After reporting earnings on June 9, DocuSign's (DOCU -1.76%) stock crashed 25%. This sell-off helped push DocuSign shares down more than 80% from their all-time high.
This fall is pretty dramatic, but is it deserved? After all, DocuSign gained many customers over the past two years. But with the CEO stepping down immediately, a wrench has been thrown into the business. While I can't predict the future, I think this last quarter had some obvious signals investors and potential investors must be aware of.
Slow growth for a young business
DocuSign's software is relatively self-explanatory: It allows parties to sign legally binding contracts without being there in person. Additionally, it offers a contract lifecycle management product that helps users quickly and efficiently process contracts, saving time and money. These tools were vital during the pandemic as few deals were closed in person.
Now that the business world has moved on from that environment, DocuSign's products are in less demand. This fact was underscored by DocuSign's projection of only 7% to 8% billings growth this year. For most investors, if a company is only growing at an 8% clip, it had better be buying back stock, paying a dividend, or be cheaply valued.
DocuSign doesn't fit any of these descriptions.
Image source: Getty Images.
For the first quarter of fiscal 2023 (ended April 30), DocuSign reported a GAAP net loss of $27 million on revenue of $589 million (which grew 25% year over year). However, it was free-cash-flow positive and posted a solid 30% margin.
Free cash flow does not factor in stock-based compensation, because it isn't a cash expense. DocuSign's stock-based compensation bill was $111 million for the quarter, but DocuSign has run into problems with paying some employees with stock.
Low stock price means lower compensation
With DocuSign's stock cratering, anyone receiving shares as compensation has received a major pay cut. Additionally, management pointed out in the earnings call that the market has become saturated, and sales leads are more difficult to find.
As a result, DocuSign has seen employee turnover and now must fill the vacant spots, which takes significant time and money in today's job market. Its stock isn't as valuable as it once was, so either it must issue more stock (which dilutes existing shareholders) or pay them with cash (which hurts free cash flow and other operating metrics). Either way, it's not a good situation to be in if you're DocuSign management or an investor.
However, one employee's recent exit tops all other departures.
A quick exit
On June 21, CEO Dan Springer announced his intention to step down effective immediately. However, during the investor call on June 9, Springer said he was "tired," and the pandemic years were "tough" because of all the "hard work" DocuSign did.
This language should have been a telltale sign to investors something was on the horizon, but it's too late for those conclusions now. Chairman of the Board Mary Wilderotter will take over as CEO for Springer, and she brings a vast amount of experience from her tenure as CEO of Frontier Communications.
Even though I have confidence in Wilderotter, it seems a bit worrisome that Springer stepped down abruptly. Whether it was a lousy business outlook or the board forcing him out, either scenario doesn't portray a great situation.
Slowing growth and workforce turnover can ruin a business. But is there anything to get excited about?
DocuSign is still gaining customers
Before its earnings announcement, DocuSign and Microsoft announced a deeper relationship that will include further integration of DocuSign's products into the Microsoft Office suite. This deal is huge for DocuSign as it places the company's offerings in front of nearly every business and consumer.
Turning back to its quarterly results, DocuSign added 70,000 customers, bringing its total to 1.24 million. Additionally, its international segment saw 43% year-over-year growth, making up 25% of total revenue. This expansion may provide DocuSign with growth opportunities, although it may need to work a little harder since it is outside U.S. borders.
Despite just a few glimmers of hope among loads of bad news, I'm still holding on to my DocuSign shares. However, I likely won't be adding to my position until I see how the next quarter shakes out. There are a lot of uncertainties with the business, stock, leadership, and the market as a whole, and there are too many other companies trading at bargain prices to consider adding to DocuSign.
