After growing like gangbusters for several years following its 2018 debut, DocuSign (DOCU -0.26%) has fallen on hard times. As remote work and social distancing gave way to a macroeconomic downturn, the digital signature specialist was particularly hard hit. The novelty of consummating contracts and other agreements with a few keystrokes and the click of a mouse eventually wore off. Many companies scrapped plans to go digital and went back to business as usual -- and DocuSign's growth slowed to a crawl.
Fair-weather investors headed for the hills, but reports of DocuSign's demise have been greatly exaggerated and the company has continued to grow -- albeit at a slower rate. While there's still much work to be done, DocuSign delivered results that outpaced expectations, giving shareholders a shot of confidence that the beleaguered company might finally have turned the corner.
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A long and bumpy road
After the market close on Thursday, DocuSign reported the results of its fiscal 2024 second quarter (ended July 31), and the results caught investors by surprise. Revenue of $688 million climbed 11% year over year. At the same time, GAAP earnings per share (EPS) swung to a profit of $0.04 per share, compared to a loss of $0.22 in the prior-year quarter. The company also delivered adjusted EPS of $0.72, which surged 63%.
To give the results context, analysts' consensus estimates were calling for revenue of $677.6 million and adjusted EPS of $0.66, so DocuSign sailed past expectations on both counts.
The top-line growth was driven by subscription revenue that grew 11% year over year to $669 million, or about 97% of total sales. Professional services revenue of $18 million edged 8% higher. Billings -- which includes contractually obligated sales that haven't yet been booked as revenue -- grew 10% to $711 million. The fact that billings and revenue growth are so closely aligned suggests business may have stabilized.
New product capabilities
In addition to its financial highlights, DocuSign provided insight into a number of operational improvements.
The company released DocuSign 2023, release 2, which introduces new product capabilities, including enhanced identity verification. Improvements to its Contract Lifecycle Management (CLM) software provide "additional real-time visibility into the entire contract lifecycle." It also sounds the alarm with the system administrator if there's any suspicious user activity, unauthorized access, or deletion or downloading of documents, among other issues.
DocuSign will need to continue rolling out additional software capabilities in order to attract and retain customers, so these developments are a positive sign.
What the future holds
In conjunction with its financial release, DocuSign's board of directors authorized an increase of $300 million to the company's existing stock repurchase plan, bringing the total to $500 million. While that's all well and good, it comes with an asterisk.
Like many technology companies, DocuSign offers a significant amount of stock-based compensation, so the number of shares outstanding is actually increasing, not decreasing. To illustrate, even though DocuSign spent more than $63 million on stock repurchases in fiscal 2023 (ended Jan. 31), the total shares outstanding during the period increased by roughly 1%. In fact, since it went public in mid-2018, DocuSign's total share count has increased by about 33%, so the latest increase to the stock buyback plan will likely be used for more of the same.
Then, there's the matter of guidance. Management has a habit of being conservative with its outlook, and its third-quarter forecast appears suspiciously low. DocuSign is guiding for revenue of $689 million at the midpoint of its guidance, which would represent growth of just 7% year over year. This could be the result of uncertainty about its prospects in the coming months, or maybe management is merely hedging its bets. If revenue growth does come in at just 7% this quarter, the resulting sell-off could be severe -- but only time will tell.
The company did, however, increase its full-year forecast. For the fiscal year ending Jan. 21, 2024, the company is now guiding for revenue in a range of $2.725 billion to $2.737 billion, which would represent growth of roughly 8.5% at the midpoint of its guidance, up from its previous forecast for 8% growth.
As a DocuSign shareholder, I'm still in "wait and see" mode. Growth is still tepid, and even management has said that its CLM offering "has great potential, but it also hasn't quite fulfilled its promise yet." This was a big part of the company's future promise, as CLM was expected to double DocuSign's total addressable market from $25 billion to $50 billion, while simultaneously juicing its growth. Thus far, at least, that hasn't happened.
Don't get me wrong: At just 3 times sales, the stock is cheap and the possibilities are vast. Unfortunately, I'm still not convinced that DocuSign can capitalize on that opportunity. Until I see evidence of that, I'll continue to watch and wait.
