HubSpot, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; amounts below are in U.S. dollars. HubSpot provides a cloud-based marketing and sales software platform, primarily through subscriptions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $97.7 million | $70.6 million | $269.1 million | $194.5 million |
| Gross profit / margin | $78.7 million / 81% | $54.8 million / 78% | $214.4 million / 80% | $149.5 million / 77% |
| Operating loss / margin | $12.1 million / 12% | $10.0 million / 14% | $30.7 million / 11% | $30.8 million / 16% |
| Net loss | $10.6 million | $10.5 million | $28.2 million | $31.7 million |
| Operating cash flow | Not presented for the quarter | $35.6 million | $17.1 million |
- Q3 revenue grew 38% year over year; subscription revenue rose 40% to $93.2 million and represented 95% of revenue. Professional services and other revenue was $4.6 million.
- Nine-month revenue also grew 38%. Gross margin improved in both comparisons, which management attributed mainly to better leverage of hosting costs.
- Operating expenses rose 40% in Q3 to $90.8 million, led by sales and marketing ($57.9 million), research and development ($18.8 million), and general and administrative ($14.1 million). Stock-based compensation was $12.1 million in Q3 and $34.4 million year to date.
- Q3 net loss was broadly unchanged year over year despite a higher operating loss; nine-month net loss narrowed. Income tax benefits of $5.4 million for Q3 and $8.4 million year to date included effects related to the Motion AI acquisition and convertible notes.
Balance sheet, liquidity, and debt
- At September 30, cash and cash equivalents were $176.7 million; short-term investments were $315.1 million and long-term investments $35.7 million. Working capital was $410.4 million.
- Current liabilities were $160.6 million, including $118.4 million of deferred revenue. Total liabilities were $477.8 million and stockholders’ equity was $208.5 million.
- Operating cash flow for the first nine months was $35.6 million, versus $17.1 million a year earlier. Investing cash outflow was $296.8 million, substantially reflecting investment purchases net of maturities, as well as capital spending and acquisitions. Financing cash inflow was $375.7 million, primarily from the notes offering.
- In May 2017, HubSpot issued $400 million principal amount of 0.25% convertible senior notes due 2022. Net proceeds were approximately $389.2 million; the balance-sheet carrying amount was $293.6 million and disclosed fair value was $443.6 million. The notes’ conversion price was initially $94.77 per share. A note hedge and warrants were intended to offset dilution up to a higher effective price; the company reported a net $20 million cost for those transactions.
Changes, outlook, and notable items
- Customers increased to 37,450 from 25,541 a year earlier. Q3 average subscription revenue per customer declined to $10,332 from $10,762, which management attributed primarily to adoption of lower-priced freemium sales products.
- Management said it expects continued investment in sales and marketing, research and development, international operations, customer support, and infrastructure. It does not expect near-term profitability, while anticipating potential long-term operating leverage if revenue growth outpaces expenses. The filing provides no numerical financial guidance.
- HubSpot acquired Motion AI on September 20 for $9.0 million. Preliminary purchase accounting included $6.0 million of developed technology and $5.2 million of goodwill; up to approximately $4.0 million of potential consideration was excluded from the purchase-price allocation and, if earned, is expected to be recognized over about three years. The filing says the acquisition did not materially affect reported-period revenue or earnings.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. It expects changes to sales-commission capitalization and amortization, and earlier recognition on certain bundled subscription contracts; the overall financial-statement impact was still being assessed.
- Management cited competition, customer renewals and expansion, execution of growth plans, hiring and retention, service scalability and third-party hosting, cybersecurity and privacy regulation—including the EU GDPR effective May 2018—as key risks. Foreign-exchange and investment interest-rate exposures are also disclosed; the company had not hedged those exposures.
- The filing reports no material pending litigation, no material off-balance-sheet arrangements other than operating leases and specified indemnifications, and effective disclosure controls as of quarter-end.
Investor verification priorities
- Verify customer growth alongside average subscription revenue per customer and subscription dollar retention; the filing defines the retention metric but does not provide its reported rate in the text presented.
- Assess whether subscription growth and improving gross margins can offset rising operating costs and ongoing losses.
- Review the 2022 notes’ conversion, cash-settlement and repurchase provisions, related interest accounting, and potential dilution.
- Track the realized impact of the Motion AI acquisition, potential contingent consideration, and the 2018 revenue-recognition transition.
- Monitor liquidity and cash generation, including the composition and maturity of investments, and exposure to international operations, privacy requirements, and hosting or security disruptions.