HubSpot, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Filed February 12, 2020. All financial amounts below are U.S. dollars.
Business context
HubSpot sells a cloud-based marketing, sales, and customer service platform, including a free CRM, primarily to mid-market B2B businesses. Revenue is predominantly subscription-based. At year-end, the company reported 73,483 paying customers in more than 120 countries and 3,387 employees. It operates as one reportable segment.
Financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $674.9 million | $513.0 million |
| Subscription revenue | $646.3 million | $487.5 million |
| Gross profit / gross margin | $544.9 million / 80.7% | $412.6 million / 80.4% |
| Operating loss | $47.0 million | $48.3 million |
| Net loss / diluted loss per share | $53.7 million / $1.28 | $63.8 million / $1.66 |
| Cash provided by operating activities | $119.0 million | $84.9 million |
| Cash, cash equivalents and investments | $1,015.3 million | $603.7 million |
| Convertible notes, net carrying value | $340.6 million | $318.8 million |
Revenue increased 32% year over year; subscription revenue increased 33%. Subscription revenue accounted for 96% of total revenue. Sales and marketing expense rose 27% to $340.7 million, research and development rose 35% to $158.2 million, and general and administrative expense rose 23% to $93.0 million. Stock-based compensation was $97.8 million, up from $76.3 million.
Year-end cash and cash equivalents were $269.7 million; short- and long-term investments totaled $745.6 million. Balance-sheet working capital was $787.2 million; the filing separately reports working capital excluding deferred revenue of $1,018.3 million. The $400 million principal amount of 0.25% convertible notes is due in 2022. The notes’ carrying value reflects unamortized discount and issuance costs.
For Q4 2019, revenue was $186.2 million, gross profit $150.2 million, net loss $10.3 million, and diluted loss per share $0.24. Q4 2018 revenue was $144.0 million and net loss was $11.5 million.
Changes versus prior year
- Customers increased from 56,628 to 73,483, while average subscription revenue per customer was nearly unchanged: $9,920 versus $9,904.
- Total subscription dollar retention was 99.9%, down from 100.7% in 2018.
- Gross margin improved modestly, from approximately 80% to 81%; management attributed the increase mainly to changes in service offerings, partly offset by higher hosting costs.
- Operating loss narrowed slightly, but the company remained unprofitable. Net loss declined by $10.1 million.
- Operating cash flow rose to $119.0 million. Investing cash outflow increased to $316.2 million, including investment purchases and maturities, $40.4 million of property and equipment purchases, $13.5 million of capitalized software development, and the PieSync acquisition.
- A February 2019 common-stock offering generated $342.6 million net proceeds and included approximately 2.2 million shares. Year-end shares issued and outstanding increased to 42.955 million from 39.300 million.
Outlook, risks and unusual items
- Management expects continued investment in sales and marketing, product development, customer support, international expansion, and infrastructure. It stated that it does not expect near-term profitability, while anticipating longer-term margin improvement if revenue growth outpaces expenses. No quantified forward guidance is provided in the supplied filing text.
- Key business risks include customer renewal and expansion performance, intense competition and pricing pressure, continued operating losses, scaling and service reliability, cybersecurity and data privacy regulation, and foreign currency and economic uncertainty.
- The 2022 notes may be converted under specified conditions; holders could require cash repurchase after a fundamental change. The notes were convertible at holders’ option during Q1 2020 under the disclosed stock-price condition. Conversion or repurchase could affect liquidity; the company also described potential dilution and accounting effects.
- PieSync was acquired on October 31, 2019 for $23.3 million net of acquired cash. The purchase accounting included $9.8 million of developed technology and $15.2 million of goodwill; management said the acquired results were not material to reported revenue or earnings.
- Adoption of the new lease standard added $267.8 million of operating lease liabilities at year-end. Future operating lease commitments were $412.7 million, with an additional approximately $83.0 million if optional lease extensions are exercised.
- HubSpot reported a March 2019 platform outage that disrupted customer use; it stated that no pre-outage data was lost. Management considered ordinary-course legal matters not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether customer additions and retention support continued subscription growth, particularly given the decline in dollar retention and nearly flat average subscription revenue per customer.
- How much of operating cash flow reflects durable cash generation versus non-cash stock compensation and growth in deferred revenue; stock-based compensation reached $97.8 million.
- The terms, potential cash settlement requirements, conversion status, and dilution implications of the 2022 notes, hedges, and warrants.
- Whether growth investments, hosting costs, and lease commitments can be absorbed while improving margins and reaching profitability.
- Execution and integration of PieSync, including the estimates used to value acquired technology and goodwill.
- Exposure to privacy and data-protection laws, security incidents, and third-party hosting or integration disruptions.