DocuSign, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended January 31, 2019. Fiscal Q4 refers to the three months ended January 31, 2019. Amounts are in U.S. dollars.
Business context
DocuSign sells cloud-based electronic-signature and agreement-workflow software, primarily through subscriptions. It reported more than 475,000 paying customers and 17% of revenue from outside the U.S. SpringCM, acquired in September 2018, expanded its products into document generation and contract lifecycle management.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $701.0 million | $518.5 million | +35% |
| Subscription revenue | $663.7 million | $484.6 million | +37% |
| Gross profit / gross margin | $508.5 million / 73% | $400.2 million / 77% | Margin down 4 points |
| Operating loss | $426.3 million | $51.7 million | Loss widened |
| Net loss | $426.5 million | $52.3 million | Loss widened |
| Cash from operating activities | $76.1 million | $55.0 million | +$21.1 million |
| Free cash flow (company-defined) | $45.7 million | $36.1 million | +$9.6 million |
FY2019 gross margin was affected by a steep increase in professional-services costs; that business had a 100% gross loss margin, versus 2% in FY2018. Sales and marketing, R&D, and G&A expenses rose 94%, 101%, and 157%, respectively. The company recorded $411.0 million of stock-based compensation, including a $262.8 million charge when IPO-related RSU performance conditions were met. Excluding stock compensation and other specified items, DocuSign reported non-GAAP operating income of $15.2 million and non-GAAP net income of $17.5 million; these are non-GAAP measures, not GAAP profitability.
Fiscal Q4 results and comparison
| Metric | Q4 FY2019 | Q4 FY2018 |
|---|---|---|
| Revenue | $199.7 million | $148.9 million |
| Gross margin | 74% | 79% |
| Operating loss | $62.6 million | $6.3 million |
| Net loss | $66.2 million | $6.4 million |
Quarterly revenue increased about 34% year over year, while losses widened substantially. The prior-year comparison did not include the IPO-triggered RSU compensation charge recorded in Q1 FY2019; Q4 FY2019 also included elevated stock-compensation and payroll-tax costs from RSU settlements.
Cash, liquidity and debt
At January 31, 2019, cash and cash equivalents were $517.8 million and investments were $415.4 million, totaling $933.2 million. Working capital was $468.2 million; current assets were $984.5 million and current liabilities $516.3 million. Contract liabilities (largely advance subscription billings) totaled $388.8 million.
Operating cash flow was positive, but investing activities used $664.3 million, including $415.1 million for investments, $218.8 million for SpringCM and $30.4 million for property and equipment. The company reported $853.1 million of financing cash flow, principally from the IPO and convertible-note issuance. It said existing cash and cash equivalents were expected to cover working-capital and capital-expenditure needs for at least 12 months.
DocuSign issued $575.0 million principal amount of 0.5% convertible senior notes due 2023, receiving about $560.8 million net proceeds. The balance-sheet carrying amount was $438.9 million after debt discount and issuance costs. It spent $67.6 million on capped calls intended to reduce conversion dilution, subject to a cap. The notes are senior unsecured obligations; conversion, repurchase and potential dilution depend on specified conditions and terms.
Material changes, outlook and risks
- Revenue growth was strong, but GAAP losses expanded. Management cited continued investment in sales and marketing, product development, infrastructure, international growth and customer support; it expected operating losses to continue for the foreseeable future. The filing gives no numerical revenue or earnings guidance.
- The SpringCM acquisition cost $218.8 million in cash and contributed $9.8 million of revenue from its acquisition date through year-end. Integration and realization of expected benefits remain execution risks.
- The May 2018 IPO raised approximately $523.9 million net. In Q4, the company paid $215.3 million in employee RSU tax withholding and $14.4 million of employer payroll taxes related to RSU settlements, materially affecting cash use.
- Key disclosed risks include competition (particularly Adobe), customer renewal and expansion, cybersecurity and service availability, privacy and regulatory compliance (including GDPR and the forthcoming California Consumer Privacy Act), acquisition integration, international expansion, and sustained profitability. The company reported a prior 2017 incident involving temporary access to a non-core system containing email addresses.
- The company reported no legal proceeding expected to have a material adverse effect. Management said disclosure controls were effective; the 10-K did not include management’s internal-control-over-financial-reporting assessment because of the newly public company transition period.
- Management identified expected adoption of lease accounting as likely to add approximately $80–$100 million of right-of-use assets and $110–$130 million of lease liabilities, without an expected material income-statement or cash-flow effect.
Important facts for investors to verify
- How much of the FY2019 GAAP loss and margin decline reflects the IPO-related RSU charge and other unusual costs, and what ongoing stock-compensation expense should be expected.
- Whether subscription growth, customer renewals and expansion, and billings remain strong; FY2019 billings were $801.4 million versus $599.1 million in FY2018.
- Whether professional-services costs and margins improve, and whether SpringCM integration produces the anticipated product and revenue benefits.
- Cash conversion and liquidity after the RSU tax payments, acquisition spending, and investment purchases; also monitor the $575.0 million notes’ conversion, cash-settlement and maturity implications.
- Execution against growth plans alongside the company’s stated expectation of continued operating losses; no quantitative forward guidance is provided in this filing.