Source: Beast Finance Author: Beast Finance
Summary
(1) DocuSign's core electronic signature business continues to grow. Although the growth rate has slowed down after the epidemic, the revenue in the first quarter has reached 661 million US dollars, with a growth rate of 12%.
(2) DocuSign is currently entering the lucrative enterprise market and has 220,000 customers in this area, accounting for 16% of the total number of customers.
(3) Despite declining net retention, DocuSign's valuation remains attractive compared to competitors such as Adobe, and the risk/reward is favorable for investors.
The core product of DocuSign , the global leader in electronic signature solutions
, is to provide electronic signature solutions for enterprises. It has been widely adopted in recent years, especially during the epidemic, which not only accelerated the trend of remote work, but also increased the need for enterprises to The needs of the agreement process. DocuSign's electronic signature solution simplifies the agreement and signing process, and eliminates administrative barriers and paperwork, saving businesses money and time. According to Statista, DocuSign has a 75% share of the global electronic signature solutions market, making it the most dominant company in the industry so far.
While DocuSign has started off strong growth driven by the pandemic over the past few years, the company's revenue growth has slowed since 2021. In the most recent quarter, DocuSign's revenue hit $661 million, up 12%. In the same period last year, DocuSign's growth rate was more than twice that of the same period last year, with a growth rate of 25%.
While revenue growth has slowed, the company has continued to make inroads into the lucrative enterprise market. As of the end of the first quarter, DocuSign had 140 total customers, including 220,000 enterprise customers, which means that the company's enterprise customers have tripled since fiscal 2020. Enterprise customers also bring continuous growth opportunities for DocuSign, because once these customers adopt DocuSign's products, it is possible to promote the use of DocuSign throughout the company.
Strong Free Cash Flow Margin
DocuSign generated $661 million in revenue in the first quarter of fiscal 2024, with free cash flow of $215 million and a free cash flow margin of 32%. In fiscal 2023, the company's free cash flow is only $429 million, and the free cash flow margin is 17%. As DocuSign continues to expand its product offerings and customer usage continues to increase, especially in the enterprise market, Beast Finance believes that DocuSign's free cash flow margins still have the opportunity to continue to improve. Based on a free cash flow margin of 25-30% and expected revenue of $2.91 billion, Beast Finance expects DocuSign's free cash flow to reach $730-870 million next year.
Declining Net Retention
DocuSign can scale revenue not only by adding new customers, but also through organic revenue. This can be measured from its net retention rate.
Net retention measures the growth in revenue generated by existing customers over a specific period of time. It is calculated as the percentage of retained revenue earned from a group of customers, taking into account factors such as growth, decline, and churn. DocuSign's net retention rate data for the first quarter of fiscal 2024 shows that the company's net retention rate is 105%, which indicates that the company's revenue increased by 5% compared with the same period last year.
But over time, DocuSign's net retention rate has declined, continuing to decline from more than 120% in fiscal 2021, and is now at its lowest point since its IPO in 2018. Part of the reason is that companies have cut back on IT spending in a hyperinflationary economy. For a SaaS company like DocuSign (which generates 97% of its revenue from subscriptions), a net retention rate below 100% is a sign that revenue is slipping, and a potential warning sign that customers don't appreciate DocuSign's products and services. Service is essential.
The continued deterioration in DocuSign's net retention rate, especially falling below 100%, suggests that valuation pressure on the company may increase.
DocuSign's Valuation
DocuSign expects to generate $2.72 billion in revenue this year and $2.91 billion next year, implying 8% and 7% revenue growth, respectively. DocuSign currently trades at 3.74 times earnings, while its competitor in the e-signature market, Adobe (ADBE), has already traded at 10.5 times earnings, suggesting that Adobe is worth much more than DocuSign because the company has much higher revenues than DocuSign. more, and has a wider range of products. However, DocuSign's advantage is that the company has a large share of the electronic signature market.
Risks facing DocuSign
Beast Finance believes that DocuSign's net retention rate is currently at risk, because in the past few quarters, the company's net retention rate has experienced a continuous decline and is currently at its lowest point since its IPO in 2018.
Additionally, slower revenue growth could also give investors renewed hesitation about paying higher earnings multiplier factors going forward. If DocuSign fails to meet market expectations for its free cash flow growth and generates lower free cash flow margins, then we would be even more bearish on it.
Conclusion
While DocuSign's revenue growth slowed in the first quarter, it continued to sign up new customers, bringing its total customer base to 1.4 million while expanding its lucrative enterprise customer base to 220,000 .
And DocuSign has achieved free cash flow profitability, which makes the company very different from many SaaS companies that have not yet reached profitability.
Considering that DocuSign's valuation is greatly underestimated compared with Adobe, Beast Finance believes that DocuSign is a promising SaaS company.