Business context and reporting period
DocuSign, Inc. filed this unaudited Form 10-Q for the quarter ended July 31, 2019, the second quarter of fiscal 2020. The company provides subscription software for electronic signatures and broader agreement workflows, including capabilities added through its September 2018 SpringCM acquisition.
Financial performance and position
- Revenue: Q2 revenue was $235.6 million, up 41% year over year. Subscription revenue was $220.8 million (+39%); professional services and other revenue was $14.8 million (+72%). For the six months, revenue was $449.6 million, up 39%.
- Profit and margins: Q2 gross profit was $174.4 million; GAAP gross margin was 74%, down from 78%. Operating loss was $64.7 million (27% of revenue), versus $37.7 million (23%) a year earlier. Net loss was $68.6 million, or $0.39 per share, versus $36.7 million, or $0.22 per share. Six-month net loss was $114.4 million.
- Cash flow: Q2 operating cash flow was $26.4 million and free cash flow, as defined by the company, was $11.9 million. For the six months, operating cash flow was $72.1 million and free cash flow was $42.3 million; capital expenditures were $29.8 million.
- Liquidity and debt: At July 31, cash and cash equivalents were $224.3 million; cash, cash equivalents and investments totaled $930.4 million, including $180.1 million of long-term investments. The company reported $575.0 million principal amount of 0.5% convertible notes due 2023, carried net at $451.9 million, and operating lease liabilities with a present value of $167.7 million.
- Other metrics: Remaining performance obligations were $628.6 million, with 53% expected to be recognized in the following 12 months. The company reported more than 535,000 customers. International revenue was 18% of total revenue in both the quarter and six-month period.
Material changes versus the prior comparable period
- Revenue grew substantially, led by subscriptions to new and existing customers and the addition of SpringCM offerings. Q2 subscription cost growth outpaced revenue growth, contributing to lower total gross margin.
- Q2 operating expenses rose to $239.2 million from $168.4 million; sales and marketing increased 45%, R&D 41%, and G&A 32%.
- Interest expense increased to $7.3 million in Q2 from $0.05 million, primarily from the notes’ discount and issuance-cost amortization.
- Six-month 2018 expenses and losses included a large IPO-related catch-up in stock-based compensation. Stock-based compensation was $309.9 million for the six months ended July 2018 versus $98.1 million in 2019; this makes the year-over-year improvement in six-month GAAP losses and expense totals less indicative of underlying operating trends.
- Cash and cash equivalents declined from $517.8 million at January 31 to $224.3 million at July 31, while the company increased its marketable-securities holdings. Six-month investing cash outflow was $331.7 million, including net purchases of marketable securities and other investments.
Outlook, risks and unusual items
- Management said existing cash and cash equivalents should cover working capital and capital expenditure needs for at least 12 months, while noting expected operating losses for the foreseeable future and possible need for additional capital to support strategic initiatives.
- Management expects subscription revenue to continue increasing as it adds functionality and attracts customers, and expects continued investment in sales, marketing, product development, infrastructure and international growth. The filing provides no numeric earnings or revenue guidance.
- Key risks include sustaining customer acquisition, renewals and expansion; competition and pricing pressure; scaling operations and infrastructure; cybersecurity, privacy and regulatory compliance; and integrating SpringCM and realizing its expected benefits.
- In August 2019, after quarter-end, DocuSign settled two RPost patent cases and both were dismissed. The related settlement amount recorded at quarter-end was described as not material.
- Lease accounting adoption in February 2019 recognized $93.9 million of right-of-use assets and $121.8 million of lease liabilities at adoption; it did not materially affect the income or cash-flow statements. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer additions, renewals and expansion sustain the reported 39% subscription growth and support future billings and revenue.
- How gross margin and operating losses develop as hosting, personnel, sales and marketing costs rise.
- The composition and liquidity of the $930.4 million cash-and-investment balance, and cash needs related to RSU tax withholding, capital expenditure and leases.
- The notes’ conversion, cash-settlement and dilution exposure, including the terms and limits of the capped calls.
- Progress integrating SpringCM, and any material developments in litigation, privacy regulation or cybersecurity risks.