HubSpot, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated financial statements. Unless otherwise noted, amounts below are in millions of dollars. HubSpot provides a cloud-based inbound marketing and sales platform. At quarter-end it had 14,746 customers in more than 90 countries.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $38.2 | $24.2 |
| Subscription revenue | $34.9 | $22.3 |
| Professional services and other revenue | $3.2 | $1.9 |
| Gross profit / gross margin | $27.7 / 73% | $16.5 / 68% |
| Operating expenses | $39.1 | $25.9 |
| Operating loss | $(11.4) | $(9.4) |
| Net loss | $(10.9) | $(9.5) |
| Net loss per share, diluted | $(0.34) | $(1.73) |
| Cash used in operating activities | $(0.8) | $(2.6) |
- Revenue increased 58% year over year. Subscription revenue was 92% of total revenue in both periods.
- Gross margin improved to 73% from 68%, which management attributed primarily to better leverage of hosting costs. Operating expenses grew 51%, faster than revenue, and the operating loss increased in dollars despite improving as a share of revenue.
- Cash and cash equivalents were $129.4 million at March 31; short- and long-term investments totaled $25.8 million. Working capital was $98.9 million. The company reported $69.9 million of total liabilities, including $154,000 of capital lease obligations; its revolving credit line was unused.
- Operating cash use was partly offset by $6.5 million of increased deferred revenue and noncash charges, including $5.1 million of stock-based compensation. Investing activities used $28.2 million, including $25.8 million of investment purchases, $1.0 million of property and equipment, $0.8 million of capitalized software costs and a $0.6 million acquisition. Financing activities provided $35.1 million, primarily from the March stock offering.
Material changes versus the prior-year quarter
- Customers increased from 10,902 to 14,746. Annualized average subscription revenue per customer rose from $8,478 to $9,740, with management citing greater product usage, additional subscriptions and sales of higher-priced plans.
- Research and development expense rose 60%, sales and marketing 50%, and general and administrative expense 45%, primarily reflecting increased headcount and growth-related investment.
- Stock-based compensation increased to $5.1 million from $1.1 million, including expense associated with restricted stock units and the employee stock purchase plan.
- Other income was $0.6 million, compared with a $51,000 expense in Q1 2014; management attributed the change primarily to foreign-exchange movements.
- The company raised approximately $34.3 million net of underwriting discounts and commissions in a March public offering, before offering expenses. It also purchased $25.8 million of corporate debt investments; none were held at December 31, 2014.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the filing. Management said it expects continued investment in sales and marketing, research and development, customer support, data-center infrastructure and international operations, and does not expect near-term profitability. It expects losses in the short term while aiming for longer-term operating leverage and margin improvement; those outcomes depend on revenue growth and customer renewals.
- Key risks include continued losses, customer renewal and pricing pressure, intense competition, managing rapid growth, attracting and retaining employees, service availability and third-party hosting dependence, cybersecurity and privacy obligations, and foreign-exchange exposure. Most subscriptions are one year or less, and revenue is recognized over the subscription term.
- In April 2015, HubSpot signed a lease for approximately 59,772 square feet in Cambridge, scheduled to commence upon completion of the premises. The filing estimates approximately $37 million in rent over the 10-year term, in addition to certain operating costs, taxes and insurance.
- The company reported no material pending litigation and no material changes in contractual obligations as of March 31. Management said disclosure controls were effective and reported no material change in internal control during the quarter. Separately, the risk factors discuss identified internal-control deficiencies around systems and the closing process and ongoing remediation.
- Management was evaluating the impact of the forthcoming revenue recognition standard. The filing also notes that credit card fees were reclassified from subscription cost of revenue to general and administrative expense; the comparable 2014 quarter was reclassified by $450,000.
Important facts for investors to verify
- Whether customer growth, higher subscription revenue per customer and renewals can continue, and how these affect deferred revenue and future recognized revenue.
- Whether operating expense growth and stock-based compensation moderate enough to support progress toward profitability.
- The company’s cash burn, investment portfolio liquidity and credit quality, and how much cash remains available after planned growth investments.
- The details and financial impact of the new 10-year lease, including commencement timing and obligations beyond base rent.
- The status of the internal-control remediation described in the risk factors, and the effect of the upcoming revenue recognition standard.
- Potential dilution and share supply: the filing states that approximately 18.1 million additional shares could become available for public sale beginning June 2, 2015, subject to lock-up arrangements and possible early release.