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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________
FORM 10-Q
______________________________________

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                
Commission File Number: 001-38465
______________________________________
DOCUSIGN, INC.
(Exact name of registrant as specified in its charter)
______________________________________
Delaware 91-2183967
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
221 Main St. Suite 1550 San Francisco California 94105
(Address of Principal Executive Offices) (Zip Code)
(415) 489-4940
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par value $0.0001 per share DOCU The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 
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 Exchange Act.
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 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 
The registrant has 196,718,307 shares of common stock, par value $0.0001, outstanding at August 31, 2021.



DOCUSIGN, INC.
TABLE OF CONTENTS
5
6
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DocuSign, Inc. | 2022 Form 10Q | 2


NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and objectives for future operations, and the impact of the ongoing coronavirus pandemic (the “COVID-19 pandemic”) on our financial conditions and results of operations are forward-looking statements. 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 Quarterly Report on Form 10-Q 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 expectations regarding the impact of the ongoing COVID-19 pandemic on our business, the businesses of our customers, partners and suppliers, and the economy;
our ability to attract new customers and to maintain and expand our existing customer base;
our ability to scale and update our software suite 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 use cases within existing customers and vertical solutions;
our ability to expand our operations and increase adoption of our software suite internationally;
our ability to strengthen and foster our relationship with developers;
our ability to expand our direct sales force, customer success team and strategic partnerships around the world;
our ability to identify targets for and execute potential acquisitions;
our ability to successfully integrate the operations of businesses we may acquire, or to realize the anticipated benefits of such acquisitions;
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 software suite of services to comply with applicable industry standards, laws and regulations;
our ability to maintain, protect and enhance our intellectual property;
our ability to successfully defend litigation against us;
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 estimate the size and potential growth of our target market; and
our ability to maintain proper and effective internal controls.

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 Quarterly Report on Form 10-Q, 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 not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, including risks and uncertainties related to the COVID-19 pandemic. Many risks and uncertainties are currently elevated by, and may or will continue to be elevated by, the COVID-19 pandemic. 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 Quarterly Report on Form 10-Q. We cannot assure you that the 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.

DocuSign, Inc. | 2022 Form 10Q | 3


The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law.
DocuSign, Inc. | 2022 Form 10Q | 4


PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOCUSIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except per share data) July 31, 2021 January 31, 2021
Assets
Current assets
Cash and cash equivalents $ 518,577  $ 566,055 
Investments—current 304,292  207,450 
Accounts receivable, net of allowance for doubtful accounts of $6,437 and $5,362 as of July 31, 2021 and January 31, 2021
284,730  323,570 
Contract assets—current 13,993  16,883 
Prepaid expenses and other current assets 61,197  48,390 
Total current assets 1,182,789  1,162,348 
Investments—noncurrent 64,088  92,717 
Property and equipment, net 173,983  165,039 
Operating lease right-of-use assets 140,589  159,352 
Goodwill 355,595  350,151 
Intangible assets, net 110,327  121,828 
Deferred contract acquisition costs—noncurrent 289,636  260,130 
Other assets—noncurrent 38,680  24,942 
Total assets $ 2,355,687  $ 2,336,507 
Liabilities and Equity
Current liabilities
Accounts payable $ 33,612  $ 37,367 
Accrued expenses and other current liabilities 81,817  66,566 
Accrued compensation 142,599  156,158 
Convertible senior notes—current 2,032  20,469 
Contract liabilities—current 914,619  779,642 
Operating lease liabilities—current 34,951  32,971 
Total current liabilities 1,209,630  1,093,173 
Convertible senior notes, net—noncurrent 730,272  693,219 
Contract liabilities—noncurrent 18,138  16,492 
Operating lease liabilities—noncurrent 146,025  165,704 
Deferred tax liability—noncurrent 6,424  6,464 
Other liabilities—noncurrent 33,322  32,328 
Total liabilities 2,143,811  2,007,380 
Commitments and contingencies (Note 7)
Convertible senior notes (Note 6)
—  3,390 
Stockholders’ equity
Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding as of July 31, 2021 and January 31, 2021
—  — 
Common stock, $0.0001 par value; 500,000 shares authorized, 196,467 shares outstanding as of July 31, 2021; 500,000 shares authorized, 192,807 shares outstanding as of January 31, 2021
20  19 
Treasury stock, at cost: 5 shares as of July 31, 2021 and January 31, 2021
(1,219) (1,048)
Additional paid-in capital 1,611,897  1,702,254 
Accumulated other comprehensive income 3,246  4,964 
Accumulated deficit (1,402,068) (1,380,452)
Total stockholders’ equity
211,876  325,737 
Total liabilities and equity $ 2,355,687  $ 2,336,507 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DocuSign, Inc. | 2022 Form 10Q | 5


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except per share data) 2021 2020 2021 2020
Revenue:
Subscription $ 492,758  $ 323,643  $ 944,693  $ 604,565 
Professional services and other 19,086  18,566  36,230  34,661 
Total revenue 511,844  342,209  980,923  639,226 
Cost of revenue:
Subscription 84,455  64,730  162,526  116,740 
Professional services and other 29,325  25,885  56,497  47,907 
Total cost of revenue 113,780  90,615  219,023  164,647 
Gross profit 398,064  251,594  761,900  474,579 
Operating expenses:
Sales and marketing 262,372  194,992  501,491  366,785 
Research and development 94,651  63,791  180,067  118,025 
General and administrative 63,652  51,446  113,690  90,257 
Total operating expenses 420,675  310,229  795,248  575,067 
Loss from operations (22,611) (58,635) (33,348) (100,488)
Interest expense (1,669) (7,684) (3,341) (15,244)
Interest income and other income (expense), net (1,063) 2,601  4,974  6,343 
Loss before provision for income taxes (25,343) (63,718) (31,715) (109,389)
Provision for income taxes 158  842  2,140  2,975 
Net loss $ (25,501) $ (64,560) $ (33,855) $ (112,364)
Net loss per share attributable to common stockholders, basic and diluted $ (0.13) $ (0.35) $ (0.17) $ (0.61)
Weighted-average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted 195,996  184,862  195,183  183,930 
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of tax $ (2,058) $ 8,714  $ (1,422) $ 3,525 
Unrealized gains (losses) on investments, net of tax (54) 87  (296) 246 
Other comprehensive income (loss) (2,112) 8,801  (1,718) 3,771 
Comprehensive loss $ (27,613) $ (55,759) $ (35,573) $ (108,593)
Stock-based compensation expense included in costs and expenses
Cost of revenue—subscription $ 7,539  $ 5,014  $ 13,557  $ 8,878 
Cost of revenue—professional services and other 6,446  5,225  11,980  9,350 
Sales and marketing 46,921  32,305  85,057  56,970 
Research and development 26,275  14,781  46,737  26,666 
General and administrative 12,778  11,442  23,764  20,454 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DocuSign, Inc. | 2022 Form 10Q | 6


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity
(in thousands) Shares Amount
Balances at April 30, 2021 194,734  $ 19  $ 1,615,646  $ (1,219) $ 5,358  $ (1,376,567) $ 243,237 
Settlement of convertible senior notes due in 2023 234  (279) —  —  —  (278)
Exercise of stock options 624  —  5,202  —  —  —  5,202 
Settlement of restricted stock units 865  —  —  —  —  —  — 
Tax withholding on net share settlement of restricted stock units —  —  (114,481) —  —  —  (114,481)
Charitable donation of common stock 10  3,000  3,000 
Employee stock-based compensation —  —  102,809  —  —  —  102,809 
Net loss —  —  —  —  —  (25,501) (25,501)
Other comprehensive loss, net —  —  —  —  (2,112) —  (2,112)
Balances at July 31, 2021 196,467  $ 20  $ 1,611,897  $ (1,219) $ 3,246  $ (1,402,068) $ 211,876 
Balances at April 30, 2020 183,428  $ 18  $ 1,714,462  $ —  $ (6,703) $ (1,184,989) $ 522,788 
Exercise of stock options 460  —  5,403  —  —  —  5,403 
Settlement of restricted stock units 1,002  (1) —  —  —  — 
Tax withholding on net share settlement of restricted stock units —  —  (89,449) —  —  —  (89,449)
Issuance of shares as consideration for acquisition 247  —  48,361  —  —  —  48,361 
Employee stock-based compensation —  —  70,547  —  —  —  70,547 
Net loss —  —  —  —  —  (64,560) (64,560)
Other comprehensive income, net —  —  —  —  8,801  —  8,801 
Balances at July 31, 2020 185,137  $ 19  $ 1,749,323  $ —  $ 2,098  $ (1,249,549) $ 501,891 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DocuSign, Inc. | 2022 Form 10Q | 7



DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Continued)
Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity
(in thousands) Shares Amount
Balances at January 31, 2021 192,807  $ 19  $ 1,702,254  $ (1,048) $ 4,964  $ (1,380,452) $ 325,737 
Cumulative impact of Accounting Standards Update 2020-06 adoption —  —  (86,144) —  —  12,239  (73,905)
Settlement of convertible senior notes due in 2023 586  (725) —  —  —  (724)
Exercise of stock options 1,112  —  11,818  —  —  —  11,818 
Settlement of restricted stock units 1,820  —  —  —  —  —  — 
Tax withholding on net share settlement of restricted stock units and employee stock purchase plan —  —  (227,894) (171) —  —  (228,065)
Employee stock purchase plan 132  —  23,167  —  —  —  23,167 
Charitable donation of common stock 10  —  3,000  —  —  —  3,000 
Employee stock-based compensation —  —  186,421  —  —  —  186,421 
Net loss —  —  —  —  —  (33,855) (33,855)
Other comprehensive loss, net —  —  —  —  (1,718) —  (1,718)
Balances at July 31, 2021 196,467  $ 20  $ 1,611,897  $ (1,219) $ 3,246  $ (1,402,068) $ 211,876 
Balances at January 31, 2020 181,254  $ 18  $ 1,685,167  $ —  $ (1,673) $ (1,137,185) $ 546,327 
Exercise of stock options 1,300  —  13,038  —  —  —  13,038 
Settlement of restricted stock units 2,080  (1) —  —  —  — 
Tax withholding on net share settlement of restricted stock units —  —  (136,172) —  —  —  (136,172)
Employee stock purchase plan 256  —  13,590  —  —  —  13,590 
Issuance of common stock as consideration for acquisition 247  —  48,361  —  —  —  48,361 
Employee stock-based compensation —  —  125,340  —  —  —  125,340 
Net loss —  —  —  —  —  (112,364) (112,364)
Other comprehensive income, net —  —  —  —  3,771  —  3,771 
Balances at July 31, 2020 185,137  $ 19  $ 1,749,323  $ —  $ 2,098  $ (1,249,549) $ 501,891 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DocuSign, Inc. | 2022 Form 10Q | 8


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended July 31,
(in thousands) 2021 2020
Cash flows from operating activities:
Net loss $ (33,855) $ (112,364)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 40,997  31,976 
Amortization of deferred contract acquisition and fulfillment costs 63,476  45,194 
Amortization of debt discount and transaction costs 2,593  13,784 
Fair value adjustments to strategic investments (5,119) — 
Impairment of operating lease right-of-use assets 3,892  — 
Non-cash operating lease costs 13,649  13,119 
Stock-based compensation expense 181,095  122,318 
Non-cash charitable donation 3,000  — 
Deferred income taxes (1,250) (284)
Other 666  (493)
Changes in operating assets and liabilities:
Accounts receivable 38,840  25,154 
Contract assets 2,820  1,570 
Prepaid expenses and other current assets (10,367) (5,388)
Deferred contract acquisition and fulfillment costs (95,418) (92,414)
Other assets (6,676) (6,132)
Accounts payable (9,443) 6,275 
Accrued expenses and other liabilities 17,022  11,710 
Accrued compensation (13,047) 22,865 
Contract liabilities 136,624  107,486 
Operating lease liabilities (16,233) (7,098)
Net cash provided by operating activities 313,266  177,278 
Cash flows from investing activities:
Cash paid for acquisition, net of acquired cash (6,388) (180,370)
Purchases of marketable securities (185,628) (11,667)
Sales of marketable securities 3,002  28,986 
Maturities of marketable securities 113,171  301,416 
Purchases of strategic and other investments (500) (3,241)
Purchases of property and equipment (28,534) (44,751)
Net cash (used in) provided by investing activities (104,877) 90,373 
Cash flows from financing activities:
Repayments of convertible senior notes (61,714) — 
Payment of tax withholding obligation on net share settlement of restricted stock units (228,575) (133,860)
Proceeds from exercise of stock options 11,818  13,038 
Proceeds from employee stock purchase plan 23,167  13,590 
Net cash used in financing activities (255,304) (107,232)
Effect of foreign exchange on cash, cash equivalents and restricted cash (564) 2,640 
Net increase (decrease) in cash, cash equivalents and restricted cash (47,479) 163,059 
Cash, cash equivalents and restricted cash at beginning of period (1)
566,337  241,483 
Cash, cash equivalents and restricted cash at end of period (1)
$ 518,858  $ 404,542 
(1) $0.3 million of restricted cash was included in Prepaid expenses and other current assets at July 31, 2021, and in Other assets—noncurrent at January 31, 2021.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DocuSign, Inc. | 2022 Form 10Q | 9


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
Six Months Ended July 31,
(in thousands) 2021 2020
Supplemental disclosure:
Cash paid for interest $ 223  $ 1,438 
Cash paid for operating lease liabilities 20,352  14,387 
Cash paid for income taxes 4,310  1,827 
Non-cash investing and financing activities:
Property and equipment in accounts payable and accrued expenses and other current liabilities $ 7,500  $ 6,478 
Operating lease right-of-use assets exchanged for lease obligations —  27,569 
Fair value of shares issued as part of the repayments of convertible senior notes 133,288  — 
Fair value of shares issued as consideration for acquisition —  48,361 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DocuSign, Inc. | 2022 Form 10Q | 10


DOCUSIGN, INC.
Index for Notes to the Condensed Consolidated Financial Statements

DocuSign, Inc. | 2022 Form 10Q | 11


DOCUSIGN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Organization and Description of Business

DocuSign, Inc. (“we,” “our” or “us”) was incorporated in the State of Washington in April 2003. We merged with and into DocuSign, Inc., a Delaware corporation, in March 2015.

We provide a platform that enables businesses of all sizes to digitally prepare, sign, act on and manage agreements, thereby simplifying and accelerating the process of doing business.

Basis of Presentation and Principles of Consolidation

Our condensed consolidated financial statements include those of DocuSign, Inc. and our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our fiscal 2021 Annual Report on Form 10-K.

Our condensed consolidated financial statements are unaudited and have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and, in our opinion, include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations and cash flows. Our condensed consolidated balance sheet as of January 31, 2021 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and six months ended July 31, 2021 are not necessarily indicative of the results to be expected for the year ending January 31, 2022.

Our fiscal year ends on January 31. References to fiscal 2022, for example, are to the fiscal year ending January 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the condensed consolidated financial statements and notes thereto.

Significant items subject to such estimates and assumptions made by management include, but are not limited to, the determination of:
the fair value of assets acquired and liabilities assumed in business combinations;
the average period of benefit associated with deferred contract acquisition costs and fulfillment costs;
the valuation of strategic investments;
the fair value of certain stock awards issued;
the fair value of the liability and equity components of convertible notes;
the useful life and recoverability of long-lived assets;
the discount rate used for operating leases; and
the recognition, measurement and valuation of deferred income taxes.

Since the emergence of the COVID-19 pandemic in March 2020, we have undertaken measures to protect our employees, partners and customers, including providing the majority of our employees the option to work remotely until at least January 10, 2022. However, there can be no assurance that these measures will be effective, that we will be able to adopt new measures as needed or that we will be able to discontinue these measures without adversely affecting our business operations. In addition, the COVID-19 pandemic and related recent developments (including vaccine deployments, national and regional outbreaks and the emergence of disease variants) have created and may continue to create significant uncertainty in global financial markets, which may decrease technology spending, depress demand for our products and harm our business and results of operations. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities, except for a sublease that resulted in an impairment of $3.9 million on operating lease right-of-use assets recorded during the three months ended July 31, 2021. These
DocuSign, Inc. | 2022 Form 10Q | 12


estimates may change as new events occur and additional information is obtained, which could be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.

Significant Accounting Policies

Other than as described below, there have been no changes to our significant accounting policies described in our fiscal 2021 Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.

Convertible Debt

Effective February 1, 2021, we account for our convertible debt instruments as a single liability measured at its amortized cost. See “Recently Adopted Accounting Pronouncements” below. At issuance, the carrying amount is calculated as the proceeds, net of initial purchasers’ discounts and transaction costs. The difference between the principal amount and carrying value is amortized to interest expense over the term of the convertible debt instruments using the effective interest rate method.

At settlement, the carrying amount of the liability is derecognized and the excess of the cash consideration, if any, over the carrying amount is recorded as a reduction to additional paid-in capital.

Refer to Note 1 of our 2021 Annual Report on Form 10-K for our convertible debt policy prior to the adoption of ASU 2020-06.

Recently Adopted Accounting Pronouncements

On February 1, 2021, we early adopted ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) using the modified retrospective approach. This ASU removes separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. Such convertible debt is accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The ASU also requires the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. The adoption of the ASU using the modified retrospective method resulted in:
an increase of $77.3 million to the total carrying value of our convertible senior notes to reflect the full principal amount of the convertible notes outstanding net of issuance costs,
reductions of $86.1 million to additional paid-in capital and $3.4 million to mezzanine equity to remove the equity component separately recorded for the conversion features associated with the convertible notes, and
a cumulative-effect adjustment of $12.2 million to the beginning balance of accumulated deficit as of February 1, 2021.

Note 2. Revenue

Subscription revenue is recognized over time and accounted for approximately 96% and 95% of our revenue for the three months ended July 31, 2021 and 2020 and approximately 96% and 95% of our revenue for the six months ended July 31, 2021 and 2020.

Performance Obligations
    
As of July 31, 2021, the amount of the transaction price allocated to remaining performance obligations for contracts greater than one year was $1.3 billion. We expect to recognize 52% of the transaction price allocated to remaining performance obligations within the 12 months following July 31, 2021 in our condensed consolidated statement of operations and comprehensive loss.
DocuSign, Inc. | 2022 Form 10Q | 13



Contract Balances

Contract assets represent amounts for which we have recognized revenue, pursuant to our revenue recognition policy, for contracts that have not yet been fully invoiced to our customers where there remains a performance obligation, typically for our multi-year arrangements. Total contract assets were $14.6 million and $17.5 million as of July 31, 2021 and January 31, 2021, of which $0.6 million and $0.6 million were noncurrent and included within “Other assets—noncurrent” on our condensed consolidated balance sheets. The change in contract assets reflects the difference in timing between the satisfaction of our remaining performance obligations and our contractual right to bill our customers.

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. For the six months ended July 31, 2021 and 2020, we recognized revenue of $595.4 million and $375.8 million that was included in the corresponding contract liability balance at the beginning of the periods presented.

We receive payments from customers based upon contractual billing schedules. We record accounts receivable when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days.

Note 3. Fair Value Measurements
The following table summarizes our financial assets that are measured at fair value on a recurring basis:
July 31, 2021
(in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Level 1:
Cash equivalents(1)
Money market funds $ 117,167  $ —  $ —  $ 117,167 
Level 2:
Available-for-sale securities
Commercial paper(1)
160,860  (22) 160,846 
Corporate notes and bonds 193,624  61  (55) 193,630 
U.S. governmental securities 32,548  —  32,552 
Level 2 total 387,032  73  (77) 387,028 
Total $ 504,199  $ 73  $ (77) $ 504,195 
January 31, 2021
(in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Level 1:
Cash equivalents(2)
Money market funds $ 284,312  $ —  $ —  $ 284,312 
Level 2:
Available-for-sale securities
Commercial paper 42,048  (23) 42,026 
Corporate notes and bonds 199,277  375  (67) 199,585 
U.S. governmental securities 58,050  12  (6) 58,056 
Level 2 total 299,375  388  (96) 299,667 
Level 3:
Available-for-sale securities
Corporate notes and bonds 500  —  —  500 
Total $ 584,187  $ 388  $ (96) $ 584,479 

DocuSign, Inc. | 2022 Form 10Q | 14


(1)    Included in “cash and cash equivalents” in our consolidated balance sheets as of July 31, 2021, in addition to cash of $382.8 million and commercial paper of $18.6 million.
(2)    Included in “cash and cash equivalents” in our consolidated balance sheets as of January 31, 2021, in addition to cash of $281.7 million.

We use quoted prices in active markets for identical assets to determine the fair value of our Level 1 investments. The fair value of our Level 2 investments is determined using pricing based on quoted market prices or alternative market observable inputs. The fair value of our Level 3 investments is determined based on an income approach using unobservable inputs.

The fair value of our available-for-sale securities as of July 31, 2021, by remaining contractual maturities, were as follows (in thousands):
Due in one year or less $ 322,940 
Due in one to two years 64,088 
$ 387,028 

As of July 31, 2021 and January 31, 2021, securities in an unrealized loss position were, individually and in aggregate, not material. An allowance for credit losses was deemed unnecessary for these securities, given the extent of the unrealized loss positions as well the issuers' high credit ratings and consistent payment history.

Strategic Investments

During the six months ended July 31, 2021, investments in equity securities without readily determinable fair values increased by $4.8 million due to adjustments related to observable price changes that occurred primarily during the three months ended April 30, 2021. Such investments are recorded in “Other assets—noncurrent” on our condensed consolidated balance sheets.

Convertible Senior Notes

We estimated the fair value of the convertible senior notes based on the quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). The Notes are recorded at face value less unamortized debt discount and transaction costs as “Convertible senior notes—current” and “Convertible senior notes, net—noncurrent” on our condensed consolidated balance sheets. Refer to Note 6 for further information.

(in thousands) July 31, 2021 January 31, 2021
0.5% Convertible Senior Notes due in 2023
Aggregate principal amount $ 53,289  $ 115,000 
Fair value amount 219,615  373,928 
0% Convertible Senior Notes due in 2024
Aggregate principal amount $ 690,000  $ 690,000 
Fair value amount 736,713  725,100 

DocuSign, Inc. | 2022 Form 10Q | 15


Note 4. Property and Equipment, Net

Property and equipment consisted of the following:
(in thousands) July 31, 2021 January 31, 2021
Computer and network equipment $ 112,420  $ 102,163 
Software, including capitalized software development costs 67,081  56,858 
Furniture and office equipment 21,507  21,682 
Leasehold improvements 79,608  79,892 
280,616  260,595 
Less: Accumulated depreciation (143,225) (121,029)
137,391  139,566 
Work in progress 36,592  25,473 
     Total $ 173,983  $ 165,039 

Depreciation and amortization expense associated with property and equipment was $14.3 million and $10.5 million for the three months ended July 31, 2021 and 2020, and $27.8 million and $20.3 million for the six months ended July 31, 2021 and 2020.

For the three months ended July 31, 2021 and 2020, we capitalized $9.3 million and $6.8 million of internally developed software. For the six months ended July 31, 2021 and 2020, we capitalized $17.1 million and $11.0 million of internally developed software.

Note 5. Deferred Contract Acquisition and Fulfillment Costs

The following table represents a rollforward of our deferred contract acquisition and fulfillment costs:
Six Months Ended July 31,
(in thousands) 2021 2020
Deferred Contract Acquisition Costs:
Beginning balance $ 262,519  $ 155,697 
Additions to deferred contract acquisition costs 83,600  80,836 
Amortization of deferred contract acquisition costs (53,250) (36,528)
Cumulative translation adjustment (332) 677 
Ending balance $ 292,537  $ 200,682 
Deferred Contract Fulfillment Costs:
Beginning balance $ 12,506  $ 8,218 
Additions to deferred contract fulfillment costs 11,731  11,578 
Amortization of deferred contract fulfillment costs (10,116) (8,666)
Ending balance $ 14,121  $ 11,130 

Note 6. Debt

Convertible Senior Notes

In September 2018 we issued $575.0 million in aggregate principal amount of the 0.5% Convertible Senior Notes due in 2023 (“2023 Notes”). The net proceeds from the issuance of the 2023 Notes were $560.8 million after deducting the initial purchasers’ discounts and transaction costs. Based upon the reported sales price of our common stock, the 2023 Notes became convertible on August 1, 2020 and continue to be convertible through July 31, 2021.

In January 2021 we issued $690.0 million in aggregate principal amount of the 0% Convertible Senior Notes due in 2024 (“2024 Notes,” and together with the 2023 Notes, the “Notes”). The net proceeds from the issuance of the 2024 Notes were $677.3 million after deducting the initial purchasers’ discounts and transaction costs. As of July 31, 2021, the conversion conditions for the 2024 Notes described in our 2021 Annual Report on Form 10-K were not met.
DocuSign, Inc. | 2022 Form 10Q | 16



Conversions of the 2023 Notes

We accounted for early conversions and settlements of the 2023 Notes during the six months ended July 31, 2021 under ASU 2020-06. Refer to Note 1 for further discussion of early adoption.

During the six months ended July 31, 2021, we settled $61.7 million aggregate amount of the principal of 2023 Notes, including $23.9 million elected for conversion as of January 31, 2021, for aggregate consideration of $195.0 million, consisting of $61.7 million in cash and 0.6 million shares of our common stock with a value of $133.3 million. The $0.7 million excess of the cash consideration over the corresponding carrying value was recorded as a reduction to additional paid-in capital.

Additionally, as of July 31, 2021, we had received conversion notices on our 2023 Notes for $2.0 million in aggregate principal amount, the corresponding carrying value is reflected in Convertible senior notes—current on our condensed consolidated balance sheet. From August 1, 2021 through September 2, 2021, we received conversion notices on our 2023 Notes for $1.1 million in aggregate principal amount. We plan to settle the principal amount in cash during the three months ended October 31, 2021.

DocuSign, Inc. | 2022 Form 10Q | 17


The net carrying amounts of the liability and equity components of the Notes were as follows:
(in thousands) July 31, 2021 January 31, 2021
2023 Notes:
Principal $ 53,289  $ 115,000 
Less: unamortized debt discount (1)
—  (15,116)
Less: unamortized transaction costs (572) (1,224)
Net carrying value of current and noncurrent liability component $ 52,717  $ 98,660 
Proceeds allocated to the conversion option (debt discount) (1)
$ 134,667 
Less: extinguishment or conversion (31,933)
Less: transaction costs (3,336)
Net carrying value of mezzanine and permanent equity component $ 99,398 
2024 Notes:
Principal $ 690,000  $ 690,000 
Less: unamortized debt discount (1)
—  (63,619)
Less: unamortized transaction costs (10,413) (11,353)
Net carrying value of noncurrent liability component $ 679,587  $ 615,028 
Proceeds allocated to the conversion option (debt discount) (1)
$ 64,453 
Less: transaction costs (1,185)
Net carrying value of permanent equity component $ 63,268 
(1) Not applicable under ASU 2020-06

The effective interest rate on the liability component of the 2023 Notes was 5.9% prior to the adoption of ASU 2020-06 and 1.0% after adoption. The effective interest rate on the liability component of the 2024 notes was 3.8% prior to the adoption of ASU 2020-06 and 0.6% after adoption. Interest expense recognized related to the Notes was as follows:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
Contractual interest expense $ 66  $ 720  $ 102  $ 1,438 
Amortization of debt discount —  6,422  —  12,751 
Amortization of transaction costs 1,135  520  2,316  1,033 
Total $ 1,201  $ 7,662  $ 2,418  $ 15,222 

Capped Calls

To minimize the potential economic dilution to our common stock upon conversion of the Notes, we entered into privately-negotiated capped call transactions (“Capped Calls”) with certain counterparties.

The material terms of the capped call transactions were as follows:
(in thousands, except per share amounts) 2023 Notes 2024 Notes
Aggregate cost of capped calls $ 67,563  $ 31,395 
Initial strike price per share (1)
$ 71.50  $ 420.24 
Initial cap price per share (1)
$ 110.00  $ 525.30 
Shares of our common stock covered by the capped calls (1)
8,042  1,642 
(1) Subject to adjustments for certain events, such as merger events and tender offers, and anti-dilution adjustments
DocuSign, Inc. | 2022 Form 10Q | 18



Impact on Loss Per Share

After February 1, 2021, upon adoption of ASU 2020-06, in periods when we have net income, the shares of our common stock subject to the Notes outstanding during the period are included in our diluted earnings per share under the if-converted method. As of the beginning of the fourth quarter of 2021, share settlement was presumed, and shares subject to the Notes would have been included under the if-converted method. In periods prior to that, cash settlement was presumed and shares subject to the Notes would have been included under the treasury stock method. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive.

Upon conversion, there will be no economic dilution from the Notes unless the market price of our common stock exceeds the cap prices listed above in the Capped Calls section, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the cap price. As of July 31, 2021, the market price of our common stock exceeded the $110.00 per share cap price associated with the 2023 Notes but not the $525.30 cap price associated with the 2024 Notes; therefore, the 2023 Notes would have caused economic dilution if converted.

Revolving Credit Facility

In January 2021, we entered into a credit agreement with a syndicate of banks. The credit agreement extended a senior secured revolving credit facility (the “Credit Facility”) to us in an aggregate principal amount of $500.0 million, which amount may be increased by an additional $250.0 million subject to the terms of the credit agreement. We may use the proceeds of future borrowings under the credit facility to finance working capital, for capital expenditures and for other general corporate purposes, including permitted acquisitions.

The Credit Facility matures in January 2026 and requires us to comply with customary affirmative and negative covenants. We were in compliance with all covenants as of July 31, 2021. As of July 31, 2021, there were no outstanding borrowings under the Credit Facility. The Credit Facility is subject to customary fees for loan facilities of this type, including ongoing commitment fees at a rate between 0.25% and 0.30% per annum on the daily undrawn balance.

Note 7. Commitments and Contingencies

As of July 31, 2021, we had outstanding unused letters of credit associated with our various operating leases totaling $7.4 million.

We have entered into certain noncancellable contractual arrangements that require future purchases of goods and services. These arrangements primarily relate to cloud infrastructure support and sales and marketing activities. As of July 31, 2021, the future noncancellable minimum payments due under these contractual obligations with a remaining term of more than one year were as follows:
Fiscal Period: Amount (in thousands)
2022, remainder $ 9,829 
2023 34,970 
2024 22,314 
2025 14,025 
2026 10,060 
Thereafter 3,145 
Total $ 94,343 
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Indemnification

We enter into indemnification provisions under our agreements with customers and other companies in the ordinary course of business, including business partners, contractors and parties performing our research and development. Pursuant to these arrangements, we agree to indemnify and defend the indemnified party for certain claims and related losses suffered or incurred by the indemnified party from actual or threatened third-party claims because of our activities. The duration of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification clauses or agreements is not determinable. Historically, we have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these indemnification agreements is not material as of July 31, 2021, and January 31, 2021. We maintain commercial general liability insurance and product liability insurance to offset certain of our potential liabilities under these indemnification agreements.

We have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with us.

Claims and Litigation

From time to time, we may be subject to legal proceedings, claims and litigation made against us in the ordinary course of business. We believe the final outcome of these matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

Note 8. Stockholders' Equity

Equity Incentive Plans

We maintain three stock-based compensation plans: the 2018 Equity Incentive Plan (the “2018 Plan”), the Amended and Restated 2011 Equity Incentive Plan (the “2011 Plan”) and the Amended and Restated 2003 Stock Plan (the “2003 Plan”).

The 2018 Plan serves as a successor to the 2011 Plan and 2003 Plan and provides for the grant of stock-based awards to our employees, directors and consultants. Shares available for grant under the 2011 Plan that were reserved but not issued as of the effective date of the 2018 Plan were added to the reserves of the 2018 Plan. No additional awards under the 2011 Plan or 2003 Plan have been made since the effective date of the 2018 Plan. Outstanding awards under these two plans continue to be subject to the terms and conditions of the respective plans.

As of July 31, 2021, 42.2 million shares of our common stock were available for issuance under the 2018 Plan.

The 2018 Plan provides that the number of shares reserved will automatically increase on the first day of each fiscal year, beginning on February 1, 2019 and ending on February 1, 2028, by 5% of the total number of shares of our capital stock outstanding on the immediately preceding January 31st (or such lesser number of shares as our board of directors or a committee of our board of directors may approve). The most recent automatic increase of 9.6 million shares occurred on February 1, 2021.

Restricted Stock Units

Restricted stock units (“RSUs”) granted under the 2018 Plan generally vest over a four-year period, either quarterly or with 25% vesting at the end of one year and the remainder quarterly thereafter. The majority of RSUs vest upon the satisfaction of a service-based vesting condition. From time to time, we also grant RSUs that are subject to either a performance-based or market-based vesting condition. The performance-based conditions will be satisfied upon satisfaction of certain financial performance targets. The market-based conditions will be satisfied if certain milestones based on our common stock price or relative total shareholder return are met.
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RSU activity for the six months ended July 31, 2021 was as follows:
(in thousands, except per share data) Number of Units Weighted-Average Grant Date Fair Value
Unvested at January 31, 2021 10,586  $ 83.98 
Granted 2,110  221.95 
Vested (2,634) 65.10 
Canceled (757) $ 93.58 
Unvested at July 31, 2021 9,305  $ 119.83 

As of July 31, 2021, our total unrecognized compensation cost related to RSUs was $869.0 million. We expect to recognize this expense over the remaining weighted-average period of approximately 2.3 years.

Stock Options
    
Option activity for the six months ended July 31, 2021 was as follows:
(in thousands, except years and per share data) Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Outstanding at January 31, 2021 4,798  $ 15.55  5.0 $ 1,042,879 
Exercised (1,112) 13.52 
Outstanding at July 31, 2021, all vested and exercisable 3,686  $ 16.16  4.8 $ 1,039,112 

As of July 31, 2021, there was no remaining unrecognized compensation cost related to stock option grants.

2018 Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of our common stock at a discounted price, normally through payroll deductions, of up to 15% of their earnings, subject to the terms of the ESPP and applicable law. The purchase price for common stock under the ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. The ESPP provides for separate six-month offering periods that begin in the first and third quarter of each year. In the six months ended July 31, 2021, 0.1 million shares of our common stock were purchased under the ESPP. Compensation expense related to the ESPP was $4.8 million and $2.9 million for the three months ended July 31, 2021 and 2020, and $9.1 million and $4.8 million for the six months ended July 31, 2021 and 2020.

The number of shares reserved under the ESPP will automatically increase on the first day of each fiscal year through February 1, 2028, in an amount equal to the lesser of (i) 1% of the total number of shares of our common stock outstanding on January 31 of the preceding fiscal year, (ii) 3.8 million shares or (iii) a lesser number of shares determined by our board of directors. As of July 31, 2021, 8.1 million shares of our common stock were reserved for issuance under the ESPP.

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Note 9. Net Loss per Share Attributable to Common Stockholders

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders for periods presented:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except per share data) 2021 2020 2021 2020
Numerator:
Net loss attributable to common stockholders $ (25,501) $ (64,560) $ (33,855) $ (112,364)
Denominator:
Weighted-average common shares outstanding 195,996  184,862  195,183  183,930 
Net loss per share attributable to common stockholders:
Basic and diluted $ (0.13) $ (0.35) $ (0.17) $ (0.61)

Outstanding potentially dilutive securities that were excluded from the diluted per share calculations because they would have been antidilutive are as follows:
July 31,
(in thousands) 2021 2020
RSUs 9,305  13,350 
Stock options 3,686  5,577 
ESPP 158  227 
Convertible senior notes 2,387  5,390 
Total antidilutive securities 15,536  24,544 

Note 10. Income Taxes

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. There were no material discrete items in the quarter.

Our income tax provision was $0.2 million and $0.8 million for the three months ended July 31, 2021 and 2020. Our income tax provision was $2.1 million and $3.0 million for the six months ended July 31, 2021 and 2020.

We review the likelihood that we will realize the benefit of our deferred tax assets and, therefore, the need for valuation allowances, on a quarterly basis. We maintain a valuation allowance against certain deferred tax assets, including all U.S. consolidated group deferred tax assets and certain foreign deferred tax assets as a result of our history of losses in the United States and certain foreign jurisdictions, and the variability and uncertainty of our operating results. In the event we determine our deferred tax assets are realizable based on our assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made.

As of July 31, 2021, our gross unrecognized tax benefits totaled $37.2 million, excluding related accrued interest and penalties, of which $16.3 million would impact the effective tax rate if recognized. Our policy is to account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months.

We are subject to taxation in the United States and various foreign jurisdictions. Our tax years from inception in 2003 through July 31, 2021 remain subject to examination by U.S. and California taxing authorities, as well as taxing authorities in various other state and foreign jurisdictions. We are under examination by the Israel Tax Authority for tax years 2016 through 2019. We are not under examination in any other material jurisdiction. We believe that adequate amounts have been reserved in all jurisdictions.

Note 11. Geographic Information

We operate in one operating segment and one reportable segment as we only report financial information on an aggregate and consolidated basis to the Chief Executive Officer, who is our chief operating decision maker.
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Revenue by geography is based on the address of the customer as specified in our master subscription agreements with our customers. Revenue by geographic area was as follows:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
U.S. $ 397,882  $ 275,494  $ 766,305  $ 517,662 
International 113,962  66,715  214,618  121,564 
Total revenue $ 511,844  $ 342,209  $ 980,923  $ 639,226

No single country other than the U.S. had revenue greater than 10% of total revenue in the three and six months ended July 31, 2021 and 2020.

Our long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows:
(in thousands) July 31, 2021 January 31, 2021
U.S. $ 219,503  $ 221,549 
Ireland 61,977  66,670 
International 33,092  36,172 
Total long-lived assets $ 314,572  $ 324,391 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 2021 Annual Report on Form 10-K. As discussed in the section titled “Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our 2021 Annual Report on Form 10-K. Our fiscal year ends January 31.

Executive Overview of Second Quarter Results

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.

We offer the world’s #1 e-signature solution as the core part of our broader software suite for automating the agreement process, which we call the DocuSign Agreement Cloud. It is designed to allow companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process or transaction digital. It provides comprehensive functionality across e-signature and addresses the broader agreement process. As a result, over one million customers and one billion users worldwide utilize DocuSign to create, upload and send documents for multiple parties to sign electronically. The DocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes. DocuSign eSignature integrates with popular business apps, and our functionality can also be embedded using our API. Finally, the DocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant.

We generally offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned. Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients. Our customers have the flexibility to put a large number of documents in an Envelope. For a number of
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use cases, such as buying a home, multiple Envelopes are used over the course of the process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform.

We generate substantially all our revenue from sales of subscriptions, which accounted for 96% and 95% of our revenue in the three months and the six months ended July 31, 2021 and 2020. Our subscription fees include the use of our software suite and access to customer support. Subscriptions generally range from one to three years, and substantially all our multi-year customers pay in annual installments, one year in advance.

We also generate revenue from professional and other non-subscription services, which consists primarily of fees associated with providing new customers deployment and integration services. Other revenue includes amounts derived from sales of on-premises solutions. Professional services and other revenue accounted for the remainder of total revenue in the three and six months ended July 31, 2021 and 2020. We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers’ deployment of our software suite, which helps drive customer retention and expansion of the use of the DocuSign Agreement Cloud.

We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses (“VSBs”), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships and individuals. We sell to customers through multiple channels. Our go-to-market strategy relies on our direct sales force and partnerships to sell to enterprises and commercial businesses and our web-based self-service channel to sell to VSBs, which we believe is the most cost-effective way to reach our smallest customers. We offer more than 350 off-the-shelf, prebuilt integrations with the applications that many of our customers already use—including those offered by Google, Microsoft, NetSuite, Oracle, Salesforce, SAP, SAP SuccessFactors and Workday—so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning various industries and countries with no significant customer concentration. No single customer accounted for more than 10% of total revenue in any of the periods presented.

We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers. To demonstrate this growth over time, the number of our customers with greater than $300,000 in annual contract value (measured in billings) has increased from approximately 30 customers as of January 31, 2013 to 714 customers as of July 31, 2021. Each of our customer types has a different purchasing pattern. VSBs tend to become customers quickly with very little to no direct sales or customer support interaction and generate smaller average contract values, while commercial and enterprise customers typically involve longer sales cycles, larger contract values and greater expansion opportunities for us.

COVID-19 Update

The COVID-19 pandemic continues to have large-scale, rapidly shifting effects on workforces, organizations, customers, economies and financial markets globally, contributing to increased market volatility. We are continuing to monitor the effects of the pandemic across our business. These effects are dependent on highly uncertain future developments, including the duration, spread and severity of the pandemic, the emergence of coronavirus variants, the actions undertaken to contain the virus or mitigate its impacts, the speed and breadth of vaccination progress, vaccine efficacy against COVID-19 variants, current or future travel restrictions and how quickly and to what extent normal global economic and operating conditions can or will resume, all of which are highly uncertain and cannot be accurately predicted. While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the effects of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.

During the pandemic, we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers, including by shifting to a largely remote work environment, imposing work-related travel restrictions for all employees and shifting most planned customer, partner and investor events to virtual-only formats. We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, as well as expenses associated with planning and risk mitigation for reopening of our offices and resumption of in-person business activities, and may incur similar expenses in the future. The impact of these and any other operational changes we may implement is uncertain, but as of the date of this filing they have not materially affected our ability to maintain operations.

We have experienced a substantial increase in overall demand for our products, particularly DocuSign eSignature, as the shift to remote, digital business operations has caused more organizations to adopt or expand their use of digital agreements. This acceleration of the digital transformation of agreements has resulted in growth in our customer base and a significant increase in customer spending across almost all industries and regions we serve.


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While we have experienced a significant increase in paying customers and revenue due to the pandemic, there is no assurance that we will experience a continued increase in paying customers or that new or existing customers will continue to utilize our products at similar levels after the COVID-19 pandemic has tapered globally. As vaccinations become widely available and the pandemic wanes, this may result in a decline in paying customers once individuals are no longer working or attending school from home and/or their priorities change. As the pandemic continued in 2021, the rate of vaccinations and emerging COVID-19 variants have had variable impacts on different regions of the world and areas of the economy. This has caused and may continue to cause new, existing and potential customers to experience rapidly changing conditions and disruptions to their businesses. This may result in differing levels of demand for our products as our customers’ priorities, resources, financial conditions and economic outlook change, which could adversely affect or increase the volatility of our financial results. See the section below titled “Risk Factors” for further discussion of the potential impact of the COVID-19 pandemic, including the conclusion or tapering of the pandemic, on our business, financial condition and results of operations.

Financial Results for the Three and Six Months Ended July 31, 2021 and 2020

Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
Total revenue $ 511,844  $ 342,209  $ 980,923  $ 639,226 
Total costs and expenses 534,455  400,844  1,014,271  739,714 
Total stock-based compensation expense 99,959  68,767  181,095  122,318 
Loss from operations (22,611) (58,635) (33,348) (100,488)
Net loss (25,501) (64,560) (33,855) (112,364)
Net cash provided by operating activities 177,669  118,134  313,266  177,278 
Purchases of property and equipment (15,938) (18,362) (28,534) (44,751)

Cash, cash equivalents, restricted cash and investments were $887.2 million as of July 31, 2021.

Key Factors Affecting Our Performance

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

Growing Customer Base
    
We are highly focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. As of July 31, 2021, we had a total of over 1,053,000 customers, including over 148,000 enterprise and commercial customers, compared to almost 750,000 customers and over 95,000 enterprise and commercial customers as of July 31, 2020. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution or a distinct business unit of a large company that has an active contract to access our software suite. We define enterprise customers as companies generally included in the Global 2000. We define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and small-to-medium-sized businesses, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. We refer to total customers as all enterprises, commercial businesses and VSBs.

We believe that our ability to increase the number of customers using our software suite, particularly the number of enterprise and commercial customers, is an indicator of our market penetration, the growth of our business and our potential future business opportunities. By increasing awareness of our software suite, further developing our sales and marketing expertise and continuing to build features tuned to different industry needs, we have expanded the diversity of our customer base to include organizations of all sizes across nearly every industry.

Retaining and Expanding Contracts with Existing Enterprise and Commercial Customers
    
Many of our customers have increased spend with us as they have expanded their use of our offerings in both existing and new use cases across their front or back office operations. Our enterprise and commercial customers may start with just one use case and gradually implement additional use cases across their organization once they see the benefits of our software suite. Several of our largest enterprise customers have deployed our software suite for hundreds of use cases across their organizations. We believe there is significant expansion opportunity with our customers following their initial adoption of our software suite.
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Increasing International Revenue
    
Our international revenue represented 22% and 19% of our total revenue in both the three months and the six months ended July 31, 2021 and 2020.

We started our international selling efforts in English-speaking common law countries, such as Canada, the United Kingdom and Australia, where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions and the United States (“U.S.”). We have since made significant investments to be able to offer our products in select civil law countries. For example, in Europe, we have Standards-Based Signature (“SBS”) technology tailored for electronic IDentification, Authentication and trust Services (“eIDAS”). SBS supports signatures that involve digital certificates, including those specified in the European Union’s (“EU”) eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition in Japan, we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement.
    
We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existing U.S.-based customers manage agreements across their international businesses. We have experienced increased demand in Latin America and are expanding our sales and marketing resources to capitalize on the potential growth of these markets. Additionally, we expect to continue to develop and enhance our strategic partnerships in key international markets as we grow internationally.

Investing for Growth

We believe that our market opportunity is large, and we plan to invest to continue to support further growth. This includes expanding our sales headcount and increasing our marketing initiatives. We also plan to continue to invest in expanding the functionality of our software suite and underlying infrastructure and technology to meet the needs of our customers across industries. Our acquisitions of Seal Software and Liveoak Technologies, intended to bring additional functionality to our DocuSign Agreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.

Components of Results of Operations

Revenue

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

Subscription Revenue
Subscription revenue consists of fees for the use of our software suite and our technical infrastructure and access to customer support, which includes phone or email support. We typically invoice customers in advance on an annual basis. We recognize subscription revenue ratably over the term of the contract subscription period beginning on the date access to our software suite is provided.
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 overhead costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology, information security and recruiting costs to all departments based on headcount. As such, these allocated overhead costs are reflected in each cost of revenue and operating expense category.

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Cost of Revenue

Cost of Subscription Revenue
Cost of subscription revenue primarily consists of expenses related to hosting our software suite and providing support. These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, associated with our technical infrastructure, customer success and customer support. These expenses also consist of software and maintenance costs, third-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 costs.
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 costs.

Gross Profit and Gross Margin

Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, timing and amount of investment to maintain or expand our hosting capability, the growth of our software suite support and professional services team, stock-based compensation expenses, amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead costs.

Operating Expenses

Our operating expenses consist of selling and marketing, research and development and general and administrative expenses. As our revenues continue to increase, our operating expenses as a percentage of revenue may increase or decrease at different rates, driven by the timing of revenue recognition, our investments in growth and other factors.

Selling and Marketing Expense
Selling and marketing expense consists primarily of personnel costs, including sales commissions. These expenses also include expenditures related to advertising, marketing, promotional events and brand awareness activities, as well as allocated overhead costs. We expect selling and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement marketing strategies.
Research and Development 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, as well as allocated overhead costs. 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 software suite.
General and Administrative Expense General and administrative expense consists primarily of employee-related costs for those employees providing administrative services such as legal, human resources, information technology related to internal systems, accounting and finance. These expenses also include certain third-party consulting services, certain facilities costs, allocated overhead costs, and impairment of operating lease right-of-use assets. We expect general and administrative expense to increase in absolute dollars to support the overall growth of our operations.

Interest Expense

Interest expense consists primarily of contractual interest expense, amortization of discount and amortization of debt issuance costs on our Convertible Senior Notes (the “Notes”).

Interest income and other income (expense), net

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

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Provision for income taxes

Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock-based compensation. We have a valuation allowance against our U.S. consolidated group and certain foreign deferred tax assets. We expect to maintain this valuation allowance for the foreseeable future or until it becomes more likely than not that the benefit of these U.S. and foreign deferred tax assets will be realized by way of expected future taxable income.

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Discussion of Results of Operations

The following table summarizes our historical consolidated statements of operations data:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except percentages) 2021 As % of revenue 2020 As % of revenue 2021 As % of revenue 2020 As % of revenue
Revenue:
Subscription $ 492,758  96  % $ 323,643  95  % $ 944,693  96  % $ 604,565  95  %
Professional services and other 19,086  18,566  36,230  34,661 
Total revenue 511,844  100  342,209  100  980,923  100  639,226  100 
Cost of revenue:
Subscription 84,455  17  64,730  19  162,526  17  116,740  19 
Professional services and other 29,325  25,885  56,497  47,907 
Total cost of revenue 113,780  22  90,615  26  219,023  22  164,647  26 
Gross profit 398,064  78  251,594  74  761,900  78  474,579  74 
Operating expenses:
Sales and marketing 262,372  51  194,992  57  501,491  51  366,785  57 
Research and development 94,651  18  63,791  19  180,067  18  118,025  19 
General and administrative 63,652  13  51,446  15  113,690  12  90,257  15 
Total operating expenses 420,675  82  310,229  91  795,248  81  575,067  91 
Loss from operations (22,611) (4) (58,635) (17) (33,348) (3) (100,488) (17)
Interest expense (1,669) —  (7,684) (2) (3,341) —  (15,244) (2)
Interest income and other income (expense), net (1,063) (1) 2,601  —  4,974  —  6,343  — 
Loss before provision for income taxes (25,343) (5) (63,718) (19) (31,715) (3) (109,389) (19)
Provision for income taxes 158  —  842  —  2,140  —  2,975  — 
Net loss $ (25,501) (5) % $ (64,560) (19) % $ (33,855) (3) % $ (112,364) (19) %

Amortization of finite-lived intangible assets was as follows:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
Cost of subscription revenue $ 3,328  $ 3,132  $ 6,500  $ 4,480 
Sales and marketing 3,333  4,284  6,691  7,195 
Total $ 6,661  $ 7,416  $ 13,191  $ 11,675 

The following discussion and analysis is for the three and six months ended July 31, 2021, compared to the same period in 2020, unless otherwise stated.

Revenue
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
Revenue:
Subscription $ 492,758  $ 323,643  52  % $ 944,693  $ 604,565  56  %
Professional services and other 19,086  18,566  % 36,230  34,661  %
Total revenue $ 511,844  $ 342,209  50  % $ 980,923  $ 639,226  53  %

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Subscription revenue increased by $169.1 million, or 52%, in the three months ended July 31, 2021 and by $340.1 million, or 56%, in the six months ended July 31, 2021. The increase was primarily due to a combination of the acquisition of new customers and upsells to our existing customer base. This growth was mainly driven by an increase in sales to our mid-market and enterprise customers through our direct and indirect sales channels.

We continue to invest in a variety of customer programs and initiatives, which, along with expanded customer use cases, have helped increase our subscription revenue over time. We expect subscription revenue to continue to increase as existing customers increase their usage across their organizations while we offer new functionality, attract new customers and fully realize the potential of our acquisitions in our product offerings. We continue to monitor the COVID-19 pandemic in fiscal 2022 and its impact on the economy, the digital transformation of business and customer demand for our solutions.

Cost of Revenue and Gross Margin
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
Cost of revenue:
Subscription $84,455 $64,730 30  % $162,526 $116,740 39  %
Professional services and other 29,325 25,885 13  % 56,497 47,907 18  %
Total cost of revenue $113,780 $90,615 26  % $219,023 $164,647 33  %
Gross margin:
Subscription 83  % 80  % pts 83  % 81  % pts
Professional services and other (54) % (39) % (15) pts (56) % (38) % (18) pts
Total gross margin 78  % 74  % pts 78  % 74  % pts

Cost of subscription revenue increased $19.7 million, or 30%, in the three months ended July 31, 2021 and $45.8 million, or 39%, in the six months ended July 31, 2021, primarily driven by higher costs to support our growing customer base.

Increases in the three months ended July 31, 2021 primarily consisted of:
$5.7 million in personnel costs and $2.5 million in stock-based compensation driven by higher headcount and annual salary increases; and
$5.3 million in operating costs due to higher costs to support our platform and the growth in our revenue, including increases in subscription reseller fees, hosting costs and authentication and processing fees.

Increases in the six months ended July 31, 2021 primarily consisted of:
$15.3 million in personnel costs and $4.7 million in stock-based compensation driven by higher headcount and annual salary increases;
$11.5 million in operating costs to support our platform and the growth in our revenue, including increases in subscription reseller fees, hosting costs and authentication and processing fees; and
$9.9 million in depreciation and amortization, which reflects the impact of higher data center and capitalized software assets as well as the higher existing technology intangible assets from acquisitions.

Cost of professional services and other revenue increased $3.4 million, or 13%, in the three months ended July 31, 2021 and $8.6 million, or 18%, in the six months ended July 31, 2021, primarily due to an increase in personnel costs driven by higher headcount and annual salary increases.

Sales and Marketing
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
Sales and marketing $262,372 $194,992 35  % $501,491 $366,785 37  %
Percentage of revenue 51  % 57  % 51  % 57  %

Sales and marketing expenses increased $67.4 million, or 35%, in the three months ended July 31, 2021 and $134.7 million, or 37%, in the six months ended July 31, 2021, primarily driven by investments in workforce and
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technology support to accommodate the significant increase in demand due to the acceleration of the digital transformation of agreements.

Increases in the three months ended July 31, 2021 primarily consisted of:
$33.8 million in personnel costs and $14.6 million in stock-based compensation due to higher headcount, annual salary increases, higher commissions in line with higher sales and higher payroll taxes; and
$12.8 million in marketing and advertising expense due to higher spend on online advertising platforms to help capture the increased market interest in our product offering.

Increases in the six months ended July 31, 2021 primarily consisted of:
$74.6 million in personnel costs and $28.1 million in stock-based compensation due to higher headcount, annual salary increases, higher commissions in line with higher sales and higher payroll taxes; and
$23.7 million in marketing and advertising expense due to higher spend on online advertising platforms to help capture the increased market interest in our product offering.

Research and Development
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
Research and development $94,651 $63,791 48  % $180,067 $118,025 53  %
Percentage of revenue 18  % 19  % 18  % 18  %

Research and development expenses increased $30.9 million, or 48%, in the three months ended July 31, 2021 and $62.0 million, or 53%, in the six months ended July 31, 2021, primarily due to investments in workforce and technology support to accommodate growth. Personnel costs and stock-based compensation increased $15.5 million and $11.5 million in the three months ended July 31, 2021 and $34.8 million and $20.1 million in the six months ended July 31, 2021, due to higher headcount and annual salary increases. The increase in the six months ended July 31, 2021 also reflects the impact of the addition of Seal and Liveoak employees to our workforce.

General and Administrative
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
General and administrative $63,652 $51,446 24  % $113,690 $90,257 26  %
Percentage of revenue 13  % 15  % 12  % 15  %

General and administrative expenses increased $12.2 million, or 24%, in the three months ended July 31, 2021 and $23.4 million, or 26%, in the six months ended July 31, 2021, primarily due to investments in workforce and technology support to accommodate growth. Personnel costs and stock-based compensation increased $2.9 million and $2.2 million in the three months ended July 31, 2021 and $9.8 million and $4.2 million in the six months ended July 31, 2021, due to higher headcount and the impact of annual salary increases. The expense for the three and six months ended July 31, 2021 also includes $3.9 million impairment of operating lease right-of-use assets.
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Other Income and Expense
Three Months Ended July 31, 2021 versus 2020 Six Months Ended July 31, 2021 versus 2020
(in thousands, except for percentages) 2021 2020 2021 2020
Interest expense $1,669 $7,684 (78) % $3,341 $15,244 (78) %
Percentage of revenue —  % % —  % %
Interest income $1,194 $1,825 (35) % $2,320 $5,206 (55) %
Foreign currency gain (loss) (1,738) 1,425 NM (1,473) 880 NM
Fair value adjustments to strategic investments —  % 5,270 —  %
Other (519) (649) (20) % (1,143) 257 NM
Interest income and other income (expense), net $(1,063) $2,601 (141) % $4,974 $6,343 (22) %
Percentage of revenue (1) % —  % —  % %

Interest expense decreased by $6.0 million in the three months ended July 31, 2021 and $11.9 million in the six months ended July 31, 2021, primarily due to lower amortization expense under ASU 2020-06 effective February 1, 2021.

Interest income and other income, net, for the six months ended July 31, 2021 included $5.3 million adjustments to fair value of certain strategic investments resulting from observable price changes that occurred during the quarter.
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Liquidity and Capital Resources

Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations. As of July 31, 2021, we had $822.9 million in cash and cash equivalents and short-term investments. We also had $64.1 million in long-term investments that provide additional capital resources. We finance our operations primarily through payments by our customers for use of our product offerings and related services and through debt financings.

In September 2018, we issued and sold $575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, of which $521.7 million has been settled as of July 31, 2021. In January 2021, we issued and sold $690.0 million in aggregate principal amount of 0% Convertible Senior Notes due 2024.

In January 2021 we entered into a $500.0 million credit facility, which may be increased by an additional $250.0 million subject to customary terms and conditions. The credit facility is available until January 11, 2026, to optimize our capital structure and strengthen our balance sheet. There were no outstanding borrowings under the credit facility as of July 31, 2021.

Further details of these transactions are described in Note 6 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q.

We were in compliance with all debt covenants at July 31, 2021.

We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. While we have generated positive cash flows from operations in recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of $1.4 billion as of July 31, 2021. We may not achieve profitability in the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business.

We typically invoice our customers annually in advance. Therefore, a substantial source of our cash is from such invoices, which are included on our consolidated balance sheets in contract liabilities until revenue is recognized or in accounts receivable until cash is collected. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Our accounts receivable decreased by $38.8 million in the six months ended July 31, 2021, compared to a decrease of $25.2 million in the six months ended July 31, 2020, which resulted in a $13.6 million increase in cash provided by operating activities year over year. Contract liabilities consist of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. Our contract liabilities increased by $136.6 million in the six months ended July 31, 2021, compared to an increase of $107.5 million in the six months ended July 31, 2020. The year over year increase contributed an additional $29.1 million to cash provided by operating activities.

Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite. We may in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:
Six Months Ended July 31,
(in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 313,266  $ 177,278 
Investing activities (104,877) 90,373 
Financing activities (255,304) (107,232)
Effect of foreign exchange on cash, cash equivalents and restricted cash (564) 2,640 
Net change in cash, cash equivalents and restricted cash $ (47,479) $ 163,059 

Cash Flows from Operating Activities

Cash provided by operating activities was $313.3 million and $177.3 million for the six months ended July 31, 2021 and 2020. The improvement of $136.0 million compared to the prior year, was primarily the result of increased sales and the related cash collections, partially offset by higher operating costs to support growth and increased headcount.

Cash Flows from Investing Activities

For the six months ended July 31, 2021, net cash used in investing activities of $104.9 million was primarily driven by $69.5 million net purchases of marketable securities, $28.5 million purchases of property and equipment, and $6.4 million cash paid for acquisitions.

For the six months ended July 31, 2020, cash provided by investing activities of $90.4 million was primarily driven by $318.7 million from maturities and sales of marketable securities, partially offset by $180.4 million paid for acquisitions, net of cash acquired, and $44.8 million purchases of property and equipment.

Cash Flows from Financing Activities

For the six months ended July 31, 2021, cash used in financing activities of $255.3 million was primarily driven by $193.6 million in net payments related to our equity plans, as compared to $107.2 million in the prior year for similar activities. We also used $61.7 million for repayments of our 2023 Notes.

Obligations and Commitments

Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancellable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities. Refer to Note 6 and Note 7 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q.

We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, valuation of acquired intangible assets in business combinations and income taxes.
    
There have been no material changes to our critical accounting policies and estimates as described in our 2021 Annual Report on Form 10-K.

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Recent Accounting Pronouncements

Refer to Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Non-GAAP Financial Measures and Other Key Metrics

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We present these non-GAAP measures to assist investors in seeing our financial performance using a management view, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin and non-GAAP net income: We define these non-GAAP financial measures as the respective GAAP measures, excluding expenses related to stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquisition-related intangibles, amortization of debt discount and issuance costs, acquisition-related expenses, fair value adjustments to strategic investments, impairment of operating lease right-of-use assets, and, as applicable, other special items. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. When evaluating the performance of our business and making operating plans, we do not consider these items (for example, when considering the impact of equity award grants, we place a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants). We believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies and over multiple periods.

Free cash flow: We define free cash flow as net cash provided by operating activities less purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash that is available (if any), after purchases of property and equipment, for operational expenses, investment in our business and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

Billings: We define billings as total revenues plus the change in our contract liabilities and refund liability less contract assets and unbilled accounts receivable in a given period. Billings reflects sales to new customers plus subscription renewals and additional sales to existing customers. Only amounts invoiced to a customer in a given period are included in billings. We believe billings is a key metric to measure our periodic performance. Given that most of our customers pay in annual installments one year in advance, but we typically recognize a majority of the related revenue ratably over time, we use billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers.

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Reconciliation of gross profit and gross margin:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
GAAP gross profit $398,064 $251,594 $761,900 $474,579
Add: Stock-based compensation 13,985 10,239 25,537 18,228
Add: Amortization of acquisition-related intangibles 3,328 3,132 6,500 4,480
Add: Employer payroll tax on employee stock transactions 2,121 1,738 4,895 2,774
Non-GAAP gross profit $417,498 $266,703 $798,832 $500,061
GAAP gross margin 78  % 74  % 78  % 74  %
Non-GAAP adjustments % % % %
Non-GAAP gross margin 82  % 78  % 81  % 78  %
GAAP subscription gross profit $408,303 $258,913 $782,167 $487,825
Add: Stock-based compensation 7,539 5,014 13,557 8,878
Add: Amortization of acquisition-related intangibles 3,328 3,132 6,500 4,480
Add: Employer payroll tax on employee stock transactions 971 926 2,413 1,461
Non-GAAP subscription gross profit $420,141 $267,985 $804,637 $502,644
GAAP subscription gross margin 83  % 80  % 83  % 81  %
Non-GAAP adjustments % % % %
Non-GAAP subscription gross margin 85  % 83  % 85  % 83  %
GAAP professional services and other gross loss $(10,239) $(7,319) $(20,267) $(13,246)
Add: Stock-based compensation 6,446 5,225 11,980 9,350
Add: Employer payroll tax on employee stock transactions 1,150 812 2,482 1,313
Non-GAAP professional services and other gross loss $(2,643) $(1,282) $(5,805) $(2,583)
GAAP professional services and other gross margin (54) % (39) % (56) % (38) %
Non-GAAP adjustments 40  % 32  % 40  % 31  %
Non-GAAP professional services and other gross margin (14) % (7) % (16) % (7) %

Reconciliation of income (loss) from operations and operating margin:
Three Months Ended July 31, Six Months Ended July 31,
(in thousands) 2021 2020 2021 2020
GAAP loss from operations $ (22,611) $ (58,635) $ (33,348) $ (100,488)
Add: Stock-based compensation 99,959 68,767 181,095 122,318
Add: Amortization of acquisition-related intangibles 6,661  7,416 13,191 11,675
Add: Employer payroll tax on employee stock transactions 11,585 9,259 27,868 15,807
Add: Acquisition-related expenses 221 6,932 387 7,626
Add: Impairment of operating lease right-of-use assets 3,892 3,892
Non-GAAP income from operations $ 99,707  $ 33,739  $ 193,085  $ 56,938 
GAAP operating margin (4) % (17) % (3) % (16) %
Non-GAAP adjustments 23  % 27  %