DOCUSIGN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 2022 Annual Report on Form 10-K. As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our 2022 Annual Report on Form 10-K. Our fiscal year endsJanuary 31 .
Executive Overview of First Quarter Results
Overview
DocuSign offers the world's leading electronic signature product, enabling an agreement to be signed electronically on a wide variety of devices, from virtually anywhere in the world, securely. This is the foundation of theDocuSign Agreement Cloud, which allows organizations to do business efficiently and effectively, while providing better experiences for customers and employees. We offer the world's #1 e-signature product as the core part of our broader software platform that automates and connects the agreement process, which we call theDocuSign Agreement Cloud. It is designed to allow companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process or transaction digital. It provides comprehensive functionality acrossDocuSign eSignature and addresses the broader agreement process. As a result, over 1.2 million customers and more than a billion users worldwide utilizeDocuSign to create, upload and send documents for multiple parties to sign electronically. TheDocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes. TheDocuSign Agreement Cloud integrates with popular business apps, and our functionality can also be embedded using our application programming interfaces ("APIs"). Finally, theDocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant. We generally offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned. Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients. Our customers have the flexibility to put a large number of documents in an Envelope. For a number of use cases, such as buying a home, multiple Envelopes are used over the course of the process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform.DocuSign, Inc. | 2023 Form 10Q | 19 -------------------------------------------------------------------------------- We generate substantially all our revenue from sales of subscriptions, which accounted for 97% and 96% of our revenue in the three months endedApril 30, 2022 and 2021. Our subscription fees include the use of our software platform and access to customer support. Subscriptions generally range from one to three years, and substantially all our multi-year customers pay in annual installments, one year in advance. We also generate revenue from professional and other non-subscription services, which consists primarily of fees associated with providing new customers deployment and integration services. Other revenue includes amounts derived from sales of on-premises solutions. Professional services and other revenue accounted for the remainder of total revenue. We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers' deployment of our software platform, which helps drive customer retention and expansion of the use of theDocuSign Agreement Cloud. We offer subscriptions to our software platform to businesses at all scales, from global enterprise down to local very small businesses ("VSBs") (including professionals, sole proprietorships, nonprofits and individuals). We sell to customers through multiple channels. Our go-to-market strategy relies on our direct sales force and partnerships to sell to enterprises and commercial businesses and our web-based self-service channel to sell to VSBs, which we believe is the most cost-effective way to reach our smallest customers. We offer more than 400 off-the-shelf, prebuilt integrations with the applications that many of our customers already use-including those offered by Google, Microsoft, Oracle,Salesforce , SAP, and Workday-so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning across virtually all industries and around the world with no significant customer concentration. No single customer accounted for more than 10% of total revenue in any of the periods presented. We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers. The number of our customers with greater than$300,000 in annual contract value (measured in billings) has increased from 673 customers as ofApril 30, 2021 to 886 customers as ofApril 30, 2022 . Each of our customer types has a different purchasing pattern. VSBs tend to become customers quickly with very little to no direct sales or customer support interaction and generate smaller average contract values, while commercial and enterprise customers typically involve longer sales cycles, larger contract values and greater expansion opportunities for us.DocuSign, Inc. | 2023 Form 10Q | 20 --------------------------------------------------------------------------------
COVID-19 Update
As the pandemic continued in 2022, the rate of vaccinations, emerging COVID-19 variants, and shifting governmental policies on vaccination mandates and other pandemic restrictions have had variable impacts on different regions of the world and areas of the economy. This has caused and may continue to cause new, existing and potential customers to experience rapidly changing conditions and disruptions to their businesses. While we experienced a significant increase in paying customers and revenue during the pandemic, we later experienced periods in which the urgency of customer demand slowed. It can be difficult to predict customer demand, especially as our customers' priorities, resources and economic outlook change, along with other shifting market conditions. These shifts have occurred and may in the future occur more quickly than we anticipate. Additionally, due to our subscription-based business model, the full effects of these changes may not be fully reflected in our results of operations until future periods. If the COVID-19 pandemic continues to have a substantial impact on our employees', partners' or customers' productivity or if the abatement of the pandemic results in decreased demand or a more challenging sales environment, our results of operations and overall financial performance may be harmed.
See Risk Factors for further discussion of the potential impact of the COVID-19 pandemic, including the impact to our business, financial condition and results of operations.
Financial Results for the Three Months Ended
Three Months Ended April 30,
(in thousands) 2022 2021
Total revenue $ 588,692 $ 469,078
Total costs and expenses 607,918 479,815
Total stock-based compensation expense 110,723 81,136
Loss from operations (19,226) (10,737)
Net loss (27,373) (8,354)
Net cash provided by operating activities 196,286 135,597
Purchases of property and equipment (21,709) (12,596)
Cash, cash equivalents, restricted cash and investments were
Key Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Growing Customer Base We are highly focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. As ofApril 30, 2022 , we had a total of over 1.2 million customers, including almost 182,000 enterprise and commercial customers, compared to over 980,000 customers and over 135,000 enterprise and commercial customers as ofApril 30, 2021 . We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution or a distinct business unit of a large company that has an active contract to access our software platform. We define enterprise customers as companies generally included in the Global 2000. We define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and small-to-medium-sized businesses, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. We define VSBs as companies with fewer than 10 employees. We refer to total customers as all enterprises, commercial businesses and VSBs. We believe that our ability to increase the number of customers using our software platform, particularly the number of enterprise and commercial customers, is an indicator of our market penetration, the growth of our business and our potential future business opportunities. By increasing awareness of our software platform, further developing our sales and marketing expertise and continuing to build features tuned to different industry needs, we have expanded the diversity of our customer base to include organizations of all sizes across nearly every industry.DocuSign, Inc. | 2023 Form 10Q | 21 --------------------------------------------------------------------------------
Retaining and Expanding Contracts with Existing Enterprise and Commercial Customers
Many of our customers have increased spend with us as they have expanded their use of our offerings in both existing and new use cases across their front or back office operations. Our enterprise and commercial customers may start with just one use case and gradually implement additional use cases across their organization once they see the benefits of our software platform. Several of our largest enterprise customers have deployed our software platform for hundreds of use cases across their organizations. We believe there is significant expansion opportunity with our customers following their initial adoption of our software platform.
Increasing International Revenue
Our international revenue represented 25% and 21% of our total revenue in the
three months ended
We started our international selling efforts in English-speaking common law countries, such asCanada , theUK andAustralia , where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions and theU.S. We have since made significant investments to be able to offer our products in select civil law countries. For example, inEurope , we offer Standards-Based Signature ("SBS") technology tailored for theEU's electronic Identification,Authentication and Trust Services ("eIDAS") regulations. SBS supports signatures that involve digital certificates, including those specified in theEU's eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition inJapan , we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement. We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existingU.S. -based customers manage agreements across their international businesses. We have experienced increased demand across multiple regions and are expanding our sales and marketing resources to capitalize on the potential growth of these markets. Additionally, we expect to continue to develop and enhance our strategic partnerships in key international markets as we grow internationally.
Investing for Growth
We believe that our market opportunity is large, and we plan to invest to continue to support further growth. This includes expanding our sales headcount and increasing our marketing initiatives. We also plan to continue to invest in expanding the functionality of our software platform and underlying infrastructure and technology to meet the needs of our customers across industries. Our acquisitions intend to bring additional functionality to ourDocuSign Agreement Cloud offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.
Components of Results of Operations
Revenue
We derive revenue primarily from the sale of subscriptions and, to a lesser extent, professional services.
Subscription Revenue Subscription revenue consists of fees for the use of our software
platform and our technical infrastructure and access to customer
support, which includes phone or emailsupport. We typically invoice
customers in advance on an annual basis. We recognize subscription
revenue ratably over the term of the contract subscription period
beginning on the date access to our software platform is provided.
Professional Services and Professional services revenue includes fees associated with new
Other Revenue customers requesting deployment andintegration services. We price
professional services on a time and materials basis and on a fixed fee
basis. We generally have standalone value for our professional
services and recognize revenue based on standalone selling price as
services are performed or upon completion of services for fixed fee
contracts. Other revenue includes amounts derived from sales of
on-premises solutions.
DocuSign, Inc. | 2023 Form 10Q | 22 --------------------------------------------------------------------------------
Overhead Allocation
We allocate shared overhead costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology, information security and recruiting costs to all departments based on headcount. As such, these allocated overhead costs are reflected in each cost of revenue and operating expense category.
Cost of Revenue
Cost of Subscription Revenue Cost of subscription revenue primarily consists of expenses related to
hosting our software platform and providing support. These expenses
consist of employee-related costs, including salaries, bonuses,
benefits, stock-based compensation and other related costs, associated
with our technical infrastructure, customer success and customer
support. These expenses also consist ofsoftware and maintenance costs,
third-party hosting fees, outside services associated with the delivery
of our subscription services, amortization expense associated with
capitalized internal-use software andacquired intangible assets, credit
card processing fees and allocated overhead costs.
Cost of Professional Services Cost of professional services and other revenue consists primarily of
and Other Revenue personnel costs for our professional services delivery team,
travel-related costs and allocated overhead costs.
Gross Profit and Gross Margin
Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, timing and amount of investment to maintain or expand our hosting capability, the growth of our software platform support and professional services team, stock-based compensation expenses, amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead costs.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. As our revenues continue to increase,
our operating expenses as a percentage of revenue may increase or decrease at
different rates, driven by the timing of revenue recognition, the timing of
hiring, our investments in growth and other factors.
Sales and Marketing Expense Sales and marketing expense consists primarily of personnel costs,
including sales commissions. These expenses also include expenditures
related to advertising, marketing, promotional events and brand
awareness activities, as well as allocated overhead costs. We expect
sales and marketing expense to continue to increase in absolute dollars
as we enhance our product offerings and implement marketing strategies.
Research and Development Research and development expense consists primarily of personnel costs.
Expense These expenses also include non-personnel costs, such as
subcontracting, consulting and professional fees for third-party
development resources, as well as allocated overhead costs. Our
research and development efforts focus on maintaining and enhancing
existing functionality and adding newfunctionality. We expect research
and development expense to increase in absolute dollars as we invest in
the enhancement of our software platform.
General and Administrative General and administrative expense consists primarily of
Expense employee-related costs for those employees providing administrative
services such as legal, human resources,information technology related
to internal systems, accounting and finance. These expenses also
include certain third-party consulting services, certain facilities
costs, allocated overhead costs, and impairment of operating lease
right-of-use assets. We expect general and administrative expense to
increase in absolute dollars to support the overall growth of our
operations.
Interest Expense
Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs on our Notes.
DocuSign, Inc. | 2023 Form 10Q | 23 --------------------------------------------------------------------------------
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net, consists primarily of interest earned on our cash, cash equivalents and investments, changes in fair value of our strategic investments and foreign currency transaction gains and losses.
Provision for Income Taxes
Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock-based compensation. We have a valuation allowance against ourU.S. consolidated group and certain foreign deferred tax assets. We expect to maintain this valuation allowance for the foreseeable future or until it becomes more likely than not that the benefit of theseU.S. and foreign deferred tax assets will be realized by way of expected future taxable income.DocuSign, Inc. | 2023 Form 10Q | 24 --------------------------------------------------------------------------------
Discussion of Results of Operations
The following table summarizes our historical consolidated statements of
operations data:
Three Months Ended April 30,
As % of As % of
(in thousands, except percentages) 2022 revenue 2021 revenueRevenue:
Subscription$ 569,251 97 %$ 451,935 96 % Professional services and other 19,441 3 17,143 4 Total revenue 588,692 100 469,078 100 Cost of revenue: Subscription 105,159 18 78,071 17 Professional services and other 27,257 4 27,171 5 Total cost of revenue 132,416 22 105,242 22 Gross profit 456,276 78 363,836 78 Operating expenses: Sales and marketing 300,697 51 239,119 51 Research and development 112,227 19 85,416 18 General and administrative 62,578 11 50,038 11 Total operating expenses 475,502 81 374,573 80 Loss from operations (19,226) (3) (10,737) (2) Interest expense (1,649) - (1,672) - Interest income and other income (expense), net (4,650) (1) 6,037 1 Loss before provision for income taxes (25,525) (4) (6,372) (1) Provision for income taxes 1,848 1 1,982 1 Net loss$ (27,373) (5) %$ (8,354) (2) %
The following discussion and analysis is for the three months ended
Revenue
Three Months Ended
April 30, 2022 versus
(in thousands, except for percentages) 2022 2021 2021
Revenue:
Subscription$ 569,251 $ 451,935 26 % Professional services and other 19,441 17,143 13 % Total revenue$ 588,692 $ 469,078 25 % Subscription revenue increased$117.3 million , or 26%, in the three months endedApril 30, 2022 . The increase was primarily due to the expansion of existing customers and the addition of new customers. This growth was mainly driven by an increase in sales to our mid-market and enterprise customers through our direct and indirect sales channels. We continue to invest in a variety of customer programs and initiatives, which, along with expanded customer use cases, have helped increase our subscription revenue over time.
We expect subscription revenue to continue to increase as existing customers increase their usage across their organizations while we offer new functionality, attract new customers and fully realize the potential of our acquisitions in our product offerings.
DocuSign, Inc. | 2023 Form 10Q | 25 --------------------------------------------------------------------------------
Cost of Revenue and Gross Margin
Three Months Ended April 30,
(in thousands, except for percentages) 2022 2021 2022 versus 2021
Cost of revenue:
Subscription $105,159 $78,071 35 %
Professional services and other 27,257 27,171 - %
Total cost of revenue $132,416 $105,242 26 %
Gross margin:
Subscription 82 % 83 % (1) pts
Professional services and other (40) % (58) % 18 pts
Total gross margin 78 % 78 % - pts
Cost of subscription revenue increased $27.1 million , or 35%, in the three
months ended April 30, 2022 , primarily driven by higher costs to support our
growing customer base. Significant increases consisted of:
?$9.5 million in personnel costs and $4.6 million in stock-based compensation
expense driven by higher headcount and annual salary increases; and
?$7.0 million in operating costs to support our platform and the growth in our
revenue, including increases in hosting costs, authentication and processing
fees and subscription reseller fees.
Sales and Marketing
Three Months Ended April 30,
(in thousands, except for percentages) 2022 2021 2022 versus 2021
Sales and marketing $300,697 $239,119 26 %
Percentage of revenue 51 % 51 %
Sales and marketing expenses increased $61.6 million , or 26%, in the three
months ended April 30, 2022 primarily driven by investments in workforce and
technology support to accommodate demand for our products and increased interest
in digital transformation of agreements. Significant increases consisted of:
?$35.5 million in personnel costs and $9.3 million in stock-based compensation
expense due to higher headcount, annual salary increases, higher commissions in
line with higher sales and higher payroll taxes; and
?$8.9 million in marketing and advertising expense due to higher spend on online
advertising platforms to help capture the continued market interest in our
product offering.
Research and Development
Three Months Ended April 30, 2022 versus
(in thousands, except for percentages) 2022 2021 2021
Research and development $112,227 $85,416 31 %
Percentage of revenue 19 % 18 %
Research and development expenses increased
General and Administrative
Three Months Ended April 30, 2022 versus
(in thousands, except for percentages) 2022 2021 2021
General and administrative $62,578 $50,038 25 %
Percentage of revenue 11 % 11 %
DocuSign, Inc. | 2023 Form 10Q | 26
--------------------------------------------------------------------------------
General and administrative expenses increased $12.5 million , or 25%, in the
three months ended April 30, 2022 , primarily due to investments in workforce and
technology support to accommodate growth. Personnel costs and stock-based
compensation expense increased $3.0 million and $4.4 million in the three months
ended April 30, 2022 , due to higher headcount and the impact of annual salary
increases.
Other Income and Expense
Three Months Ended April 30, 2022 versus
(in thousands, except for percentages) 2022 2021 2021
Interest expense $1,649 $1,672 (1) %
Percentage of revenue - % - %
Interest income and other income (expense), net $(4,650) $6,037 (177) %
Percentage of revenue (1) % 1 %
Interest income and other income (expense), net, for the three months ended
April 30, 2021 included $5.1 million in adjustments to fair value of certain
strategic investments resulting from observable price changes that occurred
during the quarter. Additionally, foreign currency exchange losses increased
$5.4 million due to rate fluctuations, primarily the weakening of the euro and
the British pound compared to the U.S. dollar, in the three months ended April
30, 2022 .
DocuSign, Inc. | 2023 Form 10Q | 27
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations. As ofApril 30, 2022 , we had$967.6 million in cash and cash equivalents and short-term investments. We also had$94.8 million in long-term investments that provide additional capital resources. We finance our operations primarily through payments by our customers for use of our product offerings and related services and through debt financing. InSeptember 2018 , we issued and sold$575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, of which$537.9 million has been settled as ofApril 30, 2022 . InJanuary 2021 , we issued and sold$690.0 million in aggregate principal amount of 0% Convertible Senior Notes due 2024. InJanuary 2021 , we entered into a$500.0 million credit facility, which may be increased by an additional$250.0 million subject to customary terms and conditions. The credit facility is available for five years untilJanuary 11, 2026 , to optimize our capital structure and strengthen our balance sheet. There were no outstanding borrowings under the credit facility as ofApril 30, 2022 .
Further details of these transactions are described in Note 6 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q.
We were in compliance with all debt covenants at
We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. While we generated positive cash flows from operations in the recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of$1.5 billion as ofApril 30, 2022 . We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business. We typically invoice our customers annually in advance. Therefore, a substantial source of our cash is from such invoices, which are included on our consolidated balance sheets in contract liabilities until revenue is recognized and in accounts receivable until cash is collected. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Our accounts receivable decreased by$140.1 million in the three months endedApril 30, 2022 , compared to a decrease of$73.2 million in the three months endedApril 30, 2021 , which resulted in a$66.9 million increase in cash provided by operating activities year over year. Contract liabilities consist of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. Our contract liabilities increased by$18.7 million in the three months endedApril 30, 2022 , compared to an increase of$51.6 million in the three months endedApril 30, 2021 . The year-over-year decrease resulted in a$32.9 million decrease in cash provided by operating activities. Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, inflation, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software platform, the expansion of sales and marketing activities and the continuing market acceptance of our software platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.DocuSign, Inc. | 2023 Form 10Q | 28 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three Months Ended April 30,
(in thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 196,286 $ 135,597
Investing activities (62,514) (70,506)
Financing activities 1,350 (112,954)
Effect of foreign exchange on cash, cash equivalents and restricted cash
(5,180) 779
Net change in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
Cash provided by operating activities was$196.3 million and$135.6 million for the three months endedApril 30, 2022 and 2021. The year-over-year improvement of$60.7 million was primarily the result of increased sales and higher cash collections, partially offset by higher operating costs to support growth and increased headcount.
Cash Flows from Investing Activities
For the three months endedApril 30, 2022 , net cash used in investing activities of$62.5 million was primarily driven by$38.7 million net purchases of marketable securities and$21.7 million purchases of property and equipment as we continued to invest in data center build outs to support our growing operations and capitalized software development projects. For the three months endedApril 30, 2021 , cash used in investing activities of$70.5 million was primarily driven by$57.4 million net purchases of marketable securities and$12.6 million in purchases of property and equipment.
Cash Flows from Financing Activities
For the three months endedApril 30, 2022 , cash provided by financing activities was primarily driven by$1.4 million proceeds associated with equity plans, net of payments for tax withholding on share settlements. For the three months endedApril 30, 2021 , cash used in financing activities was primarily driven by$76.3 million payments for tax withholding on share settlements, net of proceeds associated with equity plans and$36.7 million in repayments of our 2023 Notes.
Obligations and Commitments
Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancellable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities. Refer to Note 6 and Note 7 to the Condensed Consolidated Financial Statements, included in
Part I, Item 1 of this Form 10-Q.
We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with GAAP. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, valuation of acquired intangible assets in business combinations and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our 2022 Annual Report on Form 10-K.
DocuSign, Inc. | 2023 Form 10Q | 29 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
There have been no accounting pronouncements that are significant or potentially significant to the Company.
Non-GAAP Financial Measures and Other Key Metrics
To supplement our consolidated financial statements, which are prepared and
presented in accordance with GAAP, we use certain non-GAAP financial measures,
as described below, to understand and evaluate our core operating performance.
These non-GAAP financial measures, which may be different than similarly titled
measures used by other companies, are presented to enhance investors' overall
understanding of our financial performance and should not be considered a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP.
We believe that these non-GAAP financial measures provide useful information
about our financial performance, enhance the overall understanding of our past
performance and future prospects, and allow for greater transparency with
respect to important metrics used by our management for financial and
operational decision-making. We present these non-GAAP measures to assist
investors in seeing our financial performance using a management view, and
because we believe that these measures provide an additional tool for investors
to use in comparing our core financial performance over multiple periods with
other companies in our industry. However, these non-GAAP measures are not
intended to be considered in isolation from, a substitute for, or superior to
our GAAP results.
Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations,
non-GAAP operating margin and non-GAAP net income: We define these non-GAAP
financial measures as the respective GAAP measures, excluding expenses related
to stock-based compensation, employer payroll tax on employee stock
transactions, amortization of acquisition-related intangibles, amortization of
debt discount and issuance costs, fair value adjustments to strategic
investments, and, as applicable, other special items. The amount of employer
payroll tax-related items on employee stock transactions is dependent on our
stock price and other factors that are beyond our control and do not correlate
to the operation of the business. When evaluating the performance of our
business and making operating plans, we do not consider these items (for
example, when considering the impact of equity award grants, we place a greater
emphasis on overall stockholder dilution rather than the accounting charges
associated with such grants). We believe it is useful to exclude these expenses
in order to better understand the long-term performance of our core business and
to facilitate comparison of our results to those of peer companies and over
multiple periods. In addition to these exclusions, we subtract an assumed
provision for income taxes to calculate non-GAAP net income. We utilize a fixed
long-term projected tax rate in our computation of the non-GAAP income tax
provision to provide better consistency across the reporting periods. For fiscal
2023, we determined the projected non-GAAP tax rate to be 20% tax rate.
Free cash flow: We define free cash flow as net cash provided by operating
activities less purchases of property and equipment. We believe free cash flow
is an important liquidity measure of the cash that is available (if any), after
purchases of property and equipment, for operational expenses, investment in our
business and to make acquisitions. Free cash flow is useful to investors as a
liquidity measure because it measures our ability to generate or use cash in
excess of our capital investments in property and equipment. Once our business
needs and obligations are met, cash can be used to maintain a strong balance
sheet and invest in future growth.
Billings: We define billings as total revenues plus the change in our contract
liabilities and refund liability less contract assets and unbilled accounts
receivable in a given period. Billings reflects sales to new customers plus
subscription renewals and additional sales to existing customers. Only amounts
invoiced to a customer in a given period are included in billings. We believe
billings is a key metric to measure our periodic performance. Given that most of
our customers pay in annual installments one year in advance, but we typically
recognize a majority of the related revenue ratably over time, we use billings
to measure and monitor our ability to provide our business with the working
capital generated by upfront payments from our customers.
DocuSign, Inc. | 2023 Form 10Q | 30
--------------------------------------------------------------------------------Reconciliation of gross profit (loss) and gross margin:
Three Months Ended April
30,
(in thousands) 2022 2021
GAAP gross profit $456,276 $363,836
Add: Stock-based compensation 15,695 11,553
Add: Amortization of acquisition-related intangibles 2,403 3,171
Add: Employer payroll tax on employee stock transactions 791 2,774
Non-GAAP gross profit $475,165 $381,334
GAAP gross margin 78 % 78 %
Non-GAAP adjustments 3 % 3 %
Non-GAAP gross margin 81 % 81 %
GAAP subscription gross profit $464,092 $373,864
Add: Stock-based compensation 10,613 6,018
Add: Amortization of acquisition-related intangibles 2,403 3,171
Add: Employer payroll tax on employee stock transactions 508 1,442
Non-GAAP subscription gross profit $477,616 $384,495
GAAP subscription gross margin 82 % 83 %
Non-GAAP adjustments 2 % 2 %
Non-GAAP subscription gross margin 84 % 85 %
GAAP professional services and other gross loss $(7,816) $(10,028)
Add: Stock-based compensation 5,082 5,535
Add: Employer payroll tax on employee stock transactions 283 1,332
Non-GAAP professional services and other gross loss $(2,451) $(3,161)
GAAP professional services and other gross margin (40) % (58) %
Non-GAAP adjustments 27 % 40 %
Non-GAAP professional services and other gross margin (13) % (18) %
Reconciliation of income (loss) from operations and operating margin:
Three Months Ended April 30,
(in thousands) 2022 2021
GAAP loss from operations $(19,226) $(10,737)
Add: Stock-based compensation 110,723 81,136
Add: Amortization of acquisition-related intangibles 5,608 6,529
Add: Employer payroll tax on employee stock transactions 5,099 16,283
Non-GAAP income from operations $102,204 $93,211
GAAP operating margin (3) % (2) %
Non-GAAP adjustments 20 % 22 %
Non-GAAP operating margin 17 % 20 %
DocuSign, Inc. | 2023 Form 10Q | 31
--------------------------------------------------------------------------------Reconciliation of net income (loss):
Three Months Ended
April 30,
(in thousands) 2022 2021
GAAP net loss $ (27,373) $ (8,354)
Add: Stock-based compensation 110,723 81,136
Add: Amortization of acquisition-related intangibles 5,608 6,529
Add: Employer payroll tax on employee stock transactions 5,099 16,283
Add: Amortization of debt discount and issuance costs 1,284 1,319
Less: Fair value adjustments to strategic investments (340) (5,119)
Add: Income tax effect of non-GAAP adjustments (1) (17,522) -
Non-GAAP net income $ 77,479 $ 91,794
(1) Represents the income tax adjustment using our estimated non-GAAP tax rate
of 20%. Estimating a non-GAAP tax rate of 20%, the income tax effect of non-GAAP
adjustments for the three months ended April 30, 2021 was $16.8 million .
Computation of free cash flow:
Three Months Ended
April 30,
(in thousands) 2022 2021
Net cash provided by operating activities $ 196,286 $ 135,597
Less: Purchases of property and equipment (21,709) (12,596)
Non-GAAP free cash flow $ 174,577 $ 123,001
Net cash used in investing activities $ (62,514) $ (70,506)
Net cash (used in) provided by financing activities
Computation of billings:
Three Months Ended
April 30,
(in thousands) 2022 2021
Revenue $ 588,692 $ 469,078
Add: Contract liabilities and refund liability, end of period 1,074,460 857,969
Less: Contract liabilities and refund liability, beginning of period
(1,049,106) (800,940) Add: Contract assets and unbilled accounts receivable, beginning of period
18,273 21,021
Less: Contract assets and unbilled accounts receivable, end of
period (18,756) (19,737)
Non-GAAP billings $ 613,563 $ 527,391
DocuSign, Inc. | 2023 Form 10Q | 32--------------------------------------------------------------------------------
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