HubSpot, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The financial statements are unaudited and prepared under U.S. GAAP.
Business context
HubSpot sells a cloud-based customer platform and CRM, including Marketing, Sales, Service, CMS, Operations and Commerce Hubs. Subscription revenue represented 98% of revenue. At quarter-end, the company reported 194,098 customers and 7,478 full-time employees; it serves customers in more than 120 countries.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $557.6m (+26%) | $444.0m | $1,588.3m (+26%) | $1,261.3m |
| Subscription revenue | $545.8m (+25%) | $435.0m | $1,553.3m (+26%) | $1,232.4m |
| Gross profit / margin | $470.0m / 84% | $361.8m / 82% | $1,331.5m / 84% | $1,027.3m / 81% |
| Operating loss | $20.4m | $32.2m | $183.7m | $95.6m |
| Net loss | $5.5m | $31.4m | $162.7m | $97.1m |
| Net loss per share, diluted | $0.11 | $0.65 | $3.27 | $2.03 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $246.7m | $183.2m |
Q3 operating loss improved year over year, while the nine-month operating and net losses widened. Higher interest income helped reduce the Q3 net loss; it rose to $16.2m from $4.7m, reflecting higher investment yields. Nine-month operating expenses included $93.3m of restructuring charges. Stock-based compensation was $107.5m in Q3 and $318.5m year to date, versus $72.2m and $199.1m, respectively, in 2022.
Management attributed customer growth mainly to demand for lower-priced Starter products. Average subscription revenue per customer also increased, supported by Professional and Enterprise demand and adoption of multiple Hubs, partly offset by Starter purchases. Gross-margin expansion was attributed primarily to hosting efficiencies and infrastructure optimization.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $535.5m; short-term investments were $1,061.5m and long-term investments $150.9m. Cash plus short- and long-term investments totaled approximately $1.75bn.
- Working capital was $1.14bn. Current assets were $1.97bn and current liabilities $839.2m.
- Nine-month operating cash flow of $246.7m compared with net loss of $162.7m; cash flow included substantial noncash stock compensation and restructuring charges. Investing activities used $68.3m and financing activities provided $30.4m.
- Convertible senior notes had a $455.7m carrying value and $459.1m principal outstanding, with a 0.375% coupon and June 2025 maturity. The company said it expects to settle principal in cash. Their disclosed fair value was $818.5m.
- Operating lease liabilities totaled approximately $331.4m. Disclosed future minimum lease payments were $410.2m and non-cancelable vendor commitments were $868.7m.
Material changes and significant items
- Revenue growth was accompanied by customer growth from 158,905 at September 30, 2022 to 194,098 at September 30, 2023. Revenue outside the Americas represented 40% of Q3 revenue, versus 38% a year earlier; international customers generated approximately 47% of revenue.
- On January 25, 2023, HubSpot authorized a restructuring plan involving an approximately 7% workforce reduction and global office lease consolidation. Nine-month charges were $93.3m, including $66.4m for facilities and $26.9m for severance, benefits and other costs. Management expected an additional $2m–$4m of lease-consolidation charges; related actions were expected to be completed in 2023.
- On October 31, 2023, after quarter-end, HubSpot agreed to acquire Clearbit for approximately $150m in cash, subject to customary adjustments and closing conditions. The deal was expected to close in Q4 2023 and to have an insignificant effect on 2023 revenue.
- The 2025 notes became convertible at holders’ option during the quarter ending December 31, 2023, following the stock-price condition described in the filing. As of November 3, HubSpot had received no material conversion notices.
Outlook, risks and contingencies
No numeric revenue or earnings guidance is provided in the supplied filing text. Management said it does not expect to be profitable in the near term, but believes cash, cash equivalents, investments and anticipated operating cash flows will be sufficient for working capital and operating needs over the next 12 months.
Key risks include customer renewals and spending amid economic uncertainty; intense competition and rapid technology change, including AI; foreign-exchange movements; service availability and cybersecurity; privacy and regulatory compliance; and execution of the restructuring plan. Management noted that inflation, interest rates and macroeconomic conditions may affect demand, costs and investment values. The company had not hedged foreign-currency transaction exposure or interest-rate exposure.
HubSpot reported no material pending litigation. It had committed an additional $4.0m to the Black Economic Development Fund. Management concluded disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer additions, renewals and expansion can sustain subscription growth, particularly given the contribution from lower-priced Starter products.
- Whether operating expenses and stock-based compensation growth moderate enough to improve profitability after restructuring charges.
- Actual cash generation and liquidity after investment activity, contractual commitments, the Clearbit acquisition and any cash settlement of convertible notes.
- Whether the 2025 notes convert, and the resulting cash, dilution and working-capital implications.
- Whether the restructuring delivers expected savings without impairing product development, service quality or employee retention.
- Clearbit closing, final purchase accounting and integration costs; these were not finalized in the filing.