HubSpot, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; amounts below are in millions of U.S. dollars except per-share data and percentages. HubSpot provides a cloud-based marketing, sales, and customer service software platform. It reported 48,091 customers at quarter-end, up from 34,326 a year earlier.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $122.6 | $89.1 | $237.1 | $171.3 |
| Gross profit / margin | $97.7 / 80% | $70.5 / 79% | $189.9 / 80% | $135.7 / 79% |
| Operating loss | $(14.1) | $(10.6) | $(25.4) | $(18.6) |
| Net loss | $(18.2) | $(9.5) | $(33.7) | $(17.6) |
| Basic and diluted loss per share | $(0.48) | $(0.26) | $(0.88) | $(0.48) |
| Operating cash flow | — | $40.2 | $27.8 |
- Q2 revenue grew 38% year over year; subscription revenue rose 38% to $116.6 million and accounted for 95% of revenue. Professional services and other revenue rose 27% to $6.0 million.
- Operating expenses increased 38% in Q2 to $111.8 million. Research and development rose 79% to $28.5 million; sales and marketing rose 29% to $65.3 million. Higher staffing and growth investments drove much of the increases.
- At June 30, cash and cash equivalents were $98.4 million, short-term investments $451.8 million, and long-term investments $16.4 million. Working capital was $448.8 million. Management said working capital was sufficient for at least the next 12 months.
- Six-month investing cash outflow was $35.1 million, including $11.3 million of property and equipment purchases and $5.8 million of capitalized software development costs. Financing cash inflow was $7.2 million.
- The company had $400.0 million principal amount of 0.25% convertible senior notes due 2022; their balance-sheet carrying amount was $308.4 million and disclosed fair value was $574.8 million. The company reported $10.5 million of interest expense in H1, largely non-cash debt discount and issuance-cost amortization.
Changes versus the prior comparable period
- Customer count increased about 40%, supporting subscription growth. Average subscription revenue per customer declined: Q2 to $10,004 from $10,228; H1 to $10,016 from $10,298. HubSpot attributed the decline primarily to growth in its freemium and lower-priced offerings.
- Gross margin improved to 80% from 79%, which management attributed chiefly to better leverage of hosting costs. The operating loss widened in dollars, while the operating-loss margin was approximately 11% versus 12% in Q2 2017. Net loss widened, and the prior-year periods included income tax benefits.
- International revenue increased to 37% of total revenue in Q2 from 32% a year earlier; revenue outside the Americas was 29%, compared with 23%.
- Operating cash flow increased to $40.2 million from $27.8 million for H1, supported in part by higher deferred revenue and non-cash expenses, including stock-based compensation of $35.7 million versus $22.3 million.
Outlook, accounting changes, and risks
- Management expects continued investment in sales and marketing, research and development, customer support, international operations, and infrastructure. It does not expect near-term profitability; it expects longer-term operating leverage if revenue grows faster than expenses. The filing provides no numerical revenue or earnings guidance.
- HubSpot adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Compared with prior accounting, the standard reduced H1 total revenue by $0.1 million but reduced selling and marketing and total operating expenses by $7.4 million, improving H1 net loss by $7.3 million. Comparisons with 2017 are not restated. The filing also reports a $5.5 million net increase to opening retained earnings from adoption.
- The notes were convertible at holders’ option from July 1 through September 30, 2018 after the stock-price condition was met. As of July 30, no holders had converted or indicated an intention to convert. Cash settlement upon conversion could affect liquidity; the company may elect cash, shares, or a combination, subject to the note terms.
- Subsequent to quarter-end, HubSpot entered a three-year web-hosting renewal with approximately $48 million of contractual obligations over the initial term, with an option to extend for two additional years. Operating lease payments disclosed at June 30 totaled $253.5 million, with terms extending through October 2027.
- Key risks include ongoing losses and execution of growth investments; customer renewals, retention, and competition; scaling operations and third-party hosting dependence; cybersecurity, privacy, and GDPR compliance; international and currency exposure; and possible cash requirements related to convertible notes. The company reported no material pending litigation and no material off-balance-sheet arrangements beyond operating leases and specified indemnifications.
Important facts for investors to verify
- Customer retention, renewal, and expansion: the filing describes total subscription dollar retention as a key metric, but the supplied filing text does not provide a numerical rate.
- Whether customer growth and adoption of lower-priced products translate into higher average subscription revenue per customer over time.
- How much of operating cash flow reflects sustainable collections and deferred revenue versus non-cash items, including substantial stock-based compensation.
- Potential cash or dilution impact if holders convert the $400 million notes, and the timing and terms of any settlement.
- The financial and operating impact of the new hosting commitment, lease obligations, and continued spending needed to support growth.