HubSpot, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. HubSpot provides a cloud-based marketing and sales platform, primarily to mid-market businesses. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $65.0 million | $42.9 million | $123.9 million | $81.1 million |
| Gross profit / margin | $49.8 million / 77% | $31.7 million / 74% | $94.8 million / 76% | $59.4 million / 73% |
| Operating loss | $(11.0) million | $(11.3) million | $(20.9) million | $(22.7) million |
| Net loss | $(11.1) million | $(11.4) million | $(21.2) million | $(22.3) million |
| Net loss per share, diluted | $(0.32) | $(0.34) | $(0.61) | $(0.69) |
- Revenue mix and growth: Q2 subscription revenue was $60.9 million, up 55%; professional services and other revenue was $4.1 million, up 11%. Subscription revenue represented 94% of Q2 revenue. Six-month subscription revenue rose 56% to $115.9 million.
- Expenses: Q2 operating expenses were $60.8 million, up from $43.0 million. Sales and marketing was $39.1 million, up 49%; research and development was $11.3 million, up 38%. Stock-based compensation was $8.5 million in Q2 and $14.7 million for the six months.
- Cash flow: Operating activities provided $11.8 million for the six months, versus $0.8 million in 2015. The 2016 inflow included an $11.8 million increase in deferred revenue. Investing used $13.5 million, including $11.3 million for property and equipment; financing provided $4.5 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $58.7 million and short- and long-term investments totaled $89.3 million. Working capital was $54.7 million. The $35 million revolving credit line was undrawn and expires March 2017. Capital lease obligations totaled approximately $1.0 million. Management said working capital was sufficient for at least the next 12 months.
- Balance sheet changes: Total assets were $236.5 million versus $220.4 million at December 31, 2015; total liabilities were $116.1 million versus $98.7 million. Deferred revenue, current and long-term, was $77.2 million versus $65.1 million.
Material changes versus prior comparable periods
- Q2 revenue grew 51%, driven by both customer growth and higher subscription revenue per customer. Customers increased to 20,444 from 15,839 a year earlier; annualized average subscription revenue per customer rose to $11,978 from $10,127.
- Gross margin improved three percentage points in both the quarter and six-month comparison, which management attributed primarily to improved leverage of hosting costs relative to subscription revenue growth.
- Operating and net losses narrowed, though the company remained loss-making. Sales and marketing remained the largest operating expense, reflecting continued hiring and investment in customer acquisition.
- Six-month operating cash flow increased substantially from 2015, largely alongside growth in deferred revenue and non-cash expenses. Cash and cash equivalents increased $3.1 million from year-end.
- Revenue generated outside the Americas increased to 19% of Q2 revenue from 14% a year earlier. HubSpot announced a Tokyo office opening in July 2016.
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects to continue investing in sales and marketing, research and development, customer support, infrastructure and international operations; it does not expect near-term profitability. It anticipates potential long-term margin improvement as revenue growth produces operating leverage, while cautioning that losses are expected in the short term.
- Management said professional services margins are expected to range from a moderate loss to breakeven for the foreseeable future. Achieving profitability depends in part on revenue growth and customer renewals.
- Key risks include a history of losses; customer renewal and acquisition needs; competition and pricing pressure; managing rapid headcount and international growth; dependence on third-party hosting and application integrations; cybersecurity, privacy and data-transfer regulation; and foreign currency exposure. The filing notes uncertainty around EU-to-U.S. personal-data transfers following the invalidation of the Safe Harbor framework and anticipated GDPR obligations.
- There was no material pending litigation reported and no material change in contractual obligations. The company reported no material off-balance-sheet arrangements, apart from operating leases and specified indemnifications. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- Unusual or notable items include substantial stock-based compensation ($14.7 million for the first six months), increased capital spending, and the contribution of deferred revenue growth to operating cash flow. The company reported no outstanding borrowings on its revolving credit line.
Important facts for investors to verify
- Whether customer additions, renewals and higher subscription revenue per customer continue to support the reported revenue growth.
- How much operating cash generation reflects sustainable business performance versus advance customer billings and deferred-revenue movements.
- Whether expense growth, particularly sales and marketing and stock-based compensation, moderates enough to improve profitability.
- Future capital spending, cash and investment balances, and the availability and expiration terms of the undrawn credit line.
- The effects of competitive pricing, customer retention, data-protection requirements and international expansion on growth, costs and margins.
- Customer-count definition: HubSpot excludes entities with paid subscriptions solely for HubSpot Sales from its reported total-customer metric.