DocuSign, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended April 30, 2018; fiscal year ends January 31. Unaudited results are compared with the three months ended April 30, 2017. DocuSign provides a subscription-based digital agreement and e-signature platform.
Financial performance and position
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Revenue | $155.8 million | $113.5 million |
| Subscription revenue | $148.2 million | $106.8 million |
| Gross profit / gross margin | $97.5 million / 63% | $86.4 million / 76% |
| Operating loss | $267.6 million | $19.3 million |
| Net loss | $270.7 million | $19.4 million |
| Operating cash flow | $15.0 million | $(0.7) million |
| Capital expenditures | $6.2 million | $6.8 million |
- Revenue rose 37% year over year; subscription revenue increased 39% and represented 95% of revenue. Professional services and other revenue increased 14% to $7.6 million.
- GAAP gross margin fell 13 percentage points to 63%. Subscription gross margin was 78%, versus 82%; professional services and other gross margin was negative 240%, versus negative 18%.
- Operating expenses were $365.1 million, compared with $105.6 million. Stock-based compensation was $269.8 million, including $262.8 million recognized after the IPO registration statement became effective and satisfied RSU performance conditions. Excluding stock-based compensation and acquired-intangible amortization, the company reported non-GAAP operating income of $4.7 million, versus a non-GAAP operating loss of $8.3 million. These non-GAAP measures exclude substantial expenses.
- Operating cash flow improved year over year, largely because of non-cash stock compensation and changes in working capital. Non-GAAP free cash flow was $8.8 million, versus negative $7.5 million.
- At April 30, cash and cash equivalents were $269.4 million; restricted cash was $0.4 million. Current assets totaled $415.7 million and current liabilities $362.5 million. Contract liabilities totaled $290.5 million. Accumulated deficit was $773.0 million.
- No borrowings were outstanding under the $80 million credit facility at quarter-end. The facility expired in May 2018, and DocuSign had not extended it as of the filing date. The filing reports no other debt balance.
- International revenue was $26.0 million, or 17% of total revenue, compared with 15% in the prior-year quarter. Remaining performance obligations were $405.7 million; the company expected to recognize 42% in the fiscal year ending January 31, 2019.
Material changes and notable events
- The principal driver of the sharply higher GAAP loss and lower reported margins was IPO-triggered RSU compensation expense. Operating expenses also rose with personnel, sales and marketing investment, and IPO/public-company costs.
- On May 1, 2018, after quarter-end, DocuSign completed its IPO: it issued 19.3 million shares at $29 per share and received net proceeds of $524.8 million. Existing stockholders sold an additional 5.6 million shares; DocuSign received no proceeds from those sales. Preferred shares converted into common stock. The reported April 30 balance sheet does not include the IPO proceeds or conversion.
- The company expected substantial cash outflows for tax withholding when pre-IPO RSUs settle. It estimated an approximately $224.9 million cash remittance using specified assumptions, including a 40% withholding rate and a $49.81 share price; the actual amount could differ materially with share price and vesting.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management expects continued investment in sales and marketing, product development, infrastructure and international expansion, and expects operating losses for the foreseeable future.
- Management said existing cash and cash equivalents were expected to cover working capital and capital expenditure needs for at least 12 months; the subsequent IPO added net proceeds of $524.8 million. The company also noted that RSU tax remittances could consume a substantial portion of cash.
- Key risks include sustained losses and uncertain profitability; competition and customer retention or expansion; scaling technology and operations; cybersecurity, service availability and third-party hosting; privacy and regulatory compliance, including the GDPR; foreign-exchange exposure; and the ability to manage rapid growth. The company cited a 2017 incident involving temporary access to a non-core announcements system containing email addresses.
- The filing says no known legal proceeding was expected to have a material adverse effect, while also warning of intellectual-property litigation exposure and describing lawsuits as a risk. It reports an ongoing Israeli tax examination for tax years 2013–2016 and $7.8 million in gross uncertain tax benefits, including interest and penalties.
- Operating lease commitments were $116.4 million, and commitments under an enterprise cloud partnership were $6.3 million. Unused letters of credit associated with leases totaled $9.9 million.
Important facts for investors to verify
- How much of the quarterly loss and margin deterioration reflects the one-time IPO-related RSU charge, and how should ongoing stock-based compensation be assessed?
- Whether revenue growth, billings and the $405.7 million remaining performance obligation translate into durable renewals, customer expansion and cash generation.
- The actual timing and cash cost of RSU tax withholding, compared with the filing’s estimate, and the effect on post-IPO liquidity.
- How DocuSign manages liquidity and financing after the credit facility expired without extension.
- Whether professional services economics improve, and whether adjusted operating performance can convert into sustained GAAP profitability.
- Developments in intellectual-property litigation, the Israeli tax examination, GDPR compliance and cybersecurity controls.