DOCU — Q2 2026 Financial Report Analysis

Docusign's quarter ended July 31, 2026 (the company's fiscal Q2 2027, which covers May through July) was a profit story more than a growth story. Revenue rose 9.4% to $875.7 million, about 1.3 points of which came from a weaker US dollar, while GAAP operating income — profit from running the business, after all costs including stock-based pay — jumped 80% to $117.6 million because total operating expenses grew only 1.8%. Management raised its full-year revenue and ARR outlook and said its newer AI-driven product line, Intelligent Agreement Management (IAM), reached 15.1% of annual recurring revenue, up from 12.6% just three months earlier.

The quarter in numbers

Subscription revenue is 98% of the total; the 10-Q now folds subscription and professional services into one revenue line on the income statement, though the revenue note still breaks them out. Docusign no longer reports billings or dollar net retention, and it reports total ARR only once a year, so IAM's share of ARR is the main quarterly growth signal it gives.

What drove it

Revenue. The 10-Q attributes the $75.1 million increase "primarily" to "the expansion of revenue from our commercial and enterprise accounts, as well as our digital channel." Larger customers are where the growth is: accounts paying more than $300,000 a year rose 14%, faster than revenue, while direct customers rose about 6.6% to roughly 289,000. International revenue was 31% of the total versus 29% a year ago and grew 17% in the first half — but part of that is the stronger euro and pound, which the company quantifies as about a 1.3-point lift to total revenue growth this quarter.

Costs. This is where the margin came from:

• Cost of revenue rose 7%, slower than revenue, with the increase mostly hosting costs ($6.5M more, tied to IAM and moving customer data to cloud storage) and depreciation of capitalized software ($4.7M more).
• Sales and marketing rose only 3%, falling from 38.2% to 35.9% of revenue.
• Research and development fell 4% to $163.6M. The filing explains it: personnel costs dropped $9.8M "primarily due to an increase in capitalized software development costs and a decrease in stock-based compensation related to executive transitions."
• General and administrative rose 8%, on headcount and incentive pay.

Below the operating line. Interest and other income fell from $12.1M to $7.9M on lower interest rates and currency losses. The bigger swing was tax: the provision rose from $13.5M to $47.3M, taking the effective tax rate from about 17.6% to 37.8%. The 10-Q blames higher pre-tax profit plus "shortfalls from stock-based compensation in fiscal 2027 compared to windfalls in fiscal 2026" — in plain terms, employee shares vested at prices below what they were valued at when granted, so the company got a smaller tax deduction than it had already booked. That is why pre-tax income rose 63% but net income only 23%.

What the headline numbers hide

• Part of the R&D drop is accounting, not savings. Docusign capitalized $52.7M of software development costs this quarter versus $35.4M a year ago — spending that is recorded as an asset and expensed gradually through amortization instead of hitting R&D right away. The extra $17.3M capitalized is larger than the entire $6.0M decline in reported R&D. The cash is still spent (it sits in capital expenditures, which rose from $28.4M to $38.8M), and amortization of capitalized software is already rising ($21.6M vs $18.5M). So some of the GAAP margin gain is timing.
• Stock-based compensation is still large, but shrinking as a share of revenue. Expensed stock-based pay was $148.6M, or 17.0% of revenue, down from $160.5M (20.1%). Part of the decline is the executive-transition effect above, and part is that more of it was capitalized ($18.7M vs $12.9M). Including the capitalized portion, total stock-based pay fell more modestly, from about $173M to $167M.
• The GAAP vs non-GAAP gap is wide but narrowing. Non-GAAP operating income of $276.8M adds back stock-based pay ($148.6M), employer payroll taxes on employee stock ($5.8M) and acquired-intangible amortization ($4.7M). Those add-backs equal 18.2 points of margin, down from 21.7 points a year ago. Non-GAAP EPS of $1.16 also uses a fixed 21% tax rate, which this quarter is far below the actual 37.8% GAAP rate.
• Buybacks did a lot of the EPS work. Diluted shares fell 8.5%, from 211.0M to 193.1M. Basic shares fell 5.6%; the rest came from far fewer "dilutive securities" (1.9M vs 8.3M) counted in the diluted figure. Net income grew 23.4%, EPS 33.3% — so roughly a quarter of the EPS growth (about 9 of the 33 points) is the shrinking share count. In the first half, Docusign repurchased 13.3M shares for $624.0M, more than its $585.2M of free cash flow, and cash plus investments fell from about $1.07B at January 31 to $973.1M. $2.1B of authorization remains.
• Cash conversion is strong, and that's normal for this model. Operating cash flow of $334.5M was more than four times net income, because customers pay annually in advance and because stock pay and a $37.8M deferred tax charge are non-cash. Free cash flow margin rose to 34% from 27%.
• Deferred revenue (prepaid subscriptions not yet earned) is broadly in step with revenue. Contract liabilities rose $10.4M during the quarter versus $16.0M in the same quarter last year. A rough billings proxy — revenue plus the change in contract liabilities — is about $886M versus $817M, roughly +8.5%, a touch slower than revenue. Not alarming, but no sign of acceleration in what customers are signing up to pay. Remaining performance obligations (contracted revenue not yet recognized, for contracts over a year) stood at $2.3B, 58% due within 12 months; the filing does not give a year-ago comparison.

Takeaway: Docusign's earnings growth is real but mostly comes from spending discipline, share buybacks and capitalizing more development cost — not from faster sales growth. Revenue is still growing about 8% in constant currency, so the IAM shift has to start lifting the top line, not just the product mix, for this to become a growth story again.

Outlook

Management raised its full-year (fiscal 2027, ending January 31, 2027) guidance; the release does not restate the previous ranges:

Currency is again doing some of the lifting: excluding FX, guided revenue growth would be about 1.0 point lower for Q3 and 1.2 points lower for the year. Even the raised full-year ARR range of 8.5%–9.0% implies the business is not accelerating. The first-half non-GAAP operating margin was 31.8%, so the full-year range implies the second half comes in slightly lower.

Our read: the one number to watch next quarter is IAM's share of ARR. Going from 15.1% to 18–19% by year-end means IAM keeps taking share of a book growing under 9% a year, and much of that may be existing e-signature customers moving onto IAM rather than new money. If total ARR growth stays at the low end of 8.5%–9.0% while IAM's share climbs, IAM is mostly re-packaging what customers already buy; if ARR growth moves toward 9%+, it is adding to it. On profits, watch the GAAP tax rate (stock-vesting shortfalls could keep it elevated) and whether buybacks keep running ahead of free cash flow as the cash balance comes down.