HubSpot, Inc. — Q3 2020 Form 10-Q
Business context and period. HubSpot provides a cloud-based CRM platform with marketing, sales, service, and website management products. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. The company reported 95,634 customers in more than 120 countries and 3,981 employees at quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $228.4 million | $173.6 million | $631.0 million | $488.7 million |
| Subscription revenue | $221.1 million | $167.1 million | $608.7 million | $467.2 million |
| Gross profit / margin | $185.8 million / 81% | $140.4 million / 81% | $511.3 million / 81% | $394.7 million / 81% |
| Operating loss | $15.5 million | $14.1 million | $43.2 million | $38.8 million |
| Net loss | $22.5 million | $15.0 million | $69.6 million | $43.4 million |
| Net loss per share | $0.49 | $0.35 | $1.57 | $1.04 |
- Revenue grew 32% in Q3 and 29% year to date. Subscription revenue represented 97% of Q3 revenue and 96% of nine-month revenue.
- Customers increased from 68,803 to 95,634 year over year. Average subscription revenue per customer declined to $9,669 for Q3 from $9,992, and to $9,568 for the first nine months from $9,921.
- Operating expenses rose 30% year to date to $554.5 million, led by sales and marketing and research and development. Stock-based compensation was $90.0 million for the nine months, up from $73.7 million.
- Operating cash flow was $28.0 million for the nine months, versus $71.1 million a year earlier. Investing activities used $398.6 million and financing activities provided $217.7 million. Cash, cash equivalents, and restricted cash ended the period at $127.9 million.
- At September 30, cash and cash equivalents were $124.9 million; short- and long-term investments totaled $1.103 billion. Working capital was $986.4 million. Current assets were $1.359 billion and current liabilities were $372.4 million.
- Convertible senior notes had a $474.0 million net carrying amount on the balance sheet. Principal outstanding was $127.8 million on the 2022 Notes and $460.0 million on the 2025 Notes. Operating lease liabilities totaled $313.6 million, of which $30.3 million was current.
Material changes and unusual items
- Q3 revenue growth was primarily associated with customer growth, including demand for free and lower-priced starter products. Management attributed lower average subscription revenue per customer to the continued mix shift toward starter products; the nine-month decrease also reflected pandemic-related downgrades.
- Gross margin remained 81%. Higher hosting and subscription costs, employee costs, software amortization, and allocated overhead accompanied customer and infrastructure growth. Professional services remained loss-making: its cost was 129% of related revenue in Q3 and 118% year to date.
- Interest expense increased, particularly year to date, partly because of a $10.5 million loss on early extinguishment of 2022 Notes. Interest income fell as investment yields declined.
- In June, HubSpot issued $460 million principal of 0.375% convertible notes due 2025, receiving about $450.1 million net proceeds, and used proceeds in part to repurchase $272.1 million principal of 2022 Notes for cash and shares. It also terminated related note hedges and warrants and purchased $50.6 million of capped calls for the 2025 Notes.
- The 2022 Notes were conditionally convertible at quarter-end; after quarter-end, HubSpot received conversion notices for approximately $2.1 million principal. The company said it expected to settle the 2022 Notes’ principal in cash.
Outlook, management commentary, and risks
- Management said it expects to continue investing in sales and marketing, research and development, customer support, and data-center infrastructure, and does not expect to be profitable in the near term. It believes cash, investments, and anticipated operating cash flows will be sufficient for working capital and operating needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- COVID-19 had not materially adversely affected financial results to date, but its future effects remained uncertain. HubSpot reduced prices on certain offerings, made some functionality temporarily free, suspended certain email limits, and advanced six months of commissions to certain Solutions Partners. Management cited potential customer spending reductions, delayed purchases, downgrades, shorter contracts, and higher attrition as risks.
- Management reported an incremental allowance for doubtful accounts associated with pandemic-related collection uncertainty. The allowance was $2.5 million at September 30, after $7.2 million of provision and $6.3 million of net write-offs during the nine months.
- Key disclosed risks include competition and pricing pressure; customer renewals and retention; continued losses and scaling costs; data security, privacy, and international data-transfer requirements; reliance on third-party cloud infrastructure and integrations; foreign-exchange and interest-rate exposure; and liquidity needs if convertible notes are converted or must be repurchased.
- The company reported no material pending litigation and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether rapid customer growth can offset falling average subscription revenue per customer and pandemic-related pricing concessions or downgrades.
- Whether operating cash generation improves, given the year-over-year decline and ongoing investment and operating expenses.
- The cash-settlement, conversion, and potential dilution implications of the 2022 and 2025 Notes, including the post-quarter $2.1 million conversion notices.
- How much of the large cash and investment balance is available for operations and how lease and debt obligations evolve.
- Whether COVID-19 effects, customer credit quality, and privacy or security requirements materially change demand, retention, or costs.