HubSpot, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated financial statements; amounts below are in U.S. dollars.
Business context
HubSpot sells a cloud-based inbound marketing and sales platform, primarily to mid-market businesses. Revenue is chiefly subscription-based; subscriptions accounted for 92% of revenue in both the quarter and nine-month period. At September 30, the company reported 16,854 customers in more than 90 countries, up from 12,478 a year earlier.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $47.7m | $30.4m | $128.8m | $81.7m |
| Gross profit / margin | $35.2m / 74% | $21.2m / 70% | $94.6m / 73% | $56.6m / 69% |
| Operating expenses | $48.5m | $32.2m | $130.6m | $85.2m |
| Operating loss | $(13.3)m | $(11.0)m | $(36.0)m | $(28.7)m |
| Net loss | $(13.6)m | $(10.8)m | $(35.8)m | $(28.5)m |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(3.1)m | $(10.7)m |
Q3 subscription revenue was $44.1m, up 59%; professional services and other revenue was $3.6m, up 37%. Management attributed subscription growth to customer additions and higher average subscription revenue per customer: $10,607 for Q3 2015 versus $9,183 a year earlier. Basic and diluted loss per share was $0.40 for Q3 and $1.09 for the nine months.
At September 30, cash and cash equivalents were $58.8m, with short- and long-term investments of $45.7m and $43.5m, respectively. Working capital was $59.2m. Total liabilities were $83.7m, including $55.0m of current deferred revenue; capital lease obligations totaled $0.6m. The revolving credit line was unused. Cash and cash equivalents declined $64.9m during the nine months, largely reflecting $93.9m of investment purchases; financing provided $34.6m, including $33.7m of net proceeds from the March stock offering.
Stock-based compensation expense was $15.3m for the nine months, compared with $3.5m in the prior-year period. The filing reports no material income-tax provision.
Material changes versus prior period
- Nine-month revenue rose 58%, while net loss widened to $35.8m from $28.5m. Q3 net loss widened to $13.6m from $10.8m.
- Gross margin improved to 74% from 70% in Q3 and to 73% from 69% year to date, primarily from better leverage of hosting costs relative to subscription revenue.
- Operating expenses rose 51% year to date, led by sales and marketing, which increased 48%, and research and development, which increased 64%; management cited hiring, marketing programs, partner commissions, product development, and public-company and international costs.
- Operating cash use narrowed to $3.1m from $10.7m year to date. Deferred revenue increased $14.3m, supporting operating cash flow, while accounts receivable increased $6.6m.
- The balance sheet now includes $89.2m of available-for-sale investments; the company reported no investments at December 31, 2014.
Outlook, risks and unusual items
- Management expects continued investment in sales and marketing, research and development, customer support, international operations, and infrastructure. It stated that HubSpot does not expect to be profitable in the near term, while anticipating potential long-term gross- and operating-margin improvement as revenue scales. No specific financial guidance was provided.
- Management said working capital should support operations for at least the next 12 months. This is an expectation, not a guarantee; the company cited dependence on customer renewals, new-customer growth, competition, execution, and its ability to control costs.
- New property leases carry approximately $38.3m of aggregate rent commitments: about $37m over 10 years beginning January 2016 and $1.3m over five years beginning October 2015. A renewed customer-relationship-management vendor agreement entails approximately $30m over 60 months.
- After the October 6, 2015 European Court of Justice ruling invalidated the U.S.-EU Safe Harbor framework, HubSpot said it was offering other transfer methods. It warned that uncertainty over acceptable data-transfer arrangements could affect European customers and potentially require additional systems or expense.
- Disclosure controls and procedures were deemed ineffective because an entity-level control failed after employees violated the Code of Business Conduct and Ethics while attempting to obtain a draft book manuscript believed to involve the employees and the company. The filing said this did not misstate financial statements; company-wide ethics training and annual certification were planned for Q4 2015.
- The company reported no material pending litigation. It also disclosed foreign-currency exposure, no hedging to date, and material risks relating to data privacy and security, third-party hosting, competition, growth management, and continued losses.
Important facts for investors to verify
- Whether customer growth, subscription expansion, and renewals can sustain revenue growth without operating costs continuing to outpace it.
- How much of reported cash generation depends on deferred-revenue timing, and how cash, investments, and working capital evolve after the large investment purchases.
- The scale and timing of lease and vendor commitments relative to future liquidity and operating cash flow.
- Whether the disclosed control weakness was remediated and whether disclosure controls became effective in subsequent filings.
- How the company addresses post-Safe-Harbor European data-transfer requirements and evolving privacy and security regulation.