DocuSign, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended July 31, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
DocuSign provides a subscription-based digital agreement platform. Subscription fees generated 95% of revenue. Management said the shift to remote business during COVID-19 substantially increased demand for eSignature, while some pandemic-affected industries, including travel and hospitality, showed slower or declining spending.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $342.2 | $235.6 | $639.2 | $449.6 |
| Revenue growth | 45% | — | 42% | — |
| Gross margin | 74% | 74% | 74% | 75% |
| Operating loss | $(58.6) | $(64.7) | $(100.5) | $(107.2) |
| Net loss | $(64.6) | $(68.6) | $(112.4) | $(114.4) |
| Operating cash flow | $118.1 | $26.4 | $177.3 | $72.1 |
| Free cash flow (non-GAAP) | $99.8 | $11.9 | $132.5 | $42.3 |
Subscription revenue rose 47% in the quarter and 43% year to date, primarily on customer growth. GAAP operating loss narrowed as revenue grew faster than operating expenses. Q2 sales and marketing expense rose 29%, R&D 34%, and G&A 26%. Subscription gross margin declined to 80% from 82%; professional services remained loss-making, though its gross margin improved to (39)% from (47)%. Stock-based compensation was $68.8 million for Q2 and $122.3 million for the six-month period.
Financial position and liquidity
- At July 31, cash and cash equivalents were $404.3 million; current and noncurrent investments totaled $336.0 million. Cash, cash equivalents and investments were $740.3 million.
- Current assets were $968.0 million and current liabilities $854.0 million. Contract liabilities, largely advance customer billings, were $635.9 million, up from $519.0 million at January 31.
- Convertible notes had $575.0 million principal and a $479.1 million net carrying value. The notes bear 0.5% interest and mature in 2023. Their disclosed estimated fair value was $1.7 billion.
- Six-month capital expenditures were $44.8 million. Operating cash flow benefited from increased contract liabilities and noncash expenses; cash used for acquisition consideration was $180.4 million, net of acquired cash.
- Management stated existing cash, cash equivalents and marketable securities were expected to cover working capital and capital expenditure needs for at least 12 months, while also noting expected operating losses as the company invests for growth.
Material changes, transactions and outlook
- Revenue increased 45% in Q2 year over year; international revenue increased 59% and represented 19% of quarterly revenue. The company reported nearly 750,000 total customers, including more than 95,000 enterprise and commercial customers, versus more than 535,000 and 60,000, respectively, a year earlier.
- DocuSign acquired Seal Software on May 1 for $184.7 million in cash, net of acquired cash, transaction costs and working-capital adjustments. It acquired Liveoak Technologies on July 6 for consideration of $48.4 million, primarily stock and assumed options. Both acquisitions were intended to broaden agreement analytics, AI and remote notarization capabilities; their reported operating results were not material in the period.
- The notes became convertible August 1 through October 31, 2020 after the stock-price conversion condition was met. Conversion or repurchase obligations could affect liquidity; the company may settle conversions partly or wholly in cash. Capped calls were intended to reduce dilution up to a $110 cap price.
- No specific numerical financial guidance is provided in the supplied filing text. Management expects continued investment in sales and marketing, product development, infrastructure and international growth, and says expenses will continue to rise in absolute dollars.
- Management warned that the pandemic’s effects remain uncertain. Demand had strengthened overall, but future risks include customer churn, delayed purchases, late or missed payments, pricing pressure and weaker demand in affected industries. The company also cited competition, execution and acquisition integration, service availability, cybersecurity, privacy regulation, and continued operating losses as risks.
Investor verification points
- Track whether exceptional pandemic-driven demand converts into durable renewals, customer expansion and billings, and monitor performance in more affected industries.
- Review cash conversion, deferred contract acquisition costs and the extent to which operating cash flow depends on advance billings and contract-liability growth.
- Assess ongoing losses and the scale and dilution effects of stock-based compensation, including future equity issuance.
- Monitor note conversion, potential cash settlement or current-liability reclassification, and the implications of the notes’ disclosed fair value.
- Follow integration and performance of Seal and Liveoak, including purchase-accounting adjustments, acquired-intangible amortization and the expected product benefits.
- Review cybersecurity and privacy exposure: the filing disclosed an April 2020 brute-force attack on an isolated testing environment in which a portion of source code was exfiltrated; the company said it had no operational or product impact.