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 2021 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 2021 Annual Report on Form 10-K. Our fiscal year ends
Executive overview of third quarter results
DocuSignaccelerates the process of doing business for companies and simplifies life for their customers and employees. We accomplish this by transforming the foundational element of business: the agreement. We offer the world's #1 e-signature solution as the core part of our broader software suite for automating the agreement process, which we call the DocuSignAgreement 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 across e-signature and addresses the broader agreement process. As a result, over one million customers and one billion users worldwide utilize DocuSignto create, upload and send documents for multiple parties to sign electronically. The DocuSignAgreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes. DocuSigneSignature integrates with popular business apps, and our functionality can also be embedded using our API. Finally, the DocuSignAgreement 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.| 2022 Form 10Q | 22 -------------------------------------------------------------------------------- We generate substantially all our revenue from sales of subscriptions, which accounted for 97% and 96% of our revenue in the three months ended October 31, 2021and 2020 and 97% and 95% in the nine months ended October 31, 2021and 2020. Our subscription fees include the use of our software suite 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 in the three and the nine months ended October 31, 2021and 2020. 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 suite, which helps drive customer retention and expansion of the use of the DocuSignAgreement Cloud. We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses ("VSBs"), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships 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 350 off-the-shelf, prebuilt integrations with the applications that many of our customers already use-including those offered by Google, Microsoft, NetSuite, Oracle, Salesforce, SAP, SAP SuccessFactors and Workday-so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning various industries and countries 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. To demonstrate this growth over time, the number of our customers with greater than $300,000in annual contract value (measured in billings) has increased from approximately 30 customers as of January 31, 2013to 785 customers as of October 31, 2021. 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. COVID-19 Update The COVID-19 pandemic continues to have large-scale, rapidly shifting effects on workforces, organizations, customers, economies and financial markets globally, contributing to increased market volatility. We are continuing to monitor the effects of the pandemic across our business. These effects are dependent on highly uncertain future developments, including the duration, spread and severity of the pandemic, the emergence of coronavirus variants, the actions undertaken to contain the virus or mitigate its impacts, including actions mandated by governments and health authorities and changing public health directives or restrictions, the speed and breadth of vaccination progress, vaccine efficacy against COVID-19 variants, current or future travel restrictions and how quickly and to what extent normal global economic and operating conditions can or will resume, all of which are highly uncertain and cannot be accurately predicted. The effects of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods as a result of our subscription-based business model. During the pandemic, we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers, including by shifting to a largely remote work environment, imposing work-related travel restrictions for all employees and shifting most planned customer, partner and investor events to virtual-only formats. We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, as well as expenses associated with planning and risk mitigation for reopening of our offices and resumption of in-person business activities, and may incur similar expenses in the future. The impact of these and any other operational changes we may implement is uncertain, but as of the date of this filing they have not materially affected our ability to maintain operations. We have experienced a substantial increase in overall demand for our products, particularly DocuSigneSignature, since the beginning of the pandemic as the shift to remote, digital business operations caused more organizations to adopt or expand their use of digital agreements. This acceleration of the digital transformation of agreements contributed to growth in our customer base and increases in customer spending across industries and regions. While we have experienced a significant increase in paying customers and revenue due to the pandemic, there is no assurance that we will experience a continued increase in paying customers or that new or existing customers will continue to utilize our products at similar levels after the COVID-19 pandemic has tapered globally. As vaccinations DocuSign, Inc.| 2022 Form 10Q | 23 -------------------------------------------------------------------------------- become widely available and the pandemic wanes, this may result in a decline in paying customers once individuals are no longer working or attending school from home and/or their priorities change. As the pandemic continued in 2021, 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. This may result in differing levels of demand for our products as our customers' priorities, resources, financial conditions and economic outlook change, which could adversely affect or increase the volatility of our financial results. Additionally, as a service provider to U.S.state and federal government agencies, we are subject to a variety of COVID-19 vaccination, testing, and related health and safety requirements, including the requirement that our U.S.-based employees be fully vaccinated against COVID-19 by January 4, 2022, absent a medical or religious exemption. We are not able to currently predict the full impact this requirement may have on our business. See the section below titled " Risk Factors" for further discussion of the potential impact of the COVID-19 pandemic, including the conclusion or tapering of the pandemic, on our business, financial condition and results of operations.
Financial results for the three and nine months ended
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 Total revenue
$ 545,463 $ 382,923 $ 1,526,385 $ 1,022,149Total costs and expenses 548,821 431,393 1,563,091 1,171,107 Total stock-based compensation expense 109,440 80,920 290,536 203,238 Loss from operations (3,358) (48,470) (36,706) (148,958) Net loss (5,676) (58,491) (39,531) (170,855) Net cash provided by operating activities 105,411 57,443 418,675 234,721 Purchases of property and equipment (15,392) (19,393) (43,926) (64,144)
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 of
October 31, 2021, we had a total of over 1.1 million customers, including over 159,000 enterprise and commercial customers, compared to almost 820,000 customers and over 110,000 enterprise and commercial customers as of October 31, 2020. 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 suite. 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 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 suite, 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 suite, 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.| 2022 Form 10Q | 24 --------------------------------------------------------------------------------
Maintain and extend contracts with existing companies 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 suite. Several of our largest enterprise customers have deployed our software suite 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 suite.
Increase in international income
Our international revenue represented 23% and 20% of our total revenue in the three months ended
October 31, 2021and 2020 and 22% and 19% in the nine months ended October 31, 2021and 2020. We started our international selling efforts in English-speaking common law countries, such as Canada, the United Kingdomand Australia, where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions and the United States("U.S."). We have since made significant investments to be able to offer our products in select civil law countries. For example, in Europe, we have Standards-Based Signature ("SBS") technology tailored for electronic IDentification, Authentication and trust Services ("eIDAS"). SBS supports signatures that involve digital certificates, including those specified in the European Union's("EU") eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition in Japan, 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 existing U.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 suite and underlying infrastructure and technology to meet the needs of our customers across industries. Our acquisitions of
Seal Softwareand Liveoak Technologies, intended to bring additional functionality to our DocuSignAgreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.
Components of the results of operations
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 suite and our technical infrastructure and access to customer support, which includes phone or email support. We typically invoice customers in advance on an annual basis. We recognize subscription revenue ratably over the term of the contract
subscription period starting on
the date access to our software suite is provided. Professional Services and Professional services revenue includes fees associated with new Other Revenue customers requesting deployment and
integration 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.| 2022 Form 10Q | 25 --------------------------------------------------------------------------------
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 income
Cost of subscription revenues The cost of subscription revenues consists mainly of expenses related to
hosting our software suite 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 of software and
maintenance costs, third parties
hosting fees, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired 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 suite 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 selling 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, our investments in growth and other factors. Selling and Marketing Expense Selling 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 selling 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 new
Functionality. We are awaiting research
and development expense to increase in
absolute dollars as we invest in
the enhancement of our software suite. 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,
related to information technology
to internal systems, accounting and finance.
These expenses too
include certain third-party consulting
services, some facilities
costs, allocated overhead costs, and
depreciation of the 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 is primarily comprised of contractual interest expense, discount amortization and the amortization of debt issuance costs on our convertible senior notes (the âNotesâ).
DocuSign, Inc.| 2022 Form 10Q | 26 --------------------------------------------------------------------------------
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 (profit) income tax
Our provision for (benefit from) 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 our
U.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 these U.S.and foreign deferred tax assets will be realized by way of expected future taxable income. DocuSign, Inc.| 2022 Form 10Q | 27 --------------------------------------------------------------------------------
Discussion of the results of operations
The following table summarizes our historical consolidated statements of operating results:
Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except As % of As % of As % of As % of percentages) 2021 revenue 2020 revenue 2021 revenue 2020 revenue Revenue: Subscription
$ 528,57397 % $ 366,61796 % $ 1,473,26697 % $ 971,18295 % Professional services and other 16,890 3 16,306 4 53,119 3 50,967 5 Total revenue 545,463 100 382,923 100 1,526,385 100 1,022,149 100 Cost of revenue: Subscription 84,579 16 69,905 18 247,105 16 186,645 18 Professional services and other 31,396 5 27,926 8 87,892 6 75,833 8 Total cost of revenue 115,975 21 97,831 26 334,997 22 262,478 26 Gross profit 429,488 79 285,092 74 1,191,388 78 759,671 74 Operating expenses: Sales and marketing 275,619 51 209,944 55 777,110 51 576,729 56 Research and development 102,603 19 73,362 19 282,670 19 191,387 19 General and administrative 54,624 9 50,256 13 168,314 10 140,513 14 Total operating expenses 432,846 79 333,562 87 1,228,094 80 908,629 89 Loss from operations (3,358) (1) (48,470) (13) (36,706) (2) (148,958) (15) Interest expense (1,485) - (7,769) (2) (4,826) - (23,013) (2) Interest income and other income (expense), net (940) - (311) - 4,034 - 6,032 1 Loss before provision for (benefit from) income taxes (5,783) (1) (56,550) (15) (37,498) (2) (165,939) (16) Provision for (benefit from) income taxes (107) - 1,941 - 2,033 1 4,916 1 Net loss $ (5,676)(1) % $ (58,491)(15) % $ (39,531)(3) % $ (170,855)(17) %
The following discussion and analysis covers the three and nine months ended.
Revenue Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 Revenue: Subscription
$ 528,573 $ 366,61744 % $ 1,473,266 $ 971,18252 % Professional services and other 16,890 16,306 4 % 53,119 50,967 4 % Total revenue $ 545,463 $ 382,92342 % $ 1,526,385 $ 1,022,14949 % Subscription revenue increased by $162.0 million, or 44%, in the three months ended October 31, 2021and by $502.1 million, or 52%, in the nine months ended October 31, 2021. The increase was primarily due to a combination of the acquisition of new customers and upsells to our existing customer base. 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.| 2022 Form 10Q | 28 --------------------------------------------------------------------------------
Cost of revenues and gross margin
Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 Cost of revenue: Subscription
$84,579 $69,90521 % $247,105 $186,64532 % Professional services and other 31,396 27,926 12 % 87,892 75,833 16 % Total cost of revenue $115,975 $97,83119 % $334,997 $262,47828 % Gross margin: Subscription 84 % 81 % 3 pts 83 % 81 % 2 pts Professional services and other (86) % (71) % (15) pts (65) % (49) % (16) pts Total gross margin 79 % 74 % 5 pts 78 % 74 % 4 pts
The cost of subscription revenue has increased
Increases in the three months ended
October 31, 2021primarily consisted of: ? $4.3 millionin personnel costs and $2.3 millionin stock-based compensation driven by higher headcount and annual salary increases; and ? $4.0 millionin operating costs to support our platform and the growth in our revenue, including increases in hosting costs and processing fees. Increases in the nine months ended October 31, 2021primarily consisted of: ? $19.6 millionin personnel costs and $7.0 millionin stock-based compensation driven by higher headcount and annual salary increases; ? $15.5 millionin 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; and ? $13.3 millionin depreciation and amortization, which reflects the impact of higher data center and capitalized software assets as well as the higher existing technology intangible assets from acquisitions. Cost of professional services and other revenue increased $3.5 million, or 12%, in the three months ended October 31, 2021and $12.1 million, or 16%, in the nine months ended October 31, 2021, primarily due to an increase in personnel costs driven by higher headcount, annual salary increases and stock-based compensation. Sales and Marketing Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 Sales and marketing $275,619 $209,94431 % $777,110 $576,72935 % Percentage of revenue 51 % 55 % 51 % 56 % Sales and marketing expenses increased $65.7 million, or 31%, in the three months ended October 31, 2021and $200.4 million, or 35%, in the nine months ended October 31, 2021primarily driven by investments in workforce and technology support to accommodate demand for our products and increased interest in digital transformation of agreements. Increases in the three months ended October 31, 2021primarily consisted of: ? $38.9 millionin personnel costs and $12.8 millionin stock-based compensation due to higher headcount, annual salary increases, higher commissions in line with higher sales and higher payroll taxes; and ? $8.7 millionin marketing and advertising expense due to higher spend on online advertising platforms to help capture the continued market interest in our product offering. Increases in the nine months ended October 31, 2021primarily consisted of: ? $113.5 millionin personnel costs and $40.9 millionin stock-based compensation due to higher headcount, annual salary increases, higher commissions in line with higher sales and higher payroll taxes; and DocuSign, Inc.| 2022 Form 10Q | 29 -------------------------------------------------------------------------------- ? $32.4 millionin marketing and advertising expense due to higher spend on online advertising platforms to help capture the continued market interest in our product offering; and ? $12.2 milliondue to higher information technology costs. Research and Development Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 Research and development $102,603 $73,36240 % $282,670 $191,38748 % Percentage of revenue 19 % 19 % 19 % 19 % Research and development expenses increased $29.2 million, or 40%, in the three months ended October 31, 2021and $91.3 million, or 48%, in the nine months ended October 31, 2021, primarily due to investments in workforce and technology support to accommodate growth. Personnel costs and stock-based compensation increased $15.6 millionand $11.2 millionin the three months ended October 31, 2021and $50.3 millionand $31.2 millionin the nine months ended October 31, 2021, due to higher headcount and annual salary increases, which also reflects the impact of the addition of Seal and Liveoak employees to our workforce. Additionally, the increase in the nine months ended October 31, 2021includes $7.2 milliondue to higher information technology costs.
General and administrative
Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 General and administrative
$54,624 $50,2569 % $168,314 $140,51320 % Percentage of revenue 9 % 13 % 10 % 14 % General and administrative expenses increased $4.4 million, or 9%, in the three months ended October 31, 2021and $27.8 million, or 20%, in the nine months ended October 31, 2021, primarily due to investments in workforce and technology support to accommodate growth. Personnel costs and stock-based compensation increased $1.4 millionand $1.5 millionin the three months ended October 31, 2021and $10.0 millionand $5.3 millionin the nine months ended October 31, 2021, due to higher headcount and the impact of annual salary increases. The expense for the nine months ended October 31, 2021also includes $3.9 millionimpairment of operating lease right-of-use assets.
Other income and expenses
Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except for 2021 versus 2021 versus percentages) 2021 2020 2020 2021 2020 2020 Interest expense
$1,485 $7,769(81) % $4,826 $23,013(79) % Percentage of revenue - % 2 % - % 2 % Interest income and other income (expense), net $(940) $(311)202 % $4,034 $6,032(33) % Percentage of revenue - % - % - % 1 % Interest expense decreased by $6.3 millionin the three months ended October 31, 2021and $18.2 millionin the nine months ended October 31, 2021, primarily due to lower amortization expense under ASU 2020-06 effective February 1, 2021. Interest income and other income, net, for the nine months ended October 31, 2021included $4.8 millionadjustments to fair value of certain strategic investments resulting from observable price changes that occurred during the quarter ended April 30, 2021. DocuSign, Inc.| 2022 Form 10Q | 30 --------------------------------------------------------------------------------
Liquidity and capital resources
Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations. As of
October 31, 2021, we had $818.5 millionin cash and cash equivalents and short-term investments. We also had $89.5 millionin 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 financings. In September 2018, we issued and sold $575.0 millionin aggregate principal amount of 0.5% Convertible Senior Notes due 2023, of which $524.8 millionhas been settled as of October 31, 2021. In January 2021, we issued and sold $690.0 millionin aggregate principal amount of 0% Convertible Senior Notes due 2024. In January 2021we entered into a $500.0 millioncredit facility, which may be increased by an additional $250.0 millionsubject to customary terms and conditions. The credit facility is available until January 11, 2026, to optimize our capital structure and strengthen our balance sheet. There were no outstanding borrowings under the credit facility as of October 31, 2021.
Further details on these transactions are described in Note 6 of 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 have generated positive cash flows from operations in recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of
$1.4 billionas of October 31, 2021. We may not achieve profitability in 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 direct 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 or 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 $18.0 millionin the nine months ended October 31, 2021, compared to an increase of $11.4 millionin the nine months ended October 31, 2020, which resulted in a $29.4 millionincrease 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 $161.0 millionin the nine months ended October 31, 2021, compared to an increase of $172.5 millionin the nine months ended October 31, 2020, which resulted in an $11.5 milliondecrease in cash provided by operating activities. Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite. 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.| 2022 Form 10Q | 31 --------------------------------------------------------------------------------
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended October 31, (in thousands) 2021 2020 Net cash provided by (used in): Operating activities
$ 418,675 $ 234,721Investing activities (157,685) 100,064 Financing activities (320,691) (202,435)
Effect of foreign exchange on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash flow from operating activities
Cash provided by operating activities was
$418.7 millionand $234.7 millionfor the nine months ended October 31, 2021and 2020. The improvement of $184.0 millioncompared to the prior year, was primarily the result of increased sales and the related cash collections, partially offset by higher operating costs to support growth and increased headcount.
Cash flow from investing activities
For the nine months ended
For the nine months ended
Cash flow from financing activities
For the nine months ended
October 31, 2021, cash used in financing activities of $320.7 millionwas primarily driven by $255.9 millionin net payments related to our equity plans, as compared to $202.4 millionin the prior year for similar activities. We also used $64.8 millionfor 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, point 1 of this 10-Q form.
We do not have a special purpose entity and we do not enter into off-balance sheet financing agreements.
DocuSign, Inc.| 2022 Form 10Q | 32 --------------------------------------------------------------------------------
Critical accounting conventions and estimates
We prepare our financial statements in accordance with
U.S.generally accepted accounting principles ("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 accounting policies and critical estimates as described in our 2021 Annual Report on Form 10-K.
Recent accounting positions
Refer to Note 1 to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
DocuSign, Inc.| 2022 Form 10Q | 33 --------------------------------------------------------------------------------
Non-GAAP financial measures and other key indicators
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. 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, acquisition-related expenses, fair value adjustments to strategic investments, impairment of operating lease right-of-use assets, 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. 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.| 2022 Form 10Q | 34 --------------------------------------------------------------------------------
Reconciliation of gross margin and gross margin:
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 GAAP gross profit
$429,488 $285,092 $1,191,388 $759,671Add: Stock-based compensation 15,365 11,782 40,902 30,010 Add: Amortization of acquisition-related intangibles 2,766 3,376 9,266 7,856 Add: Employer payroll tax on employee stock transactions 1,800 1,676 6,695 4,450 Non-GAAP gross profit $449,419 $301,926 $1,248,251 $801,987GAAP gross margin 79 % 74 % 78 % 74 % Non-GAAP adjustments 3 % 5 % 4 % 4 % Non-GAAP gross margin 82 % 79 % 82 % 78 % GAAP subscription gross profit $443,994 $296,712 $1,226,161 $784,537Add: Stock-based compensation 8,095 5,777 21,652 14,655 Add: Amortization of acquisition-related intangibles 2,766 3,376 9,266 7,856 Add: Employer payroll tax on employee stock transactions 873 722 3,286 2,183 Non-GAAP subscription gross profit $455,728 $306,587 $1,260,365 $809,231GAAP subscription gross margin 84 % 81 % 83 % 81 % Non-GAAP adjustments 2 % 3 % 3 % 2 % Non-GAAP subscription gross margin 86 % 84 % 86 % 83 % GAAP professional services and other gross loss $(14,506) $(11,620) $(34,773) $(24,866)Add: Stock-based compensation 7,270 6,005 19,250 15,355 Add: Employer payroll tax on employee stock transactions 927 954 3,409 2,267 Non-GAAP professional services and other gross loss $(6,309) $(4,661) $(12,114) $(7,244)GAAP professional services and other gross margin (86) % (71) % (65) % (49) % Non-GAAP adjustments 49 % 42 % 42 % 35 % Non-GAAP professional services and other gross margin (37) % (29) % (23) % (14) %
Reconciliation of operating profit and operating margin:
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 GAAP loss from operations
$(3,358) $(48,470) $(36,706) $(148,958)Add: Stock-based compensation 109,440 80,920 290,536 203,238 Add: Amortization of acquisition-related intangibles 5,971 7,357 19,162 19,032 Add: Employer payroll tax on employee stock transactions 10,104 8,959 37,972 24,766 Add: Acquisition-related expenses - 336 387 7,962 Add: Impairment of operating lease right-of-use assets - - 3,892 - Non-GAAP income from operations $122,157 $49,102 $315,243 $106,040GAAP operating margin (1) % (13) % (2) % (15) % Non-GAAP adjustments 23 % 26 % 23 % 25 % Non-GAAP operating margin 22 % 13 % 21 % 10 % DocuSign, Inc.| 2022 Form 10Q | 35 --------------------------------------------------------------------------------
Reconciliation of net income (loss):
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 GAAP net loss
Add: Stock-based compensation
109,440 80,920 290,536 203,238 Add: Amortization of acquisition-related intangibles 5,971 7,357 19,162 19,032 Add: Employer payroll tax on employee stock transactions 10,104 8,959 37,972 24,766 Add: Acquisition-related expenses - 336 387 7,962 Add: Amortization of debt discount and issuance costs 1,255 7,044 3,848 20,828 Less: Fair value adjustments to strategic investments - - (5,270) - Add: Impairment of operating lease right-of-use assets - - 3,892 - Non-GAAP net income
$ 121,094 $ 46,125 $ 310,996 $ 104,971
Calculation of free cash flow:
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020
Net cash flow generated by operating activities
Less: Purchases of property, plant and equipment (15,392) (19,393)
(43,926) (64,144) Non-GAAP free cash flow
$ 90,019 $ 38,050 $ 374,749 $ 170,577Net cash (used in) provided by investing activities $ (52,808) $ 9,691
Net cash used in financing activities
Calculation of invoices:
Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 Revenue
$ 545,463 $ 382,923 $ 1,526,385 $ 1,022,149Add: Contract liabilities and refund liability, end of period 961,243 702,691 961,243 702,691 Less: Contract liabilities and refund liability, beginning of period (939,826) (638,790) (800,940) (522,201) Add: Contract assets and unbilled accounts receivable, beginning of period 18,067 20,395 21,020 15,082 Less: Contract assets and unbilled accounts receivable, end of period (19,708) (26,808) (19,708) (26,808) Add: Contract assets and unbilled accounts receivable by acquisitions - - - 6,589 Less: Contract liabilities and refund liability contributed by acquisitions - - - (9,344) Non-GAAP billings $ 565,239 $ 440,411 $ 1,688,000 $ 1,188,158 DocuSign, Inc.| 2022 Form 10Q | 36
Â© Edgar online, source