HubSpot, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Figures are unaudited and in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. HubSpot provides a cloud-based marketing, sales and customer service platform. At quarter-end it reported 86,672 customers and 3,769 full-time employees.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $203.6 | $163.3 | $402.6 | $315.1 |
| Subscription revenue | $196.4 | $155.9 | $387.6 | $300.1 |
| Gross profit | $164.8 | $132.1 | $325.5 | $254.3 |
| Operating loss | $(13.6) | $(15.7) | $(27.7) | $(24.8) |
| Net loss | $(29.4) | $(17.4) | $(47.1) | $(28.5) |
| Net loss per share, diluted | $(0.67) | $(0.41) | $(1.08) | $(0.69) |
- Revenue increased 25% year over year in Q2 and 28% for the first half. Subscription revenue was 96% of revenue in 2020, up from 95% in 2019.
- Gross margin was 81% in both comparable periods. Q2 operating margin was approximately negative 6.7%; net margin was approximately negative 14.4%.
- Q2 operating expenses rose 21% to $178.5 million. Sales and marketing was $102.6 million, research and development $49.4 million, and general and administrative $26.5 million.
- Q2 interest expense increased to $16.8 million from $5.7 million, primarily reflecting a $10.5 million loss on early extinguishment of 2022 notes and convertible-note discount and issuance-cost amortization.
Cash flow, liquidity and debt
- For the first half, operating cash flow was negative $10.7 million, compared with positive $51.4 million a year earlier. Investing cash outflow was $277.2 million; financing cash inflow was $213.6 million. Cash, cash equivalents and restricted cash ended the period at $204.1 million.
- At June 30, cash and cash equivalents were $201.1 million, short-term investments $935.0 million and long-term investments $61.1 million. Together these totaled approximately $1.197 billion; working capital was $962.9 million.
- Convertible-note principal outstanding was approximately $587.8 million: $127.8 million of 2022 notes and $460.0 million of 2025 notes. The balance-sheet carrying amount was $467.5 million after unamortized discounts and issuance costs.
- In June, HubSpot issued $460 million of 0.375% convertible notes due 2025 and used part of the proceeds in a partial repurchase of $272.1 million principal of 2022 notes. It also paid $50.6 million for capped-call options. The remaining 2022 notes became convertible at holders’ option during Q3 2020 under the stated stock-price condition.
Changes and management commentary
- Customer count increased from 64,836 to 86,672 year over year. However, average subscription revenue per customer declined: Q2 average was $9,466 versus $9,913, which management attributed mainly to lower-priced Starter purchases and pandemic-related downgrades.
- COVID-19 prompted price reductions on certain products, free functionality, suspended marketing-email send limits, and a six-month advance of commissions to certain Solutions Partners. Management said the full effects on demand, renewals and financial performance remained uncertain.
- Management plans to continue investing in sales and marketing, product development, customer support and infrastructure, and stated it does not expect profitability in the near term. It believes existing cash, investments and anticipated operating cash flows will meet working-capital and operating needs for the next 12 months.
- Stock-based compensation was $58.8 million in the first half, compared with $49.9 million a year earlier. The allowance for doubtful accounts rose to $4.1 million from $1.6 million at year-end, reflecting an incremental pandemic-related reserve.
- International customers generated approximately 42% of revenue in Q2 2020, versus 40% in Q2 2019. The company reported no material pending litigation and said disclosure controls were effective.
Risks, contingencies and unusual items
- The pandemic could further affect customer purchasing, contract size and duration, renewals, collections and pricing; the filing says the impact was not yet fully reflected in reported results.
- On July 16, 2020, the European Court of Justice invalidated the EU-U.S. Privacy Shield. HubSpot noted continuing uncertainty around lawful cross-border data transfers and potential effects on customers and operations.
- Other material risk areas include competition, customer retention, data privacy and security, reliance on third-party hosting and integrations, foreign exchange, and the ability to service or settle convertible debt. The 2022 notes’ conversion feature was exercisable in Q3 2020; cash settlement could affect liquidity.
- Operating lease liabilities were $305.0 million in total. Future operating lease payments shown in the filing totaled $396.8 million; commitments would rise by about $83.1 million if certain leases were extended beyond optional termination dates. A vendor commitment was extended with approximately $24 million of additional obligations over three years.
Investor verification points
- Check subsequent disclosures for customer retention, downgrades, average subscription revenue per customer, and the lasting effects of pandemic-related discounts.
- Review operating cash flow and collections, including the doubtful-account reserve and whether deferred revenue converts into recognized revenue as expected.
- Track debt settlement, note conversion and dilution exposure, as well as interest expense from convertible-note accounting.
- Assess whether continued investment and stock-based compensation translate into improved operating leverage and a path toward profitability.
- Monitor developments in EU-U.S. data-transfer rules and any resulting customer, compliance or infrastructure costs.