Docusign (DOCU -1.92%) shares tanked after the provider of electronic signature solutions cut its full-year guidance on billings. Billings are the total value of custom contracts signed, and are a leading indicator of future revenue growth.
Despite the cut in billings guidance, I think the market is overreacting. Let's explore why.
Bookings guidance disappoints, but may not be a negative
Docusign was a pandemic winner that saw steep revenue growth in 2020 and 2021. However, this growth wasn't a new normal; instead, it was a pulling forward of demand that then caused revenue growth to slow significantly. Docusign was far from the only company to experience this, as companies like Zoom Communications and Peloton Interactive also got caught in this trap.
Since then, Docusign has been looking to help reinvigorate growth. It almost sold itself to go private and work on its turnaround outside of the prying eyes of the public market, but it ended up balking at the price and remained a public company. Last year, its turnaround seemed to begin gaining momentum, but with the company cutting its billing guidance, investors once again are concerned about where it's headed.
Docusign now expects full-year billings in a range of $3.28 billion to $3.34 billion, down from its prior outlook of between $3.3 billion and $3.35 billion. However, it said this was largely a result of timing, not demand, noting that a change in its go-to-market strategy is impacting the timing of renewals. It added that it sees an improved and accelerating outlook for billings growth by the end of fiscal 2026 (in January 2026).
The company is shifting its focus from e-signature services to a more comprehensive Intelligent Agreement Management (IAM) platform, and in the process is looking to upsell customers to IAM. It has historically seen a lot of early renewals, but with IAM, customers are taking more time to evaluate whether or not to upgrade, which in turn impacts billings. So despite the market reaction, this could actually be a positive if more customers are exploring upgrading to IAM.
On this week's earnings call (for the first fiscal quarter), Docusign called IAM the fastest-growing offering in its history, as the platform surpassed 10,000 direct customers in the quarter. It expects IAM to account for a double-digit percentage of its "subscription book of business" exiting the fiscal year. It highlighted that international IAM deals were up over 50% sequentially, while the new IAM self-service channel is showing early promise with 1,000 new IAM customers added within three weeks of its launch.
Image source: Getty Images.
Overall, Docusign turned in solid fiscal Q1 results. Revenue jumped 8% from a year ago to $763.7 million, while subscription revenue also rose by 8% to $746.2 million. Professional service revenue increased by 4% to $17.5 million. Adjusted earnings per share (EPS) climbed 10% to $0.90; that easily surpassed analyst expectations for adjusted EPS of $0.81 on revenue of $748 million, as compiled by LSEG.
International markets continued to lead the way with revenue growth of 10%, or 13% in constant currency. International revenue was 28% of Docusign's total revenue mix.
Billings grew 4% to $740 million for the quarter. That was below prior guidance of $741 million to $751 million.
The company ended the quarter with more than 1.7 million customers, an increase of 10% compared to a year ago. Large customers spending over $300,000 annually rose by 6% year over year to 1,123. Dollar net retention in the quarter was 101%, unchanged from last quarter.
Docusign continues to be a strong cash flow generator. It produced $307.9 million of operating cash flow in the quarter, with free cash flow of $279.6 million. It ended the quarter with cash and investments of $1.1 billion and zero debt, after repurchasing $161.7 million worth of shares in the quarter. It also initiated a new $1 billion share repurchase program.
Looking ahead, the company increased its full-year revenue and subscription revenue forecasts while lowering its billings guidance. It now expects revenue to be in the range of $3.151 billion to $3.163 billion, with subscription revenue of $3.083 billion to $3.095 billion.
Below is a chart of the full-year guidance changes:
| Metric | March 13 Guidance | June 5 Guidance |
|---|---|---|
| Revenue |
$3.129 billion to $3.141 billion |
$3.151 billion to $3.163 billion |
| Subscription revenue |
$3.062 billion to $3.074 billion |
$3.083 billion to $3.095 billion |
| Billings |
$3.3 billion to $3.354 billion |
$3.285 billion to $3.339 billion |
Data source: Docusign earnings releases.
For the second fiscal quarter, the company projected revenue of $777 million to $781 million and subscription revenue of $760 million to $764 million, each representing growth of 6%. Billings are forecast to be between $757 million and $767 million, which would be growth of about 5% at the midpoint of guidance.
Should investors buy the dip?
The sell-off in Docusign stock drops its valuation to a forward price-to-earnings (P/E) ratio of just over 21 times this year's analyst estimates, and a price-to-sales (P/S) ratio of under 5. Approximately 7% of its market cap is also in cash. That's a pretty attractive valuation for a high-gross-margin software-as-a-service (SaaS) company generating a lot of cash.
Of course, when it comes to tech stocks, growth often takes priority over valuation. That means investors will focus on continued momentum in revenue and billings. While the shift to IAM is impacting renewal timing and weighing on near-term billings, it should ultimately be a positive driver for long-term revenue growth.
In that context, the market looks to be overreacting to Docusign's lowered billings outlook. As a result, I'd view this pullback as a buying opportunity.
