To The Moon

$Docusign(DOCU)$ is scheduled to report their quarterly result on 05 Sep 2024 after market close.

DocuSign met analysts’ revenue expectations last quarter, reporting revenues of $709.6 million, up 7.3% year on year. It was a strong quarter for the company, with an impressive beat of analysts’ ARR (annual recurring revenue) estimates and a solid beat of analysts’ billings estimates.

Market are expecting DocuSign’s revenue to grow 5.8% year on year to $727.8 million, slowing from the 10.5% increase it recorded in the same quarter last year. Adjusted earnings are expected to come in at $0.80 per share.

DocuSign (DOCU) Falling Net Retention Rate - A Big Red Flag

DocuSign informed in Q1 2024 that they do not provide the gross retention, this is a metric which is for us to see if clients are moving to the competition.

The most recent update was that DocuSign “gross retention was flat year-over-year in Q4 across the direct book of business.” So that does not make sense.

Hence we shall looked at the net retention rate (NRR), now this stands at 98% which mean that their clients are spending less over time which is a big red flag for a SaaS company. DocuSign did try to provide some comforting statement that they are encouraged that the pace of year-over-year decline slowed substantially,

They are expecting Q2 2024 (upcoming reporting quarter) NRR to be flat or down slightly. But I am more concerned whether they can show that NRR that is above 100% which shows that they have successfully upselling and cross-selling.

With their average contract having a life of 19 months, it means they’ are likely negotiating contract renewals at less than what they received before. Typically, salespeople will talk up new and added features to justify a price increase. In this case, clients are probably pointing to reasons why they should pay less.

Since eSignatures clearly add value, clients are probably finding cheaper alternatives from competing solutions. This should start putting pressure on DocuSign’s gross margins, but they seem fine for now, hovering around 82-83%.

Expect To See Their Sales Growth Being Catalysed By Cross-Selling

I would think DocuSign would be using the new avenues for growth from startups that they have invested, but more important we need to see cross-selling adjacent offerings – like AI contract negotiations – and then breaking these out in revenue segments .

If DocuSign continued to focus on profitability metrics and point to international revenues (27% of total) as a key growth area going forward. This might harm their earnings prospect as there will be decreasing spend in the United States.

DocuSign (DOCU) Price Target Forecast

Based on 14 Wall Street analysts offering 12 month price targets for DocuSign in the last 3 months. The average price target is $63.00 with a high forecast of $86.00 and a low forecast of $48.00. The average price target represents a 9.72% change from the last price of $57.42.

I will not be hoping for a stock price increase significantly after its earnings because there might be a conservative outlook for their customer retention and new customer acquisition.

This is important as there have been signs of decreased customer spending. Customer might be looking for e-Signature alternatives.

DocuSign (DOCU) Year-To-Date Returns

Though there have been a small decrease in stock price to investors, but DocuSign might not be able to return to a nice positive returns in near term.

What we need to focus is whether DocuSign has a sound cross selling strategy to boost its sales and also to fend off any competitions from new incumbents.

DocuSign (DOCU) Technicals (MACD and KDJ)

If we looked closely at how DOCU NRR performance is like over the past 2 quarter, we are seeing that there have not been much effect on their cross selling.

Hence, we can see that from the technical, DOCU is having a potential downside before its earnings result, as investors might be wary of a not so positive outlook considering that NRR has not been showing signs of improvement.

Unless we can see that DocuSign has a huge increase in new customer sign up, then we might see a reversal.

Summary

DOCU is facing competition from cheaper alternatives though e-Signature is considered to be a good security feature to have for online presence. There have been many alternatives cheaper than DOCU.

And DOCU retention of existing customer have not been very successful so we might be seeing a not so positive guidance. I will be monitoring cautiously as I am looking to see if there is any opportunity for this stock.

Appreciate if you could share your thoughts in the comment section whether you think DOCU outlook for 2024 would turned out better with good cross selling strategy?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.