The DocuSign Party Ends Abruptly With a Billings Miss

We are lowering our fair value estimate for narrow-moat DocuSign (DOCU) to $244 per share, from $290, as we have adjusted our model based on near-term guidance, which reduces our growth forecast over the next several years. DocuSign delivered generally solid results, exceeding our above-consensus revenue and profitability estimates while falling meaningfully short on billings. The firm also provided lower guidance for the fourth quarter. Management was guiding more conservatively to start the year thinking the pandemic-fueled demand would wane sooner, but strength persisted and began to unravel this quarter, hence the diminished outlook.

DocuSign noted customers were not buying with the same sense of urgency and as buying returned to normal, the sales organization took its eye off the ball as it had to transition from urgent order taking during the depths of the lockdowns to lead generation, which had been neglected. The firm announced various moves to address this and believes it will return to normal DocuSign levels of success. We do not disagree. That said, even though the shares are down 30% in after-hours trading and we see meaningful upside to our fair value estimate, we are cautious on the stock and believe our very high uncertainty rating is particularly relevant. Shares had already sold off 25% over the last three months, so our initial inclination is the after-hours move is punitive towards management rather than fundamental. However, we believe annual guidance released next quarter for fiscal 2023 will serve as a catalyst, negative or positive, for the stock as expectations can be reset further.

Total revenue grew 42% year over year to $545 million, above the high end of guidance at $532 million and FactSet consensus of $530 million. Once again, Subscriptions led the way increasing 44% year over year with the firm reporting strong new customer adds, and continued strength internationally. Non-GAAP operating margin was strong at 22.4%, versus 12.8% a year ago.