DocuSign, Inc. — Q2 Fiscal 2022 Form 10-Q
Business context and reporting period. DocuSign provides a subscription-based platform for electronic signatures and agreement workflow automation. This unaudited quarter ended July 31, 2021; comparisons are with the quarter ended July 31, 2020. The six-month figures cover the same fiscal-year periods.
Financial performance and position
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $511.8 million (+50%) | $342.2 million | $980.9 million (+53%) | $639.2 million |
| Subscription revenue | $492.8 million (+52%) | $323.6 million | $944.7 million (+56%) | $604.6 million |
| GAAP gross margin | 78% | 74% | 78% | 74% |
| Operating loss | $22.6 million | $58.6 million | $33.3 million | $100.5 million |
| Net loss | $25.5 million | $64.6 million | $33.9 million | $112.4 million |
| Operating cash flow | $177.7 million | $118.1 million | $313.3 million | $177.3 million |
| Free cash flow (non-GAAP) | $161.7 million | $99.8 million | $284.7 million | $132.5 million |
Q2 GAAP operating margin was -4% versus -17%; net margin was -5% versus -19%. Q2 non-GAAP operating income was $99.7 million (19% margin), compared with $33.7 million (10%) a year earlier. Non-GAAP measures exclude specified items, including stock-based compensation and certain acquisition-related and other expenses.
At July 31, cash and cash equivalents were $518.6 million, current investments $304.3 million, and noncurrent investments $64.1 million. Management reported approximately $887.2 million of cash, cash equivalents, restricted cash and investments. Total current assets were $1.18 billion and current liabilities $1.21 billion. Convertible-note principal outstanding was $743.3 million: $53.3 million of 0.5% notes due 2023 and $690 million of 0% notes due 2024. There were no borrowings on the $500 million revolving facility, and the company reported compliance with its covenants.
Q2 billings, a non-GAAP measure, were $595.4 million, up from $405.7 million; six-month billings were $1.12 billion, versus $747.7 million. Remaining performance obligations for contracts longer than one year totaled $1.3 billion; the company expected to recognize 52% within the following 12 months. Stock-based compensation was $100.0 million in Q2 and $181.1 million for the six months.
Material changes versus prior comparable periods
- Revenue growth reflected new customer acquisition and increased sales to existing customers, particularly mid-market and enterprise customers. The company reported more than 1.053 million total customers, versus almost 750,000 a year earlier, and more than 148,000 enterprise and commercial customers, versus more than 95,000.
- Gross margin improved four percentage points to 78%. Operating and net losses narrowed, while operating cash flow and free cash flow increased.
- Operating expenses rose in dollars as the company invested in personnel, sales and marketing, research and development, and infrastructure. Sales and marketing expense increased 35% in Q2; R&D increased 48%.
- International revenue was 22% of total revenue in Q2, compared with 19% a year earlier.
- Six-month cash used in financing increased, including $228.6 million of tax-withholding payments on net share settlements of equity awards and $61.7 million of cash repayments of 2023 notes.
Outlook, commentary, risks and unusual items
Management gave no numerical quarterly or full-year guidance in the supplied filing text. It said existing cash, cash equivalents and marketable securities should meet working-capital and capital-expenditure needs for at least 12 months, while noting that continued investment could delay profitability and might require additional capital. Management expects to continue investing in sales, marketing, product development, infrastructure and international expansion.
The company attributed elevated demand to businesses accelerating digital agreement adoption during COVID-19, but cautioned that demand and growth may moderate as the pandemic wanes and customer priorities change. Other highlighted risks include continued operating losses, customer retention and expansion, competition, reliance on e-signature products, service availability and cybersecurity, privacy and regulatory compliance, and the effects of substantial convertible debt.
- A $3.9 million impairment of operating lease right-of-use assets was recorded in Q2, related to a sublease.
- Six-month results included a $5.3 million fair-value gain on strategic investments.
- Early adoption of ASU 2020-06 changed convertible-debt accounting and reduced debt-related interest expense; the adoption also produced a $12.2 million cumulative adjustment to beginning accumulated deficit.
- The company said it was not party to legal proceedings expected to have a material adverse effect. Disclosure controls were considered effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether pandemic-related demand persists and customer growth, renewals and expansion sustain the reported revenue and billings momentum.
- How much of the GAAP-to-non-GAAP earnings difference is recurring, particularly stock-based compensation, which was $100.0 million in Q2.
- Whether positive operating cash flow and free cash flow continue, given advance customer billings, equity-award tax-withholding payments and planned growth investment.
- The liquidity and potential dilution implications of the $743.3 million convertible-note principal, future conversions or settlements, and the terms of the unused revolving facility.
- Whether the company can maintain margins and service quality while scaling infrastructure, managing cybersecurity and regulatory risks, and pursuing growth after the pandemic-driven acceleration.