HubSpot, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. HubSpot provides a cloud-based marketing and sales platform focused on mid-market businesses. At quarter-end, it reported 21,658 customers in more than 90 countries. Subscription revenue represented 94% of revenue, up from 92% a year earlier.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $70.6m | $47.7m | $194.5m | $128.8m |
| Subscription revenue | $66.5m | $44.1m | $182.4m | $118.3m |
| Gross profit / margin | $54.8m / 78% | $35.2m / 74% | $149.5m / 77% | $94.6m / 73% |
| Operating loss | $(10.0)m | $(13.3)m | $(30.8)m | $(36.0)m |
| Net loss | $(10.5)m | $(13.6)m | $(31.7)m | $(35.8)m |
| Basic and diluted loss per share | $(0.30) | $(0.40) | $(0.91) | $(1.09) |
| Operating cash flow | Not separately stated for the quarter | $17.1m | $(3.1)m |
Liquidity and balance sheet. At September 30, 2016, cash and cash equivalents were $61.4m; short- and long-term investments totaled $90.2m. Working capital was $49.1m and total assets were $247.8m. Total liabilities were $125.6m, including $84.2m of current and long-term deferred revenue. Capital lease obligations were about $1.0m; the company reported no outstanding balance on its $35m revolving credit line, which expires in March 2017. Management said working capital was sufficient for at least the next 12 months.
Nine-month investing cash outflow was $18.5m, including $13.4m for property and equipment and $4.2m for capitalized software development, partly offset by investment maturities. Financing cash inflow was $6.8m, mainly from stock-plan issuances. Operating cash flow benefited from an $18.7m increase in deferred revenue and $23.4m of stock-based compensation, among other noncash items.
Material changes versus prior comparable periods
- Q3 revenue grew 48% year over year; nine-month revenue grew 51%. Subscription revenue rose 51% and 54%, respectively.
- Customers increased from 16,854 to 21,658. Management attributed subscription growth to customer additions, higher average subscription revenue per customer, greater product use and add-on purchases.
- Gross margin improved 4 percentage points in both comparisons, primarily from better leverage of hosting costs against subscription growth. Professional services remained loss-making: its cost exceeded related revenue in both periods.
- Operating losses narrowed even as operating expenses increased: Q3 operating expenses rose 33% to $64.7m, while nine-month expenses rose 38% to $180.4m. Sales and marketing was the largest expense category.
- Nine-month operating cash flow improved from a $3.1m outflow to a $17.1m inflow, substantially supported by deferred-revenue growth and noncash expenses.
Outlook, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales and marketing, research and development, customer support, international operations and infrastructure, and stated it does not expect near-term profitability. It expects long-term margin improvement as revenue growth outpaces certain operating costs, but notes profitability depends on achieving growth and customer-renewal objectives.
- Growth and execution risks: The filing highlights competition, customer renewals and pricing, rapid growth and hiring, scaling service and hosting infrastructure, product development, and reliance on third-party hosting and integrations.
- Regulatory and technology risks: Privacy, data protection, security incidents, international data transfers, email and online-tracking regulation, foreign exchange exposure, and intellectual-property claims could affect operations or demand. The company reported no material foreign-currency gains or losses in the periods presented and did not hedge currency exposure.
- Commitments and contingencies: On October 7, 2016, after quarter-end, HubSpot entered a nine-year lease expanding its Cambridge headquarters by approximately 25,000 square feet, with estimated rent of $15m over the term. The filing reported no material pending litigation and no material changes in contractual obligations as previously disclosed.
- Other items: Stock-based compensation expense increased to $8.7m in Q3 and $23.4m for the first nine months, from $4.5m and $15.3m, respectively, a significant component of reported expenses. The accumulated deficit was $232.1m. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify customer retention and renewal rates, and whether customer and average subscription revenue growth can continue.
- Assess the sustainability of gross-margin gains and the path to profitability given continued operating investment and elevated stock-based compensation.
- Review the quality of operating cash flow, especially its dependence on deferred-revenue growth and noncash adjustments.
- Confirm liquidity needs and financing arrangements, including the revolving credit line’s March 2017 expiry and the new lease commitment.
- Monitor international expansion, foreign-exchange exposure, and evolving privacy and data-transfer requirements.