DocuSign, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended April 30, 2019, compared with the three months ended April 30, 2018. DocuSign provides a subscription-based agreement platform centered on e-signature. The financial statements are unaudited.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $214.0 million | $155.8 million |
| Gross profit / gross margin | $161.9 million / 76% | $97.5 million / 63% |
| Operating loss | $42.4 million | $267.6 million |
| Net loss | $45.7 million | $270.7 million |
| Operating cash flow | $45.7 million | $15.0 million |
| Capital expenditures | $15.2 million | $6.2 million |
| Free cash flow, company-defined | $30.4 million | $8.8 million |
| Billings, company-defined | $215.0 million | $168.9 million |
- Subscription revenue was $201.5 million, up 36%; professional services and other revenue was $12.5 million, up 64%. Total revenue increased 37% year over year.
- Subscription gross margin was 84%, versus 78%; professional services and other gross margin was negative 51%, versus negative 240%.
- GAAP net loss per share was $0.27, versus $7.46. Weighted-average shares were 172.1 million versus 36.3 million.
- Non-GAAP operating income was $10.3 million versus $4.7 million; non-GAAP net income was $13.5 million versus $1.5 million. These company-defined measures exclude, among other items, stock-based compensation and specified acquisition- and debt-related costs.
Balance sheet, debt and liquidity
- At April 30, 2019, cash and cash equivalents were $236.5 million; cash, cash equivalents and investments totaled $936.8 million, including $184.7 million of noncurrent investments. Current assets were $922.1 million and current liabilities were $522.6 million.
- Operating cash flow was positive, but cash, cash equivalents and restricted cash declined $281.5 million during the quarter, mainly reflecting net purchases of marketable and strategic investments and RSU tax withholding payments.
- The company reported $575.0 million principal amount of 0.5% convertible senior notes due 2023; their net carrying amount was $445.4 million. The notes are senior unsecured, have no financial covenants, and were not convertible as of April 30, 2019. Their disclosed fair value was $615.4 million.
- Operating lease liabilities totaled $171.7 million. The company adopted lease accounting Topic 842 in February 2019, recognizing right-of-use assets and lease liabilities; adoption did not materially affect reported operations or cash flows.
Material changes and management commentary
- Revenue growth was attributed to sales to new and existing customers and the addition of SpringCM, acquired in September 2018. Management described the acquisition as extending DocuSign beyond e-signature into document generation and contract lifecycle management.
- The sharp improvement in GAAP operating loss and gross margin versus the prior-year quarter was substantially affected by the prior-year IPO-related cumulative stock-based compensation charge. Stock-based compensation was $42.3 million in the current quarter versus $269.8 million a year earlier; the comparison is therefore not solely a measure of underlying operating improvement.
- Remaining performance obligations were $574.0 million at quarter-end; DocuSign expected to recognize 53% over the following 12 months. Contract liabilities were $393.0 million.
- International revenue was $37.7 million, or 18% of total revenue, versus $26.0 million, or 17%, a year earlier. The company reported more than 500,000 customers, including 60,000 enterprise and commercial customers.
Outlook, risks and contingencies
- No specific quantified revenue or earnings guidance is provided in the filing. Management said existing cash and cash equivalents should cover working capital and capital expenditure needs for at least 12 months, while also expecting operating losses for the foreseeable future as it invests in growth.
- Management highlighted customer acquisition and retention, expansion within existing customers, international growth, product development, sales and marketing investment, and successful SpringCM integration as important to performance.
- Key risks include competition and pricing pressure; the ability to retain customers and sustain growth; cybersecurity, service availability and data protection; evolving privacy regulation, including GDPR and the upcoming CCPA; and execution and integration risks from acquisitions.
- Two RPost patent-infringement cases were pending, with trials scheduled for July 15 and December 9, 2019. The company intended to defend the claims, did not consider a loss probable, and could not estimate a reasonable range of possible loss.
- The company was under an Israel Tax Authority examination for tax years 2013–2016. Gross uncertain tax benefits were $9.7 million; management did not expect significant changes to unrecognized tax benefits over the next 12 months.
- A hypothetical 100-basis-point increase in interest rates was estimated to reduce investment portfolio fair value by $4.8 million; the filing says such losses would be realized only if securities were sold before maturity.
Important facts for investors to verify
- Whether subscription growth, renewals and expansion support continued revenue growth, and how the $574.0 million of remaining performance obligations converts into revenue.
- How much of reported profitability improvement reflects recurring operating performance versus the unusually high prior-year IPO-related stock compensation expense and the current quarter’s non-GAAP exclusions.
- Cash generation after investment purchases and RSU tax withholding, alongside the $575.0 million notes and long-term lease commitments.
- Progress integrating SpringCM and evidence that its products and capabilities contribute to customer adoption and revenue.
- Developments in the RPost litigation, Israel tax examination, and privacy and cybersecurity compliance risks.