DocuSign, Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2020. The filing is unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context
DocuSign provides a subscription-based platform for preparing, signing, acting on and managing agreements. Subscription revenue accounted for 96% of Q3 revenue. The company reported more than 820,000 total customers, including more than 110,000 enterprise and commercial customers.
Financial results and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $382.9 | $249.5 | $1,022.1 | $699.1 |
| Revenue growth | 53% | — | 46% | — |
| Gross margin | 74% | 75% | 74% | 75% |
| Operating loss | $(48.5) | $(44.0) | $(149.0) | $(151.2) |
| Net loss | $(58.5) | $(46.6) | $(170.9) | $(161.0) |
| Operating cash flow | $57.4 | $(1.9) | $234.7 | $70.2 |
| Free cash flow | $38.1 | $(14.1) | $170.6 | $28.1 |
Q3 subscription revenue was $366.6 million, up 54%; professional services and other revenue was $16.3 million, up 43%. GAAP operating expenses rose to $333.6 million from $231.5 million. Stock-based compensation was $80.9 million for the quarter and $203.2 million for the nine-month period. The company also reported non-GAAP operating income of $49.1 million for Q3 and $106.0 million for the nine months; these measures exclude specified expenses, including stock compensation and acquisition-related items.
At October 31, cash, cash equivalents and investments totaled approximately $675 million. Current assets were $929.8 million and current liabilities $923.1 million. The company reported $234.7 million of nine-month operating cash flow, offset in part by $64.1 million of capital expenditures, $180.4 million of acquisition payments and $247.3 million of RSU tax-withholding payments. Management said existing cash, cash equivalents and marketable securities should meet working-capital and capital-expenditure needs for at least the next 12 months.
Convertible senior notes had $575.0 million principal due in 2023 and a 0.5% coupon; their net carrying amount was $486.1 million. The notes were convertible through January 31, 2021. Their disclosed estimated fair value was $1.6 billion. The company’s capped calls cover approximately 8.0 million shares, with a $110 cap price; the filing says the stock price exceeded that cap at quarter-end.
Material changes versus the prior comparable period
- Revenue accelerated, with Q3 up 53% year over year; management attributed growth primarily to customer expansion and the Seal acquisition.
- Operating loss narrowed as a share of revenue, to 13% from 18%, but the absolute quarterly operating loss increased. Net loss widened, partly alongside lower interest income and foreign-currency remeasurement losses.
- Operating cash flow and free cash flow improved materially, supported by higher noncash expenses and increased contract liabilities from advance customer billings. Deferred contract acquisition and fulfillment costs also consumed more cash.
- International revenue grew 77% in Q3 and represented 20% of revenue, compared with 17% a year earlier.
Outlook, commentary and risks
The filing provides no specific quantitative revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, infrastructure, international operations and product functionality; it also expects cost of revenue and operating expenses to increase in absolute dollars. Management noted strong pandemic-related demand for digital agreements, but warned that demand could become volatile. Travel and hospitality were among industries with slower or declining spending.
COVID-19 risks include weaker customer spending, churn, late or unpaid invoices, delayed buying decisions and pricing pressure. Other disclosed risks include sustained operating losses, reliance on e-signature, competition, service availability and cybersecurity, privacy and regulatory compliance, and the execution and integration of acquisitions. The company disclosed prior security incidents, including an April 2020 attack on an isolated testing environment that resulted in source-code exfiltration; it said the incidents had not affected operations, products or services. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
DocuSign acquired Seal Software for approximately $184.7 million in cash, net of acquired cash, and acquired Liveoak Technologies for approximately $48.4 million in consideration, primarily stock and assumed options. Seal contributed $5.4 million of Q3 revenue and a $9.2 million net loss, excluding acquired-intangible amortization. The purchase-price allocations were preliminary; goodwill increased by $154.1 million from the acquisitions. Management said no pending legal proceeding was expected to have a material adverse effect. The company was under an Israel Tax Authority examination for tax years 2015–2018.
Important facts for investors to verify
- Whether customer growth, renewals and expansion sustain the exceptional reported revenue growth as pandemic-driven demand and customer spending evolve.
- How billings, contract liabilities and collections develop, and whether operating cash flow remains strong after acquisition and RSU tax-withholding outflows.
- Whether gross margins and GAAP profitability improve as operating investment, stock-based compensation and acquired-intangible amortization continue.
- The cash, share-dilution and balance-sheet implications of conversion of the $575 million notes, including the effect of the capped calls.
- How successfully DocuSign integrates Seal and Liveoak and realizes product and commercial benefits from the acquisitions.