10-Q: https://investor.docusign.com/investors/financial-informatio…
PR: https://investor.docusign.com/investors/press-releases/press…
Prezzo: https://s22.q4cdn.com/408980645/files/doc_financials/2022/q2…
Transcript: https://s22.q4cdn.com/408980645/files/doc_financials/2022/q2…
I looked at the numbers but came to a different conclusion than Bear did here: https://discussion.fool.com/updating-docusign-beliefs-34923319.a…
Perhaps a little more Bear-ish in this particular case.
And it is not without trepidation that I differ with Bear on anything, as I usually find myself agreeing wholeheartedly. And the difference is marginal: the only part of Bear’s analysis I disagree with is the conclusion.
I was also hoping for acceleration, which did not happen. But my expectations were irrelevant seeing that the share price was up by around 6% at one point yesterday - the day after results, and closed a little more that 5% up, whereas the rest of my portfolio did not have the same type of action. So the market’s expectations were much lower than either mine or Bear’s.
Where I’m at currently
Let me start off by discussing something which is perhaps a little frowned upon in these regions: the valuation of our companies. It is important because it frames the context in which I came to a different conclusion.
I would argue that most of our companies are expensive at this point in time. Relative to how much one would have paid for the same company growing at the same rate with the same profitability and cash flows about two years ago.
So I’m not saying our companies are overvalued per se; I’m saying they are more expensive that they were. And that is true for Docusign just as much as it is true for a company like Snowflake (even though it wasn’t listed back then). So in my books Docusign is expensive, given these result and the expectations of growth as they currently seem to be playing out. Perhaps even more expensive than Snowflake or Crowdstrike, relatively speaking.
How do I measure this? I do back of the matchbox discounted cash flow valuations for all of the companies in my portfolio, even though I know that this is at most only directionally interesting, given the number of uncertainties and optionality inherent in our companies’ business models and their stage of growth. And I look at measures such as price to sales (forward and current quarter), price to cash flow and price to operating profit. And of course historical measures of price to these measures for all of our companies as a whole (Bessemer ventures is a good place to look: https://cloudindex.bvp.com - look at the graph of price to expected forward sales). And then I throw it into a pot, stir it, and get a feeling for how expensive or not a company is currently. It’s not an exact science after all.
And that pot is telling me that most of our companies are expensive right now, including Docusign.
Why? I don’t know but people have been speculating on our board: the market has finally cottoned on to just how to value our SaaS companies after having gotten it wrong before. Or the pandemic has changed the trajectory of our companies for the better. Or both.
Or perhaps neither of those two are true. But regardless of why, I would venture that it’s foolish to pretend that our companies are not more expensive (however you wish to define it) than they were pre-pandemic right now.
And it is within that context that I currently look at our companies. It leaves very little margin for error or disappointment.
The numbers
So how do the numbers for our very expensive company Docusign look relative to past numbers, when the same company was much less expensive? Has something changed that can justify this?
In all of the tables below, look at the 2022 Q2 QoQ growth and compare that to the 2020 Q2 QoQ growth rate and spot the obvious. Spoiler alert: it’s roughly the same.
Revenue:
2020 214 236.0 250 275
2021 297 342 383 431
2022 469 512
QoQ:
2020 7% **10%** 6% 10%
2021 8% 15% 12% 13%
2022 9% **9%**
→ So revenue growth is back to growth rates pre-covid.
Billings:
2020 215 252 269 367
2021 342 406 440 535
2022 527 595
QoQ:
2020 -18% **17%** 7% 36%
2021 -7% 19% 8% 22%
2022 -1% **13%**
→ Billings growth, too is back to growth rates pre-covid, or even lower.
RPO:
2020 574 629 673 571
2021 769 785 849 938
2022 1200 1300
QoQ:
2020 **10%** 7% -15%
2021 35% 2% 8% 10%
2022 28% **8%**
→ RPO growth, same story.
Customer growth tells a similar tale: qoq growth dropped to 7%, which is what it was pre-COVID. But if you look at the absolute number of customers added, the story is a little more cloudy:
Customers ‘000
2020 508 537 562 589
2021 661 749 822 892
2022 988 1053
QoQ
2020 6% **6%** 5% 5%
2021 12% 13% 10% 9%
2022 11% **7%**
Net customer additions ‘000
2020 31 29 25 27
2021 72 88 73 70
2022 96 **65**
→ So on the customer add front, things look ok on a qoq growth basis, but net customer additions is the lowest it’s been in, in absolute numbers - 65k - in the last 6 quarters. And remember that Q1 2021 was for the 3 months Feb-Apr, so the first quarter of the pandemic.
Margins - GM, Operating margin and FCF - have all improved as the company has grown and operating leverage kicked in. And that is the big positive of Docusign: it generates and will continue to generate lots of profits and increasingly, cash.
Although if I were a bit cynical I could say that gross margins are now back to where they were 3 years ago, so the improvement there is illusory:
Gross margins
2019 80.3% **81.5%** 79.0% 78.0%
2020 79.4% 78.2% 78.9% 79.0%
2021 78.6% 77.9% 78.8% 80.0%
2022 81.0% **82.0%**
Operating margins improved nicely, but is down vs last quarter:
Op Margin%
2020 5.0% 0.0% 7.0% 8.0%
2021 7.8% 9.9% 12.8% 17.0%
2022 20% **19%**
And NRR, although impressive at 124%, also ticked down a notch vs last quarter’s 125%:
NRR
2020 112% 113% 117% 117%
2021 119% 120% 122% 123%
2022 125% **124%**
My take
So we’re still left with a great company, no doubt. So are Cloudflare and Snowflake, though, both of which I had exited.
But where Cloudflare’s numbers have failed to accelerate and Snowflake had a small chink in their RPO armour - while they still grew at pretty incredible rates - Docusign’s growth numbers have downright decelerated. And management said that we should expect a return to pre-COVID relatively slower growth. This left me feeling that Docusign was the definition of a COVID stock plus perhaps a quarter more. Growth accelerated for the duration of the epidemic plus a quarter or so - for 5 quarters - and has now fallen back to where it was pre-COVID.
That left me with two questions:
- How can I justify holding DOCU given that it’s expensive by my reckoning, its growth has decelerated markedly to pre-covid levels and is expected to continue at this lower level?
- Would Docusign have passed muster as a newcomer to this board given the numbers and guides for the future given by management this quarter?
I cannot, to the first question, and would wager not, to the second, so I sold out completely.
Happy to hear different opinions or constructive feedback, as always!
-WSM.