HubSpot, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
HubSpot provides a cloud-based marketing, sales, customer-service and CRM platform, primarily targeting mid-market businesses. At quarter-end it reported 68,803 customers, up from 52,505 a year earlier, and 3,204 full-time employees. Subscription revenue represented 96% of revenue. Customers outside the United States generated approximately 40% of Q3 and nine-month revenue.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $173.6 | $131.8 | $488.7 | $369.0 |
| Subscription revenue | $167.1 | $125.5 | $467.2 | $350.6 |
| Gross profit | $140.4 | $106.1 | $394.7 | $296.0 |
| Gross margin | 81% | 80% | 81% | 80% |
| Operating loss | $(14.1) | $(15.1) | $(38.8) | $(40.4) |
| Net loss | $(15.0) | $(18.7) | $(43.4) | $(52.3) |
| Net loss per share, diluted | $(0.35) | $(0.48) | $(1.04) | $(1.37) |
- Revenue increased 32% year over year in both periods; subscription revenue increased 33%. Q3 customer growth was the primary driver. Average subscription revenue per customer rose slightly in Q3, to $9,992 from $9,959.
- Operating expenses rose 28% in Q3 and 29% for the nine-month period, led by sales and marketing and research and development investment. Stock-based compensation expense was $23.8 million in Q3 and $73.7 million for nine months.
- Operating cash flow was $71.1 million for nine months, compared with $51.7 million a year earlier. Cash and cash equivalents were $225.8 million; short- and long-term investments totaled $782.6 million. Working capital was $800.3 million.
- Investing cash outflow was $309.3 million and financing cash inflow was $356.5 million for nine months. Financing included $342.6 million net proceeds from a February common-stock offering of approximately 2.2 million shares.
- Convertible notes due 2022 had $400.0 million principal and a $335.0 million net carrying amount at quarter-end; the notes bear 0.25% stated interest. Operating lease liabilities totaled approximately $241.3 million.
Changes, outlook and notable items
- Compared with 2018, losses narrowed while revenue and gross margin grew. Management attributed expense growth mainly to expanded headcount, customer support, product development, marketing, partner commissions and infrastructure.
- Management expects continued investment in sales and marketing, research and development, customer support and data-center capabilities. It stated that HubSpot does not expect to be profitable in the near term; longer-term operating leverage depends on revenue growing faster than expenses.
- Management said working capital was sufficient to support operations for at least the next 12 months. The filing does not provide specific quarterly or annual revenue or earnings guidance.
- Lease accounting adoption on January 1, 2019 added right-of-use assets and lease liabilities to the balance sheet, with no impact on equity or results of operations. The company also disclosed approximately $80.2 million of additional potential lease commitments if certain leases are extended beyond optional termination dates.
- After quarter-end, HubSpot acquired PieSync for approximately $26.5 million and entered a new 10-year Germany lease with approximately $29.1 million of rent over its term. It also extended a technology-vendor agreement, adding approximately $57 million in commitments through June 2023.
- The 2022 notes became convertible at holders’ option during Q4 2019 under the disclosed share-price condition. As of November 1, the company had received conversion notices for approximately $8,000 of principal, to be settled in cash.
- Key risks include ongoing losses, customer renewal and expansion rates, intense competition, execution of growth and international expansion, service availability and cybersecurity, evolving privacy regulation, foreign-currency exposure, and possible cash requirements upon note conversion or repurchase. The filing reports no material pending litigation, no material off-balance-sheet arrangements other than specified exclusions, and effective disclosure controls.
Important facts for investors to verify
- Whether customer growth, renewals and expansion can sustain subscription growth, particularly as average revenue per customer increased only modestly and the freemium model may temper it.
- Whether expense growth, including stock-based compensation, can be managed to improve operating results without impairing growth or customer service.
- The composition and liquidity of the substantial investment portfolio, and the cash-flow effects of investment purchases and maturities.
- The terms, conversion status and potential cash-settlement requirements of the $400 million 2022 notes, alongside lease and other contractual commitments.
- The integration and expected costs or benefits of the PieSync acquisition, and the impact of new lease and vendor commitments.
- The scope of remaining performance obligations disclosed: approximately $153.5 million for qualifying contracts, with about 94.3% expected to be recognized over the next 24 months.