DocuSign, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended July 31, 2018, compared with the same periods in 2017. Fiscal year ends January 31. Figures below are in U.S. dollars; financial-statement amounts are rounded to millions.
Business context and reporting period
DocuSign sells subscriptions to its agreement-management platform, with e-signature as its core offering. Subscription revenue represented 95% of revenue in both the quarter and first half. The company completed its IPO on May 1, 2018, issuing 19.3 million shares for approximately $524.2 million in net proceeds; preferred stock converted to common stock at the IPO.
Financial performance and liquidity
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $167.0M | $125.5M | $322.9M | $239.0M |
| Gross profit / margin | $130.7M / 78% | $97.1M / 77% | $228.2M / 71% | $183.5M / 77% |
| Operating loss | $(37.7)M | $(13.8)M | $(305.3)M | $(33.0)M |
| Net loss | $(36.7)M | $(12.0)M | $(307.4)M | $(31.4)M |
| Net loss per share, diluted | $(0.22) | $(0.39) | $(3.01) | $(1.05) |
| Operating cash flow | $22.7M | $12.1M | $37.7M | $11.4M |
Q2 revenue rose 33% year over year; first-half revenue rose 35%. Subscription revenue grew 35% for the quarter and 37% for the first half. Q2 GAAP gross margin improved one percentage point, while first-half gross margin declined six points, mainly reflecting higher professional-services costs and IPO-related stock compensation. First-half free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $27.2M, versus $0.3M a year earlier.
At July 31, cash and cash equivalents were $818.8M, restricted cash was $0.4M, and total current assets and current liabilities were $968.1M and $389.6M, respectively. Total liabilities were $426.2M. The filing reports no outstanding borrowings; the $80M revolving credit facility expired in May 2018. Cash and restricted cash increased by $561.7M during the first half, principally due to IPO proceeds. Management said existing cash should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes and unusual items
- IPO-triggered stock compensation: The IPO registration statement’s effectiveness satisfied a performance condition on existing RSUs. DocuSign recorded a cumulative $262.8M expense for awards whose service condition had been met. Total stock-based compensation was $310.0M in the first half, versus $16.9M a year earlier; $299.4M related to RSUs. This materially increased reported operating and net losses. Q2 non-GAAP operating income was $4.2M, and first-half non-GAAP operating income was $8.9M; these measures exclude stock compensation and acquired-intangible amortization.
- SpringCM acquisition: The company agreed on July 31 to acquire SpringCM for approximately $220.2M in cash, subject to adjustments. The acquisition closed September 4, after quarter-end, and was funded with cash on hand. Management described it as broadening the platform beyond e-signature into document generation and contract lifecycle management.
- RSU settlement cash needs: Management expected substantial tax-withholding payments at initial RSU settlement. Based on stated assumptions, it estimated approximately $245M of cash remittances (and approximately $253.5M in aggregate tax obligation); actual amounts depend on share price and awards vesting.
- Future revenue: Remaining performance obligations were $424.0M at July 31; the company expected to recognize 29% during the fiscal year ending January 31, 2019. This is not formal revenue guidance.
Outlook, commentary, and key risks
Management expects continued investment in sales and marketing, research and development, infrastructure, international expansion, and platform functionality. It expects operating losses to continue for the foreseeable future and did not provide quantified forward financial guidance in the supplied filing text. Priorities include acquiring customers, expanding enterprise and commercial customer usage, and growing international revenue. Customers exceeded 425,000, including more than 45,000 enterprise and commercial customers, compared with over 330,000 and 35,000, respectively, a year earlier.
Key disclosed risks include sustained losses and uncertain path to profitability; competition, customer retention and sales-cycle variability; security incidents, service availability and reliance on third-party infrastructure; evolving privacy, data-protection and e-signature regulation; acquisition integration and realization of SpringCM benefits; international, currency and tax exposure; and significant RSU-related cash requirements. The company disclosed an Israel tax examination for 2013–2016 and $8M of uncertain tax benefits, including interest and penalties. It reported no legal proceeding expected to have a material adverse effect, but noted ongoing intellectual-property litigation risk and potential future claims. Management stated that disclosure controls were effective as of July 31 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of future GAAP losses and margin movement reflects recurring operating costs versus IPO-related RSU compensation, and how non-GAAP exclusions compare with economic dilution.
- The cash impact and timing of RSU tax withholding, SpringCM’s final purchase-price adjustments, and integration costs after the September 4 closing.
- Whether subscription growth, customer retention and expansion, billings, and remaining performance obligations support continued revenue growth.
- Whether professional-services economics and first-half gross margin recover as the business scales.
- Any material developments in intellectual-property litigation, the Israel tax examination, privacy compliance, or other disclosed contingencies.