DocuSign, Inc. — Q1 FY2022 Form 10-Q
Business context and period. The unaudited quarter ended April 30, 2021 (three months ended; fiscal year ends January 31). DocuSign sells subscription software for electronic signatures and agreement automation. Subscription revenue represented 96% of quarterly revenue. The comparison is with the three months ended April 30, 2020.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $469.1 million | $297.0 million | +58% |
| Subscription revenue | $451.9 million | $280.9 million | +61% |
| Gross profit / margin | $363.8 million / 78% | $223.0 million / 75% | Margin +3 points |
| Operating loss | $10.7 million | $41.9 million | Loss narrowed |
| Net loss | $8.4 million; $0.04 per share | $47.8 million; $0.26 per share | Loss narrowed |
| Operating cash flow | $135.6 million | $59.1 million | +$76.5 million |
| Free cash flow, non-GAAP | $123.0 million | $32.8 million | More than tripled |
| Billings, non-GAAP | $527.4 million | $342.1 million | +54% |
Profitability and costs. GAAP operating margin improved to (2)% from (14)%. Sales and marketing expense rose 39% to $239.1 million; research and development rose 57% to $85.4 million; and general and administrative expense rose 29% to $50.0 million. Stock-based compensation was approximately $81.1 million, versus $53.6 million. Non-GAAP operating income was $93.2 million, compared with $23.2 million; this excludes specified items, including stock-based compensation.
Cash, debt and liquidity. At April 30, cash and cash equivalents were $519.0 million, current investments $261.7 million and noncurrent investments $94.9 million. MD&A reports cash, cash equivalents and investments of $875.6 million in one section and $875.8 million in another; the filing text does not provide a clear reconciliation. Current assets were $1.111 billion and current liabilities $1.098 billion. Convertible notes had $768.3 million aggregate principal outstanding ($78.3 million of 0.5% notes due 2023 and $690.0 million of 0% notes due 2024); carrying value was approximately $755.9 million. The $500 million revolving credit facility was undrawn, with no covenant violations reported. Management said available cash and investments should cover working capital and capital expenditure needs for at least 12 months.
Quarterly cash used in investing was $70.5 million, principally net purchases of marketable securities and $12.6 million of property and equipment. Financing used $113.0 million, including $36.7 million cash repayment of 2023 notes and substantial employee-equity-plan tax withholding. Accumulated deficit was $1.377 billion.
Material changes and notable items
- Management attributed strong subscription growth to accelerated adoption of digital agreements and increased customer spending during the pandemic. Total customers exceeded 980,000, compared with more than 660,000 a year earlier; enterprise and commercial customers exceeded 135,000, versus more than 85,000.
- International revenue increased to $100.7 million from $54.8 million and rose to 21% of revenue from 18%.
- Operating cash flow improved, supported by increased sales and collections. The company invoices many subscriptions annually in advance; contract liabilities increased $51.6 million during the quarter.
- On February 1, 2021, DocuSign early adopted ASU 2020-06 for convertible debt. Adoption increased the notes’ carrying value and resulted in a $73.9 million reduction to stockholders’ equity, including a $12.2 million cumulative adjustment to accumulated deficit.
- The company settled $36.7 million principal of 2023 notes for $36.7 million cash and shares valued at $74.7 million. It had received additional conversion notices as of quarter-end.
- A $5.1 million fair-value gain on strategic investments contributed to interest and other income. Interest expense fell to $1.7 million from $7.6 million, primarily due to lower debt-discount amortization following the accounting-standard adoption.
Outlook, commentary and risks
No numerical company revenue or earnings guidance is provided in the supplied filing text. Management expected subscription revenue to continue increasing through new functionality, customer growth and product development, while planning further investment in sales, marketing, technology and international expansion. Remaining performance obligations for contracts longer than one year were $1.2 billion; the company expected to recognize 53% within the following 12 months. Management cautioned that quarterly results are not necessarily indicative of full-year results and that sustained profitability is not assured.
Management said pandemic-driven demand had increased substantially but warned that demand could soften as conditions normalize. Other highlighted risks include competition; dependence on e-signature products; customer retention and renewal; service availability and cybersecurity; privacy and regulatory compliance; scaling operations; and the possibility that significant expenses and stock-based compensation impede sustained profitability. The company reported no pending legal proceeding expected to have a material adverse effect and said disclosure controls were effective as of April 30, 2021.
Important facts for investors to verify
- Whether pandemic-era demand and customer spending remain durable as businesses return to more normalized operations.
- The reconciliation of the filing’s $875.6 million and $875.8 million cash-and-investments disclosures.
- How convertible-note conversions, potential cash settlement and share issuance affect liquidity and dilution; the 2023 notes’ conversion conditions had been met.
- Whether rapid revenue growth can translate into sustained GAAP profitability, given ongoing investment, operating losses and substantial stock-based compensation.
- Progress against the $1.2 billion remaining performance obligation balance, including the expected recognition timing.