DocuSign, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2021; fiscal year ends January 31. Unaudited results are compared with the same periods in 2020. DocuSign provides a subscription-based agreement and e-signature platform.
Financial results
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Revenue | $545.5 million, up 42% from $382.9 million | $1,526.4 million, up 49% from $1,022.1 million |
| Subscription revenue | $528.6 million, up 44%; 97% of revenue | $1,473.3 million, up 52%; 97% of revenue |
| Gross margin, GAAP | 79%, versus 74% | 78%, versus 74% |
| Operating loss, GAAP | $3.4 million, versus $48.5 million | $36.7 million, versus $149.0 million |
| Net loss, GAAP | $5.7 million, or $0.03 per share, versus $58.5 million, or $0.31 per share | $39.5 million, or $0.20 per share, versus $170.9 million, or $0.92 per share |
| Operating cash flow | $105.4 million, versus $57.4 million | $418.7 million, versus $234.7 million |
| Free cash flow (non-GAAP) | $90.0 million, versus $38.1 million | $374.7 million, versus $170.6 million |
Profitability and expenses: Quarterly operating expenses rose 30% to $432.8 million, including sales and marketing of $275.6 million, R&D of $102.6 million, and G&A of $54.6 million. Stock-based compensation was $109.4 million for the quarter and $290.5 million for the nine months. Non-GAAP operating income was $122.2 million for the quarter and $315.2 million for the nine months; these measures exclude specified expenses and should not be treated as GAAP results.
Cash, liquidity, and debt: At October 31, cash, cash equivalents, and short-term investments were $818.5 million, with $89.5 million in long-term investments. The balance sheet reports total cash, cash equivalents, and investments of approximately $907.9 million; the MD&A separately cites $908.2 million including restricted cash. The company said existing resources should cover working capital and capital expenditures for at least 12 months. Principal outstanding on convertible notes was $740.2 million: $50.2 million of 0.5% notes due 2023 and $690.0 million of 0% notes due 2024. The $500 million revolving facility was undrawn, and the company reported covenant compliance.
Changes and business developments
- Revenue growth reflected new customer additions and expansion of existing accounts, particularly mid-market and enterprise customers. Total customers exceeded 1.1 million, including more than 159,000 enterprise and commercial customers, versus almost 820,000 and over 110,000, respectively, a year earlier.
- International revenue grew to 23% of quarterly revenue from 20%; for the nine-month period it was 22%, versus 19%.
- Cash from operations increased year over year, supported by higher sales and collections. Investing cash outflow was $157.7 million for the nine months, while financing cash outflow was $320.7 million, including $323.1 million of tax-withholding payments on employee equity settlements and $64.8 million of note repayments.
- The company settled $64.8 million principal of 2023 notes during the nine months for $64.8 million cash and 0.6 million shares valued at $142.5 million. Adoption of ASU 2020-06 changed convertible-debt accounting and reduced reported interest expense.
Outlook, commentary, and risks
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects to continue investing in sales and marketing, R&D, infrastructure, and international growth; it also expects subscription revenue to increase as customers expand usage and new customers adopt the platform.
- Management attributed elevated demand in part to pandemic-driven digital transformation, but cautioned that demand and growth may moderate as the pandemic wanes. Subscription accounting can delay the effect of changes in sales on reported revenue.
- The company reported a $3.9 million operating lease right-of-use asset impairment in the nine-month period, associated with a sublease. It also recorded $4.8 million of fair-value gains on strategic investments in the nine-month period.
- Key risks include continued dependence on e-signature adoption, competition, customer retention and expansion, cybersecurity and service availability, privacy and regulatory compliance, and uncertainty around pandemic-related demand. The company also cited potential hiring and compliance impacts from COVID-19 vaccination requirements for U.S.-based employees serving government customers.
- Management said it was not party to legal proceedings expected to have a material adverse effect. The company was under an Israel Tax Authority examination for tax years 2016–2019 and reported $45.6 million of gross unrecognized tax benefits.
Important facts for investors to verify
- Whether pandemic-related demand and customer expansion sustain revenue growth as comparisons become more difficult.
- The contribution of recurring subscription growth, renewals, and customer expansion, versus acquisition and other factors.
- How operating costs and substantial stock-based compensation affect progress toward GAAP profitability and dilution.
- Cash-flow sustainability, including the effects of advance customer billings, equity-award tax withholding, and note conversions or repayments.
- Convertible-note settlement terms and potential dilution; the filing notes the 2023 notes’ capped-call protection is limited above a $110 per-share cap.
- Developments in cybersecurity, privacy, regulatory compliance, litigation, and the Israel tax examination.