Docusign Q2 thoughts


I looked at the numbers but came to a different conclusion than Bear did here:…

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: - 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.

2020	214	236.0	250	275
2021	297	342	383	431
2022	469	512		

2020	7%	**10%**	6%	10%
2021	8%	15%	12%	13%
2022	9%	**9%**		

→ So revenue growth is back to growth rates pre-covid.

2020	215	252	269	367
2021	342	406	440	535
2022	527	595		

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.

2020	574	629	673	571
2021	769	785	849	938
2022	1200	1300		

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		

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%:

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:

  1. 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?
  2. 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!



A counterpoint, which rolls up to, maybe this is a little too harsh / unrealistic future expectations? Not every company is UPST 6 months ago or Zoom at the start of Covid…

  • QoQ revenue growth of 9% is still extremely good, yes?
  • QoQ Billings growth of 13% is still extremely good, yes?
  • Operating margin is still (effectively) their highest ever. 1% less than last quarter is not a concern for a 1 quarter change (it’s a 5% effective drop, 1/20). Two in a row might be a concern.
  • Gross margin of >80% is phenomenal by any standard.
  • NRR of over 110% for 2.5 years running is exceptional, and over 120% for 5 quarters is of course even better. A 1/125 drop QoQ is .8%. Yawn.

The one number that gives me pause is the slowdown in new customers - but that happens to every company at some point. Then again, “only” 65 new customers in one Q is what they were doing in 2 quarters merely 2 years ago - representing @100% growth, still, after Covid deceleration.

I see mature/maturing but sustained excellent growth, and Docusign has a chance at becoming a verb. This doesn’t scream “sell” to me.

FWIW, YMMV, Then Again I Could Be Wrong,
holding Docusign for now unless near future price action indicates something’s wrong under the covers


Q3/22 Rev guidance is 532. If we assume the next two quarters are similar to Q2 for %beat & %sequential gain, here is how the annual revenue growth looks.

        Rev     %Beat  %Seq Gain    %Rev Growth    %Rev Growth
                                       Q/Q            1yr
Q2/22   511.8   5.5%   9.1%           49.6%          54.2%

Q3/22   560     5.3%   9.4%           46.3%          52%
Q4/22   611     5.4%   9.1%           41.8%          48.1% 

Under this scenario the trend is not good. I’m doubtful they can continue at 9% sequential with slowing customer adds.

IMO, and could be wrong…