We’ve held DocuSign for over a year although we have not added to this LTBH position for some time. Below, we discuss why we closed the position. Our members must make their own decisions, we simply offer transparency on why we add stocks to the portfolio and why we close some positions. We always remain flexible – even with LTBH. The companies we hold must continually earn a position in the portfolio. We add positions and close positions at our discretion and we offer full transparency because we think it’s the right thing to do with anything related to finance.
We plan to re-allocate more towards Asana, Monday.com and Zoom Video for the productivity/WFH/remote trend. We lump DocuSign into this category as a productivity-based cloud company for agreements and signatures and certainly WFH helps the company. However, we think the addressable market and growth will be stronger on the other three we mentioned.
Thank you! 🙂
DocuSign
DocuSign’s earnings report spooked the market with billings growth of 28% year-over-year and billings guidance of 22.2% next quarter. For the fiscal year ending in January, the billings growth is forecast at 36% year-over-year. The company said this was caused by slowing demand, urgent buying patterns that tempered and also “the environment shifted more quickly than we anticipated, and these were the primary contributors to our billing results in Q3 and our outlook for Q4.”
The CEO also took the blame for the slowing billings growth and stated he was more focused with handling the business that came from the urgency of the shift towards cloud rather than generating new demand. “And we really do believe it’s this core phenomenon of the demand was aggressive and we got focused on meeting that demand. And so, when that demand kind of started to come to — back to normalized, we weren’t ready. We weren’t executing. We hadn’t taken all those new folks that had only joined in the time of that meet demand sort of mode and we didn’t shift fast enough back to a mode of a normal generating demand.” And later, it was stated, “But the real — the underlying story here is that we did not execute in our field the way you should expect us to execute and we got to own that and we got to fix that, and that’s why we’re putting the focus as we talked about at the beginning of the call on that execution.”
Probably where our decision hinges even more is the lack of catalyst for DocuSign as it does not necessarily participate in the hybrid or remote work-from-home trend. I’m referring specifically to the trend where 30% of the workers globally and more than 50% of the workers in the United States will remain in a WFH situation after cities fully reopen, and productivity will need to be progressively maintained across remote workforces. These tools are ideally usage based or based per employee, whereas DocuSign is tied to the number of contracts being signed.
The blockchain could be a catalyst for DocuSign or it could be how the company is will become disrupted. According to management, the blockchain is too costly for the number of agreements that DocuSign facilitates but this could change over time. DocuSign has stated the blockchain can help with identity management, however, and it’s one of the use cases the company plans to pursue although this would ideally happen with a blockchain specifically made for auditing documents and e-signatures rather than native protocols suited for the financial industry or gaming.
It's also important to note that the company pointed towards a lack of cross-sells and upsells as another factor weighing on future bookings growth: “However, what we weren’t as successful at is getting as much of the cross-sell and upsell opportunity.” This is concerning to me long-term as the net retention rate for DocuSign has been in the 112% to 119% range and is currently in the 121% range. Ultimately, I’m not convinced there is enough an up-sell with this product to expand the customers that came onboard during 2020.
One analyst attempted to get a clear sign from DOCU on when a turnaround could occur and it seems at least until the second half of next year.
“And then, because it does feel like given the sales cycles for these larger contracts are at least 6 to 9 months, this could be something that impacts you at least until you anniversary Q3 of next year. So, just get a better understanding of the — how long those elements, I guess.” – Alex Zukin, Wolfe Research
Here was management’s answer which seems to indicate H1 could be better:
“Yes, similar to some of the other commentary, I think the right way to think about it is, again, the things that were toughest for H2 of this year are going to be the areas that were dramatically strong all last year and H1 of this year. And from a geography standpoint, that’s basically the U.S., right? And from a vertical standpoint, that’s going to be healthcare, life sciences, that’s going to be financial services, banks, insurance companies, et cetera, and a little bit on the technology telecom side. So, that’s — we just clearly see that in the data.”
Currently, analysts have full year revenue for next fiscal year at $2.61 billion, or 24.8% growth.
DocuSign technically beat on EPS and revenue in the current quarter and the company is profitable. The guidance for revenue missed with analysts expecting $575.3 million and the company guiding for mid-point of $560 million. The company reported free cash flow of $90 million compared to $38.1 million last year, for a EV/FCF of 73 compared to Zoom at 32. The company has $900 million in cash and cash equivalents.
For digging our heels in on Covid stocks, we are waiting to see what Zoom’s Q1 guide says regarding the company’s post-Covid growth potential. We also like Asana and Monday.com due to enterprise growth as well other reasons outlined in our Forbes editorial and published on the forum here.