HubSpot, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. HubSpot provides a cloud-based marketing, sales and customer service platform, primarily through subscriptions. At quarter-end it reported 78,776 customers and 3,578 employees.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $199.0 million | $151.8 million | Up 31% |
| Subscription revenue | $191.2 million | $144.2 million | Up 33%; 96% of revenue |
| Gross profit / margin | $160.7 million / 81% | $122.2 million / 81% | Margin essentially unchanged |
| Operating loss | $(14.1) million | $(9.0) million | Loss widened as expenses grew faster than revenue |
| Net loss / diluted loss per share | $(17.7) million / $(0.41) | $(11.1) million / $(0.27) | Loss widened year over year |
| Operating cash flow | $23.0 million | $37.7 million | Down $14.7 million |
Operating expenses rose 33% to $174.8 million, led by sales and marketing, up 37% to $102.3 million, and research and development, up 31% to $46.2 million. Stock-based compensation was $27.5 million, compared with $21.2 million. Professional services revenue was $7.7 million, while its cost was $8.6 million.
Liquidity, debt and cash flows
- Cash and cash equivalents were $229.1 million at March 31, down from $269.7 million at year-end. Short- and long-term investments totaled $805.6 million; cash and investments together were approximately $1.035 billion, excluding restricted cash.
- Working capital was $785.4 million. Current liabilities were $327.4 million, including $238.9 million of deferred revenue.
- The 0.25% convertible notes due 2022 had a $400.0 million principal balance and $346.3 million net carrying value. Their disclosed fair value was $597.8 million. They became convertible at holders’ option for the quarter ending June 30, 2020; the company said it expected to settle principal in cash.
- Investing activities used $72.9 million, principally reflecting investment purchases net of maturities, property and equipment purchases, and capitalized software development. Financing activities provided $5.9 million; unlike Q1 2019, there was no common-stock offering proceeds.
Material changes and management commentary
Customer count grew from 60,814 to 78,776, and average subscription revenue per customer increased to $10,018 from $9,811. Management attributed growth to customer additions, greater product adoption and higher-priced plans, partly offset by freemium adoption. International customers generated approximately 42% of revenue, compared with 39% a year earlier.
COVID-19 had not required material adjustments to the Q1 financial statements, but management said its effects were beginning to negatively affect operations and would be more fully reflected in future periods. HubSpot closed offices, moved employees to remote work, changed pricing and packaging, offered some functionality free, suspended marketing email limits, and advanced commissions to certain Solutions Partners.
Outlook, risks and unusual items
- Management said it planned to continue investing in sales and marketing, product development, customer support and infrastructure, and did not expect to be profitable in the near term. It believed available cash, cash equivalents and investments, together with anticipated operating cash flow, would meet requirements for at least the next 12 months. The filing provides no specific numerical revenue or earnings guidance.
- COVID-19 risks include weaker customer spending, delayed purchases, discounts or extended payment terms, shorter or smaller subscriptions, and increased attrition. Management emphasized substantial uncertainty about the duration and scale of effects.
- Other key risks include competition and pricing pressure, continued operating losses, customer renewals, data security and privacy regulation, reliance on third-party hosting, foreign currency exposure, and the cash requirements associated with convertible notes.
- The company recorded a $250,000 impairment on strategic investments. It reported no material pending litigation and no material off-balance-sheet arrangements. A vendor commitment was extended after quarter-end, adding approximately $24 million of obligations over three years. Operating lease commitments were $402.6 million, excluding potential extensions beyond optional termination dates.
Investor verification priorities
- Track post-Q1 COVID-19 effects on new sales, renewals, customer retention, pricing concessions and deferred revenue.
- Assess whether strong subscription growth can offset rising operating expenses and sustain operating cash flow.
- Review convertible-note conversion, cash settlement and potential liquidity or balance-sheet classification effects.
- Monitor investment portfolio liquidity and credit quality, as well as lease and vendor commitments.
- Reconcile customer growth and average subscription revenue per customer with future reported revenue; deferred revenue alone is not presented by management as a reliable indicator of future revenue.