Investors lost confidence in DocuSign (DOCU) after the company blamed deals taking longer to close in the quarter. Even after falling from $55 to around $48, the stock is still richly valued at 13.6 times sales. At that level, the company could not afford to disappoint investors. Even more troubling for shareholders are the reasons for deals taking longer to close. DocuSign said it expanded its product portfolio, which increased the time it took for customers to review the offering. The risk is that DocuSign is bloating its software and could offer features that customers do not want. Still, if the product portfolio expansion plays out, is the stock a buy after falling around 10% in the last month?
Strong First Quarter
DocuSign reported billings of $215 million, up 27% Y/Y and revenue of $214 million, up 37%. Revenue from subscription fell 1% from last year's levels to 94%. Revenue of $38 million from international markets helped the total, as customers embraced DocuSign's core products. Although 84% of the contracts had an average length of less than 12 months, 35% of the contracts were longer than that on a dollar-weighted basis. This suggests that DocuSign relies on big customers for its revenue growth.
Cash flow jumped to $46 million, up from $15 million last year due to strong collections in the quarter. The downside of this is that the historically strong collections in the second quarter shifted to the just-reported period.
The new customer growth of 31,000 in the quarter is a notable achievement. Worldwide paying customers grew from 405,000 last year to 508,000. Customers with ACVs (average contract values) of greater than $300,000 grew by 51% from last year. Expect DocuSign sustaining these growth rates as it develops its market in the UK, France, Germany, Brazil, Australia, and Japan.
DocuSign forecast disappointing billings, which is a major concern for investors. Billings weakened in the first quarter and may not necessarily recover until the third quarter. The company gave the following Q2/FY 2020 guidance:
The company is upselling the eSignature business to new customers and the expansion of existing relationships. This is lengthening the sales cycle as customers consider Contract Lifecycle Management (CLM) as well as the eSignature solution. With the Q1 report that includes a full quarter of integrated products in the mix, investors may bet on the sales cycle improving over time. And since the TAM (total addressable market) of the total agreement cloud is $25 billion, DocuSign has room to increase revenue as it captures more of the market.
Shift Towards Multi-Product Company
DocuSign Agreement Cloud automates and connects the entire agreement process, saving time and money for customers. The product is made up of the core eSignature product, its other DocuSign products, and SpringCM for contract life cycle management. The suite continues to expand and now has 350 integrations that facilitate a company's digital transformation. By having integration to Salesforce.com (NYSE:CRM), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Oracle (NYSE:ORCL), and SAP (NYSE:SAP), customers on these platforms may naturally consider DocuSign's products, too.
DocuSign previously benefited from customers sun-setting legacy products. Without that tailwind, the company may not match past growth rates and must pivot to multi-product sales to reaccelerate revenue growth. The company risks even slower contract completions as customers take more time evaluating the product. Even after winning a sale, customers need a few quarters to implement the multi-product solution, delaying the pace of DocuSign's cross-selling to them.
According to Tipranks, nine analysts covering DocuSign stock have an average price target of $62.22. This suggests the stock has an upside of 29%. Analysts were quick to reiterate "buy" calls on the stock after the earnings report:
Investors may assume revenue growth slows to the single digits within a 10-year period. In that scenario, a DCF Revenue Exit model suggests DocuSign stock has a fair value of $56.49, 17% above the recent price of $48.12:
DocuSign is a wait and see story for investors who want more proof that sales of its multi-product offering will increase. Yet, if consumers view the product as bloated features, sales will slow.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.