Digital signature cloud company DocuSign Inc. (NASDAQ: DOCU) stock got clobbered on the Sell rating by UBS on Feb. 21, 2023. The company is arguably the leader in digital eSignatures and offers additional services that lead to complete contract lifecycle management. The company has a growing list of competitors, including Adobe Inc. (NASDAQ: ADBE), Dropbox Inc. (NYSE: DBX), Zix Co. (NASDAQ: ZIXI), and SAP SE (NYSE: SAP).

Outstanding shares grew from 198 million to 201 million in fiscal Q3 2022. It's falling top-line growth, growing outstanding shares, normalization, and a second round of layoffs in less than eight months makes for a compelling case for the downgrade.

Miscalculating the Pandemic

DocuSign experienced tremendous growth during the pandemic as lockdowns and social distancing restrictions forced businesses to adopt eSignatures for contracts and agreements. The growth of remote work and elastic offices have been strong tailwinds for DocuSign, but investors are concerned about normalization. The company admits it made the mistake of not scaling correctly, leading to a loss in innovation velocity.

The company announced restructuring plans to include a layoff of 10% of its workforce (approximately 680 workers) on Feb. 16, 2023. Layoffs have become commonplace among companies that saw wild, unprecedented growth during the pandemic, like Zoom Video Communications Inc. (NYSE: ZM), which announced 15% layoffs the previous week. DocuSign plans to take a $25 million to $35 million charge-off, primarily in its fiscal Q1 2024 earnings period. This is the second round of layoffs since its 9% reduction in September 2022.

New Leadership at the Helm

DocuSign, now spearheaded by a new CEO, Allen Thygeson, comes over from Alphabet Inc. (NASDAQ: GOOGL) Google. He focuses on broadening the category, parlaying on its core eSignature business into integrating deeper with partner applications like its web forms and artificial intelligence (AI) powered contract life management (CLM) platform. For the third year, DocuSign was named Leader Gartner 2022 Magic Quadrant Leader in CLM. 

Contract Lifecycle Management is The Growth Driver

CLM enables enterprises to customize, scale, streamline, automate, and integrate contract management processes with other business systems. The DocuSign CLM platform also provides the tools to help create, negotiate, analyze, sign, store, and manage contracts throughout their whole lifecycle.

 Its AI engine helps to reduce risk by improving contract compliance, provides analytics and workflows, and improves the efficiency and visibility of a company's contract portfolio. DocuSign is focused on broadening the category to drive growth.

Impressive Earnings Beat

On Dec. 8, 2022, DocuSign released its fiscal third-quarter 2023 results for the quarter that ended October 2022. The company reported an earnings-per-share (EPS) profit of $0.57 versus $0.42 consensus analyst estimates, a $0.15 beat. GAAP net loss was $0.15 on 201 million shares outstanding, compared to $0.03 on 198 million shares in the year-ago period. Revenues grew 18.3% year-over-year (YoY) to $645.6 million, beating analyst estimates of $627.23 million.

Billing rose 17% YoY to $659.4 million, beating its prior guidance range of $584 million to $594 million. Non-GAAP operating margin improved to 23% versus 22% the previous year and above the 16% to 18% previous guidance range. The company ended the quarter with $1.1 billion in cash and cash equivalents.

CEO Thygeson commented, “We know that customers who use more than three features are more likely to expand their footprint with us, which will be critical for more profitable growth at scale.” He continued, “By reimagining how we engage that ecosystem, we expect to create a platform that will see stronger revenue contribution from our partners and help unlock and fuel international expansion opportunities in particular.”

Slowdown Ahead

DocuSign provided downside fiscal Q4 2023 guidance for revenues to come in between $637 million to $641 million versus $641.69 million consensus analyst estimates. Q4 billings are expected between $705 million to $715 million with a non-GAAP operating margin of 24%.

Weekly Rising Channel Inside Rounded Bottom Cup

The weekly candlestick chart peaked around the $65.75 lip line in September 2022 and fell to a swing low at $39.63 by early November 2022. Its fiscal Q3 2022 earnings helped trigger the weekly market structure low (MSL) breakout through $53.05 as the market shrugged off the lowered guidance.

Shares managed to climb back through the cup lip line in a rising price channel that saw shares peak at $69.45 in February 2023, just before the UBS downgrade to a SELL rating. This caused shares to collapse over 9% as the weekly 20-period exponential moving average (EMA) attempted to hold support at $57.99, the lower rising price channel trendline.

The weekly stochastic is peaking at the 80-band, which could trigger an oscillation down if it falls under. Pullback support levels are $55.86, $53.05 weekly MSL trigger, $49.13, and $43.95.