On Thursday evening, DocuSign (DOCU) , a darling of the pandemic economy, released the first first quarter financial results. For the three month period ended April 30th, DocuSign posted adjusted EPS of $0.38 (GAAP EPS: $-0.14) on revenue of $588.69M. The sales number was good enough for annual growth of 25.5%, and did beat Wall Street. The bottom line print, however... fell short of expectations and compares poorly to the year ago comp of $0.44 adjusted, $0.04 GAAP.
From the numbers behind the numbers... Subscription revenue grew 26% to $569.3M, while Professional Services grew sales 13% to $19.4M. Billings printed at $613.6M, up 16%. GAAP gross margin landed at 78%, Adjusted gross margin at 81%. Net cash provided by operating activities increased 44.8% to $196.3M, while free cash flow landed at $174.6M, up 41.9% from the year ago comp.
If you're like me, you are probably looking at this quarter and thinking that it does not look so bad. The stock has been simply smashified overnight. For those wondering, the adjustments made, that add up to $0.52 per share, are derived from numerous sources. However, the dominant adjustment was made for stock based compensation. Let's explore.
Outlook
The forward guidance was a little tough, which is primarily why overnight sellers piled in.
For the current quarter (ending July 31)... Total revenue is seen at $600M to $604M. Wall Street had been at $604M for this line. Subscription revenue is seen at $583M to $587M, while Billings are expected to land at $599M to $609M. Adjusted gross margin is projected at 79% to 81%, while adjusted operating margin is expected to print at 16% to 18%.
For the full fiscal year (ending January 31)... Total revenue is seen at $2.47B to $2.482B. Wall Street had been at $2.48B for FY revenue. Subscription revenue is seen at $2.394B to $2.406B, while Billings are expected to land at $2.521B to $2.541B. Adjusted gross margin is projected at the same 79% to 81% as is the current quarter, while adjusted operating margin is expected to print at 16% to 18%, same as Q2.
Wall Street
I can find 10 sell-side analysts who are rated at either four or five stars by TipRanks and have opined on DOCU since this release last night. There are a couple of downgrades and several slashed target prices. This is the aggregate after adjusting for those changes. Of the 10, there are two who rate DOCU as a "buy" or buy equivalent. There is one "sell" rating, that's Dan Ives at Wedbush. There are also seven "hold" ratings or hold equivalents.
One of the holds, Scott Berg at Needham did not set a target price. The average target price of the other nine analysts is $80.50, with a high of $151 (Patrick Walravens of JMP Securities) and a low of $50 (Ives). Omitting the high and low, the average of the other six is $73.83.
My Thoughts
Earnings growth, even adjusted.. has gone sequentially (y/y) from +164% to +30% to -14% over the past three quarters. Revenue growth has gone from +42% to +35% to +25% over that same time frame. At the firm's projection for the current quarter, DocuSign will generate $600M to $604M. That would be good for growth of 17.6% at the midpoint. There is absolutely no doubt that this business is rapidly decelerating. The full year revenue projection of $2.47B to $2.482B... at the midpoint, that's growth of 17.3%, which implies after Q1 growth of 25% and Q2 expected growth of 17.6%, further slowing in the second half of the year.
The trend is as plain as the nose on your face. The stock traded at a high of $314.76 last August, and has done nothing but head lower since, leaving an unfilled gap between $227 and $159, and now another gap this morning. The shares had recaptured their 50 day SMA this week, and that had drawn several indicators toward neutral if not almost short-term overbought readings.
With this morning's beating, these indicators have moved back toward neutral, but not nearly oversold, meaning that there is room to run.. to the downside. Incredibly, DOCU now trades almost $100 below its 200 day SMA. Buy the dip? Hasn't worked so far with this falling knife.
My instinct says to stay away. If I were drawn to DocuSign like a moth to a lethal flame, I would rather sell September $55 puts for $5.50 than get long the equity today. At least that way, the trader takes in $550 in revenue per contract and if the trader does get run over in September, you're talking about a net basis of $49.50 rather than something in the mid to high $60's.
