DocuSign, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended October 31, 2018. Financial statements are unaudited. Fiscal 2019 ends January 31, 2019.
Business context and results
DocuSign sells cloud-based agreement and e-signature services, primarily through subscriptions. Subscription revenue was 95% of revenue. The company reported more than 450,000 customers, including more than 50,000 enterprise and commercial customers, versus more than 350,000 and 35,000, respectively, a year earlier.
Key financial metrics
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $178.4 million | $130.6 million | $501.2 million | $369.6 million |
| Revenue growth | 37% | — | 36% | — |
| Gross margin, GAAP | 75% | 76% | 72% | 77% |
| Operating loss | $58.4 million | $12.3 million | $363.7 million | $45.4 million |
| Net loss | $52.8 million | $14.5 million | $360.2 million | $45.9 million |
| Net loss per share, diluted | $0.31 | $0.45 | $2.90 | $1.49 |
| Operating cash flow | $4.3 million | $11.6 million | $41.9 million | $23.0 million |
| Free cash flow, non-GAAP | $(4.3) million | $7.0 million | $22.9 million | $7.3 million |
At October 31, cash and cash equivalents were $1.094 billion; current assets were $1.266 billion and current liabilities $434.6 million. Convertible notes had a $575 million principal amount and $432.6 million net carrying value. Accumulated deficit was $862.5 million. Cash flow from investing included the $218.8 million SpringCM acquisition; financing included IPO and convertible-note proceeds.
Material changes and unusual items
- Revenue increased 37% in the quarter, driven mainly by subscription sales to new and existing customers and the addition of SpringCM. Subscription revenue grew 38% in the quarter; professional services and other revenue grew 17%.
- Quarterly GAAP gross margin declined one percentage point; nine-month margin declined five points. Professional services and other revenue had a GAAP gross loss of $7.4 million in the quarter, versus $1.2 million a year earlier.
- Operating expenses rose substantially: quarterly sales and marketing increased 68%, R&D 71%, and G&A 86%. Nine-month stock-based compensation was $361.7 million, including a $262.8 million cumulative charge when IPO registration effectiveness triggered vesting conditions on certain RSUs.
- SpringCM was acquired for approximately $218.8 million cash on September 4. It contributed $3.8 million revenue from acquisition through quarter-end; the purchase-price allocation was preliminary. Goodwill increased to $194.5 million.
- In September, DocuSign issued $575 million of 0.5% convertible senior notes due 2023, receiving $560.8 million net proceeds, and spent $67.6 million on capped calls intended to reduce potential dilution, subject to a cap. The notes are unsecured and have no financial covenants. They were not convertible as of October 31.
- The May IPO generated approximately $524.2 million net proceeds. A September follow-on offering consisted of stockholder sales; DocuSign received no proceeds.
- After quarter-end, on November 15, DocuSign settled 12.3 million RSUs, withheld 4.8 million shares, and remitted $186.2 million in cash for holder tax liabilities.
Outlook, risks, and contingencies
The filing provides no quantified forward guidance. Management expects subscription revenue to continue increasing as it develops functionality, attracts customers, and integrates SpringCM, while continuing to invest in sales, marketing, R&D, infrastructure, and international growth. Management expects operating losses for the foreseeable future, despite positive operating cash flow for the nine-month period, and says existing cash is expected to cover working-capital and capital-expenditure needs for at least 12 months. This liquidity statement predates the $186.2 million post-quarter RSU tax remittance.
Key risks include failure to sustain growth or achieve profitability; customer renewal and expansion, competition and pricing; execution and integration of SpringCM; cybersecurity, service availability, privacy and regulatory compliance; international and currency exposure; and potential dilution or cash demands from the convertible notes. The company disclosed intellectual-property litigation risk and stated it was not aware of proceedings expected to have a material adverse effect. It was under an Israel Tax Authority examination for tax years 2013–2016. Management reported disclosure controls were effective as of October 31, while internal-control changes related to SpringCM integration remained under evaluation.
Important facts for investors to verify
- Whether revenue growth and customer retention/expansion continue, and whether SpringCM contributes meaningfully after integration.
- How much of the large GAAP loss reflects IPO-triggered and ongoing stock-based compensation, and the potential dilution from outstanding awards.
- Whether professional-services economics and consolidated gross margins improve as the business scales.
- Cash and liquidity after the $186.2 million RSU tax remittance, and the company’s cash generation relative to acquisition and investment needs.
- The terms and potential conversion, repayment, and dilution effects of the $575 million notes and capped calls.
- Final SpringCM purchase accounting, integration costs, and realization of anticipated benefits; also monitor the Israel tax examination and disclosed IP claims.