The huge 42% single day drop in DocuSign (DOCU) we discussed last week triggered an insider purchase at the company with the CEO purchasing 34,751 shares worth $4.99 million on the open market. This is the first insider purchase at the company since it went public in April 2018 at $29 per share. The tides have certainly changed as we are now seeing insiders of high-growth companies starting to buy shares after years of mostly selling them.
Just like Asana (ASAN), DocuSign (DOCU) was hit by a deceleration in its growth rate and soft Q4 2022 guidance (fiscal year ends in January 2022). The company reported a 42% year-over-year increase in revenue to $545 million in Q3 2022 and at the midpoint of its guidance of $560 million for Q4 2022, expects to grow revenue 30% year-over-year. The biggest concern beyond the soft Q4 forecast was a decline in billings and the pandemic related tailwinds subsiding.
Unlike Asana, DocuSign generates a significant amount of free cash flow even though net income is consistently negative. For the trailing twelve months ending October 2021, the company generated $419 million in free cash flow. The company was also free cash flow positive pre-pandemic generating $44 million of free cash flow in the twelve months ending January 2020. You probably guessed it that the reason the company is reporting negative net income is on account of very high stock-based compensation. In addition to stock buyback announcements, we also track shares outstanding data from 10-Q and 10-K filings and when I pulled up the shares outstanding data for DocuSign, I was not surprised to see that the company diluted shareholders to the tune of 45% from January 2019 to October 2021 as it focused on growth and issued shares to employees.
DocuSign was trading at a EV/Sales of 23 before the stock took a big hit and now trades for a little below 15 times sales, about the same valuation the market afforded the company pre-pandemic. The market is concerned about slowing revenue growth because the world will gradually return to normalcy after the pandemic. The digitization of documents and e-signatures are secular trends and I don’t see why companies would want to go back to wet signatures even if their workforces return to the office.
The bigger concerns should probably be competition from large companies like Adobe and smaller ones like HelloSign and PandaDoc. DocuSign was founded in 2003 and Adobe acquired EchoSign in 2011 to create its Adobe Sign product, which it launched broadly in 2016. Given how ubiquitous Adobe Acrobat is, I would not be surprised if DocuSign loses market share to Adobe. The good news is that the overall pie for e-signature solutions is growing rapidly and DocuSign has barely made a dent in international sales. In fiscal Q3 2022, the company saw its international sales grow 68% year-over-over and the international segment now represents 23% of overall revenue despite a presence in just a handful of countries. DocuSign is interesting enough that I am going to build a model taking its share dilution into account to see if the company makes sense at current levels.