After taking a step in the right direction last quarter, when Duck Creek Technologies (DCT) flew higher on a beat-and-raise report, the company finds its wings clipped following its release of a decent Q2 (Feb) report overshadowed by downbeat Q3 (May) guidance. The software-as-a-service (SaaS) developer of property and casualty insurance software continues to encounter choppy waters; shares have fallen to half their August 2020 IPO opening price of $40. Mainly keeping DCT grounded is a challenging combination of a somewhat pricey multiple of 9x forward sales and slowing growth.
The silver lining is that after multiple quarters filled with less-than-stellar results, investors reset their expectations. Meanwhile, following DCT’s bullish outlook last quarter, perhaps it was finally time for DCT to reverse a long downward trend. However, as the company guided Q3 revenues below estimates, it appears that investors need to lower the bar once again.
Beginning with the rough spots from DCT’s Q2 report, the company expects Q3 revs of $71-73 mln, or just 6% growth yr/yr at the midpoint. This would mark the slowest quarterly growth rate for DCT since it went public — the weakest quarter thus far still saw +18.6% growth yr/yr. Additionally, as revs jumped 22% yr/yr in Q2 to $76.42 mln, DCT’s Q3 guidance could also translate to its first sequential decline.
A similar scenario played out in Q2 as well. New business signed during the quarter missed DCT’s expectations due to delays in signing several critical deals, leading to ARR growth of just 28% yr/yr to $151.4 mln, a deceleration from the +40% last quarter. DCT commented that heightened uncertainty due to the current inflationary environment and other macroeconomic factors are lengthening sales cycles with some of its larger customers.
However, investors are not homing in on the mostly upside FY22 revenue guidance, especially since it still represents a slowdown in growth from FY21. Still, perhaps with today’s sell-off, DCT is finally bottoming out. The company is heading into favorable tailwinds as the financial sector adopts more digital platforms to better compete with a boom in fintech alternatives. Therefore, DCT is a name to keep on the radar, as it is positioned to benefit once inflationary-induced uncertainty begins to ease.