This was not a good earnings card from DocuSign (NASDAQ:DOCU). The e-Signature leader saw its share price decline by a massive 20% after the firm submitted its earnings card for the last quarter. The outlook for the 2023 financial year widely disappointed and business growth is slowing. With customer acquisition rates and net dollar retention rates also softening, the stock may no longer be a buy!
Companies with cloud-based platform models have had a massive run during the COVID-19 pandemic which accelerated DocuSign's subscription revenue growth, customer acquisition and monetization. However, as the pandemic wanes, growth rates are also normalizing… and it is this normalization of growth that has been driving a revaluation of companies like DocuSign lately.
Revenues in the fourth-quarter of DocuSign's FY 2022 increased 35% year over year to $581M, but revenue growth did slow down considerably from a year earlier. Subscription revenues, which generate about 97% of DocuSign's revenue base, increased 37% in Q4'22 to $564M, also marking a slowdown from the 59% rate achieved in the year-earlier period. Combined revenues, including subscription and professional services revenues, still surged 45% year over year to an all time high of $2.1B in FY 2022... but DocuSign's period of hyper-growth is clearly coming to an end.
During the COVID-19 pandemic DocuSign made inroads with larger enterprise customers that used the firm's product suite to simplify agreement processes… which are at the heart of the firm's services. The e-Signature company ended FY 2022 with 1.17M customers, showing 31% growth year over year. Enterprise and commercial customers -- those accounts that are actually very lucrative and present a scaling opportunity for DocuSign -- grew 36% year over year to 170 thousand.
While customers are still joining up and generating revenue growth, the platform is seeing some very negative trends in its business that indicate falling revenue growth in the future. Net dollar retention rates/NDRR are in a steep decline, potentially indicate more trouble for DocuSign in the quarters ahead.
The net dollar retention rate shows how much success a company has in growing internal revenues from the same customer base. A net dollar retention rate of 119% expresses that the same customer pool, from one reporting period to the next, increased spending on DocuSign's products and services by 19%. A figure above 100% therefore shows that internal revenue growth is happening. In Q4'22, DocuSign's net dollar retention rate dropped another 2 PP quarter over quarter. A 2% decline in the NDR rate is not necessarily a big deal, all things considered, but it is if the trend is going the wrong way. The fourth-quarter marked the third consecutive quarter in which DocuSign's NDR rate dropped off.
The other thing that was concerning in DocuSign's earnings card was the outlook for the current fiscal year, FY 2023. DocuSign projects total revenue and subscription revenue growth of only 18% year over year. FY 2023 will still be a year of expansion for DocuSign, but the firm is not coming anywhere near the pandemic-kind of growth rates it enjoyed in the last two years.
DocuSign is going through a post-pandemic adjustment period that will result in slowing top line growth. Estimates for the coming two years are likely going to decrease as the market refreshes its revenue expectations and considers NDR rate drop offs and slower customer acquisition for the DocuSign platform.
Based off of revenues, and considering the firm's slowing top line growth, DocuSign's 5 X P-S ratio may now be considered expensive.
The slowdown in customer acquisition and revenue growth constitutes a serious problem for DocuSign because it applies pressure on the firm's high sales valuation factor. I believe DocuSign has a strong product suite and will continue to grow its services (and revenues), but growth will be markedly slower going forward than it was in the last two years. For that reason, I believe DocuSign will likely revalue lower and I am changing my rating from buy to hold until we have more clarity about DocuSign's future runway for growth.
DocuSign is facing a return to pre-pandemic growth rates. The pandemic was an accelerant for the e-Signature firm's growth, especially regarding customer accounts and revenues, but things are resetting to a post-pandemic normal... and it has started to seriously hurt the stock. This reset means that DocuSign will grow a lot slower going forward than it did in the last two years and the outlook for FY 2023, unfortunately, implies potential for shares of DocuSign to revalue lower in the short term!
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Disclosure: I/we have a beneficial long position in the shares of DOCU either through stock ownership, options, or other derivatives. 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.