After growing like wildfire during the pandemic-induced lockdowns, DocuSign (DOCU 1.56%) suddenly hit a wall. Many investors expected demand for digital signatures to transcend remote work and social distancing. The ability to finalize contracts and other agreements with a click of a mouse and a few keystrokes seemed invaluable.
Unfortunately, many businesses went back to the status quo, and DocuSign's growth fell off a cliff. Some believed the writing was on the wall and left the company for dead. However, there were signs of life in DocuSign's recent results which suggest that after more than a year, the tech stock could finally be on the long road to recovery.
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A long and winding road
DocuSign reported the results of its fiscal 2023 third quarter (ended Oct. 31) after the market close on Thursday, and the results were surprisingly robust. Revenue of $645 million climbed 18% year over year. And adjusted earnings per share (EPS) of $0.57 were comparable to this time last year.
To give the results context, analysts' consensus estimates were calling for revenue of $626.9 million and adjusted EPS of $0.42, so DocuSign eclipsed expectations on both counts.
The top-line growth was powered by subscription revenue that grew 18% to $624 million or 97% of total sales. Professional services revenue climbed 27% to $21 million. Billings, a sales metric that includes changes in deferred revenue, grew 17% to $659 million. This suggests that growth could be stabilizing. One contradictory metric, however, is its net dollar retention rate, which slipped (again) to 108%, down from 110% last quarter.
On a positive note, for the third consecutive year, DocuSign was cited as a leader in Gartner's (IT 1.62%) vaunted 2022 Magic Quadrant for Contract Lifecycle Management (CLM). The company was rated highest among the 18 providers evaluated for its ability to execute. It also rated highly on its completeness of vision.
Opportunities ahead
For investors, part of the attraction to DocuSign was the potential for the company to grow beyond its digital signature business -- where it has a dominant 75% market share -- and expand its customer relationships into its CLM business. This is an area that bears watching, since it makes up half of DocuSign's market. There simply isn't enough evidence yet to know if the company will be able to capitalize on this massive opportunity.
That's not to say its digital signature business is tapped out -- far from it. While estimates vary, the digital signature market is expected to top $4 billion in 2022, growing to more than $35 billion by 2029, a compound annual growth rate of 36%. That suggests DocuSign has much more core growth ahead, particularly from its position as the industry leader.
Management believes the combination of its e-signature business and CLM amounts to a $50 billion total addressable market. When viewed in the context of its fiscal 2023 revenue, which is expected to top out near $2.5 billion, this suggests a long and potentially lucrative runway ahead.
Much more growth ahead?
Management has historically been conservative with its guidance, and its forecast suggests that trend will continue. The company's outlook for its fiscal fourth quarter, which ends Jan. 31, calls for revenue in a range of $637 million to $641 million, or roughly 10% growth at the midpoint. That seems suspiciously low given its better-than-expected performance this quarter, so that could be either a warning flag or management merely factoring in economic uncertainty.
DocuSign also raised its full-year forecast. For the fiscal year ending Jan. 31, 2023, the company is now guiding for revenue in a range of $2.493 billion to $2.497 billion, which would represent growth of roughly 19%, up from its previous forecast of 18% growth.
The stock currently trades at just 3 times next year's sales, a bit higher than the 1 to 2 price-to-sales ratio that analysts think is reasonable. So while it might seem like DocuSign is getting near bargain-basement territory, investors should exercise caution. This is a company in transition, and it remains to be seen if it can return to its glory days of high growth.
As a DocuSign shareholder, it pains me to say this, but given the available evidence, investors might still want to take a wait-and-see approach.
