HubSpot, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated financial statements; amounts below are in U.S. dollars, generally millions unless noted. HubSpot provides a cloud-based marketing and sales software platform. It reported 34,326 total customers, including 26,560 marketing customers, across more than 90 countries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $89.1 | $65.0 | $171.3 | $123.9 |
| Subscription revenue | $84.4 | $60.9 | $161.9 | $115.9 |
| Gross profit / gross margin | $70.5 / 79% | $49.8 / 77% | $135.7 / 79% | $94.8 / 76% |
| Operating loss / margin | $(10.6) / (12)% | $(11.0) / (17)% | $(18.6) / (11)% | $(20.9) / (17)% |
| Net loss | $(9.5) | $(11.1) | $(17.6) | $(21.2) |
| Net loss per share, basic and diluted | $(0.26) | $(0.32) | $(0.48) | $(0.61) |
Q2 revenue grew 37% year over year; six-month revenue grew 38%. Subscription revenue grew 38% and 40%, respectively. Management attributed subscription growth to more marketing customers and higher average subscription revenue per customer, including greater product usage, add-ons, and sales of higher-priced plans. Q2 total average subscription revenue per customer was reported at $10,228; marketing average was $12,773.
Operating cash flow for the six months was $27.8, versus $11.8 in 2016. Investing cash outflow was $287.8, mainly reflecting investment purchases, while financing cash inflow was $374.1, principally from convertible-note proceeds. Cash and cash equivalents at June 30 were $175.6.
Financial position, debt, and liquidity
- Cash and cash equivalents were $175.6; short- and long-term investments totaled $358.7. Working capital was $410.0. The company said working capital was sufficient for at least the next 12 months.
- Current liabilities included $109.9 of deferred revenue. HubSpot cautioned that changes in deferred revenue are not, in its view, an accurate indicator of future revenue, partly because customer billing schedules vary.
- In May 2017, HubSpot issued $400.0 principal amount of 0.25% convertible senior notes due 2022. Net proceeds were approximately $389.2; the balance-sheet carrying amount was $288.8 after debt discount and issuance costs. The notes’ disclosed fair value was $392.9.
- The company spent $78.9 on note hedges and received $58.9 from warrant sales; management said these transactions were intended to offset dilution above the notes’ conversion price and effectively raise the overall conversion price to $115.83 per share.
- Cash held outside the United States was $26.1; HubSpot said it intended to reinvest those funds abroad. Restricted cash was $5.1.
Material changes and unusual items
- Gross margin improved year over year, which management attributed primarily to better leverage of hosting costs relative to subscription revenue. Professional services remained loss-making: related costs exceeded revenue in both comparison periods.
- Operating expenses increased with investment in staffing and growth: Q2 research and development rose 41%, sales and marketing 30%, and general and administrative 39% year over year. Stock-based compensation was $22.3 for the first half, up from $14.7.
- Interest expense increased substantially following the convertible-note issuance; first-half interest expense included $2.5 of debt-discount amortization and $0.2 of issuance-cost amortization.
- The first-half income tax benefit of $3.1 was primarily related to the notes’ deferred-tax effects. The filing describes a $9.4 deferred tax liability and related tax-benefit accounting, including amounts expected to be recognized later in 2017 as losses were generated.
- Investing outflow was unusually high compared with the prior year because the company purchased $305.3 of investments. Purchases and maturities are investing activity, not operating cash burn.
Outlook, risks, and contingencies
Management said it did not expect near-term profitability and planned continued investment in sales and marketing, research and development, customer support, infrastructure, and international expansion. It expected long-term operating margins to improve as revenue growth outpaced operating-expense growth, but noted that profitability depends on meeting growth objectives, including customer renewals. The filing provides no specific numerical revenue or earnings guidance.
Key risks include ongoing losses; dependence on renewals, customer expansion, and new customer growth; intense competition and pricing pressure; execution and scaling challenges; reliance on third-party hosting and integrations; cybersecurity, privacy, and data-protection obligations, including the approaching EU GDPR; foreign-currency exposure; and the cash, liquidity, accounting, and potential dilution implications of the convertible notes. The company reported no material pending litigation, no material off-balance-sheet arrangements apart from operating leases and indemnifications, and no material change in contractual obligations other than disclosed lease commitments. New lease commitments included approximately $6.0 over about nine years for a Cambridge facility amendment and approximately $10.9 over the initial 10 years and six months of a Dublin lease. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether customer additions, subscription revenue per customer, and renewal and dollar-retention trends continue; the filing text does not provide a clear retention-rate value.
- Whether revenue growth can outpace rising operating expenses and stock-based compensation sufficiently to reduce losses.
- The effects of the 2022 notes’ cash settlement terms, conversion triggers, discount amortization, note hedges, and warrants on future liquidity, reported earnings, and dilution.
- How the 2018 revenue-recognition standard affects revenue timing and capitalized sales commissions; HubSpot was still assessing the impact and expected modified-retrospective adoption.
- Execution and cost of international expansion, including GDPR compliance, data security, third-party hosting dependencies, and foreign-exchange exposure.