DocuSign, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2022. Fiscal year ends January 31. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
DocuSign provides a subscription-based platform for preparing, signing, managing and automating agreements. Subscriptions generated 97% of revenue. At quarter-end, the company reported over 1.3 million customers, including approximately 202,000 enterprise and commercial customers. No customer accounted for more than 10% of revenue.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $645.5 | $545.5 | $1,856.3 | $1,526.4 |
| Subscription revenue | $624.1 | $528.6 | $1,798.5 | $1,473.3 |
| Gross margin, GAAP | 80% | 79% | 79% | 78% |
| Operating loss, GAAP | $(27.4) | $(3.4) | $(87.7) | $(36.7) |
| Net loss | $(29.9) | $(5.7) | $(102.3) | $(39.5) |
| Net loss per share, diluted | $(0.15) | $(0.03) | $(0.51) | $(0.20) |
| Operating cash flow | $52.5 | $105.4 | $369.7 | $418.7 |
| Free cash flow (non-GAAP) | $36.1 | $90.0 | $316.1 | $374.7 |
- Quarterly revenue increased 18% year over year; nine-month revenue increased 22%. Subscription revenue growth was attributed to new customers and expansion within existing customers.
- Quarterly operating expenses were $543.4 million, including $28.1 million of restructuring charges. General and administrative expense rose 57% year over year; sales and marketing rose 14%, and research and development rose 13%.
- Stock-based compensation was $140.8 million in Q3 and $392.8 million for the nine months. Non-GAAP operating margin was 23% for Q3 versus 22% a year earlier, and 19% for the nine months versus 21%; these measures exclude stock compensation and other specified items.
- Nine-month operating cash flow declined $49.0 million year over year, which management attributed primarily to higher operating costs and slower growth in contract liabilities. Nine-month billings, a non-GAAP measure, were $1,920.7 million versus $1,688.0 million.
Liquidity, debt and commitments
- At October 31, cash and cash equivalents were $632.6 million; current and noncurrent investments were $342.7 million and $129.8 million, respectively. Total cash, cash equivalents and investments were approximately $1.1 billion.
- Current assets were $1,480.4 million and current liabilities were $1,449.5 million, implying working capital of approximately $30.9 million.
- Outstanding convertible note principal totaled approximately $727.1 million: $37.1 million of 0.5% notes due 2023, classified as current, and $690.0 million of 0% notes due 2024. The $500 million revolving credit facility had no borrowings; the company reported compliance with its covenants.
- The company expects existing cash, cash equivalents and marketable securities to cover working capital and capital expenditures for at least 12 months, but noted it expects operating losses for the foreseeable future. A cloud-provider agreement entered in May 2022 carried a $175 million minimum commitment through FY2028, with $165.5 million remaining at quarter-end; this was excluded from the filing’s listed contractual-obligations table.
Outlook, risks and unusual items
- No specific quantitative revenue, earnings or margin guidance is provided in this 10-Q. Management said it expects subscription revenue to continue increasing, while also expecting continued investment and operating losses for the foreseeable future.
- A restructuring plan authorized in Q3 targets improved operating margin, scale and profitability. The company reported $28.1 million of Q3 charges, primarily employee termination benefits, and said most charges were expected in Q3 and Q4 FY2023. The plan included a workforce reduction of approximately 9%, expected to be substantially complete by fiscal year-end.
- Management cited uncertain customer demand as pandemic-related urgency eased, alongside inflation, rising interest rates and broader economic volatility. Other significant risks include customer retention and expansion, competition, dependence on eSignature, cybersecurity and service availability, privacy regulation, and execution of international growth.
- Legal matters include a securities class action alleging misleading statements about business prospects during the pandemic, related derivative cases, and litigation concerning former CEO Dan Springer’s board status. The company moved to dismiss the securities complaint and disputes Springer’s claim; the board-status case was set for trial in March 2023. The filing does not quantify potential losses.
- Allan Thygesen became CEO in October 2022 following leadership changes. A new ERP system launched in September; management reported disclosure controls were effective and noted changes to certain financial reporting controls associated with the implementation.
Key facts for investors to verify
- Whether revenue growth, billings and contract-liability trends indicate sustained demand and renewal/expansion momentum.
- Whether restructuring delivers durable expense savings, and how operating costs and GAAP losses evolve.
- The scale and persistence of stock-based compensation, its effect on dilution, and the gap between GAAP and non-GAAP results.
- Liquidity and cash generation relative to the 2023 note maturity, the 2024 notes and the remaining cloud commitment.
- Developments in the securities and board litigation, leadership transitions, and the ERP system’s effect on reporting controls.