Business context and reporting period
DocuSign, Inc. provides a subscription-based digital agreement platform, with eSignature as its core offering. This Form 10-Q covers the three months ended April 30, 2020, the first quarter of fiscal 2021; comparisons are with the same period in 2019. The financial statements are unaudited.
Subscription revenue was 95% of total revenue. DocuSign reported more than 660,000 customers, including more than 85,000 enterprise and commercial customers, and operated as one reportable segment.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $297.0 million | $214.0 million | +39% |
| Gross profit / margin | $223.0 million / 75% | $161.9 million / 76% | Margin down 1 point |
| Operating expenses | $264.8 million | $204.4 million | +30% |
| Operating loss | $41.9 million | $42.4 million | Loss narrowed slightly |
| Net loss | $47.8 million | $45.7 million | Loss increased |
| Basic and diluted loss per share | $0.26 | $0.27 | Loss per share improved |
| Operating cash flow | $59.1 million | $45.7 million | + $13.5 million |
| Capital expenditures | $26.4 million | $15.2 million | Higher |
| Free cash flow (non-GAAP) | $32.8 million | $30.4 million | Higher |
Subscription revenue rose 39% to $280.9 million; professional services and other revenue rose 29% to $16.1 million. Non-GAAP operating income was $23.2 million, versus $10.3 million, and non-GAAP operating margin was 8%, versus 5%. These non-GAAP measures exclude specified items, including stock-based compensation.
At April 30, 2020, cash, cash equivalents and investments totaled $898.1 million: $442.2 million in cash and equivalents, $315.7 million in current investments, and $140.1 million in noncurrent investments. Total current assets were $1.04 billion and current liabilities were $729.6 million. Contract liabilities were $563.6 million. Management said available cash and investments should cover working capital and capital expenditures for at least 12 months.
Convertible senior notes had $575.0 million principal outstanding, a 0.5% coupon and 2023 maturity; their net carrying amount was $472.2 million. Operating lease liabilities totaled $201.4 million. The company reported a $1.18 billion accumulated deficit and said it expected operating losses to continue for the foreseeable future.
Material changes versus the prior comparable period
- Revenue grew 39%, primarily attributed to customer growth; customers increased from more than 500,000 to more than 660,000 year over year.
- Gross margin declined to 75% from 76%. Subscription gross margin fell to 81% from 84%, reflecting higher operating costs, reseller fees, data-center costs and personnel.
- Sales and marketing increased 32% and research and development increased 46%, mainly due to higher headcount and stock-based compensation. General and administrative expense rose 4%.
- Net loss widened despite a slightly narrower operating loss; lower interest and other income and higher income tax expense contributed to the change.
- Operating cash flow increased, supported in part by a $44.6 million increase in contract liabilities. Capital expenditures also rose.
Outlook, risks, contingencies and unusual items
The filing provides no numerical revenue or earnings guidance. Management reported substantially increased demand across almost all industries and regions during the pandemic as businesses shifted to remote operations, while travel and hospitality spending slowed or declined. It warned that future demand could be volatile, with risks including customer churn, late or missed payments, delayed purchasing, and pricing and payment-term pressure. Management said remote operations had not materially affected its ability to maintain operations as of the filing.
DocuSign acquired Seal Software Group Limited, a contract analytics and artificial intelligence provider, on May 1, 2020, after quarter-end. The announced cash consideration was approximately $185.1 million, subject to adjustments. The filing also disclosed an April 2020 brute-force attack on an isolated testing environment in which a portion of source code was exfiltrated; the company said the incident had not affected operations, products or services.
Other risks highlighted include ongoing operating losses, competition, reliance on eSignature, service availability and cybersecurity, privacy and regulatory compliance, and uncertainty from COVID-19. The company reported no current legal proceeding expected to have a material adverse effect, and stated that disclosure controls were effective as of April 30, 2020.
Most important facts for investors to verify
- Whether elevated pandemic-era demand translated into durable renewals, customer expansion and billings, rather than temporary adoption or accelerated purchases.
- How subscription gross margin and infrastructure, reseller and personnel costs trend as revenue scales.
- Whether the company can reduce GAAP losses while managing substantial stock-based compensation and continued investment.
- The cash impact and integration results of the Seal acquisition, including any adjustments to the announced consideration.
- Liquidity and potential dilution or cash-settlement obligations associated with the $575 million convertible notes, alongside lease and other commitments.
- Any subsequent impact from the disclosed source-code incident, remote-work cybersecurity exposure, or COVID-19-related customer payment and demand risks.