HubSpot, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Amounts below are USD millions unless stated otherwise.
Business context
HubSpot provides a cloud-based CRM platform spanning Marketing, Sales, Service, CMS and Operations products, plus related tools and payments. Subscription revenue is the primary source of revenue. At quarter-end, the company reported 158,905 customers and 7,409 full-time employees. It operates as one reportable segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $444.0 | $339.2 | $1,261.3 | $931.3 |
| Subscription revenue | $435.0 | $329.0 | $1,232.4 | $899.7 |
| Gross profit | $361.8 | $269.6 | $1,027.3 | $744.1 |
| Gross margin | 82% | 79% | 81% | 80% |
| Operating loss | $(32.2) | $(14.9) | $(95.6) | $(46.6) |
| Net loss | $(31.4) | $(13.7) | $(97.1) | $(61.5) |
| Diluted net loss per share | $(0.65) | $(0.29) | $(2.03) | $(1.31) |
Q3 revenue grew 31% year over year, led by subscription revenue growth of 32%; nine-month revenue grew 35%. Customer count rose from 128,144 to 158,905. Management attributed growth primarily to demand for lower-priced Starter products, with continued Professional and Enterprise demand contributing to higher average subscription revenue per customer. Professional services and other revenue declined 13% in Q3 and 9% for the nine-month period.
Operating expenses rose to $394.0 million in Q3 from $284.5 million, driven by higher employee-related costs and continued investment in research and development and sales and marketing. Q3 research and development increased 45%, sales and marketing 35%, and general and administrative 40%. Stock-based compensation was $72.2 million in Q3 and $199.1 million for the nine months, compared with $45.0 million and $120.8 million, respectively, in 2021.
Cash flow, liquidity and debt
- Operating cash flow was $183.2 million for the first nine months, versus $143.5 million in 2021. Cash generation included $199.1 million of stock-based compensation and a $63.7 million increase in deferred revenue.
- Investing activities used $211.1 million net, including purchases of property and equipment, strategic investments, capitalized software development and the $10.0 million purchase of the connect.com domain. Investment purchases and maturities/sales were major gross cash movements.
- Financing activities used $1.2 million net. The 2022 convertible notes matured in June; the company paid $19.4 million principal and $60.4 million conversion premium and received $60.5 million from settlement of related note hedges.
- At September 30, cash and cash equivalents were $331.7 million; short- and long-term investments were $952.7 million and $152.7 million. Working capital was $892.9 million. Cash, cash equivalents and restricted cash totaled $334.7 million.
- The 2025 convertible notes had a $459.1 million principal amount and $453.7 million net carrying amount. The notes bear 0.375% interest and mature in June 2025. Operating lease liabilities totaled approximately $282.8 million.
- Deferred revenue was $473.7 million in total. Management said existing cash, investments and expected operating cash flows should fund working capital and operating needs for at least the next 12 months.
Changes, outlook and risks
Despite strong revenue growth and higher gross margins, operating and net losses widened as expenses—particularly personnel and stock-based compensation—grew faster than revenue. Management expects continued investment in sales and marketing, research and development, international operations, customer support and data-center infrastructure, and stated it does not expect near-term profitability. The filing provides no quantified forward guidance.
HubSpot adopted updated convertible-debt accounting guidance in January 2022. The adoption increased opening debt liabilities by $69.8 million, reduced additional paid-in capital by $101.2 million and increased opening retained earnings by $31.4 million; prior-period comparisons were not restated. Higher interest income partly reflected increased investment yields. Foreign-exchange movements, including a weaker euro and British pound, affected results; the company did not then hedge foreign-currency transactions.
Management cited uncertain effects from inflation, interest-rate changes, foreign-exchange volatility, economic weakness and the Russia-Ukraine conflict. Key business risks include customer renewals and retention, competition and pricing pressure, growth management and hiring, platform availability and cybersecurity, third-party hosting dependence, privacy and data-protection regulation, and the company’s history of losses. The company reported no material pending litigation and effective disclosure controls; it identified no material change in internal control over financial reporting.
Investor verification priorities
- Track customer additions, renewals, product mix and average subscription revenue per customer, including the contribution from lower-priced Starter plans and foreign exchange.
- Assess whether operating-expense and stock-based-compensation growth can moderate relative to revenue, and monitor progress toward profitability.
- Review operating cash flow quality, deferred-revenue trends, investment portfolio valuation losses and liquidity available after contractual commitments.
- Monitor the 2025 notes, including future conversion conditions, potential cash-settlement needs and dilution from outstanding warrants and equity awards.
- Evaluate exposure to macroeconomic demand weakness, currency movements, cybersecurity and service interruptions, and evolving privacy requirements.