HubSpot, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results compared with Q1 2018. HubSpot provides a cloud-based marketing, sales and customer-service platform, primarily to mid-market businesses. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $151.8 million | $114.6 million; up 33% |
| Subscription revenue | $144.2 million | $108.6 million; up 33% |
| Professional services and other revenue | $7.6 million | $6.0 million; up 27% |
| Gross profit / margin | $122.2 million / 81% | $92.2 million / 80% |
| Operating loss | $9.0 million | $11.3 million |
| Net loss / diluted loss per share | $11.1 million / $0.27 | $15.4 million / $0.41 |
| Cash from operating activities | $37.7 million | $26.7 million |
- Operating expenses were $131.3 million, up from $103.5 million. Research and development rose 33% to $35.2 million; sales and marketing rose 25% to $74.9 million; general and administrative rose 23% to $21.2 million.
- At March 31, cash and cash equivalents were $285.1 million, short-term investments $684.0 million, and long-term investments $14.5 million. Working capital was $814.8 million. Management said working capital was sufficient for at least the next 12 months.
- Q1 investing cash outflow was $210.1 million, mainly reflecting investment purchases net of maturities. Financing cash inflow was $347.2 million, principally $342.7 million in net proceeds from a February common-stock offering.
- Convertible notes had $400 million principal outstanding, with a $324.0 million net carrying amount and $711.5 million disclosed fair value. The notes bear 0.25% interest and mature in 2022.
- Operating lease liabilities totaled about $187.1 million at quarter-end. The company adopted updated lease accounting on January 1, 2019, recognizing right-of-use assets and lease liabilities; adoption did not affect equity or the income statement.
Changes versus the prior comparable period
- Revenue growth was driven mainly by customer expansion: total customers increased from 44,894 to 60,814. Average subscription revenue per customer declined from $10,016 to $9,811, which management attributed primarily to adoption of lower-priced freemium products.
- Gross margin improved by one percentage point, to 81%, as subscription revenue grew faster than hosting costs. Operating and net losses narrowed despite higher operating expenses.
- Operating cash flow increased by $11.0 million year over year. Stock-based compensation was $21.2 million, up from $16.0 million.
- Cash and investments increased substantially following the stock offering. The offering sold approximately 2.2 million shares and generated approximately $343 million net proceeds before offering expenses.
Outlook, commentary and risks
- No numeric revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales and marketing, research and development, customer support, international operations, and data-center infrastructure; it does not expect near-term profitability. It expects improved operating leverage and margin expansion over the long term, contingent on revenue growth.
- Professional services and other margins are expected to range from a moderate loss to breakeven for the foreseeable future.
- For remaining performance obligations on contracts with original terms exceeding one year, $134.4 million remained; the company expects to recognize approximately 94% over the next 24 months.
- Management cited customer renewals, customer growth and expansion, competition, rapid technology change, hiring and growth management as key business dependencies. The filing also highlights risks around service interruptions, cybersecurity and privacy regulation, international operations and currency exposure.
- In April 2019, the company entered into new U.S. and Singapore leases and extended existing leases, adding approximately $31.2 million of rent over their terms. In March, it extended a technology-vendor agreement through June 2023, adding approximately $57 million of contractual obligations.
- The company reported no material pending litigation and no material off-balance-sheet arrangements other than operating leases and specified indemnifications. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether customer and subscription growth can continue while average subscription revenue per customer is declining.
- Renewal rates, customer expansion and the eventual profitability of growth investments; the filing does not provide a numeric profitability timetable.
- Cash-flow sustainability after excluding the one-time stock-offering proceeds and considering investment purchases, lease commitments and potential cash settlement of convertible notes.
- The potential dilution and liquidity implications of the $400 million convertible notes, which were eligible for holder conversion in Q2 2019; the filing said no holders had converted or indicated intent to convert as of May 3, 2019.
- The cost and execution implications of the disclosed lease and technology-vendor commitments, as well as material service, data-security and privacy developments.