Docusign Earnings: Strong Results, but Sales Compensation Changes Drive Slight Billings Shortfall

Key Morningstar Metrics for Docusign

• Fair Value Estimate: $86.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Docusign’s Earnings

Docusign’s DOCU first-quarter revenue grew by 8.2% year over year in constant currency to $764 million, while non-GAAP operating margin was 29.5%.

Why it matters: While revenue and margins easily topped guidance, billings fell just shy, which we think is causing the sharp after-hours selloff. Notwithstanding the billings hiccup, we see a continuation of strong trends.

• Changes to sales compensation and the go-to-market approach made in February drove slightly lower early renewals—the firm wasn’t expecting the impact to hit in the first quarter. Lower early renewals thus drove lower billings.
• These trends have already stabilized in May, and with IAM deals growing in the mix, we think billings will accelerate throughout the year.

The bottom line: We keep our fair value estimate of $86 per share for no-moat Docusign, as strong results and reasonable guidance coupled with an incrementally more cautious tone keep changes to our model modest. With the steep after-hours selloff, we now see shares as undervalued.

• Docusign has exhibited good business momentum over the last six quarters, which began to manifest in share momentum more recently, with the stock likely getting ahead of itself, in our view.

Coming up: Guidance is fine, but now includes more risk, with more meaningful annual recurring revenue acceleration. For the fiscal second quarter, guidance includes revenue of $771 million-$781 million, with non-GAAP operating margin of 6.5%-27.5% and ARR of $762 million at the midpoint.

• For the full year, management raised its guidance, with revenue now at $3.151 billion-$3.163 billion from $3.129 billion-$3.141 billion previously, non-GAAP operating margin unchanged at 27.8%-28.8%, and ARR down $15 million at the midpoint to $3.312 billion.
• There are definitely crosscurrents within guidance, with first-quarter outperformance and easing currency pressure pushing the outlook up, while some prudent caution is serving as a governor for the full year.