DocuSign (DOCU) is set to report third quarter fiscal 2019 earnings results after the closing bell Thursday.
Wall Street is eager to learn whether this young promising company, which has shown decelerated revenue growth in its previous two quarters, is the real thing or a forgery. The revenue growth drop has sent DocuSign share price plunging some 33% over the past three months. Its share price — currently trading around $45 per share has declined almost 40% from its all-time high of $68.
From my vantage point, investors who have waited for a better entry price have gotten their chance. DocuSign, which provides individuals and businesses the ability to digitize an agreement process, is doing well in key aspects of its business, namely its subscriptions revenue, which accounts for about 95% of total revenues. In the second quarter subscription revenue rose 35% year over year, outpacing the 33% year-over-year total revenue growth during the quarter.
The fact that subscription revenue is outpacing total revenue is important because it underscores the extent to the company's software-as-a-service model is working. On Thursday the company must show that these positive trends can continue.
In the three months that ended October, the San Francisco, Calif.-based company is expected to post a per-share loss of 2 cents on revenue of $173.55 million. This compares to the previous quarter when earnings came to 3 cents per share on revenue of $167.05 million. For the full year, ending in January, the company is expected to lose 2 cents per share on revenue of $685.88 million.
Another area analysts will focus on Thursday will be DocuSign’s profitability, which has come under pressure amid increased competition. Among others, DocuSign competes with HelloSign and Adobe (ADBE) Sign. But even amid the crowded space the company continues to attract large Fortune 500 clients, including the likes of T-Mobile (TMUS), Salesforce, Morgan Stanley (MS) and Bank of America (BAC). These clients sign recurring contracts that have an average lifetime of 13 months.
And as another sign that the underlying business is working, DocuSign boasts a strong customer net retention rate of 115%, which means customers spend about 15% (on average) more annually on DocuSign services. In other words, while investors might be concerned about the recent deceleration of revenue (Q2 revenue rose 33%, or four percentage points slower than the 37% year-over-year revenue growth posted in Q1), the quality of revenue is improving.
Investors should focus more on this particular trend than any other in DocuSign's fundamentals. Combined with an accelerating subscription revenue segment and improving non-GAAP gross profit margin, which showed growth acceleration in Q1 and Q2, DocuSign stock is poised to rise in the quarters ahead.