HubSpot, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results, compared with Q1 2017. Unless otherwise noted, amounts are U.S. dollars in millions. HubSpot provides a cloud-based marketing, sales, and customer-service software platform. It reported 44,894 customers at quarter-end, up from 31,262 a year earlier.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date | Change or context |
|---|---|---|---|
| Revenue | $114.6 | $82.3 | Up 39%; subscription revenue was $108.6, up 40% |
| Gross profit / gross margin | $92.2 / 80% | $65.2 / 79% | Margin improved about 1 percentage point |
| Operating expenses | $103.5 | $73.2 | Up 41%; R&D rose 97%, sales and marketing 28%, and G&A 31% |
| Operating loss | $(11.3) | $(8.0) | Operating-loss margin was approximately 10% in both periods |
| Net loss / diluted loss per share | $(15.4) / $(0.41) | $(8.1) / $(0.22) | Interest expense included $4.9 of noncash debt-discount and issuance-cost amortization |
| Cash from operating activities | $26.7 | $19.1 | Supported by deferred-revenue growth and noncash expenses, including stock compensation |
| Cash, cash equivalents and restricted cash | $160.0 | $92.8 at Dec. 31, 2017 | Cash and cash equivalents alone were $154.0 |
| Investments | $403.5 | $448.1 at Dec. 31, 2017 | Short- and long-term investments; cash plus investments totaled about $557.5 |
| Working capital | $427.2 | $44.1 at Mar. 31, 2017 | Filing reports substantial increase |
| Convertible notes | $400.0 principal; $303.4 net carrying amount | $298.4 carrying amount at Dec. 31, 2017 | 0.25% notes due 2022; disclosed fair value was $516.4 |
Investing activities provided $36.3, primarily because investment maturities exceeded purchases; financing activities provided $3.6. At March 31, 2018, $32.7 of cash and cash equivalents was held outside the United States. The company said working capital was sufficient to support operations for at least 12 months.
Material changes and unusual items
- Customer growth drove subscription revenue, but average subscription revenue per customer declined from $10,357 to $10,016, primarily reflecting the company’s continued adoption of a lower-cost “freemium” model.
- Professional services revenue increased 25% to $6.0, while related costs were $7.1; management expects this business to produce a moderate loss to breakeven for the foreseeable future.
- Stock-based compensation increased to $16.0 from $9.3. Growth in employee-related costs was a principal driver of higher operating expenses.
- HubSpot adopted the new revenue and contract-cost guidance on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $5.8. Compared with prior guidance, Q1 2018 revenue was $0.03 lower and operating expenses were $3.6 lower, producing a reported net-loss impact of $3.5 in the direction of a smaller loss. Operating cash flow was unchanged by adoption.
- Deferred revenue was $150.8 at quarter-end. The company reported $74.3 of remaining performance obligations on contracts with original terms exceeding one year and expects to recognize about 90% over the next 24 months. Most subscriptions are one year or less.
Outlook, risks and contingencies
- Outlook: No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales and marketing, R&D, customer support, data-center infrastructure, and international operations, and does not expect near-term profitability. It expects operating margins to improve over the long term if revenue growth outpaces expenses.
- Key business risks: Customer renewal and expansion, competition and pricing pressure, execution of the freemium and cross-selling strategy, hiring and managing rapid growth, service reliability and third-party hosting, cybersecurity and privacy compliance, and foreign-currency exposure. The GDPR was due to take effect in May 2018; the filing warns of potential compliance costs and penalties.
- Debt and commitments: The $400.0 convertible notes may require cash for conversions or repurchases in specified circumstances. Future minimum operating-lease payments were $250.2, with leases extending through October 2027.
- Legal and controls: The company reported no material pending litigation and no material off-balance-sheet arrangements other than operating leases and specified indemnifications. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported Q1 loss improvement versus prior revenue guidance reflects the new accounting treatment, and how commission capitalization and amortization affect future periods.
- Whether customer growth and renewals can offset the decline in average subscription revenue per customer, and whether the freemium model supports sustainable customer economics.
- Whether rising R&D and other operating costs can be matched by revenue growth, given the widening net loss and substantial stock-based compensation.
- The notes’ conversion, cash-settlement, and repurchase terms, and the difference between their principal, carrying amount, and disclosed fair value.
- Whether liquidity remains adequate after considering lease obligations, growth investment needs, and potential cash demands from the convertible notes.
- Progress and costs of GDPR compliance, data security, international operations, and reliance on third-party hosting providers.