HubSpot, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. HubSpot sells a cloud-based marketing and sales platform, primarily on subscriptions. It reported 31,262 total customers at quarter-end, including 24,775 marketing customers.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $82.3 | $59.0 | +40% |
| Subscription revenue | $77.5 | $54.9 | +41% |
| Gross profit / margin | $65.2 / 79% | $45.0 / 76% | +45%; margin +3 pts |
| Operating loss | $(8.0) | $(9.9) | Loss narrowed |
| Net loss | $(8.1) | $(10.2) | Loss narrowed |
| Net loss per share, diluted | $(0.22) | $(0.29) | Improved |
| Operating cash flow | $19.1 | $3.2 | Increased |
At March 31, cash and cash equivalents were $69.8 million; short- and long-term investments totaled $90.8 million. Working capital was $44.1 million. Restricted cash was $4.9 million. Capital lease obligations were approximately $1.1 million; the filing reports no material off-balance-sheet arrangements. Current and long-term deferred revenue totaled $105.6 million.
Changes versus prior comparable period
- Revenue growth reflected more marketing customers (24,775 versus 19,322) and higher marketing average subscription revenue per customer ($12,598 versus $11,494), as well as sales-product growth.
- Gross margin improved primarily because hosting costs were leveraged against subscription revenue growth. Operating expenses rose 33% to $73.2 million, led by sales and marketing (+33%) and research and development (+36%).
- Operating cash flow improved, supported in part by an $8.5 million increase in deferred revenue and a $4.2 million decrease in accounts receivable. Noncash stock-based compensation was $9.3 million, up from $6.2 million.
- International customers generated approximately 30% of revenue, versus 26% a year earlier. Revenue outside the Americas was 22%, versus 17%.
Outlook, risks and notable items
- Management said it expected to continue investing in sales and marketing, research and development, customer support, infrastructure and international operations, and did not expect near-term profitability. It stated working capital was sufficient for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management expects professional services margins to range from a moderate loss to breakeven for the foreseeable future. Those services generated 6% of Q1 2017 revenue, while their cost was 119% of that revenue.
- Key risks include sustained losses and execution of growth plans; customer renewal, retention and expansion; intense competition and pricing pressure; scaling customer service and hosting; data security, privacy and evolving regulation, including the EU GDPR; and foreign-exchange exposure. The company did not hedge foreign-currency transactions.
- The company adopted updated share-based payment accounting, recording a $30.4 million increase in deferred tax assets with an offsetting valuation allowance; it also changed its forfeiture accounting policy. The filing says these adoption effects did not materially affect the reported financial position or results.
- A Cambridge facility lease amendment increased future commitments by approximately $6.0 million over about nine years. The company reported no material pending litigation.
Important facts for investors to verify
- Whether customer growth and subscription expansion continue to support revenue growth, and the company’s actual retention and renewal performance; the filing text does not provide a clear retention-rate value.
- How operating expenses, particularly sales and marketing and stock-based compensation, affect the path to profitability.
- Whether operating cash flow remains strong when deferred-revenue growth and working-capital movements vary.
- The impact of the planned 2018 revenue-recognition standard adoption on revenue timing and deferred commissions.
- Exposure to international privacy requirements, hosting-provider concentration, currency movements and the company’s capacity to scale operations.