HubSpot, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; financial amounts below are in millions of dollars unless stated otherwise. HubSpot sells a cloud-based marketing and sales platform, primarily through subscriptions. It reported 12,478 customers in 80 countries at quarter-end.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $30.448 | $20.179 | $81.720 | $55.255 |
| Gross profit / margin | $20.743 / 68% | $12.797 / 63% | $55.163 / 68% | $34.071 / 62% |
| Operating loss | $(10.957) | $(9.500) | $(28.657) | $(25.883) |
| Net loss | $(10.793) | $(9.511) | $(28.533) | $(25.849) |
| Net loss per share, basic and diluted | $(1.84) | $(1.85) | $(5.00) | $(5.09) |
- Q3 revenue increased 51% year over year; subscription revenue rose 51% to $27.806 million. For the first nine months, total revenue rose 48% and subscription revenue 49%.
- Management attributed subscription growth to more customers (12,478 versus 9,537 a year earlier), higher average subscription revenue per customer, increased customer usage and improved retention. Q3 average subscription revenue per customer was $9,183 versus $7,952; nine-month figures were $8,828 versus $7,572.
- Gross margin improved, but operating expenses continued to exceed gross profit. Q3 sales and marketing expense was $21.680 million, or 71% of revenue; total operating expenses grew 42% to $31.700 million.
Cash, liquidity and debt
- At September 30, cash was $12.379 million, total assets $58.938 million, and working capital was negative $17.924 million. Deferred revenue was $34.672 million, including current and non-current balances.
- For the nine months, operating cash use was $10.712 million, investing cash use $8.402 million, and financing cash provided $18.964 million. Operating cash use improved from $13.889 million in the comparable 2013 period. Deferred revenue increased $10.149 million and helped fund operations.
- The company had $18 million drawn on its $35 million revolving credit line at quarter-end; the rate was prime plus 0.5%. In October, after quarter-end, it repaid the balance using IPO proceeds.
- On October 15, 2014, HubSpot completed its IPO, selling 5.75 million shares at $25 each and receiving approximately $133.7 million after underwriting discounts and commissions, before approximately $2.7 million of offering expenses. Preferred shares converted into common stock at the IPO closing.
Changes, outlook and risks
- Compared with 2013, revenue growth and higher gross margins were accompanied by continued losses; nine-month net loss widened to $28.533 million from $25.849 million. The accumulated deficit was $134.605 million at September 30.
- Management expected continued investment in sales and marketing, research and development, customer support, infrastructure and international expansion, and anticipated short-term losses. It expected long-term gross and operating margin improvement as revenue growth outpaced expense growth, but provided no quantified financial guidance in the supplied filing text.
- Q3 selling and marketing costs were seasonally elevated in part because the annual INBOUND conference takes place in the third quarter. The company also cited employee growth, infrastructure expansion and public-company costs as drivers of expense increases.
- Principal risks include continued losses and uncertain path to profitability; customer renewals and retention; competition and pricing pressure; rapid growth and hiring demands; service availability and third-party hosting dependence; cybersecurity, privacy and regulatory exposure; foreign currency and international expansion; and intellectual-property claims. A September 2014 allegation asserted that Sidekick’s email-tracking feature infringed patents; the company said it was evaluating the claim and did not expect a material adverse effect based on information then available.
- A wage-and-hour class action was settled for an immaterial amount in November 2014. Management stated disclosure controls were effective and reported no material change in internal control during the quarter; elsewhere, the filing identified internal-control deficiencies relating to financial systems and the closing process and described remediation efforts.
- Management said working capital and available borrowing capacity were sufficient for at least 12 months; this assessment preceded the subsequent IPO and repayment of the credit-line balance. The filing also noted that $1.3 million of quarter-end cash was held outside the United States and was not intended to be repatriated.
Key facts for investors to verify
- Customer growth, subscription dollar retention, renewal rates and average subscription revenue per customer, including whether improvements persist.
- Whether revenue growth can outpace sales, marketing, product development and infrastructure spending sufficiently to reduce operating losses.
- Post-IPO cash, share count, equity-based compensation expense and dilution. The filing expected to begin recognizing compensation for performance-based RSUs in Q4 2014.
- Progress remediating the disclosed financial close and internal-control deficiencies, and the status and potential implications of the Sidekick patent allegation.
- The 10-Q marked “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should confirm the company’s reporting history and subsequent filings.