S-1 1 d614105ds1.htm FORM S-1 Form S-1
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As filed with the U.S. Securities and Exchange Commission on September 11, 2018.

Registration Statement No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

DOCUSIGN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   91-2183967

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

221 Main St., Suite 1000

San Francisco, California 94105

(415) 489-4940

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel D. Springer

Chief Executive Officer

DocuSign, Inc.

221 Main St., Suite 1000

San Francisco, California 94105

(415) 489-4940

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Eric C. Jensen

David Peinsipp

Carlton Fleming

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

(650) 843-5000

 

Reginald D. Davis, Esq.

Yanira Wong, Esq.

DocuSign, Inc.

221 Main St., Suite 1000

San Francisco, California 94105

(415) 489-4940

 

Sarah K. Solum

Alan F. Denenberg

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

 

Large Accelerated Filer     ☐    Accelerated Filer     ☐    Non-accelerated Filer     ☒    Smaller Reporting Company     ☐
               Emerging growth company     ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per
Share(2)
  Proposed Maximum
Aggregate Offering
Price(2)
 

Amount of

Registration Fee

Common Stock, $0.0001 par value per share

 

9,269,632

  $57.97   $537,360,567   $66,901

 

 

(1)

Includes shares that the underwriters have the option to purchase from the selling stockholders.

(2)

Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act, on the basis of the average high and low sales price of the Registrant’s common stock as reported by The Nasdaq Global Select Market on September 7, 2018.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued September 11, 2018

8,060,550 Shares

 

 

LOGO

COMMON STOCK

 

 

The selling stockholders identified in this prospectus are offering 8,060,550 shares of our common stock. We are not selling any shares under this prospectus and we will not receive any proceeds from the sale of shares by the selling stockholders.

 

 

Our common stock is listed on The Nasdaq Global Select Market under the symbol “DOCU.” On September 10, 2018, the last reported sale price of our common stock on The Nasdaq Global Select Market was $53.93 per share.

Concurrently with this offering of common stock, we are offering to qualified institutional buyers, in an offering exempt from registration under the Securities Act of 1933, as amended, $400,000,000 aggregate principal amount of our     % Convertible Senior Notes due 2023, which we refer to as the notes, or a total of $460,000,000 aggregate principal amount of notes if the initial purchasers in the concurrent notes offering exercise in full their option to purchase additional notes. We cannot assure you that the concurrent notes offering will be completed or, if completed, on what terms it will be completed. The offering of common stock hereby is not contingent upon the consummation of the concurrent notes offering, and the concurrent notes offering is not contingent upon the consummation of the offering of common stock hereby. See “Concurrent Convertible Note Offering”.

 

 

This prospectus is not an offer to sell or a solicitation of an offer to buy any securities being offered in the concurrent offering of notes. See “Concurrent Convertible Note Offering” for a summary of the terms of the notes and a further description of the concurrent offering of notes.

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, are subject to certain reduced public company reporting requirements for this and future filings. Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

 

 

PRICE $         A SHARE

 

 

 

      

Price to
Public

      

Underwriting
Discounts

and
Commissions(1)

      

Proceeds to Selling
Stockholders

 

Per Share

       $                      $                      $              

Total

       $                      $                      $              

 

(1)

See “Underwriters” for a description of the compensation payable to the underwriters.

The selling stockholders have granted the underwriters the right to purchase up to an additional 1,209,082 shares of common stock.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2018.

 

 

 

MORGAN STANLEY   J.P. MORGAN   GOLDMAN SACHS & CO. LLC
CITIGROUP   BofA MERRILL LYNCH   DEUTSCHE BANK SECURITIES
JMP SECURITIES   KEYBANC CAPITAL MARKETS   PIPER JAFFRAY   WILLIAM BLAIR

                    , 2018


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LOGO

 

Transforming the foundation of doing business: the agreement.


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LOGO

 

How it was done before. Today, we DocuSign.


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Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we, the selling stockholders nor the underwriters take responsibility for, or can provide assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements, the financial statements of SpringCM Inc., the pro forma financial information of DocuSign and SpringCM Inc. and the related notes to all financial statements included elsewhere in this prospectus and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context otherwise requires, we use the terms “DocuSign,” “company,” “our,” “us,” and “we” in this prospectus to refer to DocuSign, Inc. and, where appropriate, our consolidated subsidiaries. Our fiscal year ends January 31. In addition, any reference to or description of our concurrent offering of     % Senior Convertible Notes due 2023, or notes, herein is wholly subject to the separate offering memorandum pursuant to which the notes are being offered. The notes are being offered only to qualified institutional buyers pursuant to such offering memorandum. We refer to our concurrent offering of notes as the “Convertible Note Offering.”

DOCUSIGN, INC.

DocuSign accelerates 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.

As the core part of our broader platform for automating the agreement process, we offer the world’s #1 e-signature solution. According to an October 2016 Forrester Research report, DocuSign is the “strongest brand and market share leader: the company name is becoming a verb.”

Our value is simple to understand: the traditional, paper-based agreement process is manual, slow, expensive, and error-prone. We eliminate the paper and automate the process. Doing so allows companies to measure turnaround time in minutes rather than days, substantially reduce costs, and largely eliminate errors.

Our cloud-based platform today enables more than 425,000 companies and hundreds of millions of users to make nearly every agreement, approval process, or transaction digital—from practically any device, virtually anywhere in the world, securely. Currently, 7 of the top 10 global technology companies, 18 of the top 20 global pharmaceutical companies, and 10 of the top 15 global financial services companies are DocuSign customers. Since our founding in 2003, our customers have completed over 700 million Successful Transactions on our platform. For additional information, see “Management’s Discussion and Analysis of Financial Results of Operation—Overview.”

We attribute much of our success to our market-leading investment in technology and infrastructure—more than $300 million in research and development since inception. The result is a platform that can handle the most demanding customer requirements. We deliver over 99.99% availability, provide highly advanced security, and offer hundreds of prebuilt partner connectors, along with an extensive API for embedding and connecting DocuSign with other systems—all behind a simple and friendly user interface.

Our customers range from the largest global enterprises to sole proprietorships, across industries around the world. Within a given company, our technology can be used broadly across business functions: contracts for sales, employment offers for human resources, and non-disclosure agreements for legal, among many others. For example, one of our customers has implemented more than 300 such use cases across its enterprise. This broad potential applicability drove our total addressable market, or TAM, to approximately $25 billion in 2017, according to our estimates. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the sections titled “Industry and Market Data” and “Business—Our Market Opportunity.”

To address our opportunity, our sales and marketing strategy focuses on enterprise businesses, which are generally businesses in the Global 2000, commercial businesses, which include mid-market and small- to



 

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medium-sized businesses, or SMBs, and very small businesses, or VSBs, which include professionals, sole proprietorships, and individuals. We rely 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 is the most cost effective way to reach our smallest customers. We offer subscriptions to our platform via product editions with varying functionality that is tuned to different customers’ needs—as well as features specific to particular geographies or industries. We also focus on customer adoption, success, and expansion—this helps us to deliver continued value and creates opportunities for increased usage.

In addition, our marketing and sales efforts often benefit from the fact that many of our prospects already know us from being signers—for example, if they have “DocuSigned” a job offer or completed the purchase of a home via our platform. These experiences tend to have a meaningful impact on people’s lives, which is reflected by our strong Net Promoter Score of 63 as of October 2017. As a result, when we sell into these people’s companies, we often find that awareness and favorability toward DocuSign is already present among buyers and influencers.

We have experienced rapid growth in recent periods. For the years ended January 31, 2016, 2017 and 2018, our revenue was $250.5 million, $381.5 million and $518.5 million, respectively, representing year-over-year growth of 52% and 36%, respectively. Our revenue grew from $239.0 million in the six months ended July 31, 2017 to $322.9 million in the six months ended July 31, 2018. For the years ended January 31, 2016, 2017 and 2018, our net loss was $122.6 million, $115.4 million and $52.3 million, respectively, and we generated a net loss of $31.4 million and $307.4 million in the six months ended July 31, 2017 and 2018, respectively.

Industry Background

Organizations are facing pressure to transform the process of doing business

Many organizations have undertaken major digital transformation projects across their front and back office to respond to increased customer and employee expectations in an accelerated world. While these projects have yielded positive results—improved efficiency, faster time to market, and an enhanced customer experience—they have been unable to completely address one of the most fundamental elements of doing business: the agreement.

Agreements are foundational to business, but have not yet been transformed

Every day, companies enter into millions of agreements with their customers, employees, and other parties with which they do business. Yet every day, the process is still fraught with friction and frustration. The traditional agreement process is outdated, costly, and unnecessarily difficult—and therefore ripe for transformation.

The signature has been a critical bottleneck in the agreement process

For most organizations, getting agreements signed has continued to require a physical signature, subjecting people to manual, paper-based processes. The requirement for a physical signature can mean the turnaround time to fully execute an agreement is measured in days or weeks. Paper-based signatures also create other challenges, including tracking the status of documents, collecting and managing documents from multiple sources, and human error.

Yet, despite all these shortcomings, paper-based processes have persisted. A primary reason is that the signature is the moment of legal commitment—one that can have disproportionately severe consequences if something goes wrong. And because of these high stakes, many companies have been wary of change.



 

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The hurdle for a technology solution to modernize the agreement process is high

We believe that any technology solution proposing to modernize the agreement process should address far more than the digital representation of the signature itself. It should also meet the complex and challenging requirements that businesses demand when transacting in real time on a global scale. We believe the most important include:

 

   

Security. In order to protect the integrity of documents and to prevent tampering, the technology needs to offer compliance with worldwide security standards, document encryption, and robust options to authenticate the parties in the signing process.

 

   

Availability. When a business trusts technology with the signature—the moment of legal commitment in the agreement process—that technology needs to be always available.

 

   

Global legal compliance and validity. To support business electronically across borders, the technology should accommodate signers and senders in a way that complies with regional regulations and industry standards around the world, such as the Electronic Signatures in Global and National Commerce Act, or ESIGN Act, in the United States and eIDAS in the European Union.

 

   

Interoperability. Because agreements often contain elements that cover multiple departments in a company—such as sales, finance, human resources, and legal—a technology solution should integrate seamlessly with these departments’ systems, such as customer relationship management, or CRM, enterprise resource planning, or ERP, and human capital management, or HCM.

 

   

Ease of use. For authors of agreements, it should be simple—all the way from document setup, to routing, execution, real-time monitoring, and archiving. For signers of agreements, they need to be able to review, sign and send quickly using any device, from anywhere in the world. For developers, the technology must be easy to integrate into existing systems and processes.

The rise of e-signature and its early adoption

For almost 20 years, technologies have been developed that start to address these issues. Foremost among them, electronic signature, or e-signature, enables agreements to be electronically routed, signed in a legally valid manner, and digitally managed.

Despite the technology’s immense promise, companies were initially reluctant to entrust one of their most fundamental business processes to any of the dozens of startups that emerged as potential players. However, over time, a substantial base of early-adopters concentrated around the few vendors that made significant investments in the technology, infrastructure, and compliance expertise necessary to create a critical mass of market confidence. Based largely on these vendors’ track records with customers, the research firm Gartner Inc., or Gartner, recently concluded that “having reached mainstream adoption, the real-world benefits of e-signature are predictable, broadly acknowledged and have been realized by thousands of organizations across millions of users.”

The use cases for e-signatures are extensive. Initial adoption began across front office, or customer-facing, functions—for example, financial services organizations using e-signatures for credit card applications or account opening, the real estate industry working to make the home-buying process digital, or healthcare and life sciences companies managing the clinical trial process. There are also countless use cases across a company’s back office, or internal, functions—including human resources, legal, supply chain management, and finance, among many others. Companies use e-signature to manage internal compliance, approve purchase orders, accelerate invoice processing, and complete new hire paperwork.

Today, while the usage of e-signature is increasing, we believe the technology is still early in its adoption cycle—both as a standalone offering and as the central pillar of a broader solution to streamline, accelerate, and manage the entire agreement process.



 

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The DocuSign Platform

Since inception in 2003, DocuSign has pioneered the development of e-signature, and has led the market in managing digital transactions that were formerly paper-based. Today, we offer the world’s #1 e-signature solution as the core part of our broader platform for automating the agreement process.

We help our customers address the challenge of modernizing the agreement process in the following ways:

 

   

Stringent security standards. We seek to meet the industry’s most rigorous security certification standards and use the strongest data encryption technologies that are commercially available.

 

   

Always on. The strength of our technology architecture has enabled us to deliver over 99.99% availability to our customers and users worldwide over the past 24 months.

 

   

Globally adopted and auditable. Our domain expertise in e-signature and the management of digital transactions has enabled us to create a truly global platform. We enable multiple parties in different jurisdictions to complete agreements and other documents in a legally valid manner. Once any agreement is electronically signed, our cryptographic technology secures documents and signatures with tamper-evident seals. We also offer a court-admissible Certificate of Completion for transactions—including party names, email addresses, public IP addresses, and a time-stamped record of individuals’ interactions with the document.

 

   

Embedded in widely used business applications. We offer more than 300 prebuilt integrations with applications such as those offered by Google, Microsoft, NetSuite, Oracle, Salesforce, SAP, SAP SuccessFactors, and Workday. Additionally, using our API, companies can integrate DocuSign into their own custom apps. These integrations allow customers to sign, send, and manage agreements from the systems in which they already conduct business.

 

   

Simple to use. For the past 15 years, we have sought to simplify and accelerate the process of doing business for all users of our platform—including authors, signers, and developers—streamlining and expediting even the most complex agreement processes.

We believe these key elements provide the following primary benefits:

 

   

Accelerated transactions and business processes. In 2017, 83% of all Successful Transactions on our platform were completed in less than 24 hours and 50% within 15 minutes—compared to the days or weeks common to traditional methods.

 

   

Improved customer and employee experience. Companies that use DocuSign eliminate the challenges of faxing, scanning, emailing, mailing, couriering, or other manual activities associated with the agreement process—giving back time, one of the things that people value most in the accelerated world that we live in.

 

   

Reduced cost of doing business. Based on a 2015 third-party study of certain of our enterprise customers we commissioned from IntelliCap, our enterprise customers realized an average of $36 of incremental value (with a typical range from $5 to $100 per document depending on use case) per transaction when they deployed DocuSign versus their existing paper-based processes. IntelliCap performed the study by engaging with customers to develop “a deep understanding of DocuSign’s value drivers based upon hundreds of use cases and thousands of data points.” The value generated was attributed to hard dollar savings—such as the reduced consumption of paper, printer and copier consumables, envelopes, postage, and the benefit of paper-free storage and management of documents—and the benefits from improved efficiencies and greater productivity across uses cases. As companies, particularly larger enterprises, eliminate the friction inherent in processes that involve people, documents, and data, we believe they can see improved sales productivity, increased conversion rates, and higher customer retention.



 

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Our Competitive Strengths

We believe we have significant points of differentiation that will enable us to continue our market leadership in e-signature and the broader automation of the agreement process:

 

   

World’s #1 e-signature solution. Since inception, we have invested more than $300 million in research and development to build the global platform of choice for e-signature and agreement automation. The result is a platform that can handle the most demanding customer requirements almost anywhere in the world, deliver over 99.99% availability, provide highly advanced security, and offer hundreds of prebuilt partner connectors, along with an extensive API for embedding and connecting DocuSign with other systems.

 

   

Brand recognition and reputation. We believe that our association with positive events in people’s lives, such as accepting a job offer or buying their first house, can create a marketing halo effect that helps influence the adoption of our solution at their companies.

 

   

Breadth, depth, and quality of customers. Today, we have a total of over 425,000 customers. While we consider e-signature to still be a largely underpenetrated market, customers that have chosen to use an e-signature solution have overwhelmingly chosen DocuSign.

 

   

Vertically applied technology. While our platform is designed to serve any industry, we have expertise and features for specific verticals—including real estate, financial services, insurance, manufacturing, and healthcare and life sciences.

 

   

Robust partnership network. We have a multi-faceted partnership strategy that involves strategic partners, systems integrators, independent software vendors, or ISVs, and distributors and resellers.

Our Market Opportunity

We believe that companies of all sizes and across all industries will continue to invest heavily in e-signature technology, as well as systems that help them unify, automate, and accelerate the agreement process. As such, we estimate the TAM for our platform to be approximately $25 billion in 2017.

We calculate our market opportunity by estimating the total number of companies in our immediate core markets globally across enterprises, commercial businesses, and VSBs and apply an average annual contract value, or ACV, to each respective company based on its size, industry, and location. The ACV applied to the estimated number of companies is calculated by leveraging internal company data on current customer spend by size and industry. For our enterprise customers, we have applied the median ACV of our top 100 global customers, which customers we believe have achieved broader implementation of our solution across their organizations. For our commercial customers, we have applied an average ACV based on current commercial customer spend by size and industry. For our VSBs, we have applied an ACV of the annual price for DocuSign’s personal plan, our most basic plan. Additionally, the ACV applied to non-enterprise businesses in international markets was reduced to account for differences in the pricing of goods and services in various international markets relative to the United States using data provided by the Organization for Economic Cooperation and Development. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the sections titled “Industry and Market Data” and “Business—Our Market Opportunity.”

Our Growth Strategy

We intend to drive the growth of our business by executing on the following strategies:

 

   

Drive new customer acquisition. Despite our success to date, we believe the market for e-signature remains largely underpenetrated. As a result, there is a vast opportunity to take our core capabilities to many more enterprises, commercial businesses, and VSBs around the world.



 

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Expand use cases within existing customers. Once a company begins to realize the benefits of our platform, we often have an opportunity to expand into other use cases—going beyond sales into services, human resources, finance, and other functions—thereby increasing the overall number of agreement processes that are automated. For example, one large customer has grown from a single initial use case to over 300 today.

 

   

Accelerate international expansion. For the year ended January 31, 2018, we derived 17% of our revenue from customers outside the United States. We believe there is a substantial opportunity for us to increase our international customer base by leveraging and expanding investments in our technology, direct sales force, and strategic partnerships around the world.

 

   

Expand vertical solutions. While our platform is industry agnostic, we will continue to invest in sales, marketing and technical expertise across several industry verticals, each of which have differentiated business requirements—for example, real estate, healthcare and life sciences, and U.S. federal government agencies.

 

   

Strengthen and foster our developer community. Over 70,000 developer sandboxes have been created, which enable product development and testing in isolated environments, and nearly 60% of transactions on our platform were processed via our API today. We intend to continue investing in our API and other forms of support to further drive this virtuous cycle of value creation between developers and DocuSign.

 

   

Extend across the entire agreement process. Although our current solutions already cover many aspects of the agreement process, we intend to expand our platform to support “Systems of Agreement” for our customers. These systems would further unify and automate the agreement process by maintaining rich connectivity with other enterprise and third-party systems, taking inputs in the pre-agreement process and generating outputs for post-agreement actions. We recently acquired SpringCM, a leading cloud-based document generation and contract life cycle management company that has capabilities in document generation, redlining, advanced document management and end-to-end agreement workflow.

Our Initial Public Offering

In May 2018, we completed our initial public offering, or IPO, in which we issued and sold 19,314,182 shares of our common stock at price to the public of $29.00 per share, including 3,255,000 shares sold to the underwriters pursuant to their full exercise of the over-allotment option. Certain of our existing stockholders sold an additional 5,640,818 shares at the public offering price. We received net proceeds of $524.2 million after deducting underwriting discounts and commissions and other offering expenses. We did not receive any proceeds from the sale of shares by our stockholders.

Upon the completion of our IPO: all 100,226,099 shares of our convertible preferred stock automatically converted into an aggregate of 100,350,008 shares of our common stock; all our outstanding warrants to purchase shares of convertible preferred stock converted into 22,468 warrants to purchase shares of common stock with the related warrant liability of $0.8 million reclassified into additional paid-in capital; and our Amended and Restated Certificate of Incorporation was filed and went in effect authorizing a total of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Acquisition of SpringCM Inc.

On September 4, 2018, we acquired SpringCM Inc. The aggregate consideration paid in exchange for all of the outstanding equity interests of SpringCM was approximately $220.2 million in cash, subject to adjustments as set forth in the merger agreement. In addition, certain continuing employees of SpringCM received performance-vested restricted stock units and other retention incentives.



 

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Strategically, acquiring SpringCM accelerates our ability to extend across the entire agreement process. In the pre-agreement phase before the signature, SpringCM has automated document-generation and redlining capabilities. In the post-agreement phase after the signature, SpringCM has document-management capabilities for completed agreements. Across the entire agreement process, SpringCM has a system for defining and automatically executing agreement workflows.

We see these capabilities are highly complementary to our current e-signature offering. This is reflected by the fact that DocuSign and SpringCM are already integrated as partners in well over 100 customer accounts, which has been driven primarily by SpringCM’s small salesforce. We believe that with our much larger salesforce, SpringCM’s capabilities can reach a substantially larger audience in our customer base. With SpringCM, we have an additional opportunity to further differentiate our value proposition when competing for new e-signature business and across the entire agreement process.

Selected Risks Affecting Our Business

Investing in our common stock involves risk. You should carefully consider all the information in this prospectus prior to investing in our common stock. These risks are discussed more fully in the section titled “Risk Factors” immediately following this prospectus summary. These risks and uncertainties include, but are not limited to, the following:

 

   

We have a history of operating losses and may not achieve or sustain profitability in the future.

 

   

The market for our e-signature solution—as the core part of our broader platform for automating the agreement process—is relatively new and evolving. If the market does not develop further, develops more slowly, or in a way that we do not expect, our business will be adversely affected.

 

   

If we have overestimated the size of our total addressable market, our future growth rate may be limited.

 

   

If we are unable to attract new customers, our revenue growth will be adversely affected.

 

   

If we are unable to retain customers at existing levels or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected.

 

   

We are dependent on our e-signature solutions, and the lack of continued adoption of our platform could cause our operating results to suffer.

 

   

We face significant competition from both established and new companies offering e-signature solutions, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.

 

   

Our recent rapid growth may not be indicative of our future growth, and, if we continue to grow rapidly, we may not be able to manage our growth effectively.

 

   

Our security measures have on occasion in the past been, and may in the future be, compromised. Consequently, our solutions may be perceived as not being secure. This may result in customers curtailing or ceasing their use of our solutions, our reputation being harmed and our incurring significant liabilities and adverse effects on our results of operations and growth prospects.

 

   

We are subject to governmental regulation and other legal obligations, including those related to e-signature laws, privacy, data protection, and information security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could also result in additional costs and liabilities to us or inhibit sales of our software.

 

   

We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors, our stock price and the value of your investment could decline.



 

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Our sales cycle with enterprise and commercial customers can be long and unpredictable, and our sales efforts require considerable time and expense.

 

   

Recent and future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our operating results and financial condition.

Concurrent Convertible Note Offering

Concurrently with this offering of common stock, we are offering to qualified institutional buyers, in an offering exempt from registration under the Securities Act of 1933, as amended, or the Securities Act, $400 million aggregate principal amount of our     % Convertible Senior Notes due 2023, which we refer to as the notes, or a total of $460 million aggregate principal amount of notes if the initial purchasers in the concurrent Convertible Note Offering exercise in full their option to purchase additional notes. We cannot assure you that the concurrent Convertible Note Offering will be completed or, if completed, on what terms it will be completed. The offering of common stock hereby is not contingent upon the consummation of the concurrent Convertible Note Offering, and the concurrent Convertible Note Offering is not contingent upon the consummation of the offering of common stock hereby. See “Concurrent Convertible Note Offering”.

Corporate Information

We were incorporated as DocuSign, Inc. in Washington in April 2003. We merged with and into DocuSign, Inc., a Delaware corporation, in March 2015. Our principal executive offices are located at DocuSign, Inc., 221 Main St., Suite 1000, San Francisco, California 94105. Our telephone number is (415) 489-4940. Our website address is www.DocuSign.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

“DocuSign,” the DocuSign logo, and other trademarks or service marks of DocuSign, Inc. appearing in this prospectus are the property of DocuSign, Inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

an exemption from implementation of new or revised accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

   

reduced disclosure obligations regarding executive compensation arrangements; and

 

   

no requirement to seek nonbinding advisory votes on executive compensation or golden parachute arrangements.



 

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We have irrevocably elected not to avail ourselves of the extended transition period for implementing new or revised financial accounting standards. We may take advantage of some or all of the other provisions described above until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) (a) January 31, 2024, the last day of the fiscal year following the fifth anniversary of the closing of our IPO, (b) the last day of the fiscal year in which our annual gross revenue is $1.07 billion or more, or (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the U.S. Securities and Exchange Commission, or SEC, which, among other requirements, means that we have been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, for at least twelve calendar months, we have filed at least one annual report under the Exchange Act, and the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the prior July 31st, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.



 

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THE OFFERING

 

Common stock offered by the selling stockholders

   8,060,550 shares

Common stock to be outstanding after this offering

   156,785,672 shares

Option to purchase additional shares of common stock granted by the selling stockholders

  


1,209,082 shares

Concurrent Convertible Note Offering

   Concurrently with this offering of common stock, we are offering to qualified institutional buyers, in an offering exempt from registration under the Securities Act, $400 million aggregate principal amount of our     % Convertible Senior Notes due 2023, which we refer to as the notes, or a total of $460 million aggregate principal amount of notes if the initial purchasers in the concurrent Convertible Note Offering exercise in full their option to purchase additional notes. We cannot assure you that the concurrent Convertible Note Offering will be completed or, if completed, on what terms it will be completed. The offering of common stock hereby is not contingent upon the consummation of the concurrent Convertible Note Offering, and the concurrent Convertible Note Offering is not contingent upon the consummation of the offering of common stock hereby. See “Concurrent Convertible Note Offering”.

Use of proceeds

   The selling stockholders will receive all of the net proceeds from this offering and we will not receive any proceeds from the sale of shares in this offering. See “Use of Proceeds.”
   We estimate that the net proceeds to us from the concurrent Convertible Note Offering, if completed, will be approximately $             million (or $             million if the initial purchasers in the Convertible Note Offering exercise in full their option to purchase additional notes) after deducting the estimated initial purchasers’ discounts and commissions and estimated offering expenses. We expect to enter into capped call transactions with one or more of the initial purchasers or their respective affiliates and/or other financial institutions (the “option counterparties”). We intend to use approximately $             million of the net proceeds from the concurrent Convertible Note Offering to pay the cost of the capped call transactions. We intend to use the remainder of the net proceeds for working capital and other general corporate purposes. We may also use a portion of the remainder of the net proceeds from the Convertible Note Offering for acquisitions or strategic investments in businesses or technologies, although we do not currently have any commitments for any such acquisitions or investments. See “Use of Proceeds.” If the initial purchasers exercise their option to purchase additional notes, we expect to use a portion of the net proceeds from the sale of the additional notes to enter into additional capped call transactions with the option counterparties.


 

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Risk factors

   See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Nasdaq symbol

  

“DOCU”

The number of shares of our common stock that will be outstanding after this offering is based on 156,785,672 shares of common stock outstanding as of July 31, 2018, and excludes:

 

   

all shares of common stock issuable upon the conversion of the notes offered in the concurrent Convertible Note Offering;

 

   

18,121,774 shares of common stock issuable upon the exercise of options outstanding as of July 31, 2018, at a weighted-average exercise price of $11.76 per share;

 

   

28,946,196 shares of common stock issuable from time to time after this offering upon the settlement of restricted stock units, or RSUs, outstanding as of July 31, 2018, up to approximately 37% of which we plan to withhold, based on an assumed 40% tax withholding rate, to satisfy income tax obligations upon settlement of the RSUs, as discussed in “Risk Factors—We anticipate spending substantial funds in connection with the tax liabilities that arise upon the settlement of RSUs. The manner in which we fund these expenditures may have an adverse effect on our financial condition.”;

 

   

14,175,278 shares of common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan as of July 31, 2018, as well as automatic increases in the number of shares of our common stock reserved for future issuance under our 2018 Equity Incentive Plan; and

 

   

3,800,000 shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan as of July 31, 2018, as well as any automatic increases in its share reserve each year.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

no exercise of outstanding options or warrants and no settlement of outstanding RSUs subsequent to July 31, 2018; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 1,209,082 shares of our common stock from the selling stockholders.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

We derived the summary consolidated statements of operations data for the fiscal years ended January 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the unaudited summary consolidated statements of operations data for the six months ended July 31, 2017 and 2018 and the unaudited summary consolidated balance sheet data as of July 31, 2018 from our unaudited interim condensed consolidated financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. Our historical results are not necessarily indicative of the results to be expected in the future. Our fiscal year ends January 31.

When you read this summary consolidated financial data, it is important that you read it together with our historical consolidated financial statements, the historical financial statements of SpringCM, the pro forma financial information of DocuSign and SpringCM Inc. and the related notes to all financial statements included elsewhere in this prospectus, as well as the sections of this prospectus titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended January 31,     Six Months Ended
July 31,
 
    2016     2017     2018     2017     2018  
          (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

         

Revenue

         

Subscription

  $ 229,127     $ 348,563     $ 484,581     $ 224,400     $ 306,659  

Professional services and other

    21,354       32,896       33,923       14,641       16,193  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    250,481       381,459       518,504       239,041       322,852  

Cost of revenue(1)(2)

         

Subscription

    48,656       73,363       83,834       39,333       55,495  

Professional services and other

    25,199       29,114       34,439       16,249       39,160  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    73,855       102,477       118,273       55,582       94,655  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    176,626       278,982       400,231       183,459       228,197  

Operating expenses:

         

Sales and marketing(1)(2)

    170,006       240,787       277,930       133,634       294,864  

Research and development(1)(2)

    62,255       89,652       92,428       46,475       104,643  

General and administrative(1)(2)

    63,669       64,360       81,526       36,395       133,968  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    295,930       394,799       451,884       216,504       533,475  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (119,304     (115,817     (51,653     (33,045     (305,278

Interest expense

    (780     (611     (624     (320     (240

Interest income and other income (expense), net

    (3,508     1,372       3,135       1,924       770  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

    (123,592     (115,056     (49,142     (31,441     (304,748

Provision for (benefit from) income taxes

    (1,033     356       3,134       (22     2,653  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (122,559   $ (115,412   $ (52,276   $ (31,419   $ (307,401
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(3)

    26,052,441       28,019,818       32,293,729       30,715,624       102,284,494  

Net loss per share attributable to common stockholders, basic and diluted(3)

  $ (4.76   $ (4.17   $ (1.66   $ (1.05   $ (3.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(1)

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Six Months Ended
July 31,
 
     2016      2017      2018      2017      2018  
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 2,371      $ 2,211      $ 1,887      $ 958      $ 30,410  

Sales and marketing

     10,617        11,187        9,386        5,588        129,272  

Research and development

     8,221        10,161        4,896        2,679        54,627  

General and administrative

     11,455        11,884        13,578        7,693        95,650  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 32,664      $ 35,443      $ 29,747      $ 16,918      $ 309,959  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

As of January 31, 2018, we had 23,080,543 RSUs outstanding that are subject to service-based vesting conditions and liquidity event related performance vesting conditions. We had not recognized any compensation expense related to these RSUs as a qualifying liquidity event had not yet occurred as of January 31, 2018. The liquidity event was satisfied in April 2018 in connection with our IPO, and as a result, we recognized stock-based compensation expense using the accelerated attribution method with a cumulative catch-up of stock-based compensation expense of $262.8 million.

(3)

See Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     July 31, 2018  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Total current assets

   $ 968,063  

Total noncurrent assets

     201,635  

Total liabilities

     426,228  

Common stock

     16  

Additional paid-in capital

     1,555,185  

Accumulated other comprehensive income

     (2,010

Accumulated deficit

     (809,721

Total stockholders’ equity

     743,470  


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus, before making a decision to invest in our common stock. Any of the following risks could have an adverse effect on our business, results of operations, financial condition or prospects, and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

Risks Related to Our Business and Industry

We have a history of operating losses and may not achieve or sustain profitability in the future.

We began operations in 2003 and have experienced net losses since inception. We generated a net loss of $307.4 million in the six months ended July 31, 2018, and as of July 31, 2018, we had an accumulated deficit of $809.7 million. We will need to generate and sustain increased revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to expend significant funds to support further growth and further develop our platform. We also plan to continue to invest to expand the functionality of our platform to automate the agreement process, expand our infrastructure and technology to meet the needs of our customers, expand our sales headcount, increase our marketing activities, and grow our international operations. We will also face increased compliance costs associated with growth, the expansion of our customer base, and the costs of being a public company. Our efforts to grow our business may be costlier than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.

The market for our e-signature solution—as the core part of our broader platform for automating the agreement process—is relatively new and evolving. If the market does not develop further, develops more slowly, or in a way that we do not expect, our business will be adversely affected.

The market for our e-signature solutionas the core part of our broader platform for automating the agreement processis relatively new and evolving, which makes our business and future prospects difficult to evaluate. We have customers in a wide variety of industries, including real estate, financial services, insurance, manufacturing, and healthcare and life sciences. It is difficult to predict customer demand for our solutions, customer retention and expansion rates, the size and growth rate of the market, the entry of competitive products, or the success of existing competitive products. We expect that we will continue to need intensive sales efforts to educate prospective customers, particularly enterprise and commercial customers, about the uses and benefits of our e-signature solutions. The size and growth of our addressable market depends on a number of factors, including businesses continuing to desire to differentiate themselves through e-signature solutions and other aspects of our platform that automate the agreement process, as well as changes in the competitive landscape, technological changes, budgetary constraints of our customers, changes in business practices, changes in regulatory environment and changes in economic conditions. If businesses do not perceive the value proposition of our offerings, then a viable market for solutions may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business and operating results.

If we have overestimated the size of our total addressable market, our future growth rate may be limited.

We have estimated the size of our total addressable market based on data published by third parties and internally generated data and assumptions. We have not independently verified any third-party information and

 

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cannot assure you of its accuracy or completeness. While we believe our market size estimates are reasonable, such information is inherently imprecise. In addition, our projections, assumptions and estimates of opportunities within our market are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including but not limited to those described in this prospectus. If this third-party or internally generated data prove to be inaccurate or we make errors in our assumptions based on that data, our actual market may be more limited than our estimates. In addition, these inaccuracies or errors may cause us to misallocate capital and other critical business resources, which could harm our business.

Even if our total addressable market meets our size estimates and experiences growth, we may not continue to grow our share of the market. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates of our total addressable market included in this prospectus should not be taken as indicative of our ability to grow our business. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the sections titled “Industry and Market Data” and “Business—Our Market Opportunity.”

If we are unable to attract new customers, our revenue growth will be adversely affected.

To increase our revenue, we must continue to attract new customers and increase sales to new customers. As our market matures, product and service offerings evolve and competitors introduce lower cost and/or differentiated products or services that are perceived to compete with our solutions, our ability to sell subscriptions for our solutions could be impaired. As a result of these and other factors, we may be unable to attract new customers or increase sales to existing customers, which could have an adverse effect on our business, revenue, gross margins and other operating results, and accordingly on the value of our common stock.

If we are unable to retain customers at existing levels or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected.

To increase our revenue, we must retain existing customers, convince them to expand their use of our products and services across their organizations and for a variety of use cases, and expand their subscriptions on terms favorable to us. Our ability to retain our customers and expand their subscriptions could be impaired for a variety of reasons, including the risks described herein. As a result, we may be unable to renew our agreements with existing customers or attract new business from existing customers on terms favorable or comparable to prior periods, which could have an adverse effect on our business, revenue, gross margins and other operating results, and accordingly on the value of our common stock.

Our future success also depends in part on our ability to sell additional functionality and services, more subscriptions or enhanced editions of our solutions to our existing customers. This may require more sophisticated and costly sales efforts that are targeted at larger enterprises and more senior management at our customers. Similarly, the rate at which our customers purchase new or enhanced solutions from us depends on a number of factors, including general economic conditions and customer reaction to pricing of this additional functionality and these services. If our efforts to sell additional functionality and services to our customers are not successful, our business and growth prospects may suffer.

Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their initial subscription period, and a majority of our subscription contracts were one year in duration in fiscal year 2018. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires on the same or more favorable terms. We cannot accurately predict renewal or expansion rates given the diversity of our customer base across industries and geographies and its range from enterprises to VSBs. Our renewal and expansion rates may decline or fluctuate as a result of a number of factors, including customer spending levels, customer dissatisfaction with our solutions, decreases in the number of users at our customers, changes in the type and size of our customers,

 

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pricing changes, competitive conditions, the acquisition of our customers by other companies and general economic conditions. As a result, we cannot assure you that customers will renew or expand their subscriptions to our platform. If our customers do not renew their subscriptions for our service or if they reduce their subscription amounts at the time of renewal, our revenue will decline and our business will suffer. If our renewal or expansion rates fall significantly below the expectations of the public market, securities analysts, or investors, the price of our common stock could also be harmed.

We are dependent on our e-signature solutions, and the lack of continued adoption of our platform could cause our operating results to suffer.

Sales of subscriptions to our platform account for substantially all of our subscription revenue and are the source of substantially all of our professional services revenue. We expect that we will be substantially dependent on our e-signature solutions to generate revenue for the foreseeable future. As a result, our operating results could suffer due to:

 

   

any decline in demand for our e-signature solution;

 

   

the failure of our e-signature solution to achieve continued market acceptance;

 

   

the market for electronic signatures not continuing to grow, or growing more slowly than we expect;

 

   

the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our e-signature solution;

 

   

technological innovations or new standards that our e-signature solution does not address;

 

   

changes in regulatory requirements;

 

   

sensitivity to current or future prices offered by us or competing e-signature solutions; and

 

   

our inability to release enhanced versions of our e-signature solution on a timely basis.

If the market for our e-signature solution grows more slowly than anticipated or if demand for our e-signature solution does not grow as quickly as anticipated, whether as a result of competition, pricing sensitivities, product obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our customers or other factors, we may not be able to grow our revenue.

We face significant competition from both established and new companies offering e-signature solutions, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.

Our e-signature solutions address a market that is evolving and highly competitive. Our primary competition comes from companies that offer products and solutions that currently compete with some but not all of the functionality present in our platform. Our solutions compete with similar offerings by others currently, and there may be an increasing number of similar solutions offered by additional competitors in the future. In particular, one or more global software companies may elect to include an electronic signature capability in their products. Our primary global competitor is currently Adobe Systems Incorporated, which began to offer an e-signature solution following its acquisition of EchoSign in 2011 (now known as Adobe Sign). We also face competition from a select number of niche vendors that focus on specific industries or geographies. In addition, our current and prospective customers may develop their own e-signature solutions in-house. The introduction of new technologies and the influx of new entrants into the market may intensify competition in the future, which could harm our business and our ability to increase revenues, maintain or increase customer renewals and maintain our prices.

Adobe has a longer operating history than us, as well as significant financial, technical, marketing and other resources, strong brand and customer recognition, a large intellectual property portfolio and broad global distribution and presence.

 

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Many of our competitors have developed, or are developing, products that currently, or in the future are likely to, compete with some or all of our functionality. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Our competitors may also be able to offer products or functionality similar to ours at a more attractive price than we can by integrating or bundling such products with their other product offerings. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. Acquisitions and consolidation in our industry may provide our competitors with even more resources or may increase the likelihood of our competitors offering bundled or integrated products with which we cannot compete effectively.

Our current and potential competitors may also develop and market new technologies that render our existing or future products less competitive, unmarketable or obsolete. In addition, if these competitors develop products with similar or superior functionality to our solutions, we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected.

Our recent rapid growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able to manage our growth effectively.

Our revenue grew from $239.0 million in the six months ended July 31, 2017 to $322.9 million in the six months ended July 31, 2018. We expect that, in the future, as our revenue increases to higher levels, our revenue growth rate will decline. We also believe that growth of our revenue depends on a number of factors, including our ability to:

 

   

price our e-signature solutions effectively so that we are able to attract and retain customers without compromising our profitability;

 

   

attract new customers, increase our existing customers’ use of our solutions and provide our customers with excellent customer support;

 

   

expand our platform to support “Systems of Agreement” for our customers;

 

   

continue to introduce our e-signature solutions to new markets outside of the United States;

 

   

successfully identify and acquire or invest in businesses, products or technologies that we believe could complement or expand our solutions; and

 

   

increase awareness of our brand on a global basis.

We may not successfully accomplish any of these objectives. We expect to continue to expend substantial financial and other resources on:

 

   

sales and marketing, including a significant expansion of our sales organization, particularly in the United States;

 

   

our technology infrastructure, including systems architecture, management tools, scalability, availability, performance and security, as well as disaster recovery measures;

 

   

product development, including investments in our product development team and the development of new products and new functionality for our existing solutions;

 

   

acquisitions or strategic investments;

 

   

international expansion; and

 

   

general administration, including legal and accounting expenses.

In addition, our historical rapid growth has placed and may continue to place significant demands on our management and our operational and financial resources. We have also experienced significant growth in the

 

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number of customers, users and transactions and the amount of data that our infrastructure supports. As we continue to grow, we may need to open new offices in the United States and internationally, and hire additional personnel for those offices.

Finally, our organizational structure is becoming more complex as we add additional staff and acquire complementary companies, products and technologies. For example, on September 4, 2018, we acquired SpringCM. In connection with this increased complexity, we will need to improve our operational, financial and management controls, as well as our reporting systems and procedures. We will require capital expenditures and the allocation of valuable management resources to grow and change in these areas. In addition, if we are unable to effectively manage the growth of our business, the quality of our solutions may suffer and we may be unable to address competitive challenges, which would adversely affect our overall business, operations and financial condition.

Our security measures have on occasion in the past been, and may in the future be, compromised. Consequently, our solutions may be perceived as not being secure. This may result in customers curtailing or ceasing their use of our solutions, our reputation being harmed, our incurring significant liabilities and adverse effects on our results of operations and growth prospects.

Our operations involve the storage and transmission of customer data or information, and security incidents have occurred in the past, and may occur in the future, resulting in unauthorized access to, loss of or unauthorized disclosure of this information, regulatory enforcement actions, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, which could damage our reputation, impair our sales and harm our business. Cyberattacks and other malicious internet-based activity continue to increase, and cloud-based platform providers of services have been and are expected to continue to be targeted. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), employee theft or misuse and denial-of-service attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions). Despite significant efforts to create security barriers to such threats, it is virtually impossible for us to entirely mitigate these risks. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liability. We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access or to compromise our systems because they change frequently and are generally not detected until after an incident has occurred. In May 2017, a malicious third party gained temporary access to a separate, non-core system used for service-related announcements that contained a list of email addresses. We took immediate action to prevent unauthorized access to this system, put further security controls in place and worked with law enforcement agencies. Concerns regarding data privacy and security may cause some of our customers to stop using our solutions and fail to renew their subscriptions. This discontinuance in use or failure to renew could substantially harm our business, operating results and growth prospects. Further, as we rely on third-party and public-cloud infrastructure, we will depend in part on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer data. In addition, failures to meet customers’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers and grow our business. In addition, a cybersecurity event could result in significant increases in costs, including costs for remediating the effects of such an event, lost revenues due to decrease in customer trust and network downtime, increases in insurance coverage due to cybersecurity incidents and damages to our reputation because of any such incident.

Many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of data security breaches. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness

 

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of our security measures, negatively affect our ability to attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our business and operating results.

There can be no assurance that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations.

We are subject to governmental regulation and other legal obligations, including those related to e-signature laws, privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could also result in additional costs and liabilities to us or inhibit sales of our software.

We receive, store and process personal information and other data from and about customers, in addition to our employees and service providers. In addition, customers use our services to obtain and store personal identifiable information, personal health information and personal financial information. Our handling of data is thus subject to a variety of laws and regulations, including regulation by various government agencies, such as the U.S. Federal Trade Commission, or FTC, and various state, local and foreign agencies. Our data handling also is subject to contractual obligations and industry standards.

The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of data relating to individuals and businesses, including the use of contact information and other data for marketing, advertising and other communications with individuals and businesses. In the United States, various laws and regulations apply to the collection, processing, disclosure and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act and state laws relating to privacy and data security, including the California Consumer Privacy Act. We implement services that meet the technological requirements requested by our customers that would be subject to the ESIGN Act in the United States, eIDAS in the European Union, or EU, and similar U.S. state laws, particularly the Uniform Electronic Transactions Act, or UETA, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. We are particularly reliant on UETA and the ESIGN Act that together have solidified the legal landscape for use of electronic records and electronic signatures in commerce by confirming that electronic records and signatures carry the same weight and have the same legal effect as traditional paper documents and wet ink signatures. Additionally, the FTC and many state attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination and security of data. The laws and regulations relating to privacy and data security are evolving, can be subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.

In addition, several foreign countries and governmental bodies, including the EU, have laws and regulations dealing with the handling and processing of personal information obtained from their residents, which in certain cases are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of various types of data, including data that identifies or may be used to identify an individual, such as names, email addresses and in some jurisdictions, Internet Protocol, or IP, addresses. Such laws and regulations may be modified or subject to new or different interpretations, and new laws and regulations may be enacted in the future. Within the European Union, the

 

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General Data Protection Regulation, or GDPR which became effective in May 2018, replaced the 1995 European Union Data Protection Directive and superseded applicable EU member state legislation.

The GDPR significantly increases the level of sanctions for non-compliance from those in existing EU data protection law. EU data protection authorities will have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide global turnover for the preceding financial year, whichever is higher, and violations of the GDPR may also lead to damages claims by data controllers and data subjects. Such penalties are in addition to any civil litigation claims by data controllers, customers and data subjects. Since we act as a data processor for our customers, we are taking steps to cause our processes to be compliant with applicable portions of the GDPR, but we cannot assure you that such steps will be effective.

The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States, as a result of the rapidly evolving regulatory framework for privacy issues worldwide. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the content provided by users. As a result of the laws that are or may be applicable to us, and due to the sensitive nature of the information we collect, we have implemented policies and procedures to preserve and protect our data and our customers’ data against loss, misuse, corruption, misappropriation caused by systems failures, unauthorized access or misuse. If our policies, procedures or measures relating to privacy, data protection, marketing, or customer communications fail to comply with laws, regulations, policies, legal obligations or industry standards, we may be subject to governmental enforcement actions, litigation, regulatory investigations, fines, penalties and negative publicity and could cause our application providers, customers and partners to lose trust in us, which could materially affect our business, operating results and financial condition.

In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. Because the interpretation and application of privacy and data protection laws, regulations, rules and other standards are still uncertain, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the functionality of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business.

Any failure or perceived failure by us to comply with laws, regulations, policies, legal or contractual obligations, industry standards, or regulatory guidance relating to privacy or data security, may result in governmental investigations and enforcement actions (including, for example, a ban by EU Supervisory Authorities on the processing of EU personal data under the GDPR), litigation, fines and penalties or adverse publicity, and could cause our customers and partners to lose trust in us, which could have an adverse effect on our reputation and business. We expect that there will continue to be new proposed laws, regulations and industry standards relating to privacy, data protection, marketing, electronic signatures, consumer communications and information security in the United States, the EU and other jurisdictions, and we cannot determine the impact such future laws, regulations and standards may have on our business. Future laws, regulations, standards and other obligations or any changed interpretation of existing laws or regulations could impair our ability to develop and market new functionality and maintain and grow our customer base and increase revenue. Future restrictions on the collection, use, sharing or disclosure of data or additional requirements for express or implied consent of our customers, partners or end consumers for the use and disclosure of such information could require us to incur additional costs or modify our solutions, possibly in a material manner, and could limit our ability to develop new functionality.

 

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If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain solutions, which would negatively affect our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.

We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors, our stock price and the value of your investment could decline.

Our operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described herein, factors that may affect our operating results include the following:

 

   

fluctuations in demand for or pricing of our solutions;

 

   

our ability to attract and retain customers;

 

   

our ability to retain our existing customers at existing levels and expand of their usage of our solutions;

 

   

customer expansion rates and the pricing and quantity of user subscriptions renewed;

 

   

timing of new subscriptions and payments;

 

   

fluctuations in customer delays in purchasing decisions in anticipation of new products or product enhancements by us or our competitors;

 

   

changes in customers’ budgets and in the timing of their budget cycles and purchasing decisions;

 

   

potential and existing customers choosing our competitors’ products or developing their own e-signature solution in-house, or opting to use only the free version of our products;

 

   

timing of new products, new product functionality and new customers;

 

   

the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress;

 

   

delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter;

 

   

our ability to control costs, including our operating expenses;

 

   

potential accelerations of prepaid expenses and deferred costs;

 

   

the amount and timing of payment for operating expenses, particularly research and development and sales and marketing expenses (including commissions and bonuses associated with performance);

 

   

the amount and timing of non-cash expenses, including stock based compensation, goodwill impairments and other non-cash charges;

 

   

the amount and timing of costs associated with recruiting, training and integrating new employees;

 

   

impacts of acquisitions;

 

   

issues relating to partnerships with third parties, product and geographic mix;

 

   

general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate;

 

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the impact of new accounting pronouncements;

 

   

changes in the competitive dynamics of our market, including consolidation among competitors or customers;

 

   

significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our solutions; and

 

   

awareness of our brand on a global basis.

Any of the foregoing and other factors may cause our results of operations to vary significantly. In addition, we expect to incur significant additional expenses due to the increased costs of operating as a public company. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.

Our sales cycle with enterprise and commercial customers can be long and unpredictable, and our sales efforts require considerable time and expense.

The timing of our sales with our enterprise customers and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these customers. In addition, for these enterprise customers, the lengthy sales cycle for the evaluation and implementation of our solutions, which in certain implementations, particularly for highly regulated industries and customized applications, may also cause us to experience a delay between increasing operating expenses for such sales efforts and, upon successful sales, the generation of corresponding revenue. We are often required to spend significant time and resources to better educate and familiarize these potential customers with the value proposition of paying for our products and services. The length of our sales cycle for these customers, from initial evaluation to payment for our offerings is generally three to nine months but can vary substantially from customer to customer. As the purchase and deployment of our products can be dependent upon customer initiatives, infrequently, our sales cycle can extend to more than nine months. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle include:

 

   

the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force and train our new sales people to sell to enterprise customers that require more training;

 

   

the discretionary nature of purchasing and budget cycles and decisions;

 

   

the obstacles placed by customers’ procurement process;

 

   

economic conditions and other factors impacting customer budgets;

 

   

the customer’s integration complexity;

 

   

the customer’s familiarity with the e-signature process;

 

   

customer evaluation of competing products during the purchasing process; and

 

   

evolving customer demands.

Given these factors, it is difficult to predict whether and when a sale will be completed, and when revenue from a sale will be recognized.

If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.

Because our recent growth has resulted in the rapid expansion of our business and product offerings, we do not have a long history upon which to base forecasts of future revenues and operating results. Accordingly, we

 

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may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. If we do not address these risks successfully, our results of operations could differ materially from our estimates and forecasts or the expectations of investors, causing our business to suffer and our stock price to decline.

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs, requirements or preferences, our products may become less competitive.

The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards and changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we were unable to enhance our e-signature solutions or develop new solutions that keep pace with rapid technological and regulatory change, our business, results of operations and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.

If we fail to maintain our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.

We believe that our maintaining the DocuSign brand is important to supporting continued acceptance of our existing and future solutions and, as a result, attracting new customers to our solutions and retaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successfully maintaining our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide reliable and useful solutions to meet the needs of our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new functionality and solutions and our ability to successfully differentiate our solutions from competitive products and services. Additionally, the performance of our partners may affect our brand and reputation if customers do not have a positive experience with our partners’ services. Brand promotion activities may not generate customer awareness or yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Many of our customers deploy our solutions globally, and therefore, must comply with certain legal and regulatory requirements in varying countries. If our solutions fail to meet such requirements, our business could incur significant liabilities.

Customers use our solutions globally to comply with certain safe harbors and legislation of the countries in which they transact business. For example, some of our customers rely on our certification under the Federal Risk and Authorization Management Program in the United States or FedRAMP and eIDAS in the European Union to help satisfy their own legal and regulatory compliance requirements. If our solutions are found by a court or regulatory body to be inadequate to meet a compliance requirement for which they are being used, we could be exposed to liability and documents executed through our solutions could in some instances be rendered unenforceable. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.

Our sales to government entities and highly regulated organizations are subject to a number of challenges and risks.

We sell to U.S. federal, state and local, as well as foreign, governmental agency customers, as well as to customers in highly regulated industries such as financial services, pharmaceuticals, insurance, healthcare and

 

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life sciences. Sales to such entities are subject to a number of challenges and risks. Selling to such entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government contracting requirements may change and in doing so restrict our ability to sell into the government sector until we have attained the revised certification. Government demand and payment for our offerings are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offerings.

Further, governmental and highly regulated entities may demand shorter subscription periods or other contract terms that differ from our standard arrangements, including terms that can lead those customers to obtain broader rights in our offerings than would be standard. Such entities may have statutory, contractual or other legal rights to terminate contracts with us or our partners due to a default or for other reasons, and any such termination may adversely affect our reputation, business, results of operations and financial condition.

We may need to reduce or change our pricing model to remain competitive.

We price our subscriptions based on the number of users within an organization that use our platform to send agreements digitally for signature or the number of Envelopes that such users are provisioned to send. We expect that we may need to change our pricing from time to time. As new or existing competitors introduce new products that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. We also must determine the appropriate price to enable us to compete effectively internationally. Moreover, mid- to large-size enterprises may demand substantial price discounts as part of the negotiation of sales contracts. As a result, we may be required or choose to reduce our prices or otherwise change our pricing model, which could adversely affect our business, operating results and financial condition.

Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

Our ability to increase our customer base and achieve broader market acceptance of our e-signature solutions will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force and strategic partners, both domestically and internationally. We also plan to dedicate significant resources to sales and marketing programs, including internet and other online advertising. The effectiveness of our online advertising has varied over time and may vary in the future due to competition for key search terms, changes in search engine use and changes in the search algorithms used by major search engines. All of these efforts will require us to invest significant financial and other resources. In addition, the cost to acquire customers is high due to these marketing and sales efforts. Our business and operating results will be harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not effective.

We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.

Our success and future growth depend upon the continued services of our management team and other key employees. From time to time, there may be changes in our management team resulting from the hiring or departure of executives and key employees, which could disrupt our business. We also are dependent on the continued service of our existing software engineers because of the complexity of our solutions. Our senior management and key employees are employed on an at-will basis. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. The loss of one or more of our senior management or other key employees could harm our business, and we may

 

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not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees.

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for executive officers, software developers, sales personnel and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled sales and operations professionals. Many of the companies with which we compete for experienced personnel have greater resources than we do. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

If our solutions do not achieve sufficient market acceptance, our financial results and competitive position will suffer.

We spend substantial amounts of time and money to research and develop and enhance versions of our existing software to incorporate additional functionality or other enhancements in order to meet our customers’ rapidly evolving demands. Maintaining adequate research and development resources, such as the appropriate personnel and development technology, to meet the demands of the market is essential. If we are unable to develop solutions internally due to a lack of other research and development resources, we may be forced to expand into a certain market or strategy through acquisitions. Acquisitions could be expensive and we could be unsuccessful in integrating acquired technologies or businesses into our business. Thus, when we develop or acquire new or enhanced solutions, we typically incur expenses and expend resources upfront to develop, market, promote and sell the new offering. Therefore, when we develop or acquire and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing or acquiring and bringing them to market. Further, we may make changes to our solutions that our customers do not like or find useful. Our new solutions or enhancements and changes to our existing solutions could fail to attain sufficient market acceptance for many reasons, including:

 

   

failure to predict market demand accurately in terms of functionality and to supply solutions that meet this demand in a timely fashion;

 

   

defects, errors or failures;

 

   

negative publicity about their performance or effectiveness;

 

   

changes in the legal or regulatory requirements, or increased legal or regulatory scrutiny, adversely affecting our solutions;

 

   

delays in releasing our new solutions or enhancements to the market; and

 

   

introduction or anticipated introduction of competing products by our competitors.

If our new solutions or enhancements and changes do not achieve adequate acceptance in the market, or if products and technologies developed by others achieve greater acceptance in the market, our business and operating results and our ability to generate revenues could be harmed. The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new solutions or enhancements.

If our solutions fail to perform properly due to defects or similar problems, and if we fail to develop enhancements to resolve any defect or other problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs.

Our operations are dependent upon our ability to prevent system interruption. The applications underlying our e-signature solutions are inherently complex and may contain material defects or errors, which may cause

 

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disruptions in availability or other performance problems. We have from time to time found defects in our solutions and may discover additional defects in the future that could result in data unavailability, unauthorized access to, loss, corruption or other harm to our end-customers’ data. We may not be able to detect and correct defects or errors before implementing our solutions. Consequently, we or our customers may discover defects or errors after our solutions have been employed. We implement bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services and related system outages, customers could elect not to renew their subscriptions, or delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.

The occurrence of any defects, errors, disruptions in service or other performance problems with our software, whether in connection with the day-to-day operation, upgrades or otherwise, could result in:

 

   

loss of customers;

 

   

lost or delayed market acceptance and sales of our solutions;

 

   

delays in payment to us by customers;

 

   

injury to our reputation and brand;

 

   

legal claims, including warranty and service claims, against us;

 

   

diversion of our resources, including through increased service and warranty expenses or financial concessions; and increased insurance costs.

The costs incurred in correcting any material defects or errors in our software or other performance problems may be substantial and could adversely affect our operating results.

As a result of our customers’ increased usage of our e-signature solutions, we will need to continually improve our infrastructure to avoid service interruptions or slower system performance.

As usage of our e-signature solutions grows, we will need to devote additional resources to improving our computer network and our infrastructure in order to maintain the performance of our solutions. Any failure or delays in our computer systems could cause service interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to customers. These performance issues could result in lost customer opportunities and lower renewal rates, any of which could hurt our revenue growth, customer loyalty and reputation. We may need to incur significant additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand for our solutions.

Interruptions or delays in performance of our service could result in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.

We currently serve our customers from third-party data center hosting facilities. Our customers need to be able to access our products at any time, without interruption or degradation of performance. In some cases, third- party cloud providers run their own platforms that we access, and we are, therefore, vulnerable to their service interruptions. We therefore depend, in part, on our third-party facility providers’ ability to protect these facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our data center arrangements are terminated, or if there are any lapses of service or damage to a center, we could experience lengthy interruptions in our service as well as delays and additional expenses in arranging new facilities and services. Even with current and planned disaster recovery arrangements, including the existence of secondary data centers that become active during certain lapses of service or damage at a primary data center, our business could be harmed.

 

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We designed our system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our e-signature solutions. Any interruptions or delays in our service, whether or not caused by our products, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and cause our revenue to decrease and/or our expenses to increase. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business.

The success of our business depends on customers’ continued and unimpeded access to our platform on the internet.

Our customers must have internet access in order to use our platform. Some providers may take measures that affect their customers’ ability to use our platform, such as degrading the quality of the data packets we transmit over their lines, giving those packets lower priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for using our platform.

In December 2010, the Federal Communications Commission, or the FCC, adopted net neutrality rules barring internet providers from blocking or slowing down access to online content, protecting services like ours from such interference. Recently, the FCC voted in favor of repealing the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To the extent network operators attempt to interfere with our services, extract fees from us to deliver our solution or otherwise engage in discriminatory practices, our business could be adversely impacted. Within such a regulatory environment, we could experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to incur additional expense or otherwise negatively affect our business.

If we fail to offer high quality support, our business and reputation could suffer.

Our customers rely on our personnel for support of solutions. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation with existing or potential customers could be harmed.

We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed.

As usage of our e-signature solutions grows and as customers use our solutions for more types of transactions, we will need to devote additional resources to improving our application architecture, integrating with third-party systems, and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and professional services, to serve our growing customer base.

Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our solutions to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits, or requested refunds, which could hurt our revenue growth and our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our systems infrastructure. We cannot be sure that the expansion and improvements to our systems infrastructure will be

 

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effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely affect our financial results.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Not every company covered by our market opportunity estimates will necessarily buy e-signature solutions at all, and some or many of those companies may choose to continue using manual, paper-based processes or other solutions offered by our competitors. It is impossible to build every product feature that every customer wants, and our competitors may develop and offer features that our solutions do not offer. The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of the companies covered by our market opportunity estimates will purchase our solutions at all or generate any particular level of revenues for us. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow for a variety of reasons outside of our control, including competition in our industry. If any of these risks materialize, it could adversely affect our results of operations. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled “Industry and Market Data.”

Recent and future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our operating results and financial condition.

On September 4, 2018, we acquired SpringCM and we may in the future continue to seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions or the integration of the operations of acquired businesses may divert the attention of management and cause us to incur various expenses in identifying, investigating, pursuing and integrating suitable acquisitions, whether or not the acquisition purchases are completed. The failure to successfully integrate the operations, personnel or technologies of an acquired business could impact our ability to realize the full benefits of such an acquisition. If we are unable to achieve the anticipated strategic benefits of an acquisition, including our acquisition of SpringCM, or if the integration or the anticipated financial and strategic benefits, including any anticipated cost savings, revenue opportunities or operational synergies, of such an acquisition are not realized as rapidly as or to the extent anticipated by us, it could adversely affect our business, financial condition and results of operations, and could adversely affect the market price of our common stock.

In addition, we have only limited experience in acquiring other businesses. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target. Any future acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. An acquisition may also negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition, any of which could cause our operating results, business and financial condition may suffer.

 

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If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed.

In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our solutions by potential customers. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. Even if we are successful in maintaining and recruiting new partners, we cannot assure you that these relationships will result in increased customer usage of our solutions or increased revenue.

We could incur substantial costs in protecting or defending our proprietary rights, and any failure to adequately protect our rights could impair our competitive position and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual provisions in an effort to establish and protect our proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. While we have been issued patents in the United States and other countries and have additional patent applications pending, we may be unable to obtain patent protection for the technology covered in our patent applications. In addition, any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Any of our patents, trademarks or other intellectual property rights may be challenged or circumvented by others or invalidated through administrative process or litigation. There can be no guarantee that others will not independently develop similar products, duplicate any of our products or design around our patents. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of jurisdictions outside the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors or partners from independently developing technologies that are substantially equivalent or superior to our solutions.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be

 

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met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions or injure our reputation. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property may be difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, operating results and financial condition could be adversely affected.

We are currently, and may in the future be, subject to legal proceedings and litigation, including intellectual property disputes, which are costly and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual and proprietary rights. Companies in the software industry are often required to defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Any litigation may also involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our patents may therefore provide little or no deterrence. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software or cease business activities covered by such intellectual property, and may be unable to compete effectively. Any inability to license third party technology in the future would have an adverse effect on our business or operating results, and would adversely affect our ability to compete. We may also be contractually obligated to indemnify our customers in the event of infringement of a third party’s intellectual property rights. Responding to such claims, including those currently pending, regardless of their merit, can be time consuming, costly to defend in litigation and damage our reputation and brand.

We are currently the subject of lawsuits that allege our solutions infringe the intellectual property rights of other companies. While we intend to vigorously defend these lawsuits, intellectual property lawsuits are complex and inherently uncertain and there can be no assurance that we will prevail in defense of these actions. A decision in favor of the plaintiff in the currently pending lawsuits against us, or in any similar lawsuits that are brought against us in the future, could subject us to significant liability for damages and our ability to develop and sell our products may be harmed. We also may be required to redesign our products, delay releases, enter into costly settlement or license agreements, pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our solutions. Requiring us to change one or more aspects of the way we deliver our solutions may harm our business.

Lawsuits are time-consuming and expensive to resolve and they divert management’s time and attention. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. We cannot predict the outcome of lawsuits, and cannot assure you that the results of any of these actions will not have an adverse effect on our business, operating results or financial condition.

 

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We use open source software in our products, which could subject us to litigation or other actions.

We use open source software in our solutions. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could under certain of the open source licenses, be required to release the source code of our proprietary software products. If we inappropriately use or incorporate open source software subject to certain types of open source licenses that challenge the proprietary nature of our software products, we may be required to re-engineer our products, discontinue the sale of our solutions or take other remedial actions.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, data protection and other losses.

Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, data protection, damages caused by us to property or persons, or other liabilities relating to or arising from our platform, services or other contractual obligations. Some of these indemnity agreements provide for uncapped liability for which we would be responsible, and some indemnity provisions survive termination or expiration of the applicable agreement. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them and we may be required to cease use of certain functions of our platform or services as a result of any such claims. In addition, our customer agreements generally include a warranty that the proper use of DocuSign by a customer in accordance with the agreement and applicable law will be sufficient to meet the definition of an “electronic signature” as defined in the ESIGN Act and eIDAS. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations.

Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our results of operations.

Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for our solutions. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, and negatively affect the growth of our business. To the extent our solutions are perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our solutions. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be adversely affected.

 

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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of January 31, 2018, we had accumulated federal and state net operating loss carry forwards, or NOLs, of $479.0 million and $170.0 million inclusive of excess tax benefits. The federal and state net operating loss carry forwards will begin to expire in 2023 and 2024. As of January 31, 2018, we also had total foreign net operating loss carry forwards of $14.7 million, which do not expire under local law. In general, under Section 382 of the United States Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An analysis was conducted through January 31, 2017 to determine whether an ownership change had occurred since inception. The analysis indicated that because an ownership change occurred in a prior year, federal and state net operating losses were limited pursuant to Section 382 of the Code. This limitation has been accounted for in calculating the available net operating loss carryforwards. If we undergo an ownership change, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we were to achieve profitability.

The Tax Cuts and Jobs Act, or TCJA, was enacted on December 22, 2017 and significantly reforms the Code. The TCJA, among other things, includes changes to U.S. federal tax rates and the rules governing net operating loss carryforwards. For NOLs arising in tax years beginning after December 31, 2017, the TCJA limits a taxpayer’s ability to utilize NOL carryforwards to 80% of taxable income. In addition, NOLs arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation, and NOLs generated in tax years ending before January 1, 2018 will continue to have a two-year carryback and twenty-year carryforward period. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOL is expected to be utilized. The changes in the carryforward/carryback periods as well as the new limitation on use of NOLs may significantly impact our valuation allowance assessments for NOLs generated after December 31, 2017.

Natural catastrophic events and man-made problems such as power disruptions, computer viruses, data security breaches and terrorism may disrupt our business.

We rely heavily on our network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of online attack, earthquake, fire, terrorist attack, power loss, telecommunications failure or other similar catastrophic event could cause system interruptions, delays in accessing our service, reputational harm and loss of critical data or could prevent us from providing our solutions to our customers. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, including any errors, defects or failures in third- party hardware, could affect our ability to conduct normal business operations and adversely affect our operating results.

In addition, as computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our solutions and related services and technical infrastructure to the satisfaction of our customers. Any such computer malware, viruses, computer hacking, fraudulent use attempts, phishing attacks or other data security breaches to our network infrastructure or information technology systems or to computer hardware we lease from third parties, could, among other things, harm our reputation and our ability to retain existing customers and attract new customers.

 

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Our current operations are international in scope and we plan further geographic expansion, creating a variety of operational challenges.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. In each of the fiscal years ended January 31, 2017 and 2018, total revenue generated from customers outside the United States was 17% of our total revenue. We currently have offices in the United States, United Kingdom, France, Germany, Ireland, Israel, Australia, Singapore, Japan and Brazil. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will have the desired effect. As of July 31, 2018, approximately 25% of our full-time employees were located outside of the United States. We expect that our international activities will continue to grow over the foreseeable future as we continue to pursue opportunities in existing and new international markets, which will require significant management attention and financial resources. In connection with such expansion, we may face difficulties including costs associated with developing software and providing support in many languages, varying seasonality patterns, potential adverse movement of currency exchange rates, longer payment cycles and difficulties in collecting accounts receivable in some countries, tariffs and trade barriers, a variety of regulatory or contractual limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights in some countries and a geographically and culturally diverse workforce and customer base. Failure to overcome any of these difficulties could negatively affect our results of operations.

Our current international operations and future initiatives involve a variety of risks, including:

 

   

changes in a specific country’s or region’s political or economic conditions;

 

   

the need to adapt and localize our products for specific countries;

 

   

greater difficulty collecting accounts receivable and longer payment cycles;

 

   

potential changes in trade relations arising from policy initiatives implemented by the Trump administration, which has been critical of existing and proposed trade agreements;

 

   

unexpected changes in laws, regulatory requirements, taxes or trade laws;

 

   

more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal information, particularly in Europe;

 

   

differing labor regulations, especially in Europe, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

   

challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

   

difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

   

increased travel, real estate, infrastructure and legal compliance costs associated with international operations;

 

   

currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we chose to do so in the future;

 

   

limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

   

laws and business practices favoring local competitors or general preferences for local vendors;

 

   

limited or insufficient intellectual property protection or difficulties enforcing our intellectual property;

 

   

political instability or terrorist activities;

 

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exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the UK Bribery Act, and similar laws and regulations in other jurisdictions; and

 

   

adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to further expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.

Our international operations may subject us to potential adverse tax consequences.

We are expanding our international operations and staff to better support our growth into international markets. Our corporate structure and associated transfer pricing policies contemplate future growth into the international markets, and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

The TCJA, among other things, includes changes to U.S. federal tax rates, imposes additional limitations on the deductibility of interest, has both positive and negative changes to the utilization of future net operating loss carryforwards, allows for the expensing of certain capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilities and valuation allowance will be revalued at the newly enacted U.S. corporate rate. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse.

Our ability to timely raise capital in the future may be limited, or may be unavailable on acceptable terms, if at all, and our failure to raise capital when needed could harm our business, operating results and financial condition, and debt or equity issued to raise additional capital may reduce the value of our common stock.

We have funded our operations since inception primarily through equity financings and payments by our customers for use of our product offerings and related services. We cannot be certain when or if our operations will generate sufficient cash to fund our ongoing operations or the growth of our business.

We intend to continue to make investments to support our business and may require additional funds. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, operating results and financial condition. If we incur additional debt, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity

 

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securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in the future offering will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interest.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

Our solutions are subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control, and we incorporate encryption technology into certain of our solutions. These encryption products and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration.

Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations, including to countries, governments and persons targeted by U.S. embargoes or sanctions. Additionally, the Trump administration has been critical of existing trade agreements and may impose more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. While we take precautions to prevent our solutions from being exported in violation of these laws, including obtaining authorizations for our encryption products, implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.

We also note that if our strategic partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements to our strategic partner agreements; however, no assurance can be given that our strategic partners will be able to comply with such requirements.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our end-customers’ ability to implement our solutions in those countries. Changes in our solutions or future changes in export and import regulations may create delays in the introduction of our solutions in international markets, prevent our end-customers with international operations from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries, governments, or persons altogether. From time to time, various governmental agencies have proposed additional regulation of encryption technology, including the escrow and government recovery of private encryption keys. Any change in export or import regulations, economic sanctions or related legislation, increased export and import controls stemming from Trump administration policies, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential end-customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would adversely affect our business, operating results and prospects.

 

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We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.

Our sales contracts are primarily denominated in U.S. dollars, and therefore substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our platform to our customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have an adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

Furthermore, the TCJA, among other things, imposes a migration from a “worldwide” system of taxation to a territorial system. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse.

We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our clients would have to pay for our offering and adversely affect our operating results.

An increasing number of states have considered or adopted laws that attempt to impose tax collection obligations on out-of-state companies. Additionally, the Supreme Court of the United States recently ruled in South Dakota v. Wayfair, Inc. et al, or Wayfair, that online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by state governments or local governments of sales tax collection obligations on out-of-state sellers could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors and decrease our future sales, which could have a material adverse impact on our business and operating results.

 

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We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal and/or civil liability and harm our business.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the UK Bribery Act, and other anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international sales and business and sales to the public sector, we may engage with business partners and third party intermediaries to market our services and to obtain necessary permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.

While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.

Detecting, investigating and resolving actual or alleged violations can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financial condition.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

U.S. generally accepted accounting principles, or GAAP, is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales contracts are not immediately reflected in full in our operating results.

We recognize revenue over the term of each of our contracts, which are typically one year in length but may be up to three years or longer in length. As a result, much of our revenue is generated from the recognition of contract liabilities from contracts entered into during previous periods. Consequently, a shortfall in demand for our solutions and professional services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales contracts in any period, as revenue from new customers is recognized over the applicable term of their contracts.

 

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If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to allocation of revenue between recognized and deferred amounts, allowance for doubtful accounts, goodwill and intangible assets, fair value of financial instruments, valuation of stock-based compensation, valuation of warrant liabilities and the valuation allowance for deferred income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.

Future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.

Any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to take actions that may be in our best interests. Our ability to meet those financial covenants can be affected by events beyond our control, and we may not be able to continue to meet those covenants. If we seek to enter into a credit facility we may not be able to obtain debt financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

We may not be able to successfully manage the growth of our business if we are unable to improve our internal systems, processes and controls.

We need to continue to improve our internal systems, processes and controls to effectively manage our operations and growth. We may not be able to successfully implement and scale improvements to our systems and processes in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated by our sales force as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. We may experience difficulties in managing improvements to our systems, processes and controls or in connection with third-party software, which could impair our ability to provide products or services to our customers in a timely manner, causing us to lose customers, limit us to smaller deployments of our products or increase our technical support costs.

Risks Related to This Offering and Ownership of Our Common Stock

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, including:

 

   

actual or anticipated fluctuations in our financial condition and operating results;

 

   

variance in our financial performance from expectations of securities analysts;

 

   

changes in the prices of subscriptions to our solutions;

 

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changes in our projected operating and financial results;

 

   

changes in laws or regulations applicable to our solutions;

 

   

announcements by us or our competitors of significant business developments, acquisitions or new offerings;

 

   

our involvement in any litigation;

 

   

future sales of our common stock or other securities, by us or our stockholders, as well as the anticipation of lock-up releases;

 

   

changes in senior management or key personnel;

 

   

the trading volume of our common stock;

 

   

changes in the anticipated future size and growth rate of our market; and

 

   

general economic, regulatory and market conditions.

Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

We anticipate spending substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs. The manner in which we fund these expenditures may have an adverse effect on our financial condition.

We anticipate that we will spend substantial funds to satisfy tax withholding and remittance obligations when we settle the RSUs granted by us. Substantially all of the RSUs that we have issued prior to January 31, 2018 vest upon the satisfaction of both a service condition and a performance condition. The service condition for the majority of our outstanding RSUs is satisfied over a period of four years. Generally, the performance-based condition is a liquidity event requirement, which was satisfied as to any then-outstanding RSUs on the effective date of the registration statement for our IPO. The RSUs vest on the first date upon which both the service-based and performance-based requirements are satisfied. When the RSUs vest, we will deliver one share of common stock for each vested RSU on the settlement date. Since the liquidity event requirement was met because of the effectiveness of our registration statement in connection with our IPO, the settlement for RSUs following vesting generally occurs upon the later of: (1) the next quarterly settlement date (March 15, June 15, September 15 and December 15) or (2) the third quarterly settlement date that follows our IPO (December 15, 2018). Subsequent to our IPO, the compensation committee of our board of directors approved an initial settlement date of November 15, 2018.

On the settlement dates for these RSUs, we plan to withhold shares and remit income taxes on behalf of the holders at the applicable minimum statutory rates, which we refer to as a net settlement. We currently expect that the average of these withholding tax rates will be approximately 40%, and the income taxes due would be based on the then-current value of the underlying shares of our common stock. Based on 12,142,732 RSUs outstanding as of July 31, 2018, for which the service condition is expected to be satisfied on November 14, 2018 (the day before the accelerated initial settlement date following our IPO), and assuming the price of our common stock at the time of settlement is equal to $53.90, the closing price of our common stock on July 31, 2018, we estimate that this tax obligation on the initial settlement date would be approximately $253.5 million in the aggregate. The amount of this obligation could be higher or lower, depending on (1) the price of shares of our common stock on the settlement date, and (2) the actual number of RSUs outstanding for which the service condition has been satisfied. Assuming an approximate 40% tax withholding rate, we expect to deliver an aggregate of approximately 7.6 million shares of our common stock to RSU holders after withholding an aggregate of approximately 4.5 million shares of our common stock, based on 12,142,732 RSUs outstanding as of July 31,

 

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2018 for which the service condition is expected to be satisfied on November 14, 2018. In connection with these net settlements, we would withhold and remit the tax liabilities of approximately $245.0 million on behalf of the RSU holders to the relevant tax authorities in cash.

To fund these withholding and remittance obligations, we expect to use a substantial portion of our existing cash. If we elect not to fully fund tax withholding and remittance obligations through cash or we are unable to do so, we may choose to sell equity or debt securities or borrow funds, or rely on a combination of these alternatives. In the event that we sell equity securities and are unable to match successfully the proceeds to the amount of the tax liability, the newly issued shares may be dilutive, and such sale could also result in a decline of our stock price. In the event that we elect to satisfy tax withholding and remittance obligations in whole or in part by incurring debt, our interest expense and principal repayment requirements could increase significantly, which could have an adverse effect on our financial condition or results of operations.

Future sales of our common stock in the public market could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.

All of our directors and executive officers and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock are subject to market standoff agreements with us or lock-up agreements with the underwriters in our IPO that restrict their ability to transfer shares of our capital stock for 180 days from our IPO. These agreements limit the number of shares of capital stock that may be sold immediately following our IPO (i.e., through October 24, 2018). Subject to certain limitations, approximately 152,109,033 shares of common stock will become eligible for sale upon expiration of the 180-day lock-up period, based on the number of shares outstanding as of January 31, 2018 and including the shares that were sold in our IPO, which were available to be resold in the public market immediately following our IPO. The underwriters in our IPO may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In connection with this offering, we have agreed with Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, on behalf of the underwriters in this offering, that for 90 days after the date of this prospectus, subject to certain exceptions, we will not, directly or indirectly, dispose of any of our common stock or securities convertible into or exercisable or exchangeable for our common stock. In addition, all of our executive officers, directors and the selling stockholders selling shares in this offering have agreed with Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, on behalf of the underwriters in this offering, that, until the earlier of (i) 90 days after the date of this prospectus and (ii) two full trading days after the public dissemination of our earnings results for the quarter ending October 31, 2018, subject to certain exceptions, they will not, directly or indirectly, dispose of any of our common stock or securities convertible into or exercisable or exchangeable for our common stock.

Following the expiration of the lock-up agreements referred to above, under our investors’ rights agreement, certain stockholders can require us to register shares owned by them for public sale in the United States. In addition, we filed a registration statement to register shares reserved for future issuance under our equity compensation plans. As a result, subject to the satisfaction of applicable exercise periods and the expiration or waiver of the market standoff agreements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options or upon settlement of outstanding RSU awards will be available for immediate resale in the United States in the open market.

Future sales of shares of our common stock, particularly as lock-up restrictions end, may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales

 

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also could cause the trading price of our common stock to decline and make it more difficult for you to sell shares of our common stock.

We may issue our shares of common stock or securities convertible into our common stock, including the proposed concurrent Convertible Note Offering, from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our stock price and trading volume could decline.

Our stock price and trading volume is heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, our stock price and trading volume could decline.

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. A limited number of analysts are currently covering our company. If the number of analysts that cover us declines, demand for our common stock could decrease and our common stock price and trading volume may decline.

Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own.

In addition, as required by the new revenue recognition standards under ASC 606, we disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Market practices surrounding the calculation of this measure are still evolving. It is possible that analysts and investors could misinterpret our disclosure or that the terms of our customer contracts or other circumstances could cause our methods for preparing this disclosure to differ significantly from others, which could lead to inaccurate or unfavorable forecasts by analysts and investors.

Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline.

An active trading market for our common stock may not be sustained.

Our common stock is currently listed on the Nasdaq Global Select Market, or Nasdaq, under the symbol “DOCU” and trades on that market. We cannot assure you that an active trading market for our common stock will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our common stock when desired, or the prices that you may obtain for your shares.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Our executive officers, directors and current beneficial owners of 5% or more of our common stock beneficially own a significant percentage of our outstanding common stock. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

We are an “emerging growth company” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, which we expect to further increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ending January 31, 2020. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” We are required to disclose significant changes made in our internal control procedures on a quarterly basis.

We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able

 

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to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

 

   

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer;

 

   

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

   

establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;

 

   

prohibit cumulative voting in the election of directors;

 

   

provide that our directors may be removed for cause only upon the vote of sixty-six and two-thirds percent (66 2/3%) of our outstanding shares of common stock;

 

   

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

   

require the approval of our board of directors or the holders of at least sixty-six and two-thirds percent (66 2/3%) of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is

 

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responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware or the U.S. federal district courts are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Some companies that adopted a similar federal district court forum selection provision are currently subject to a suit in the Chancery Court of Delaware by stockholders who assert that the provision is not enforceable. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

Risks Related to Our Concurrent Convertible Note Offering

This offering is not contingent on the consummation of any other financing, including the concurrent Convertible Note Offering, and we have broad discretion to use the net proceeds from our concurrent Convertible Note Offering, which we may not use effectively.

Neither the completion of this offering nor of the concurrent Convertible Note Offering is contingent on the completion of the other, so it is possible that this offering occurs and the Convertible Note Offering does not occur, and vice versa. We cannot assure you that the concurrent Convertible Note Offering will be completed on the terms described herein, or at all.

We anticipate that the net proceeds from that offering will be used for working capital and other general corporate purposes. We may also use a portion of the net proceeds for acquisitions or strategic investments in businesses or technologies, although we do not currently have any commitments for any such acquisitions or investments. Our management will have considerable discretion in the application of the net proceeds. The net proceeds from that offering may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. The failure by our management to apply those funds effectively may adversely affect our operations or business prospects.

Conversion of the notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.

The conversion of some or all of the notes may dilute the ownership interests of our stockholders. Upon conversion of the notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in

 

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shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.

Certain provisions in the indenture governing the notes offered in the Convertible Note Offering may delay or prevent an otherwise beneficial takeover attempt of us.

Certain provisions in the indenture governing the notes offered in the Convertible Note Offering may make it more difficult or expensive for a third party to acquire us. For example, the indenture governing the notes will require us to repurchase the notes for cash upon the occurrence of a fundamental change (as defined in the indenture governing the notes) of us and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase the notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover. Such additional costs may have the effect of delaying or preventing a takeover of us that would otherwise be beneficial to investors.

Assuming we close our Convertible Note Offering, servicing our debt will require a significant amount of cash. We may not have sufficient cash flow to make payments on our debt, and we may not have the ability to raise the funds necessary to settle conversions of the notes or to repurchase the notes upon a fundamental change, which could adversely affect our business, financial condition and results of operations.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the notes or otherwise.

In addition, holders of the notes will have the right to require us to repurchase all or a portion of their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. Upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or at the time notes are being converted. In addition, our ability to repurchase the notes or to pay cash upon conversions of the notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the notes as required by the indenture governing the notes would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof. An event of default under the indenture governing the notes may lead to an acceleration of the notes. Any such acceleration could result in our bankruptcy. In a bankruptcy, the holders of the notes would have a claim to our assets that is senior to the claims of our equity holders.

 

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In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:

 

   

make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our industry;

 

   

place us at a disadvantage compared to our competitors who have less debt; and

 

   

limit our ability to borrow additional amounts for working capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.

The conditional conversion feature of the notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash, such as the notes, could have a material effect on our reported financial results.

In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20.

Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at issuance, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report larger net losses or lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s non-convertible coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.

In addition, under certain circumstances, convertible debt instruments (such as the notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such notes are not included in the calculation of diluted earnings per

 

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share except to the extent that the conversion value of such notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then the “if converted” method of accounting would be applied and accordingly, the full number of shares that could be issued would be included in the calculation of diluted earnings per share, which would adversely affect our diluted earnings per share.

We may still incur substantially more debt or take other actions which would intensify the risks discussed above.

We and our subsidiaries may incur substantial additional debt in the future, some of which may be secured debt. We will not be restricted under the terms of the indenture governing the notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could have the effect of diminishing our ability to make payments on the notes when due.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our ability to effectively sustain and manage our growth and future expenses, and our ability to achieve and maintain future profitability;

 

   

our ability to attract new customers and to maintain and expand our existing customer base;

 

   

our ability to scale and update our platform to respond to customers’ needs and rapid technological change;

 

   

the effects of increased competition on our market and our ability to compete effectively;

 

   

our ability to expand our operations and increase adoption of our platform internationally;

 

   

our ability to maintain, protect and enhance our brand;

 

   

the sufficiency of our cash and cash equivalents to satisfy our liquidity needs;

 

   

our failure or the failure of our platform of services to comply with applicable industry standards, laws, and regulations;

 

   

our ability to attract large organizations as users;

 

   

our ability to maintain our corporate culture;

 

   

our ability to offer high-quality customer support;

 

   

our ability to hire, retain and motivate qualified personnel;

 

   

our ability to identify targets for, execute on and realize the benefits of recent or potential acquisitions;

 

   

statements about the potential benefits of the acquisition of SpringCM;

 

   

our ability to estimate the size and potential growth of our target market;

 

   

our ability to maintain proper and effective internal controls; and

 

   

our anticipated use of net proceeds from the concurrent Convertible Note Offering.

Actual events or results may differ from those expressed in these forward-looking statements, and these differences may be material and adverse. The forward-looking statements are contained principally in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the

 

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results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this prospectus or to conform such statements to actual results or revised expectations, except as required by law.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources, and on our knowledge of the markets for our solutions. This information involves a number of assumptions and limitations and is inherently imprecise, and you are cautioned not to give undue weight to these estimates. In addition, the industry in which we operate, as well as the projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate, are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus, that could cause results to differ materially from those expressed in these publications and reports.

Some of the information contained in this prospectus is based on information from various sources, including independent industry publications by Forrester Research, data compiled by a third party or other publicly available information. The sources of these publications, data and information are provided below:

 

   

Forrester Research, Digital Transforms The Game Of Business Digital Transaction Management Emerging As Key Solution (March 2015).

 

   

Forrester Research, Vendor Landscape: E-Signature, Q4 2016 (October 12, 2016).

 

   

The Gartner report described in this prospectus represents research opinion or viewpoints published as part of a syndicated subscription service by Gartner and are not representations of fact. The Gartner report speaks as of its original publication date and not as of the date of this prospectus, and the opinions expressed in the Gartner report are subject to change without notice.

 

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USE OF PROCEEDS

The selling stockholders are selling all of the shares of common stock being sold in this offering, including any shares sold upon exercise of the underwriters’ option to purchase additional shares. Accordingly, we will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.

Concurrently with this offering of common stock, we are offering to qualified institutional buyers, in an offering exempt from registration under the Securities Act, $400 million aggregate principal amount of our     % Convertible Senior Notes due 2023, which we refer to as the notes, or a total of $460 million aggregate principal amount of notes if the initial purchasers in the concurrent Convertible Note Offering exercise in full their option to purchase additional notes. The net proceeds of the concurrent Convertible Note Offering, after deducting the estimated initial purchasers’ discounts and commissions and estimated offering expenses, are expected to be approximately $             million (or approximately $             million if the initial purchasers in the Convertible Note Offering exercise in full their option to purchase additional notes). If the Convertible Note Offering does not close, we will not receive the net proceeds described in the foregoing sentence.

In connection with the Convertible Note Offering, we expect to enter into capped call transactions with one or more of the option counterparties. We intend to use approximately $             million of the net proceeds from the Convertible Note Offering to pay the cost of the capped call transactions. We intend to use the remainder of the net proceeds from the Convertible Note Offering for working capital and other general corporate purposes. Such purposes are expected to include additional investments in extending and enhancing our technology platform, expanding our direct sales force and customer success team and related expenditures to drive new customer adoption, expanding use cases and vertical solutions, and supporting international expansion and our developer community. We may also use a portion of the net proceeds from the Convertible Note Offering for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no commitments to enter into any such acquisitions or investments at this time. Accordingly, we will have broad discretion over the uses of the net proceeds from the Convertible Note Offering.

If the initial purchasers in the Convertible Note Offering exercise their option to purchase additional notes, we expect to use a portion of the net proceeds from the sale of the additional notes to enter into additional capped call transactions with the option counterparties and for working capital and general corporate purposes.

Pending these uses, we intend to invest the net proceeds from the Convertible Note Offering in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

 

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MARKET PRICE OF COMMON STOCK

Shares of our common stock commenced trading on The Nasdaq Global Select Market under the symbol “DOCU” on April 27, 2018. Prior to that date, there was no public market for our common stock. The following table summarizes the high and low sale prices of our common stock as reported by The Nasdaq Global Select Market:

 

     High      Low  

First Quarter 2018 (from April 27, 2018)

   $ 40.89      $ 37.00  

Second Quarter 2018

   $ 66.80      $ 37.85  

Third Quarter 2018 (through September 10, 2018)

   $ 68.35      $ 53.00  

On September 10, 2018, the last reported sale price of our common stock on The Nasdaq Global Select Market was $53.93 per share. As of July 31, 2018, we had 968 holders of record of our common stock. This figure does not reflect the beneficial ownership or shares held in nominee name.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, the limitations on payment of dividends in our future debt agreements, and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of July 31, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the completion of this offering and after deducting the estimated offering expenses; and

 

   

on a pro forma as adjusted basis to give effect to (1) the adjustments set forth above and (2) the completion of the sale of notes in the concurrent Convertible Note Offering, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses (assuming the initial purchasers’ option to purchase additional notes is not exercised).

The following table does not reflect our acquisition of SpringCM on September 4, 2018 for approximately $220.2 million in cash. You should read this table together with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, the financial statements of SpringCM, the pro forma financial information of DocuSign and SpringCM Inc. and the related notes to all financial statements included elsewhere in this prospectus.

 

     As of July 31, 2018  
     Actual     Pro
Forma(1)
    Pro Forma
As Adjusted(2)(4)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 818,795     $ 817,295     $ 1,207,695  
  

 

 

   

 

 

   

 

 

 

Principal amount of     % senior convertible notes due 2023(2)(4)

     —         —         400,000  

Stockholders’ equity:

      

Common stock, par value $0.0001 per share; 500,000,000 shares authorized, 156,785,672 shares issued and outstanding, actual, pro forma and pro forma as adjusted(3)

     16       16       16  

Additional paid-in capital(4)

     1,555,185       1,555,185       1,555,185  

Accumulated other comprehensive income

     (2,010     (2,010     (2,010

Accumulated deficit

     (809,721     (811,221     (811,221
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     743,470       741,970       741,970  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 743,470     $ 741,970     $ 1,141,970  
  

 

 

   

 

 

   

 

 

 

 

(1)

The pro forma amounts reflect the completion of this offering and after deducting the estimated operating expenses.

(2)

In accordance with ASC 470-20, convertible debt (such as the notes) that may be wholly or partially settled in cash is required to be separated into a liability and an equity component, such that interest expense reflects the issuer’s non-convertible debt interest rate. Upon issuance, a debt discount is recognized as a decrease in debt and an increase in equity. The debt component will accrete up to the principal amount ($400.0 million for the notes offered in the Convertible Note Offering) over the expected term of the debt. ASC 470-20 does not affect the actual amount that we are required to repay, and the amount shown in the table above for the notes is the aggregate principal amount of the notes and does not reflect the debt discount, fees and expenses or any tax impact that we will be required to recognize in our consolidated balance sheet.

(3)

The outstanding share information in the table above excludes:

 

   

all shares of common stock issuable upon the conversion of the notes offered in the concurrent Convertible Note Offering;

 

   

18,121,774 shares of common stock issuable upon the exercise of options outstanding as of July 31, 2018, at a weighted-average exercise price of $11.76 per share;

 

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28,946,196 shares of common stock issuable from time to time after this offering upon the settlement of restricted stock units, or RSUs, outstanding as of July 31, 2018, up to approximately 37% of which we plan to withhold, based on an assumed 40% tax withholding rate, to satisfy income tax obligations upon settlement of the RSUs, as discussed in “Risk Factors—We anticipate spending substantial funds in connection with the tax liabilities that arise upon the settlement of RSUs. The manner in which we fund these expenditures may have an adverse effect on our financial condition.”;

 

   

14,175,278 shares of common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan as of July 31, 2018, as well as automatic increases in the number of shares of our common stock reserved for future issuance under our 2018 Equity Incentive Plan; and

 

   

3,800,000 shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan as of July 31, 2018, as well as any automatic increases in its share reserve each year.

 

(4)

The issuance of the notes (after giving effect to the application of ASC 470-20 as described in note (1) above) will result in an increase to additional paid-in capital and, therefore, an increase in total stockholders’ equity and a decrease to the senior convertible notes due 2023. However, amounts shown in the table above do not reflect the application of ASC 470-20 to the notes including any tax impact. Additionally, additional paid-in capital and, therefore, total stockholders’ equity and total capitalization do not reflect the reduction from the cost of the capped call transactions that are expected to be accounted for as equity instruments and not as derivatives.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated statements of operations data for the fiscal years ended January 31, 2016, 2017 and 2018 and the selected consolidated balance sheet data as of January 31, 2017 and 2018 from audited consolidated financial statements included elsewhere in this prospectus. We derived the unaudited summary consolidated statements of operations data for the six months ended July 31, 2017 and 2018 and the unaudited summary consolidated balance sheet data as of July 31, 2018 from our unaudited interim condensed consolidated financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. Our historical results are not necessarily indicative of the results to be expected in the future. Our fiscal year ends January 31.

The selected financial data set forth below should be read together with our consolidated financial statements the financial statements of SpringCM Inc., the pro forma financial information of DocuSign and SpringCM Inc. and the related notes to all financial statements included elsewhere in this prospectus, as well as the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended January 31,     Six Months Ended
July 31,
 
    2016     2017     2018     2017     2018  
                      (unaudited)  
    (in thousands, except share and per share data)  

Revenue

         

Subscription

  $ 229,127     $ 348,563     $ 484,581     $ 224,400     $ 306,659  

Professional services and other

    21,354       32,896       33,923       14,641       16,193  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    250,481       381,459       518,504       239,041       322,852  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue(1)(2)

         

Subscription

    48,656       73,363       83,834       39,333       55,495  

Professional services and other

    25,199       29,114       34,439       16,249       39,160  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    73,855       102,477       118,273       55,582       94,655  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    176,626       278,982       400,231       183,459       228,197  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Sales and marketing(1)(2)

    170,006       240,787       277,930       133,634       294,864  

Research and development(1)(2)

    62,255       89,652       92,428       46,475       104,643  

General and administrative(1)(2)

    63,669       64,360       81,526       36,395       133,968  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    295,930       394,799       451,884       216,504       533,475  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (119,304     (115,817     (51,653     (33,045     (305,278

Interest expense

    (780     (611     (624     (320     (240

Interest income and other income (expense), net

    (3,508     1,372       3,135       1,924       770  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

    (123,592     (115,056     (49,142     (31,441     (304,748

Provision for (benefit from) income taxes

    (1,033     356       3,134       (22     2,653  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (122,559   $ (115,412   $ (52,276   $ (31,419   $ (307,401
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(3)

  $ (4.76   $ (4.17   $ (1.66   $ (1.05   $ (3.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(3)

    26,052,441       28,019,818       32,293,729       30,715,624       102,284,494  

Other comprehensive income (loss):

         

Foreign currency translation gains (losses), net of tax

    (1,980     651       6,149       2,833       (5,413
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (124,539   $ (114,761   $ (46,127     (28,586     (312,814
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Six Months Ended July 31,  
     2016      2017      2018            2017                  2018        
            (unaudited)  
     (in thousands)  

Cost of revenue—Subscription

   $ 1,074      $ 1,190      $ 911      $ 469      $ 11,543  

Cost of revenue—Professional services and other

     1,297        1,021        976        489        18,867  

Sales and marketing

     10,617        11,187        9,386        5,588        129,272  

Research and development

     8,221        10,161        4,896        2,679        54,627  

General and administrative

     11,455        11,884        13,578        7,693        95,650  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 32,664      $ 35,443      $ 29,747      $ 16,918      $ 309,959  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

As of January 31, 2018, we had 23,080,543 RSUs outstanding that are subject to service-based vesting conditions and liquidity event related performance vesting conditions. We had not recognized any compensation expense related to these RSUs as a qualifying liquidity event had not yet occurred as of January 31, 2018. The liquidity event was satisfied in April 2018 in connection with our IPO, and as a result, we recognized stock-based compensation expense using the accelerated attribution method with a cumulative catch-up of stock-based compensation expense of $262.8 million.

(3)

See Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     January 31,     July 31,  
     2017     2018     2018  
                 (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 190,556     $ 256,867     $ 818,795  

Working capital

     44,250       44,976       578,473  

Total assets

     499,638       619,973       1,169,698  

Contract liabilities, current and non-current

     190,151       277,924       297,427  

Redeemable convertible preferred stock warrant liability

     419       445       —    

Redeemable convertible preferred stock

     546,040       547,501       —    

Accumulated deficit

     (450,044     (502,320     (809,721

Total stockholders’ equity (deficit)

     (347,355     (338,648     743,470  

Non-GAAP Financial Measures

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 measure 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 are presenting these non-GAAP metrics 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.

 

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Free cash flow

We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchase of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, 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. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

The following table summarizes our cash flows for the periods presented and presents a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, for each of the periods presented:

 

    Year Ended January 31,     Six Months Ended July 31,  
    2016     2017     2018           2017                 2018        
          (unaudited)          

(unaudited)

 
    (in thousands)  

Net cash provided by (used in) operating activities

  $ (67,995   $ (4,790   $ 54,979     $ 11,401     $ 37,688  

Net cash used in investing activities

    (80,165     (40,880     (18,761     (10,622     (10,520

Net cash provided by financing activities

    274,856       8,037       25,728       13,509       536,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  $ (67,995   $ (4,790   $ 54,979     $ 11,401     $ 37,688  

Purchase of property and equipment

    (28,305     (43,330     (18,929     (11,089     (10,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP free cash flow

  $ (96,300   $ (48,120   $ 36,050     $ 312     $ 27,168  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash (used in) provided by operating activities. Second, other companies may calculate free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison. Additionally, the utility of free cash flow is further limited as it does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, you should consider free cash flow along with our GAAP financial measures.

Billings

We use the non-GAAP measure of 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. Billings consists of our 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. While we believe that billings provides valuable insight into the cash that will be generated from sales of our subscriptions and services, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter to quarter or year-over-year comparative measure. These reasons include, but are not limited to, (i) a variety of customer contractual terms could result in some periods having a higher proportion of multi-year time-based subscriptions than other periods, (ii) as we experience an increasing number of larger sales transactions, the timing of executing these larger transactions has and will continue to vary, with some transactions occurring in quarters subsequent to or in advance of those that we anticipated and (iii) fluctuations in payment terms affecting the billings recognized in a particular period. Because of these and other limitations, you should consider billings along with revenue and our other GAAP financial results.

 

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The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to billings, for each of the periods presented:

 

     Year Ended January 31,     Six Months Ended July 31,  
     2016     2017     2018             2017                     2018          
     (unaudited)     (unaudited)  
     (in thousands)  

Revenue

   $ 250,481     $ 381,459     $ 518,504     $ 239,041     $ 322,852  

Add: Contract liabilities and refund liability, end of period

     137,031       195,501       282,943       214,405       300,426  

Less: Contract liabilities and refund liability, beginning of period

     (96,159     (137,031     (195,501     (195,501     (282,943

Add: Contract assets and unbilled accounts receivable, beginning of period

     708       2,532       10,095       10,095       16,899  

Less: Contract assets and unbilled accounts receivable, end of period

     (2,532     (10,095     (16,899     (11,381     (16,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP billings

   $ 289,529     $ 432,366     $ 599,142     $ 256,659     $ 341,038  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements, the financial statements of SpringCM, the pro forma financial information of DocuSign and SpringCM Inc., the related notes to all financial statements, and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends January 31.

Overview

DocuSign accelerates 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.

As the core part of our broader platform for automating the agreement process, we offer the world’s #1 e-signature solution. Our platform has achieved widespread adoption by businesses of all sizes by enabling them to digitally prepare, execute and act on agreements. Today, we have over 425,000 total customers and hundreds of millions of users around the world. The following graphic highlights key milestones since our founding in 2003 and also illustrates the increase in our annual revenue over time.

 

 

LOGO

 

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We offer access to our software platform on a subscription basis and price such subscriptions based on the functionality required by our customers and the quantity of Envelopes provisioned. Similar to how physical agreements were mailed for signature in paper envelopes historically, 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, multiple Envelopes are used over the course of the process. For example, in the purchase or sale of a home, multiple Envelopes are used over the course of the home-buying process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform.

We believe that the usage of our platform illustrates the adoption, scale and value of our platform, which we believe enhances our ability to maintain existing customer relationships and attract new customers. We track usage by measuring Successful Transactions, which is the completion of all required actions by all relevant parties in a given Envelope, such as signing or approving the forms or documents contained within the Envelope. The number of Successful Transactions completed in any period does not directly correlate to our revenue or results of operations because we do not charge our customers based on actual usage of our platform.

In the year ended January 31, 2018, over 244 million Successful Transactions were completed on our platform. The chart below shows annual Successful Transactions completed on our platform since the year ended January 31, 2011.

 

 

LOGO

We offer access to our platform on a subscription basis and we generate substantially all our revenue from sales of subscriptions, which accounted for 91% of our revenue for each of the years ended January 31, 2016 and 2017 and 93% of our revenue for the year ended January 31, 2018, and 94% and 95% of our revenue for the six months ended July 31, 2017 and 2018. Our subscription fees include the use of our platform and access to

 

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customer support. Subscriptions generally range from one to three years and substantially all of our multi-year customers pay in annual installments, one year in advance. We recognize subscription revenue ratably over the term of a contract. As the terms of most of our contracts are measured in full year increments, contracts generally come up for renewal in the same period in subsequent years. The timing of large multi-year enterprise contracts can create some variability in subscription order levels between periods, though the impact to our annual or quarterly revenue is minimal due to the fact that we recognize subscription revenue ratably over the term of our customer contracts.

Our subscriptions range from single user, multi-user, broader business users, and enterprise offerings that include enhanced functionality. Also included in our subscription revenue is revenue derived from our customer support, which includes phone or email support. This support is priced as a percentage of subscription value.

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. Revenue from professional services accounted for 5% of our total revenue for each of the years ended January 31, 2016 and 2017, 4% of our revenue for the year ended January 31, 2018, and 4% and 3% of our total revenue for the six months ended July 31, 2017 and 2018, respectively. 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 platform, which helps to drive customer retention and expansion of the use of our platform.

We offer subscriptions to our platform to enterprise businesses, commercial businesses, and VSBs, which include 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 is the most cost-effective way to reach our smallest customers. We offer more than 300 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. Our largest customer accounted for 3% or less of revenue for each of the years ended January 31, 2016, 2017 and 2018 and the six months ended July 31, 2017 and 2018.

We focused initially on selling our e-signature solutions to commercial businesses and VSBs. We later expanded our focus to target enterprise customers by adding our first enterprise sales professionals in the year ended January 31, 2011. In the year ended January 31, 2013, we began to gain meaningful traction selling into new enterprise accounts with aggregate ACV exceeding $5 million. To demonstrate this growth over time, the number of our customers with greater than $300,000 in ACV has increased from approximately 30 as of January 31, 2013 to more than 200 customers as of July 31, 2018. Each of our customer types have different purchasing patterns. VSBs tend to become customers quickly with very little to no direct 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.

Since inception, we have invested more than $300 million in research and development related to our platform to build the world’s #1 e-signature solution. This has allowed us to achieve significant growth and scale. We believe the market opportunity for our e-signature solution remains significant. We expect to continue to invest for long-term growth and to maintain our category leadership position.

We have experienced rapid growth in recent periods. Our revenue for the years ended January 31, 2016, 2017 and 2018, of $250.5 million, $381.5 million and $518.5 million, respectively, represented year-over-year growth of approximately 52% and 36%. Our revenue grew from $239.0 million in the six months ended July 31, 2017 to $322.9 million in the six months ended July 31, 2018, which represented year-over-year growth of approximately 35%. Our net loss was $122.6 million, $115.4 million, and $52.3 million for the years ended January 31, 2016, 2017 and 2018, respectively, and $31.4 million and $307.4 million for the six

 

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months ended July 31, 2017 and 2018, respectively, as we continued to invest in our business and market opportunity.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

Growing Our 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 July 31, 2018, we had over 425,000 customers, including over 45,000 enterprise and commercial customers. This compares to a total of over 330,000 customers and over 35,000 enterprise and commercial customers as of July 31, 2017. 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 platform. We define enterprise customers as companies generally included in the Global 2000. We generally define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and SMBs, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. VSBs include companies with less than 10 employees. We refer to total customers as all enterprises, commercial businesses, and VSBs.

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 platform 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 the platform. Several of our largest enterprise customers have deployed our 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 platform.

For our top 100 customers as measured by ACV for the quarter ended July 31, 2018 that placed their first order in, or prior to, the year ended January 31, 2014, their ACV has increased by a median multiple of 5.2x their initial purchase. Our top 100 customers as measured by ACV were 23% and 22% of our aggregate ACV for the quarters ended July 31, 2017 and 2018, respectively. Approximately 85% of our aggregate ACV and 84% of our revenue for the quarter ended July 31, 2018 was attributable to our enterprise and commercial customers, with the remaining amount attributable to VSBs.

Increasing International Revenue

Our international revenues represented 16% of our total revenues in the year ended January 31, 2016, 17% of our total revenues in each of the years ended January 31, 2017 and 2018, and 16% and 17% in the six months ended July 31, 2017 and 2018, respectively. We started our international selling efforts in English-speaking common law countries, such as Canada, the UK and Australia, as we were able to leverage our core technologies in these jurisdictions since they have a similar approach to e-signature as the United States. We have since made significant investments to be able to offer our solutions in select civil law countries. For example, in Europe, we have Standards-Based Signature technology tailored for eIDAS. 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. Additionally, we expect our strategic partnerships in key international markets, including our current relationships with SAP in Europe, to further growth.

 

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Investing for Growth

We believe that our market opportunity is large, and we plan to invest in order 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 platform and underlying infrastructure and technology to meet the needs of our customers across industries.

Key Business Metrics

We review the following key metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, which may hinder comparability with other companies who may calculate similarly titled metrics in a different way.

Total Number of Customers

As of July 31, 2018, we had over 425,000 customers, including over 45,000 enterprise and commercial customers. This compares to a total of over 330,000 customers and over 35,000 enterprise and commercial customers as of July 31, 2017.

We believe that our ability to increase the number of customers on our 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. Increasing awareness of our platform, further developing our sales and marketing expertise, and continuing to build features tuned to different industry needs have expanded the diversity of our customer base to include organizations of all sizes across industries.

Dollar-Based Net Retention Rate

To further illustrate the land-and-expand economics of our customer relationships, we examine the rate at which our customers increase their subscriptions with us. Our dollar-based net retention rate measures our ability to increase revenue across our existing customer base through expanded use of our platform by customers, as offset by customers whose subscriptions with us are not renewed or renew at a lower amount.

Our dollar-based net retention rate compares the ACV for subscription contracts from a set of enterprise and commercial customers at two period end dates. To calculate our dollar-based net retention rate at the end of a base year (e.g., January 31, 2018), we first identify the set of customers that were customers at the end of the prior year (e.g., January 31, 2017). We then divide the ACV attributed to that set of customers at the end of the base year by the ACV attributed to that same set at the end of the prior year. The quotient obtained from this calculation is the dollar-based net retention rate. Our dollar-based net retention rate was approximately 112% and 115% at July 31, 2017 and 2018, respectively.

International Revenue

We will continue to make significant investments to expand our presence and product capabilities in international markets, particularly in Europe and Asia-Pacific. Our focus remains on penetrating international markets where we see opportunities for our solutions. The revenue from non-U.S. regions constituted 16% of our total revenue in the year ended January 31, 2016, 17% of our total revenue in each of the years ended January 31, 2017 and 2018, and 16% and 17% in the six months ended July 31, 2017 and 2018, respectively.

Components of Results of Operations

Revenue

We derive revenue primarily from subscriptions and, to a lesser extent, professional services.

 

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Subscription Revenue. Subscription revenue consists of fees for the use of our platform 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 recognized subscription revenue ratably over the term of the contract subscription period beginning on the date access to our platform is provided, as long as all other revenue recognition criteria have been met.

Professional Services and Other Revenue. Professional services revenue includes fees associated with new 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.

Overhead Allocation

We allocate shared costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology, information security costs and recruiting to all departments based on headcount. As such, allocated shared 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 platform and providing support. These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, as well as personnel costs for employees associated with our technical infrastructure and customer support. These expenses also consist of software 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 and acquired intangible assets, credit card processing fees and allocated overhead. We expect our cost of revenue to continue to increase in absolute dollar amounts as we invest in our business.

Cost of Professional Services and Other Revenue. Cost of professional services and other revenue consists primarily of personnel costs for our professional services delivery team, travel related costs and allocated overhead.

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 platform support and professional services team, share-based compensation expenses, as well as amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead.

Operating Expenses

Our operating expenses consist of selling and marketing, research and development and general and administrative expenses.

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. We expect selling and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement marketing strategies.

 

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Research and Development Expense. Research and development expense consists primarily of personnel costs. These expenses also include non-personnel costs, such as subcontracting, consulting and professional fees for third-party development resources and depreciation costs, as well as allocated overhead. Our research and development efforts focus on maintaining and enhancing existing functionality and adding new functionality. We expect research and development expense to increase in absolute dollars as we invest in the enhancement of our platform.

General and Administrative Expense. General and administrative expense consists primarily of employee-related costs for those employees associated with 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 and allocated overhead.

We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for insurance, investor relations and professional services. We expect our general and administrative expenses will increase in absolute dollars as our business grows.

Interest Expense

Interest expense consists primarily of commitment fees and amortization of costs related to our loan facility.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net, consists primarily of interest earned on our cash and cash equivalents and foreign currency transaction gains and losses.

Provision for (Benefit from) Income Taxes

Our provision for (benefit from) income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business and state minimum taxes in the United States, as well as certain tax benefits arising from acquisitions. We have a valuation allowance of our U.S. deferred tax assets, including U.S. net operating loss carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our U.S. deferred tax assets will be realized by way of expected future taxable income in the U.S.

 

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Discussion of Results of Operations

The following table summarizes our historical consolidated statements of operations data:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(in thousands)    2016     2017     2018     2017     2018  
                       (unaudited)  

Revenue:

          

Subscription

   $ 229,127     $ 348,563     $ 484,581     $ 224,400     $ 306,659  

Professional services and other

     21,354       32,896       33,923       14,641       16,193  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     250,481       381,459       518,504       239,041       322,852  

Cost of revenue:

          

Subscription

     48,656       73,363       83,834       39,333       55,495  

Professional services and other

     25,199       29,114       34,439       16,249       39,160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     73,855       102,477       118,273       55,582       94,655  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     176,626       278,982       400,231       183,459       228,197  

Operating expenses:

          

Sales and marketing

     170,006       240,787       277,930       133,634       294,864  

Research and development

     62,255       89,652       92,428       46,475       104,643  

General and administrative

     63,669       64,360       81,526       36,395       133,968  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     295,930       394,799       451,884       216,504       533,475  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (119,304     (115,817     (51,653     (33,045     (305,278

Interest expense

     (780     (611     (624     (320     (240

Interest income and other income (expense), net

     (3,508     1,372       3,135       1,924       770  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

     (123,592     (115,056     (49,142     (31,441     (304,748

Provision for (benefit from) income taxes

     (1,033     356       3,134       (22     2,653  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (122,559   $ (115,412   $ (52,276   $ (31,419   $ (307,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
       2016         2017         2018           2017             2018      
                       (unaudited)  

Revenue:

          

Subscription

     91     91     93     94     95

Professional services and other

     9       9       7       6       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100       100       100       100       100  

Cost of revenue:

          

Subscription

     20       19       16       16       17  

Professional services and other

     10       8       7       7       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     30       27       23       23       29  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     70       73       77       77       71  

Operating expenses:

          

Sales and marketing

     68       63       53       56       91  

Research and development

     25       23       18       19       33  

General and administrative

     25       17       16       16       42  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     118       103       87       91       166  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (48     (30     (10     (14     (95

Interest expense

                              

Interest income and other income (expense), net

     (1           1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

     (49     (30     (9     (13     (94

Provision for (benefit from) income taxes

                 1             1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (49 )%      (30 )%      (10 )%      (13 )%      (95 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended July 31, 2017 and 2018

Revenue

 

     Six Months Ended
July 31,
        
(in thousands, except for percentages)    2017      2018      % Change  

Revenue:

        

Subscription

   $ 224,400      $ 306,659        37

Professional services and other

     14,641        16,193        11
  

 

 

    

 

 

    

Total revenue

   $ 239,041      $ 322,852        35
  

 

 

    

 

 

    

Subscription revenue increased $82.3 million, or 37%. Subscription revenue was 95% of total revenue in the six months ended July 31, 2018 and 94% in the six months ended July 31, 2017. The increase was primarily attributable to increases in subscription sales to new and existing customers. 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.

Professional services and other revenue increased by $1.6 million, or 11%, primarily due to increased engagement of professional services to support our growing customer base.

 

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Cost of Revenue and Gross Margin

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)    2017     2018     % Change  

Cost of revenue:

      

Subscription

   $ 39,333     $ 55,495       41

Professional services and other

     16,249       39,160       141
  

 

 

   

 

 

   

Total cost of revenue

   $ 55,582     $ 94,655       70
  

 

 

   

 

 

   

Gross margin:

      

Subscription

     82     82      pts 

Professional services and other

     (11 )%      (142 )%      (131 )pts 
  

 

 

   

 

 

   

Total gross margin

     77     71     (6 )pts 
  

 

 

   

 

 

   

Cost of subscription revenue increased $16.2 million, or 41%, primarily due to:

 

   

An increase of $11.1 million in stock-based compensation expense primarily driven by the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period;

 

   

An increase of $3.2 million in data center and other related operating costs to support our platform; and

 

   

An increase of $0.7 million in allocated overhead and $0.6 million in personnel costs primarily driven by increases in headcount.

Cost of professional service and other revenue increased $22.9 million, or 141%, primarily due to:

 

   

An increase of $18.4 million in stock-based compensation primarily driven by the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period; and

 

   

An increase of $4.4 million in personnel costs primarily related to increased headcount in our professional services organization.

Sales and Marketing

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)    2017     2018     % Change  

Sales and marketing

   $ 133,634     $ 294,864       121

Percentage of revenue

     56     91  

Sales and marketing expenses increased $161.2 million, or 121%, primarily due to:

 

   

An increase of $123.7 million in stock-based compensation expense, primarily driven by the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period;

 

   

An increase of $21.2 million in personnel costs driven by increased headcount and higher commissions in line with higher sales;

 

   

An increase of $7.2 million in marketing and advertising expense, primarily due to higher spend for online advertising campaigns;

 

   

An increase of $3.7 million in allocated overhead due to increased headcount and facility costs;

 

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An increase of $2.9 million in travel costs to support the increase in the personnel; and

 

   

An increase of $1.4 million in other expenses primarily due to higher spend on employee-related costs.

Research and Development

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)    2017     2018     % Change  

Research and development

   $ 46,475     $ 104,643       125

Percentage of revenue

     19     33  

Research and development expenses increased $58.2 million, or 125%, primarily due to:

 

   

An increase of $51.9 million in stock-based compensation expense, primarily driven by the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period;

 

   

An increase of $2.4 million in personnel costs due to higher headcount;

 

   

An increase of $1.7 million in allocated overhead due to increased headcount and facility costs;

 

   

An increase of $0.9 million in other expenses primarily due to higher team events and other employee costs; and

 

   

An increase of $0.7 million in professional fees due to higher consulting spend.

General and Administrative

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)    2017     2018     % Change  

General and administrative

   $ 36,395     $ 133,968       268

Percentage of revenue

     16     42  

General and administrative expenses increased $97.6 million, or 268%, primarily due to:

 

   

An increase of $88.0 million in stock-based compensation expense, primarily driven by the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period;

 

   

An increase of $6.3 million in professional fees, primarily driven by costs related to our IPO and preparation for operating as a public company, as well as higher audit and consulting costs; and

 

   

An increase of $3.1 million in allocated overhead primarily due to increased headcount and facility costs.

Interest Income and Other Income, Net

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)        2017             2018         % Change  

Interest income and other income, net

   $ 1,924     $ 770       (60 )% 

Percentage of revenue

     1     1  

 

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Interest income and other income, net, decreased $1.2 million. The change was primarily due to foreign currency transaction losses, partially offset by higher interest income on higher cash and cash equivalents.

Provision for (Benefit from) Income Taxes

 

     Six Months Ended
July 31,
       
(in thousands, except for percentages)        2017             2018         % Change  

Provision for (benefit from) income taxes

   $ (22   $ 2,653       NM  

Percentage of revenue

         1  

Provision for (benefit from) income taxes changed by $2.7 million primarily due to higher year-over-year earnings in certain foreign jurisdictions as we continue to scale our foreign operations to support our ongoing international growth. We have recorded valuation allowances against the deferred tax assets associated with losses for which we might not realize a related tax benefit.

Comparison of the Years Ended January 31, 2016, 2017 and 2018

Revenue

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)    2016      2017      2018      2016 vs. 2017     2017 vs. 2018  

Revenue:

             

Subscription

   $ 229,127      $ 348,563      $ 484,581        52     39

Professional services and other

     21,354        32,896        33,923        54     3
  

 

 

    

 

 

    

 

 

      

Total revenue

     250,481        381,459        518,504        52     36
  

 

 

    

 

 

    

 

 

      

2018 Compared to 2017. Total revenue increased $137.0 million, or 36%, in the year ended January 31, 2018 compared to the prior year. Subscription revenue increased $136.0 million, or 39%, in the year ended January 31, 2018 compared to the prior year. Subscription revenue was 93% of total revenue in the year ended January 31, 2018 and 91% in the year ended January 31, 2017. We estimate that approximately 70% of the increase in subscription revenue was attributable to the growth from existing customers, and the remaining approximately 30% of the increase in revenue was attributable to new customers, relating to a 29% increase in total customers. Professional services and other revenue increased $1.0 million, or 3%, in the year ended January 31, 2018 compared to the prior year, primarily due to deployment and integration services for new customers, net of the impact of the sale of our digital certificates business in the first half of fiscal 2018.

2017 Compared to 2016. Total revenue increased $131.0 million, or 52%, in the year ended January 31, 2017 compared to the prior year. Subscription revenue increased $119.5 million, or 52%, in the year ended January 31, 2017 compared to the prior year. Subscription revenue was 91% of total revenue in each of the comparative years. We estimate that approximately 70% of the increase in subscription revenue was attributable to the growth from existing customers, and the remaining approximately 30% of the increase in revenue was attributable to new customers, relating to a 35% increase in total customers. Professional services and other revenue increased $11.5 million, or 54%, in the year ended January 31, 2017 compared to the prior year. The increase in professional services and other revenue was primarily due to deployment and integration services for new customers, as well as sales of our on-premises solutions and related support services.

 

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Cost of Revenue and Gross Margin

 

     Year Ended January 31,     % Change  
(in thousands, except for percentages)    2016     2017     2018     2016 vs. 2017     2017 vs. 2018  

Cost of revenue:

          

Subscription

     48,656       73,363       83,834       51     14

Professional services and other

     25,199       29,114       34,439       16     18
  

 

 

   

 

 

   

 

 

     

Total cost of revenue

     73,855       102,477       118,273       39     15
  

 

 

   

 

 

   

 

 

     

Gross margin:

          

Subscription

     79     79     83         4

Professional services and other

     (18 )%      11     (2 )%      29     (13 )% 
  

 

 

   

 

 

   

 

 

     

Total gross margin

     71     73     77     2     4
  

 

 

   

 

 

   

 

 

     

2018 Compared to 2017. Cost of revenue increased $15.8 million, or 15%, in the year ended January 31, 2018 compared to the prior year. Cost of subscription revenue increased $10.5 million, or 14%, in the year ended January 31, 2018 compared to the prior year. This increase was primarily due to a $7.6 million increase in data center and other related operating costs to support our platform and a $2.0 million increase in personnel costs related to the hiring of employees to support customer service. Cost of professional service and other revenue increased $5.3 million, or 18%, in the year ended January 31, 2018 compared to the prior year. The increase was primarily due to $5.0 million increase in personnel costs primarily related to increased headcount in our professional services organization.

2017 Compared to 2016. Cost of revenue increased $28.6 million, or 39%, in the year ended January 31, 2017 compared to the prior year. Cost of subscription revenue increased $24.7 million, or 51%, in the year ended January 31, 2017 compared to the prior year. This increase was primarily due to a $17.5 million increase in data center and other related operating costs to support our platform, a $4.3 million increase in personnel costs related to the hiring of employees to support customer service and a $2.6 million increase in allocated overhead primarily related to increased headcount and facility costs. Cost of professional service and other revenue increased $3.9 million, or 16%, in the year ended January 31, 2017 compared to the prior year. The increase was primarily due to $2.9 million increase in personnel costs related to increased headcount in our professional services organization.

Sales and Marketing

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)    2016      2017      2018      2016 vs. 2017     2017 vs. 2018  

Sales and marketing

     170,006        240,787        277,930        42     15

2018 Compared to 2017. Sales and marketing expenses were $277.9 million, or 53% of total revenue, for the year ended January 31, 2018, compared to $240.8 million, or 63% of total revenue, for the prior year, an increase of $37.1 million. The increase was primarily due to a $29.1 million increase in personnel costs driven by increased headcount and higher commissions in line with higher sales, $2.3 million increase in travel costs to support the increase in the personnel, $1.5 million increase in consulting fees for market and other research activities and a $3.3 million increase in allocated overhead due to increased headcount and facility costs.

2017 Compared to 2016. Sales and marketing expenses were $240.8 million, or 63% of total revenue, for the year ended January 31, 2017, compared to $170.0 million, or 68% of total revenue, for the prior year, an increase of $70.8 million. The increase was primarily due to a $44.9 million increase in personnel costs driven by increased headcount, a $14.1 million increase in allocated overhead due to increased headcount and facility costs, a $7.5 million increase in marketing expenses associated with higher advertising and promotional activities and a $2.5 million increase in travel-related expenses for sales personnel.

 

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Research and Development

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)    2016      2017      2018      2016 vs. 2017     2017 vs. 2018  

Research and development

     62,255        89,652        92,428        44     3

2018 Compared to 2017. Research and development expenses were $92.4 million, or 18% of total revenue, for the year ended January 31, 2018, compared to $89.7 million, or 23% of total revenue, for the prior year, an increase of $2.8 million. The increase of $8.9 million in personnel costs to support development efforts was partially offset by a $5.3 million decrease in stock-based compensation. In the year ended January 31, 2017, we incurred additional modification expense for certain employees whose employment ceased with no such expense in the year ended January 31, 2018. The remainder of the decrease in stock-based compensation expense is driven by the impact of options that were canceled or fully vested in the year ended January 31, 2017 with no new options granted to research and development employees in the year ended January 31, 2018. During the year ended January 31, 2018, our research and development employees were granted RSUs that did not result in expense because the conditions were deemed not probable of being achieved as of the year end.

2017 Compared to 2016. Research and development expenses were $89.7 million, or 23% of total revenue, for the year ended January 31, 2017, compared to $62.3 million, or 25% of total revenue, for the prior year, an increase of $27.4 million. The increase was primarily due to an increase of $22.7 million in personnel costs driven by increased headcount to support development efforts and a $4.0 million increase in allocated overhead due to increased headcount and facility costs.

General and Administrative

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)    2016      2017      2018      2016 vs. 2017     2017 vs. 2018  

General and administrative

     63,669        64,360        81,526        1     27

2018 Compared to 2017. General and administrative expenses were $81.5 million, or 16% of total revenue, for the year ended January 31, 2018, compared to $64.4 million, or 17% of total revenue, for the prior year, an increase of $17.2 million. The increase was primarily due to a $5.1 million increase in personnel cost and a $2.6 million increase in allocated overhead in line with the increase in headcount, a $5.0 million increase in business taxes in connection with growth of the business, assessments completed in certain jurisdictions and a foreign transfer tax as well as a $2.2 million increase in stock-based compensation expense driven by a significant grant made at the end of fiscal 2017.

2017 Compared to 2016. General and administrative expenses were $64.4 million, or 17% of total revenue, for the year ended January 31, 2017, compared to $63.7 million, or 25% of total revenue, for the prior year, an increase of $0.7 million. The increase was primarily due to a $3.2 million increase in allocated overhead due to increase headcount and facility costs, offset by a $4.0 million decrease in third party professional services costs primarily related to our acquisitions of Algorithmic Research Ltd and OpenTrust in the year ended January 31, 2016 with no similar transaction in the year ended January 31, 2017.

Interest Income and Other Income (Expense), Net

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)        2016             2017              2018          2016 vs. 2017     2017 vs. 2018  

Interest income and other income (expense), net

     (3,508     1,372        3,135        (139 )%      128

2018 Compared to 2017. Interest income and other income (expense), net, was $3.1 million, or 1% of total revenue, for the year ended January 31, 2018, compared to $1.4 million, or less than 1% of total revenues, for the

 

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prior year, an increase of $1.8 million. The change was primarily due to foreign currency transaction gains driven by remeasurement of certain monetary transactions.

2017 Compared to 2016. Interest income and other income (expense), net, was $1.4 million, or less than 1% of total revenue, for the year ended January 31, 2017, compared to $(3.5) million, or 1% of total revenues, for the prior year, a change of $4.9 million. The change was primarily due to foreign currency transaction gains driven by remeasurement of certain monetary transactions.

Provision for (Benefit from) Income Taxes

 

     Year Ended January 31,      % Change  
(in thousands, except for percentages)        2016             2017              2018          2016 vs. 2017     2017 vs. 2018  

Provision for (benefit from) income taxes

     (1,033     356        3,134        (134 )%      780

2018 Compared to 2017. Provision for income taxes was $3.1 million, or 1% of total revenue, for the year ended January 31, 2018, compared to $0.4 million, or less than 1% of total revenue, for the prior year, an increase of $2.8 million. This increase was due to an increase in foreign tax expense, resulting from transfers of intellectual property and higher year-over-year earnings in certain foreign jurisdictions as we continue to scale our international operations to support our ongoing international growth.

2017 Compared to 2016. Provision for income taxes was $0.4 million for the year ended January 31, 2017, compared to a benefit from income taxes of $1.0 million for the prior year, a change in expense of $1.4 million. Provision for income taxes was less than 1% of total revenue in both comparative periods. The change was primarily due to an increase in foreign tax expense, resulting from higher year over year earnings in certain foreign jurisdictions as we continue to scale our foreign operations to support our ongoing international growth.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated results of operations for each of the quarters indicated. These unaudited quarterly results of operations have been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results in any future period and the results of a particular quarter or other interim period are not necessarily indicative of the results for a full year.

Quarterly Consolidated Statements of Operations

 

    Three Months Ended  
(in thousands)   April 30,
2016
    July 31,
2016
    October 31,
2016
    January 31,
2017
    April 30,
2017
    July 31,
2017
    October 31,
2017
    January 31,
2018
    April 30,
2018
    July 31,
2018
 

Revenue:

                   

Subscription

  $ 76,711     $ 83,427     $ 89,804     $ 98,621     $ 106,847     $ 117,553     $ 122,905     $ 137,276     $ 148,198     $ 158,461  

Professional services and other

    7,021       8,867       7,212       9,796       6,651       7,990       7,684       11,598       7,610       8,583  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    83,732       92,294       97,016       108,417       113,498       125,543       130,589       148,874       155,808       167,044  

Cost of revenue(1):

                   

Subscription

    16,312       16,784       18,889       21,378       19,293       20,040       22,335       22,166       32,438       23,057  

Professional services and other

    7,347       7,200       7,046       7,521       7,831       8,418       8,881       9,309       25,856       13,304  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    23,659       23,984       25,935       28,899       27,124       28,458       31,216       31,475       58,294       36,361  

Gross profit

    60,073       68,310       71,081       79,518       86,374       97,085       99,373       117,399       97,514       130,683  

Operating expenses:

                   

Sales and marketing(1)

    58,671       56,683       62,549       62,884       64,691       68,943       69,666       74,630       191,085       103,779  

Research and development(1)

    21,231       24,934       22,157       21,330       22,708       23,767       22,522       23,431       70,870       33,773  

General and administrative(1)

    15,289       15,589       15,592       17,890       18,239       18,156       19,528       25,603       103,117       30,851  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    95,191       97,206       100,298       102,104       105,638       110,866       111,716       123,664       365,072       168,403  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (35,118     (28,896     (29,217     (22,586     (19,264     (13,781     (12,343     (6,265     (267,558     (37,720
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

    (185     (158     (138     (130     (151     (169     (154     (150     (193     (47

Interest income and other income (expense), net

    1,602       24       (501     247       (110     2,034       (1,225     2,436       (2,228     2,998  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

    (33,701     (29,030     (29,856     (22,469     (19,525     (11,916     (13,722     (3,979     (269,979     (34,769
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes

    459       399       143       (645     (143     121       783       2,373       708       1,945  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (34,160   $ (29,429   $ (29,999   $ (21,824   $ (19,382   $ (12,037   $ (14,505   $ (6,352   $ (270,687   $ (36,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Stock-based compensation included in above line items:

 

    Three Months Ended  
(in thousands)   April 30,
2016
    July 31,
2016
    October 31,
2016
    January 31,
2017
    April 30,
2017
    July 31,
2017
    October 31,
2017
    January 31,
2018
    April 30,
2018
    July 31,
2018
 

Cost of revenue

  $ 537     $ 554     $ 536     $ 584     $ 473     $ 485     $ 481     $ 448     $ 26,000     $ 4,410  

Sales and marketing

    2,721       2,613       2,797       3,056       2,705       2,883       1,959       1,839       112,481       16,791  

Research and development

    2,202       4,943       1,503       1,513       1,391       1,288       1,042       1,175       47,268       7,359  

General and administrative

    2,888       3,109       2,766       3,121       3,837       3,856       3,113       2,772       84,045       11,605  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense

    8,348     $ 11,219     $ 7,602     $ 8,274     $ 8,406     $ 8,512     $ 6,595     $ 6,234     $ 269,794     $ 40,165  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Revenue Data

 

    Three Months Ended  
    April 30,
2016
    July 31,
2016
    October 31,
2016
    January 31,
2017
    April 30,
2017
    July 31,
2017
    October 31,
2017
    January 31,
2018
    April 30,
2018
    July 31,
2018
 

Revenue:

                   

Subscription

    92     90     93     91     94     94     94     92     95     95

Professional services and other

    8       10       7       9       6       6       6       8       5       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    100       100       100       100       100       100       100       100       100       100  

Cost of revenue:

                   

Subscription

    19       18       19       20       17       16       17       15       21       14  

Professional services and other

    9       8       8       7       7       7       7       6       16       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    28       26       27       27       24       23       24       21       37       22  

Gross profit

    72       74       73       73       76       77       76       79       63       78  

Operating expenses:

                   

Sales and marketing

    70       61       64       58       57       55       53       50       123       62  

Research and development

    25       27       23       20       20       19       17       16       45       20  

General and administrative

    19       17       16       16       16       14       15       17       67       19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    114       105       103       94       93       88       85       83       235       101  

Loss from operations

    (42     (31     (30     (21     (17     (11     (9     (4     (172     (23

Interest expense

    —         —         —         —         —         —         —         —         —         —    

Interest income and other income (expense), net

    2       —         (1     —         —         2       (2     1       (1     2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

    (40     (31     (31     (21     (17     (9     (11     (3     (173     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes

    1       1       —         (1     —         1       —         1       1       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (41 )%      (32 )%      (31 )%      (20 )%      (17 )%      (10 )%      (11 )%      (4 )%      (174 )%      (22 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

Revenue

Our subscription revenue, which was at least 90% of total revenue in each of the quarters, generally increased sequentially for the periods presented primarily due to higher sales of subscription and related services to both our existing and new customers. Professional services and other revenue fluctuates each quarter, primarily due to the timing of revenue recognition for sales of our on-premises solutions, which is recognized at the time of shipment, and therefore tends to be less consistent from period to period.

 

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Cost of Revenue

Total cost of revenue has generally increased sequentially for the periods presented and spiked in the first quarter of fiscal 2019 due to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement. As a result of our growth, we experienced an increase in subscription cost of revenue in the fourth quarter of fiscal 2017 due to non-recurring expenses as a result of acceleration of the useful life of a capitalized software project and payment of delayed consideration as part of a severance arrangement with a terminated employee.

Gross Margin

Gross margin was 72%-74% during the four quarters ended January 31, 2017 and 76%-79% for the four quarters ended January 31, 2018 and for the quarter ended July 31, 2018. The increase in gross margin during 2018 and the second quarter in fiscal 2019 was due in part to the increase in revenue and in part to the increased efficiency of our technology and infrastructure. Gross margin decreased to 63% in the quarter ended April 30, 2018, primarily due to an increase in stock-based compensation expense primarily driven by the recognition of expense related to RSUs with a performance condition satisfied upon the effectiveness of the registration statement for our IPO.

Expenses

Total operating expenses, excluding stock-based compensation, increased sequentially for all periods presented primarily due to increases in employee headcount and the expansion of our business. Stock-based compensation also increased sequentially and spiked in the first quarter of fiscal 2019 due to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement.

Liquidity and Capital Resources

As of July 31, 2018, our principal sources of liquidity were cash and cash equivalents totaling $818.8 million, which were primarily bank deposits and money market funds. In May 2018, we received net proceeds of $524.2 million upon the completion of our IPO.

We believe our existing cash and cash equivalents 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 of $37.7 million in the six months ended July 31, 2018, we have generated losses from operations in the past as reflected in our accumulated deficit of $809.7 million as of July 31, 2018. We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and as a result we 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 as accounts receivable until collection and contract liabilities. As of July 31, 2018, we had accounts receivable of $108.4 million compared to $123.8 million as of January 31, 2018. The decrease in accounts receivable resulted in net cash provided by operating activities of $15.4 million. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Contract liabilities consists of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. As of July 31, 2018, we had contract liabilities of $297.4 million compared to $277.9 million as of January 31, 2018. The increase in contract liabilities resulted in net cash provided by operating activities of $19.5 million. Therefore, our growth in billings to existing and new customers has a material net beneficial impact on our cash flows from operating activities, after consideration of the impact on our accounts receivable.

Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, the timing and extent of spending to support our efforts to develop our platform, the expansion of sales and marketing activities and the continuing market acceptance of our 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.

 

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On September 4, 2018 we acquired SpringCM, a leading cloud-based document generation and contract lifecycle management software company based in Chicago, Illinois, for approximately $220.2 million in cash, subject to adjustments as set forth in the merger agreement. The acquisition was funded with cash on hand.

We anticipate that we will spend substantial funds to satisfy tax withholding and remittance obligations when we settle our RSUs granted prior to the effective date of our IPO, as well as those we granted after such date. On the settlement dates for these RSUs, we plan to withhold shares and remit income taxes on behalf of the holders at the applicable minimum statutory rates, which we refer to as a net settlement. We currently expect that the average of these withholding tax rates will be approximately 40%, and the income taxes due would be based on the then-current value of the underlying shares of our common stock. Based on 12,142,732 RSUs outstanding as of July 31, 2018, for which the service condition is expected to be satisfied on November 14, 2018 (the day before the accelerated initial settlement date following our IPO), and assuming the price of our common stock at the time of settlement is equal to $53.90, the closing price of our common stock on July 31, 2018, we estimate that this tax obligation on the initial settlement date would be approximately $253.5 million in the aggregate. The amount of this obligation could be higher or lower, depending on (1) the price of shares of our common stock on the settlement date, and (2) the actual number of RSUs outstanding for which the service condition has been satisfied. Assuming an approximate 40% tax withholding rate, we expect to deliver an aggregate of approximately 7.6 million shares of our common stock to RSU holders after withholding an aggregate of approximately 4.5 million shares of our common stock, based on 12,142,732 RSUs outstanding as of July 31, 2018 for which the service condition is expected to be satisfied on November 14, 2018. In connection with these net settlements, we would withhold and remit the tax liabilities of approximately $245.0 million on behalf of the RSU holders to the relevant tax authorities in cash.

To fund these withholding and remittance obligations, we expect to use a substantial portion of our existing cash. If we elect not to fully fund tax withholding and remittance obligations through cash or if we are unable to do so, we may choose to sell equity and/or debt securities. For additional information, see “Risk Factors—We anticipate spending substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs. The manner in which we fund these expenditures may have an adverse effect on our financial condition.”

Credit Facility

In May 2015, we signed a Senior Secured Credit Agreement with Silicon Valley Bank (“The Credit Agreement”) and a syndicate of other banks. The Credit Agreement extended a revolving loan facility of up to $80.0 million with a letter of credit sub-facility up to $15.0 million (as a sublimit of the revolving loan facility) and a swingline sub-facility up to $5.0 million (as a sublimit of the revolving loan facility). Our obligations under the Credit Agreement were secured by substantially all our assets. The facility required us to comply with certain financial and non-financial covenants. The facility was subject to customary fees for loan facilities of this type, including ongoing commitment fees at a rate between 0.3% and 0.3375% per annum on the daily undrawn balance. The facility expired in May 2018.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(in thousands)    2016     2017     2018     2017     2018  
                       (unaudited)  

Net cash provided by (used in):

          

Operating activities

   $ (67,995   $ (4,790   $ 54,979     $ 11,401     $ 37,688  

Investing activities

     (80,165     (40,880     (18,761     (10,622     (10,520

Financing activities

     274,856       8,037       25,728       13,509       536,101  

Effect of foreign exchange on cash and cash equivalents

     (1,483     (334     4,246       2,143       (1,543
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash, cash equivalents and restricted cash

   $ 125,213     $ (37,967   $ 66,192     $ 16,431     $ 561,726  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cash Flows from Operating Activities

Six Months Ended July 31, 2018 Compared to Six Months Ended July 31, 2017. Cash provided by operating activities increased by $26.3 million for the six months ended July 31, 2018. This change was primarily due to an increase of $299.1 million in non-cash expenses, partially offset by a $276.0 million increase in net loss. The increase in non-cash expenses was driven by a $293.0 million in stock-based compensation expense driven by the expense related to RSUs with a performance condition satisfied on the effectiveness of our IPO Registration Statement, for which no expense was recorded in the same prior year period. Net cash provided by operating assets and liabilities increased by $3.1 million driven by increases in cash provided by changes in most operating activities. In particular, cash provided from changes in accrued compensation increased by $5.3 million driven by higher incentive compensation and an increase in headcount. The increases in operating activities were partially offset by an increase of $10.1 million in deferred contract acquisition and fulfillment costs.

2018 Compared to 2017. We had positive cash flows from operating activities of $55.0 million for the year ended January 31, 2018 as compared to negative cash flows of $4.8 million for the year ended January 31, 2017, an increase of $59.8 million. This change was primarily driven by a $63.1 million decrease in net loss, partially offset by a $6.1 million decrease in cash from changes in operating assets and liabilities. There were several significant positive and negative movements from changes in operating assets and liabilities over the period. Net cash from the change in deferred rent decreased by $15.1 million. We did not have any significant new leases in the year ended January 31, 2018, while the year ended January 31, 2017 reflects the buildup in the deferred rent balance related to several new Seattle leases we entered into at the end of fiscal 2016. Net cash from the change in deferred contract acquisition costs decreased by $14.6 million in line with growth in sales. Net cash from changes in contract liabilities and accounts receivable increased by $16.7 million as our business continued to grow. Net cash from changes in other liabilities increased by $7.4 million primarily due to delayed consideration related to our acquisition of Algorithmic Research Ltd. and foreign income tax provision.

2017 Compared to 2016. Cash used in operating activities decreased by $63.2 million for the year ended January 31, 2017 as compared to the prior year. This decrease was primarily driven by a $7.1 million decrease in net loss, a $16.2 million increase in net noncash income and expense, and a $39.8 million increase in cash from changes in operating assets and liabilities. The increase in net non-cash income and expense was primarily driven by higher depreciation, amortization, and stock-based compensation expenses, partially offset by changes in foreign currency gains and losses. The increase in cash from changes in operating assets and liabilities was primarily driven by $37.6 million increase in cash generated from the change in contract liabilities and accounts receivable as our business continued to grow. Net cash used from the change in prepaid expenses and other current assets decreased by $13.4 million, due to changes in tenant allowances and prepaid software and maintenance costs. Net cash generated from the change in deferred rent increased by $7.8 million in connection with the additional lease agreements we entered into in Seattle at the end of fiscal 2016 to support the growth of our business.

Cash Flows from Investing Activities

Six Months Ended July 31, 2018 Compared to Six Months Ended July 31, 2017. Cash used in investing activities remained relatively flat for the six months ended July 31, 2018 as compared to the same prior year period. Our cash outflows during the two periods consisted primarily of purchases of property and equipment.

2018 Compared to 2017. Cash used in investing activities decreased by $22.1 million for the year ended January 31, 2018 as compared to the prior year. Our cash outflows were primarily driven by purchases of property and equipment, which decreased by $24.4 million as compared to the prior year. During the year ended January 31, 2017, we made significant investments in leasehold improvements and furniture for our new Seattle leases with no similar spend during the year ended January 31, 2018.

2017 Compared to 2016. Cash used in investing activities decreased by $39.3 million for the year ended January 31, 2017 as compared to the prior year. During the year ended January 31, 2016, we had net cash outflows of $51.9 million related to our acquisitions of Algorithmic Research Ltd and OpenTrust. During the

 

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year ended January 31, 2017, our cash outflows were primarily driven by purchases of property and equipment, which increased by $15.0 million as compared to the prior year. We continued to increase investment in property and equipment to support the growth of our business.

Cash Flows from Financing Activities

Six Months Ended July 31, 2018 Compared to Six Months Ended July 31, 2017. Cash provided by financing activities increased by $522.6 million for the six months ended July 31, 2018 as compared to the same prior year period, primarily driven by proceeds from the issuance of common stock in our IPO, net of underwriting discounts and commissions, of $529.3 million. We also incurred cash outflows of $3.5 million for deferred offering costs related to our IPO. Proceeds from exercise of stock options decreased by $3.2 million during the period compared to the prior year period.

2018 Compared to 2017. Cash provided by financing activities increased by $17.7 million for the year ended January 31, 2018 as compared to the prior year. Proceeds from exercises of stock options contributed an additional $18.3 million compared to the prior year as more of our employees exercised their stock options.

2017 Compared to 2016. Cash provided by financing activities decreased by $266.8 million for the year ended January 31, 2017 as compared to the prior year. During the year ended January 31, 2016, we received $302.8 million of cash from the issuance of Series F preferred stock and $4.9 million of cash from exercises of stock options and used $32.3 million to repurchase common stock through a tender offer. During the year ended January 31, 2017, our cash inflows were primarily driven by $8.1 million of proceeds from exercise of stock options.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of July 31, 2018:

 

     Payments Due by Period  
(in thousands)    Total      Less than 1
Year
     1-3 Years      3-5 Years      More than 5
Years
 

Operating lease commitments

   $ 121.8      $ 9.2      $ 37.4      $ 34.2      $ 41.0  

Enterprise partnership agreement

   $ 5.7      $ 1.5        4.2                

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. For additional discussion on our operating leases and enterprise purchase agreement, see Note 12 to our consolidated financial statements included elsewhere in this prospectus.

As of July 31, 2018, we had unused letters of credit outstanding associated with our various operating leases totaling $9.9 million.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates.

 

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Interest Rate Risk

As of July 31, 2018, we had cash and cash equivalents of $818.8 million, which consisted primarily of bank deposits and money market funds. Interest-earning instruments carry a degree of interest rate risk. However, our historical interest income has not fluctuated significantly. A hypothetical 10% change in interest rates would have not had a material impact on our financial statements included in this prospectus. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar, depending on the circumstances. The assets and liabilities of each of our subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date. Operations accounts are translated using the average exchange rate for the relevant period. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect revenue and other operating results as expressed in U.S. dollars. Foreign currency translation adjustments are accounted for as a component of accumulated other comprehensive income (loss) within stockholders’ equity (deficit). Gains or losses due to transactions in foreign currencies are included in “Interest income and other income (expense), net” in our consolidated statements of operations and comprehensive loss. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results.

Critical Accounting Policies and Estimates

We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. See Note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of our other significant accounting policies. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

Significant estimates embedded in the consolidated financial statements for the period presented include revenue recognition, deferred contract acquisition costs, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets and income taxes.

Revenue Recognition

We recognize revenue from contracts with customers using the five-step method described in Note 2 in our consolidated financial statements. At contract inception we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We combine contracts entered into at or near the same time with the same customer if we determine that the contracts are negotiated as a package with a single commercial objective; the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or the services promised in the contracts are a single performance obligation.

Our performance obligations consist of (i) subscription services, (ii) professional and other services, (iii) on-premises solutions and (iv) maintenance and support for our on-premises solutions. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on their relative standalone selling price. We determine standalone selling price, or SSP, for all our

 

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performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with our overall pricing objectives, taking into consideration the type of subscription services and professional and other services. SSP also reflects the amount we would charge for that performance obligation if it were sold separately in a standalone sale, and the price we would sell to similar customers in similar circumstances.

In general, we satisfy the majority of our performance obligations over time as we transfer the promised services to our customers. For some of our services such as delivery of on-premises solutions, we satisfy our performance obligations at a point in time. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition; the related contract balances; and our remaining performance obligations. These evaluations require significant judgment that could affect the timing and amount of revenue recognized.

Deferred Contract Acquisition Costs

To determine the period of benefit of our deferred contract acquisition costs, we evaluate the type of costs incurred, the nature of the related benefit, and the specific facts and circumstances of our arrangements. We determine the period of benefit for commissions paid for the acquisition of the initial subscription contract by taking into consideration our initial estimated customer life and the technological life of our platform and related significant features. We determine the period of benefit for commissions on renewal subscription contracts by considering the average contractual term for renewal contracts. We evaluate these assumptions on a quarterly basis and periodically review whether events or changes in circumstances have occurred that could impact the period of benefit.

Stock-Based Compensation

We account for stock-based compensation awards, including stock options and RSUs, based on their estimated grant date fair value. We estimate the fair value of our stock options using the Black-Scholes option pricing model. We estimate fair value of our RSUs based on the fair value of the underlying common stock.

We recognize fair value of stock options, which vest based on continued service, on a straight-line basis over the requisite service period, which is generally four years. We recognize the fair value of our RSUs, which also contain performance conditions, based upon the probability of the performance conditions being met, using the graded vesting method. We estimate forfeitures based upon our historical experience. We recognize expense net of estimated forfeitures. We revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

Determining the grant date fair value of options using the Black-Scholes option pricing model requires management to make assumptions and judgments. If any of the assumptions used in the Black-Scholes model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. The assumptions and estimates are as follows:

 

   

Fair value of common stock—see “Common Stock Valuations” discussion below.

 

   

Expected term—We determine the expected term of awards which contain service-only vesting conditions using the simplified approach, in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award.

 

   

Volatility—We determine the expected volatility based on historical average volatilities of similar publicly traded companies corresponding to the expected term of the awards.

 

   

Risk free interest rates—The risk-free interest rate is based on the U.S. Treasury yield curve in effect during the period the options were granted corresponding to the expected term of the awards.

 

   

Dividend yield—We have not and do not expect to pay cash dividends on our common stock.

 

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The following weighted-average assumptions were used for the periods presented:

 

    

Year Ended January 31,

    

2016

  

2017

  

2018

Risk-free interest rate

   1.29% - 1.94%    1.25% - 2.19%    1.86% - 2.17%

Expected dividend yield

        

Expected life of option (in years)

   4.58 - 6.06    6.05    6.05

Expected volatility

   46.79% - 48.11%    45.77% - 48.58%    44.99% - 45.53%

For awards granted that contain market and performance conditions, we use a lattice model simulation analysis which captures the impact of the vesting conditions to value the performance stock units.

Restricted Stock Units

Substantially all of the RSUs that we have issued through January 31, 2018 vest upon the satisfaction of both service-based and performance-based vesting conditions. The service-based condition is typically satisfied over a four-year service period. The performance-based condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred on April 26, 2018. Upon the effectiveness of our IPO Registration Statement, we recognized $262.8 million in stock-based compensation expense related to RSUs, for which the service-based condition was satisfied as of such date. All RSUs granted after January 31, 2018 vest on the satisfaction of the service-based condition only.

In the six months ended July 31, 2018, we recognized total stock-based compensation related to our RSUs of $299.4 million. As of July 31, 2018, we have approximately $382.6 million of unrecognized stock-based compensation expense related to our RSUs to be recognized over the remaining weighted-average period of approximately 2.1 years.

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets

We estimate the fair value of assets acquired and liabilities assumed in a business combination. At the acquisition date, we measure goodwill as the excess of consideration transferred over the net of the acquisition date fair values of the tangible and intangible assets acquired and the liabilities assumed.

Business combination accounting requires us to make assumptions and apply judgment. Key assumptions include, but are not limited to, estimating future cash flows, selecting discount rates and selecting valuation methodologies. These estimates and assumptions are highly subjective. Our ability to realize the future cash flows used in our fair value calculations may be affected by changes in our financial condition, our financial performance or business strategies.

Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. During the measurement period of up to one year from the acquisition date, based on new information obtained that relates to facts and circumstances that existed as of the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. We record adjustments identified, if any, subsequent to the end of the measurement period in our consolidated statements of operations.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. These foreign jurisdictions have different statutory tax rates than the United States. We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under

 

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this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items, as a result, we may record unrecognized tax benefits in the future. At that time, we would make adjustments to these potential future reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters would be different to the amounts we may potentially record in the future, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes would include the effects of any future accruals that we believe are appropriate to record, as well as the related net interest and penalties.

We intend to permanently reinvest any future earnings from our foreign operations outside of the U.S. unless such earnings are subject to U.S. federal income taxes. As of January 31, 2017 and 2018, our foreign operations do not have material accumulated earnings, and accordingly, we currently estimate any hypothetical foreign withholding tax expense to be immaterial to our financial statements.

The TCJA significantly changes how the U.S. taxes corporations. The TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this prospectus.

Emerging Growth Company Status

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. We elected to early adopt Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effective February 1, 2017, using the full retrospective method.

 

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BUSINESS

Overview

DocuSign accelerates 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.

As the core part of our broader platform for automating the agreement process, we offer the world’s #1 e-signature solution. According to an October 2016 Forrester Research report, DocuSign is the “strongest brand and market share leader: the company name is becoming a verb.”

Our value is simple to understand: the traditional, paper-based agreement process is manual, slow, expensive, and error-prone. We eliminate the paper and automate the process. Doing so allows companies to measure turnaround time in minutes rather than days, substantially reduce costs, and largely eliminate errors.

Our cloud-based platform today enables over 425,000 companies and hundreds of millions of users to make nearly every agreement, approval process, or transaction digital—from practically any device, virtually anywhere in the world, securely. Currently, 7 of the top 10 global technology companies, 18 of the top 20 global pharmaceutical companies, and 10 of the top 15 global financial services companies are DocuSign customers. Since our founding in 2003, our customers have completed over 700 million Successful Transactions on our platform. For additional information, see “Management’s Discussion and Analysis of Financial Results of Operations—Overview.”

We attribute much of our success to our market-leading investment in technology and infrastructure—more than $300 million in research and development since inception. The result is a platform that can handle the most demanding customer requirements. We deliver over 99.99% availability, provide highly advanced security, and offer hundreds of prebuilt partner connectors, along with an extensive API for embedding and connecting DocuSign with other systems—all behind a simple and friendly user interface.

Our customers range from the largest global enterprises to sole proprietorships, across industries around the world. Within a given company, our technology can be used broadly across business functions: contracts for sales, employment offers for human resources, non-disclosure agreements for legal, among many others. For example, one of our customers has implemented more than 300 such use cases across its enterprise. This broad potential applicability drives our TAM to be approximately $25 billion in 2017 according to our estimates.

To address our opportunity, our sales and marketing strategy focuses on enterprise businesses, commercial businesses, and VSBs. We rely 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 is the most cost effective way to reach our smallest customers. We offer subscriptions to our platform via product editions with varying functionality that is tuned to different customers’ needs—as well as features specific to particular geographies or industries. We also focus on customer adoption, success, and expansion—this helps us to deliver continued value, and creates opportunities for increased usage.

In addition, our marketing and sales efforts often benefit from the fact that many of our prospects already know us from being signers—for example, if they have “DocuSigned” a job offer or completed the purchase of a home via our platform. These experiences tend to have a meaningful impact on people’s lives, which is reflected by our strong Net Promoter Score of 63 as of October 2017. As a result, when we sell into these people’s companies, we often find that awareness and favorability toward DocuSign is already present among buyers and influencers.

We have experienced rapid growth in recent periods. For the years ended January 31, 2016, 2017 and 2018, our revenue was $250.5 million, $381.5 million and $518.5 million, respectively, representing year-over-year

 

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growth of 52% and 36%, respectively. Our revenue grew from $239.0 million in the six months ended July 31, 2017 to $322.9 million in the six months ended July 31, 2018. For the years ended January 31, 2016, 2017 and 2018, our net loss was $122.6 million, $115.4 million and $52.3 million, respectively, and we generated a net loss of $31.4 million and $307.4 million in the six months ended July 31, 2017 and 2018, respectively.

Industry Background

Organizations are facing pressure to transform the process of doing business

The internet and other digital technologies are enabling business to be done faster, easier, and at lower cost than ever before. And today, people expect business processes to be as efficient and frictionless as their experience of things like one-click ordering, instant media streaming, and on-demand services from a few taps of a smartphone.

Businesses that fail to adapt to this new paradigm stand to lose customers to more agile competitors. As a result, many have undertaken major digital transformation projects across the front and back office. While these projects have yielded positive results—improved efficiency, faster time to market, and an enhanced customer experience—they have been unable to completely address one of the most fundamental elements of doing business: the agreement.

Agreements are foundational to business, but have not yet been transformed

Every day, companies enter into millions of agreements with their customers, employees, and other parties with which they do business—whether that be sales contracts, employment offers, work orders, non-disclosure agreements, or the hundreds of other examples across every department within a company. These agreements are fundamental to doing business.

Yet every day, the process is still fraught with friction and frustration. It could be the upfront paperwork and coordination involved—all the printing, faxing, scanning, emailing, mailing, couriering, and other manual activities. It could be the process of signing and executing agreements—which can be error-prone and susceptible to fraud. Or it could be the need to manage those agreements once complete—a fragmented and cumbersome process at best.

Against this backdrop, the traditional agreement process seems outdated, costly, and unnecessarily difficult—and therefore ripe for transformation.

The signature has been a critical bottleneck in the agreement process

The ubiquity of personal computing applications has meant the creation of agreement documentation—and, to a limited extent, its sharing—was digitized long ago. For most organizations though, getting those agreements signed has continued to require a physical signature, subjecting people to manual, paper-based processes that can introduce inefficiencies, errors, complications, and significant costs.

The requirement for a physical signature can mean the turnaround time to fully execute an agreement is measured in days or weeks—often because of the need to coordinate and obtain signatures across multiple parties, often in multiple locations. This can delay a company’s ability to earn revenue, or even worse, lose deals to more focused or faster competitors.

In addition to being slow, paper-based signatures create other challenges highlighted in a commissioned study conducted by Forrester Research in December 2014, as described in the independent publication Forrester Research, Digital Transforms The Game Of Business Digital Transaction Management Emerging As Key

 

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Solution (March 2015) described in the section titled “Industry and Market Data.” The firm reported that, of those IT and line of business decision makers surveyed, all experienced a combination of challenges: difficulty maintaining visibility into the location and status of paper-based documents, lack of security over printed documents, difficulty administering and controlling documents over time, difficulty collecting and managing documents from multiple sources, cumbersome paper-oriented tasks such as scanning and document management, and human error.

In a world where people have come to expect seamless, on-demand experiences, the antiquated requirement for a physical signature and the accompanying complications can result in poor customer experiences and lower satisfaction.

Yet, despite all these shortcomings, paper-based processes have persisted—primarily because the act of signing is itself so uniquely sensitive. The signature is the moment of legal commitment—one that can have disproportionately severe consequences if something goes wrong. And because of these high stakes, many companies have been wary of change.

The hurdle for a technology solution to modernize the agreement process is high

We believe that any technology solution proposing to modernize the agreement process should address far more than the digital representation of the signature itself. It should also meet the complex and challenging requirements that businesses demand when transacting in real time on a global scale. We believe the most important include:

 

   

Security. In order to protect the integrity of documents and to prevent tampering, the technology needs to offer compliance with worldwide security standards, document encryption, and robust options to authenticate the parties in the signing process. Such an approach would address the many shortfalls of the paper-based agreements process, which is inherently susceptible to tampering and fraud.

 

   

Availability. When a business trusts technology with the signature—the moment of legal commitment in the agreement process—that technology needs to be always available. Any downtime or lack of access can have dramatic implications on a company’s ability to conduct business and its bottom line.

 

   

Global legal compliance and validity. To support business being done electronically across borders, the technology should accommodate signers and senders in a way that complies with regional regulations and industry standards around the world. Different regions have different regulations—such as the ESIGN Act in the United States and eIDAS in the European Union—which outline different signing, verification, and authentication processes. There are also cultural differences to consider. In Japan, for example, businesses and individuals often prefer a customized hanko stamp for executing agreements rather than a written signature. A technology solution needs to address all of these issues, all while withstanding the closest legal scrutiny.

 

   

Interoperability. Because agreements often contain elements that cover multiple departments in a company—such as sales, finance, human resources, and legal—a technology solution should integrate seamlessly with these departments’ systems, such as CRM, ERP, and HCM. That solution should automatically extract data from these systems, input it into agreements, and then return updated data back to, and trigger actions in, those same systems.

 

   

Ease of use. A technology solution for signing should go beyond just being easier to use than paper. For authors of agreements, it should be simple—all the way from document setup, to routing, execution, real-time monitoring, and archiving. For signers of agreements, they need to be able to review, sign and send quickly using any device, from anywhere in the world. For developers, the technology must be easy to integrate into existing systems and processes, without exposing the complexity that underpins the process of digitally executing an agreement.

 

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The rise of e-signature and its early adoption

For almost 20 years, technologies have been developed that start to address these issues. Foremost among them, electronic signature, or e-signature, enables agreements to be electronically routed, signed in a legally valid way, and digitally managed. This can result in faster execution of those agreements, lower costs for materials and labor, fewer errors, greater security, and a better experience for all parties involved.

Despite the technology’s immense promise, companies were initially reluctant to entrust one of their most fundamental business processes to any of the dozens of startups that emerged as potential players. However, over time, a substantial base of early-adopters concentrated around the few vendors that made significant investments in the technology, infrastructure, and compliance expertise necessary to create a critical mass of market confidence. Based largely on these vendors’ track records with customers, Gartner recently concluded that “having reached mainstream adoption, the real-world benefits of e-signature are predictable, broadly acknowledged and have been realized by thousands of organizations across millions of users.” The use cases for e-signature are extensive. Initial adoption began across front office, or customer-facing, functions. Financial services organizations use e-signatures for credit card applications, account opening, and loan origination. The real estate industry has taken steps towards making the home-buying process digital, all the way from lead to close; governments can handle regulatory filings; and healthcare and life sciences companies can streamline everything from new patient forms all the way to the clinical trial process, even in a highly regulated environment.

There are also countless use cases across a company’s back office, or internal, functions—including human resources, legal, supply chain management, and finance, among many others. For example, companies use e-signature to manage internal compliance, approve purchase orders, accelerate invoice processing, and complete new hire paperwork. By removing the friction inherent in the processes that involve people, documents, and data, businesses can operate faster, easier, and with significantly reduced costs.

Today, while the usage of e-signature is increasing, we believe the technology is still early in its adoption cycle—both as a standalone offering and as the central pillar of a broader solution to streamline, accelerate, and manage the entire agreement process. The more central e-signature becomes, the more opportunity there is for it to be adopted by additional companies and for it to be used across more front and back office functions.

The DocuSign Platform

Since inception in 2003, DocuSign pioneered the development of e-signature and has led the market in managing digital transactions that were formerly paper-based. Today, we offer the world’s #1 e-signature solution as the core part of our broader platform for automating the agreement process.

Our cloud-based platform 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—from practically any device, from almost anywhere in the world, securely. As a result, today a total of over 425,000 customers and hundreds of millions of users worldwide utilize DocuSign to create, upload, and send documents for multiple parties to sign electronically. Our platform allows users to complete approvals, agreements, and transactions faster by building end-to-end processes. Our platform enables electronic signing, payment, and provisioning requests to be embedded in our customers’ existing processes. DocuSign integrates with popular business apps and our functionality can also be embedded using our API. Finally, our platform allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant.

We help our customers address the challenge of modernizing the agreement process in the following ways: