Pandemic turned "work from anywhere" darling DocuSign (DOCU) released the firm's fiscal second quarter financial results on Thursday evening.
For the three month period ended July 31st, the firm posted an adjusted EPS of $0.72 (GAAP EPS: $0.04) on revenue of $687.687M. Both the top line and adjusted bottom line figures did Wall Street, as that revenue print was good enough for year over year growth of 10.5%.
The overwhelming majority of the adjustments made were for a stock-based compensation expense of $151.673M. Billings were up 10% year over year to $711.2M.
Operations
Within that total revenue of $687.68M were subscription driven revenue of $669.367M (+10.6%) and professional services driven revenue of $18.32M (+7.8%). As company-wide revenue grew 10.5%, the cost of revenue grew 6.5% to $145.582M. This left the firm with GAAP gross profit of $542.105M (+11.6%) on a GAAP gross margin of 79% versus 78% for the year ago comp. Once adjusted, gross margin becomes 82%, in line with last year's comp.
Operating expenses increased 1.7% to $535.493M, leaving a GAAP operating income/loss of $6.612M, up from $-41.09M a year ago. This was good for a GAAP operating margin of 1%. Once adjusted, operating income becomes 25%. After accounting for interest and taxes, GAAP net income/loss printed at $7.395M up from $-45.078M a year ago this quarter. Once adjusted, net income becomes $149.622M (+66%). That's how $0.04 becomes $0.72.
Guidance
For the current quarter, DocuSign sees total revenue of $687M to $691M. This is a beat as Wall Street was looking for roughly $686M. The firm sees subscription driven revenue of $669M to $673M, and billings of $668M to $678M. The firm adjusted gross margin of 81% to 82% and adjusted operating margin of 22% to 23%.
For the full year, DocuSign projects total revenue of $2.2725B to $2.737B. This is up from prior guidance of $2.71B to $2.73B and above the $2.72B Wall Street consensus view. Full year subscription revenue is seen at $2.649B to $2.661B, as billings are expected at $2.804B to $2.824B. Full year adjusted gross margin is also seen at 81% to 82%, as full year adjusted operating margin is expected to be up at 23% to 24%.
Fundamentals
For the quarter reported, DocuSign generated operating cash flow of $211.016M. Out of that came CapEx of $27.379M, leaving free cash flow of $183.637M. Out of this, the firm repurchased $30.008M worth of common stock for the firm's treasury. For the first six months of the fiscal year, operating cash flow was $446.651M, CapEx spending came to $46.436M, and free cash flow printed at $398.215M.
Over the six months, the firm repurchased $70.48M worth of common stock. While DocuSign does not pay shareholders a cash dividend, the firm did boost the share buyback program authorization by $300M for a total of $500M in aggregate. The authorization bears no minimum purchase commitment and no expiration date.
Checking out the balance sheet, DocuSign ended the quarter with a cash position of $1.444B and current assets of $1.956B. Current liabilities add up to $2.234B. This includes $1.208B in contract liabilities and $725.1M in convertible senior notes. That leaves the firm with a current ratio of 0.88, which is sub-optimal. Those notes will either mature, have to be rolled over or could end up (not likely) being dilutive.
Total assets amount to $3.267B including $413.6M worth of goodwill and other intangibles. At 12.6% of total assets, this is not a problem. Total liabilities less equity comes to just $2.42B, as almost all of the firm's liabilities are shorter-term in nature.
This is not really a bad looking balance sheet outside of that current ratio. The firm has the cash to take care of them as they could with normal debt. The conversion price as I understand it for these notes is up around $420, which may have looked more realistic in January 2021 when the deal was closed, and the stock was trading in the mid $200's range. Unless something crazy happens between now and January 2024, this is borrowed money that will mature, and the firm has the cash to take care of it.
Wall Street
I could only find six sell-side analysts that had opined on DOCU and are also rated at three stars (out of five) or better at TipRanks. Among the six, there is one "buy" rating, four "hold" or hold-equivalent ratings and one "sell" rating. One of the holds did not set a target price, so we only have five of those to work with.
The average target price across those five is $61.80, with a high of $81 (Tyler Radke of Citigroup) and a low of $51 (Josh Baer of Morgan Stanley). Omitting the "buy" and the "sell", the average target price of the holds was an even $59.
My Thoughts
This was not a bad quarter. The increased buyback is nice. Cash flows are impressive. The balance sheet is not as bad as it looks. Stock trades at 20 times forward looking earnings, which is in line with the S&P 500. Is there a reason not to buy DOCU? Not overtly. That said, I do not see anything that would provoke an allocation of capital out of my cash position, where will earn a rough 5% in order to get involved here.
Just a reminder of where this stock has been. Just for fuzees, yes, I see the unfilled gaps in the $70's and in the $200's. Is there anywhere that I would buy DOCU? Yes.
The stock has seen firm support at the $47 level all year long, as resistance has formed a little bit lower each time the stock rallied. This is forming a descending triangle that once closed, is bearish.
If the stock could trade around $47 in the very short-term, I think it could be worth the risk as the triangle does not yet seem ready to close. That could be worth a few bucks ($5 to $7), but if it takes too long, the triangle will be too close to actually closing to take the risk.
An interested trader could sell September 22nd $47 puts for a rough $0.45, but I would not go further out on the timeline than that.
This puts the equity risk at $46.55 should the trader end up long the equity. If not, the trader pockets $45 a contract.
