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Stock Analyst Update

DocuSign’s Persistent Sales Execution Troubles Contribute to Cut to Billings Outlook; Slashing Fair Value to $88

First-quarter results signal that post-COVID-19 normalization is even more severe than we had previously thought.

DocuSign (DOCU) reported first-quarter results that exceeded the high end of guidance for revenue and were slightly above the midpoint for non-GAAP operating margin. That said, the firm is still experiencing sales execution issues and consequently lowered its billings outlook. Adding fuel to the fire, management also noted it was moderating its hiring, but did not raise its full-year profitability outlook. We interpret the billings outlook combined with the fact that existing customers have significantly slowed their expansion with DocuSign as signs that post-COVID-19 normalization is even more severe than we had previously modeled. Management admitted as much on the call. Based on these factors, we materially lower growth and profitability assumptions throughout our explicit 10-year DCF forecast, which in turn lowers our fair value estimate to $88 per share, from $130 previously. While we see upside from current levels to our fair value estimate, we have low confidence in management’s ability to meaningfully accelerate revenue growth in the near term, we highlight our very high uncertainty rating, and recommend investors avoid the stock. In order to be convinced our estimate cuts are too severe, we would need to see evidence that sales changes are bearing fruit, contract lifecycle management, or CLM, express is driving a material sales funnel, and customers are returning to more regular consumption levels in a normalized post-COVID-19 world.

We see the demand environment as healthy, but management noted macroeconomic issues, specifically, inflation and the war in Ukraine as potentially weighing on customer behavior. Total revenue grew 25% year over year to $589 million, above the high end of guidance at $583 million and FactSet consensus of $581 million. Once again, subscriptions led the way, increasing 26% year over year with the firm once again reporting strong new customer adds, and continued strength internationally, consistent with the last several quarters.