Duck Creek Technology (DCT) Flying Higher As Beat-And-Raise Report Points To Possible Turnaround
3:54 pm Friday, January 07th, 2022
Duck Creek Technologies’ (NASDAQ:DCT) fall from grace has been dramatic: shares are down more than 50% from the post-IPO highs reached last February. The main issue plaguing the SaaS developer for property and casualty insurance (P&C) is that its growth rates and quarterly performance relative to consensus estimates haven’t lived up to the lofty expectations placed on it. Last night, though, the company took a step in the right direction in restoring some lost confidence by posting a solid beat-and-raise 1Q22 earnings report.
Recall that DCT is coming off a disappointing 4Q21 performance in which EPS was merely in line with expectations while subscription revenue growth slipped to 35% from 56% in the prior quarter. Making matters worse, the company issued downside FY22 revenue guidance of $292-300 mln. This precipitated a downward spiral in the stock, but it also reset the bar much lower in terms of investors’ expectations.
Against that more favorable backdrop, DCT’s Q1 results and outlook were good enough to spark a pop in the stock. However, while the better-than-expected performance is encouraging, the overall picture remains a bit mixed.
Perhaps the most pressing concern is that subscription revenue — the lifeblood of any SaaS company — hasn’t been growing nearly as fast as in recent years. In fact, based on its 2Q22 subscription revenue guidance of $37-38 mln, growth could slow to ~23% next quarter, from 28% this quarter and 35% in 4Q21.
From a broader standpoint, DCT’s declining subscription revenue growth is especially disappointing when considering the substantial opportunity in front of it. In its IPO prospectus, the company estimated that its total addressable market (TAM), representing only the portion of spending that’s focused specifically on core system software, is $6 bln in the U.S. and $15 bln globally. Beyond the sheer size of the market, many insurance companies still operate on antiquated systems that are inefficient and inflexible, creating a massive replacement opportunity for DCT’s cloud-based offerings.
On the positive side, DCT’s sliding subscription revenue growth rates may not be quite as troubling as they first appear. Last June, a large legacy contract expired, which has pushed the company’s growth rates lower. The impact of this single lost contract will continue throughout the first half of this year, but DCT will benefit from easier yr/yr comps thereafter.
Additionally, SaaS Annual Recurring Revenue (ARR) growth of 40% came in ahead of DCT’s expectations, driven by strong demand from new and existing customers. This provided the company with the confidence to bump its FY22 revenue guidance higher to $298-304 mln.
The main takeaway is that DCT’s Q1 performance relative to expectations marked a material improvement from last quarter. While DCT returned to its former track record of modestly edging past EPS estimates, the most encouraging item is that SaaS ARR growth remained steady from last quarter at 40%. It’s too early to suggest that DCT has turned a corner, but this report may represent a starting point.
