HubSpot, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless noted.
Business context
HubSpot provides a cloud-based CRM platform comprising Marketing, Sales, Service, CMS and Operations Hubs. It primarily serves mid-market businesses and generates most revenue from subscriptions. At June 30, 2021, it reported 121,048 customers and 4,981 full-time employees. Operations Hub launched in April 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $310.8 | $203.6 | $592.2 | $402.6 |
| Subscription revenue | $300.4 | $196.4 | $570.7 | $387.6 |
| Gross profit | $247.9 | $164.8 | $474.5 | $325.5 |
| Gross margin | 80% | 81% | 80% | 81% |
| Operating loss | $(16.6) | $(13.6) | $(31.6) | $(27.7) |
| Net loss | $(24.6) | $(29.4) | $(47.7) | $(47.1) |
| Basic and diluted loss per share | $(0.53) | $(0.67) | $(1.02) | $(1.08) |
Q2 revenue grew 53% year over year, driven mainly by customer growth and higher average subscription revenue per customer. Customers increased from 86,672 to 121,048; average subscription revenue per customer rose from $9,466 to $10,198 for the quarter. Subscription revenue represented 97% of Q2 revenue. Operating expenses rose 48% to $264.5 million, led by sales and marketing and research and development. Operating margin was approximately negative 5% versus negative 7% a year earlier. Lower interest expense contributed to the narrower net loss, despite the larger operating loss.
Stock-based compensation was $43.4 million in Q2 and $75.9 million for the first half, compared with $31.4 million and $58.8 million, respectively, in the prior-year periods.
Cash flow, liquidity and debt
- Cash and cash equivalents were $338.3 million at June 30, 2021; short- and long-term investments totaled $959.2 million. Working capital was $862.4 million.
- First-half operating cash flow was $100.9 million, versus cash used of $10.7 million in 2020. The filing attributes cash generation in part to a $49.4 million increase in deferred revenue. Investing cash use was $110.7 million; financing cash use was $26.7 million. Cash, cash equivalents and restricted cash ended at $341.4 million.
- Convertible notes had $528.7 million aggregate principal outstanding at June 30: $68.7 million of 2022 Notes and $460.0 million of 2025 Notes. Their combined carrying amount was $438.6 million. The 2022 Notes are classified as current; the 2025 Notes as long-term.
- The company expects to settle note principal in cash. By July 30, holders had submitted conversion notices for approximately $46.4 million of 2022 Notes, expected to be settled in cash in Q3. The 2025 Notes were also eligible for conversion in Q3, but no holders had indicated conversion by July 30.
- Management said existing cash, cash equivalents and investments, together with anticipated operating cash flows, should meet working-capital and operating needs for the next 12 months.
Changes, outlook and notable items
- Revenue growth accelerated alongside customer additions and increased demand for Professional and Enterprise products. Gross margin declined by about one percentage point, with higher subscription and hosting costs, employee costs and software amortization among the drivers.
- Management expects continued investment in sales and marketing, research and development, customer support, international operations, and data-center infrastructure. It said the company does not expect to be profitable in the near term and expects professional-services margins to range from a moderate loss to breakeven.
- COVID-19 had not materially adversely affected financial results to date, but management said future effects remained uncertain. The company was gradually reopening offices while retaining a hybrid-work model.
- The February acquisition of The Hustle, a media and research-content company, had a cash purchase price of $17.2 million net of cash acquired. The filing says it did not materially affect reported revenue or earnings. Related advertising revenue in first-half 2021 was not expected to recur.
- In July 2021, HubSpot agreed to Cambridge office lease changes involving approximately $148 million of incremental rent over the lease term. It expected to record a roughly $4 million lease-extinguishment gain and about $7 million of accelerated depreciation in Q3.
- The company has a $9.4 million remaining capital contribution commitment to the Black Economic Development Fund. It reported no material pending litigation and said disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Key risks and investor verification points
- Verify customer additions, renewal rates, expansion revenue and average subscription revenue per customer; revenue growth depends on retaining customers and expanding their platform use.
- Assess whether operating costs and stock-based compensation are growing faster than revenue, and whether margin pressure persists as the company invests for growth.
- Track cash conversion, deferred-revenue trends, investment liquidity and cash requirements for note conversions. Confirm the status and cash settlement of the disclosed 2022 Notes conversion notices.
- Consider competitive pressure, potential pricing and renewal impacts, and execution risks as HubSpot expands products, employees and international operations.
- Review risks from cybersecurity, service outages, third-party hosting and evolving privacy regulation, including the operational and compliance costs of international data transfers.
- Monitor COVID-19 effects on customers and employees, as well as the new Cambridge lease commitments and expected Q3 accounting effects.
- Management cautioned that results may fluctuate and that interim results are not necessarily indicative of full-year results. The filing provides no numerical revenue or earnings guidance.