DocuSign Gen, an integration of DocuSign with salesforce.com (CRM 2.43%) software; DocuSign Click, which allows websites to secure consent through a single click and eliminate expensive in-house solutions; and DocuSign ID, which enables one to use DocuSign in place of government-issued IDs for certain processes.
DocuSign's management team said these additional products require more gatekeepers to say "yes" on the customer's end, which is causing delays in the selling process. Since a lot of these solutions are relatively new -- the agreement cloud was probably bolstered by the September 2018 acquisition of SpringCM -- the slowdown in upsells is just hitting the company now.
DocuSign seems fairly confident on the long-term outlook, with CEO Daniel Springer saying on the post-earnings conference call:
[W]e're not looking at this [as] problematic. We're looking at this [as] a positive trend that people want to buy more from us. They're buying into the agreement cloud, and now our responsibility is to get our sales force [enabled] to a position where it becomes our regular sales motion.
If Springer's right and the billings slowdown is just a hiccup on the way to DocuSign's large potential market, the stock's recent sell-off could be an opportunity. Springer claimed these new products could expand DocuSign's total addressable market from $25 billion to $50 billion. That compares with just $759 million in trailing-12-month revenue for DocuSign. Therefore, if the company's sales cycle is lengthening in order to upsell these new products, the current deceleration wouldn't necessarily be a long-term concern.
One piece of evidence supporting company leaders' assertions is that new customer growth came in much stronger than billings, at 33%. So it doesn't appear that DocuSign is struggling to sign up new customers. It's the upselling of these new use cases that appears to be causing the billing delays.
Sign on the dotted line
In all, DocuSign still appears to be a beneficiary from the long-term trends of cloud-based and digital solutions that are supplanting older ways of doing things in the enterprise. Importantly, management denied that it was seeing any new competitive threats, so I'm inclined to go with management's explanation for the slowdown. Therefore, DocuSign's stock appears to be one of the more attractive risk-rewards in enterprise software today.
