Signature technology company DocuSign (DOCU 3.82%) recently made headlines by announcing CEO Dan Springer's immediate departure. Chairman of the Board Maggie Wilderotter is serving as interim CEO, while the company searches for new leadership.
DocuSign stock has fallen over 80% from its peak, which likely contributed to Springer's abrupt resignation. But what should investors do now? What problems forced DocuSign to act, and should investors stick around for a potential rebound?
NASDAQ: DOCU
Key Data Points
A post-pandemic implosion
The world had to adapt to COVID-19, and many companies adopted digital services and offerings while lockdowns prevented things like in-person meetings. With technology that lets users securely manage and sign documents online, DocuSign's business took off during the start of the pandemic.
You can see below how revenue growth exploded. However, even some of the biggest pandemic beneficiaries have returned to their pre-COVID growth rates (or lower), and DocuSign is no exception as it reports its lowest growth rates as a public company.
Data by YCharts.
DocuSign kicked off fiscal 2023 by reporting first-quarter earnings for the period ended April 30, 2022. The stock was hammered by Wall Street, partly due to its full-year revenue outlook of about $2.48 billion, representing just 17.5% year-over-year growth at the midpoint of the range.
Considering how the company previously boasted of a $50 billion addressable market, slowing growth is an ominous signal to investors and the most likely reason Springer stepped away from the company.
Looking closer at DocuSign's struggles
But what are DocuSign's specific problems, and was dramatic action the right move? It could boil down to execution problems that ultimately hindered growth.
For example, DocuSign's net revenue retention rate indicates how much more (or less) existing customers spend from one year to the next -- that figure has steadily trended downward from 125% in the fiscal 2022 first quarter to 114% most recently.
Customer acquisition has also slowed as accounts grew 51% year over year in fiscal 2021 (the height of COVID-19) before slowing to 31% in fiscal 2022. In fiscal 2023 year to date, customer growth has further decelerated to 26%.
Lastly, there were some concerning details shared around the company's sales efforts on the latest earnings call. Management noted that billings for the year were expected to rise just 7% to 8% year over year, signaling that revenue growth could continue to slow in fiscal 2024. Additionally, Springer acknowledged the company was experiencing a higher degree of employee turnover in the sales team than in the past.
When you piece everything together, it looks like DocuSign's headaches might not be over yet.
What do investors do now?
So what is the appropriate action for investors now? Financially, DocuSign is generating positive free cash flow and has just under $1 billion in cash on its books. However, that's paired with about $720 million in debt. A growing business having debt isn't ideal, but DocuSign appears financially sound because of its ability to earn cash profits.
Perhaps new leadership will fix the internal problems causing sales employees to leave and get revenue growth back on track. Unfortunately, that's not a guarantee, and we won't know until someone new comes onboard.
Data by YCharts.
In the meantime, the market is very volatile, and stocks with negative sentiment can always fall further. The stock's price-to-sales ratio (P/S) is the lowest since the company's IPO, but investors shouldn't assume the bottom is here.
If you're hopeful for a rebound, a dollar-cost averaging strategy could protect you from ongoing volatility. Otherwise, DocuSign may need to show a turnaround is happening before Wall Street gives it the benefit of the doubt.
