HubSpot, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context
HubSpot provides a cloud-based marketing and sales platform, primarily to mid-market businesses. At quarter-end it reported 15,839 customers in more than 90 countries. Subscription revenue represented 91% of revenue in the quarter and first half.
Financial and operating highlights
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $42.9 | $27.1 | $81.1 | $51.3 |
| Subscription revenue | $39.3 | $24.9 | $74.2 | $47.2 |
| Gross profit / margin | $31.7 / 74% | $18.8 / 69% | $59.4 / 73% | $35.3 / 69% |
| Operating expenses | $43.0 | $27.1 | $82.1 | $53.0 |
| Operating loss | $(11.3) | $(8.3) | $(22.7) | $(17.7) |
| Net loss | $(11.4) | $(8.3) | $(22.3) | $(17.7) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $0.8 | $(4.9) |
- Revenue increased 58% year over year in both Q2 and the first half. Management attributed subscription growth to more customers and higher average subscription revenue per customer. Q2 average subscription revenue per customer was $10,127, versus $8,823 a year earlier.
- Gross margin rose five percentage points in Q2 and four points in the first half, primarily from improved hosting-cost leverage. Losses nevertheless widened as the company invested in sales and marketing, research and development, and administration.
- At June 30, cash and cash equivalents were $74.2, short- and long-term investments were $77.9 at fair value, and working capital was $67.0. The company reported total liabilities of $78.5 and stockholders’ equity of $130.3.
- Capital lease obligations totaled $0.4. The revolving credit line was undrawn. Operating cash flow for the first half turned positive, supported in part by a $9.5 increase in deferred revenue and noncash stock-based compensation of $10.8.
Changes, outlook, risks and unusual items
- Operating expenses rose substantially year over year, led by sales and marketing, up 54% in Q2, and research and development, up 65%. First-half stock-based compensation was $10.8, compared with $2.2 a year earlier.
- Management expects continued spending on sales and marketing, product development, customer support, infrastructure and international expansion. It does not expect near-term profitability; it expects improved long-term margins if revenue growth outpaces expense growth. No quantified revenue or earnings guidance is provided.
- Management said liquidity should support operations for at least the next 12 months. It also cautioned that deferred revenue is not a reliable standalone indicator of future revenue because customer billing schedules vary.
- New commitments include a 10-year lease for approximately 60,000 square feet, commencing in January 2016, with about $37 in aggregate rent, and a five-year customer relationship management vendor agreement with an approximately $30 obligation.
- A material weakness in the control environment made disclosure controls and procedures ineffective at June 30. The weakness followed employees’ conduct related to attempts to procure a draft book manuscript. The company said this did not misstate its financial statements and planned company-wide ethics training and annual employee certification.
- Principal risks include continuing losses, customer renewal and acquisition, intense competition, rapid growth and hiring needs, service availability and data security, privacy regulation, and foreign currency exposure. The company reported no material pending litigation and no material off-balance-sheet arrangements other than operating leases and specified indemnifications.
- The company reclassified customer credit card fees from subscription cost of revenue to general and administrative expense in comparative periods. It was evaluating the impact of the new revenue recognition standard, then expected to apply for annual periods beginning January 1, 2018.
Important facts for investors to verify
- Whether customer growth, renewal rates and higher subscription revenue per customer continue to support revenue growth.
- Whether operating expenses and stock-based compensation grow faster or slower than revenue, and how soon losses may narrow.
- Cash generation and liquidity after investment purchases, the new lease and the vendor commitment.
- Progress in remediating the material weakness and whether any additional control deficiencies emerge.
- Exposure to competition, hosting or security disruptions, privacy requirements, and international currency movements.