HubSpot, Inc. — Q2 2019 Form 10-Q
Business and period: HubSpot provides a cloud-based marketing, sales and customer-service platform, primarily serving mid-market businesses. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $163.3m (+33%) | $122.6m | $315.1m (+33%) | $237.1m |
| Subscription revenue | $155.9m (+34%) | $116.6m | $300.1m (+33%) | $225.2m |
| Gross profit | $132.1m | $97.7m | $254.3m | $189.9m |
| Gross margin | 81% | 80% | 81% | 80% |
| Operating loss | $(15.7)m | $(14.1)m | $(24.8)m | $(25.4)m |
| Net loss | $(17.4)m | $(18.2)m | $(28.5)m | $(33.7)m |
| Basic and diluted net loss per share | $(0.41) | $(0.48) | $(0.69) | $(0.88) |
- Growth and margins: Revenue growth was principally attributed to customer growth: customers rose to 64,836 from 48,091 a year earlier. Average subscription revenue per customer declined to $9,913 for Q2 from $10,004, which management attributed mainly to adoption of lower-priced freemium products. Subscription revenue represented 95% of revenue. Gross margin improved by one percentage point, primarily from better leverage of hosting costs.
- Expenses and profitability: Q2 operating expenses increased 32% to $147.8m, including R&D up 42% to $40.5m, sales and marketing up 29% to $84.1m, and general and administrative up 29% to $23.3m. Q2 operating loss widened despite revenue growth; first-half operating and net losses narrowed year over year. First-half stock-based compensation was $49.9m versus $35.7m.
- Cash flow and liquidity: First-half operating cash flow was $51.4m, versus $40.2m in 2018. Investing cash outflow was $273.2m, largely reflecting net purchases of investments; financing cash inflow was $350.4m, chiefly from a February common-stock offering that generated approximately $342.6m net proceeds. At June 30, cash and cash equivalents were $238.1m; short- and long-term investments totaled $755.7m. Working capital was $810.0m. Management said working capital was sufficient for at least the next 12 months. Quarterly cash flow is not separately provided in the filing text.
- Debt and leases: The company had $400m principal amount of 0.25% convertible notes due 2022, with a $329.5m net carrying value. Notes’ disclosed fair value was $744.2m. Operating lease liabilities totaled approximately $250.1m, with a 9.7-year weighted-average remaining term. Lease adoption added $151.9m to both assets and liabilities at January 1, 2019, with no effect on equity or the income statement; prior-year comparisons were not restated.
Outlook, risks and notable items
- Management expects continued investment in sales and marketing, R&D, customer support, infrastructure and international expansion, and does not expect near-term profitability. It expects professional-services margins to range from a moderate loss to breakeven. No specific revenue or earnings guidance is provided in the filing text.
- The filing identifies customer renewals, competition and pricing, growth execution, hiring and retention, service reliability, third-party hosting dependencies, cybersecurity, privacy regulation and international operations as important risks. HubSpot disclosed a recent product outage caused by an infrastructure-system failure; customers experienced service disruption, though the company reported no loss of prior data.
- The 2022 Notes became convertible at holders’ option during the quarter ending September 30, 2019 after the stock-price condition was met. As of August 1, 2019, no holders had converted or indicated an intention to convert. Cash settlement upon conversion could affect liquidity.
- Operating lease commitments were $370.4m, including $41.4m for signed leases not yet commenced; potential extensions beyond specified termination dates could add approximately $83.6m. The company also extended a technology-vendor agreement, adding approximately $57m of commitments through June 2023.
- HubSpot reported no material pending litigation and no material off-balance-sheet arrangements other than operating leases and specified indemnifications. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether customer and subscription growth can continue while average subscription revenue per customer declines under the freemium strategy.
- Whether gross-margin improvement can persist as hosting, employee, infrastructure and product-development costs rise.
- Cash generation relative to ongoing operating losses, stock-based compensation, investment needs and the potential cash requirements of convertible-note conversion or repurchase.
- The impact of lease commitments, the new vendor commitment and future facility requirements on operating costs and liquidity.
- Renewal and retention trends, service availability and the company’s response to privacy, cybersecurity and regulatory risks.