HubSpot Reports Q2 2016 Results

Published on August 3, 2016

Strong Revenue Growth with Improved Margins and Positive Cash Flow
Full-Year 2016 Guidance Raised

CAMBRIDGE, Mass., Aug. 3, 2016 /PRNewswire/ -- HubSpot, Inc. (NYSE: HUBS), a leading inbound marketing and sales software company, today announced financial results for the second quarter ended June 30^th, 2016.

Financial Highlights:

Revenue

Total revenue was $65.0 million, up 51% compared to the second quarter of 2015.
Subscription revenue was $60.9 million, up 55% compared to the second quarter of 2015.
Professional services and other revenue was $4.1 million, up 11% compared to the second quarter of 2015.

Operating Loss

GAAP operating margin was (17.0%) for the quarter, compared to (26.4%) in the second quarter of 2015.
Non-GAAP operating margin was (3.9%) for the quarter, an improvement of approximately 9 percentage points from (13.2%) in the second quarter of 2015.
GAAP operating loss was ($11.0) million for the quarter, compared to ($11.3) million in the second quarter of 2015.
Non-GAAP operating loss was ($2.5) million for the quarter, compared to ($5.7) million in the second quarter of 2015.

Net Loss

GAAP net loss was ($11.1) million, or ($0.32) per share for the quarter, compared to ($11.4) million, or ($0.34) per share, in the second quarter of 2015.
Non-GAAP net loss was ($2.6) million, or ($0.07) per share for the quarter, compared to ($5.7) million, or ($0.17) per share, in the second quarter of 2015.
Second quarter weighted average common shares outstanding were 35.0 million compared to 33.2 million shares in the second quarter of 2015.

Balance Sheet and Cash Flow

The company's cash, cash equivalents and investments balance was $148 million as of June 30, 2016.
During the second quarter of 2016, the company generated $8.6 million of operating cash flow and invested $5.7 million in purchases of property and equipment and capitalization of internally developed software, resulting in free cash flow of $2.9 million. During the second quarter of 2015, the company generated $1.6 million of operating cash flow and invested $1.2 million in purchases of property and equipment and capitalization of internally developed software, resulting in free cash flow of $400 thousand.

Additional Recent Business Highlights

Grew total customers to 20,444 at June 30^th, 2016, up 29% from June 30^th, 2015.
Increased average subscription revenue per customer during the second quarter of 2016 to $11,978 from $10,127 in the second quarter of 2015.

"The second quarter was another strong set of results for HubSpot," said Brian Halligan, co-founder and CEO. "We were able to deliver solid revenue growth, while showing significant operating leverage that allowed us to generate both positive operating and free cash flow in the quarter. As we continue to build on our product offerings across sales and marketing, we're really excited to help usher in a new era of doing business that matches the way modern humans buy."

Business Outlook

Based on information available as of August 3, 2016, HubSpot is issuing guidance for the third quarter of 2016 and raising guidance for full year 2016 as indicated below.

Third Quarter 2016:

Total revenue is expected to be in the range of $67.2 million to $68.2 million.
Non-GAAP operating loss is expected to in the range of ($5.2) million to ($4.2) million. This excludes stock-based compensation expense of approximately $9.0 million and amortization of acquired intangible assets of approximately $20 thousand.
Non-GAAP net loss per common share is expected to be in the range of ($0.14) to ($0.12). This excludes stock-based compensation expense of approximately $9.0 million and amortization of acquired intangible assets of approximately $20 thousand. This assumes approximately 35.4 million weighted common shares outstanding.

Full Year 2016:

Total revenue is expected to be in the range of $263 million to $265 million.
Non-GAAP operating loss is expected to in be in the range of ($20) million to ($18) million. This excludes stock-based compensation expense of approximately $33.2 million and amortization of acquired intangible assets of approximately $84 thousand.
Non-GAAP net loss per common share is expected to be in the range of ($0.55) to ($0.51). This excludes stock-based compensation expense of approximately $33.2 million and amortization of acquired intangible assets of approximately $84 thousand. This assumes approximately 35.2 million weighted common shares outstanding.

Conference Call Information

HubSpot will host a conference call on Wednesday, August 3, 2016, at 5:00 p.m. Eastern Time (ET) to discuss its second quarter 2016 financial results and business outlook. To access this call, dial (877) 201-0168 (domestic) or (647) 788-4901 (international). The conference ID is 43638681. Additionally, a live webcast of the conference call will be available in the "Investor" section of the HubSpot's web site at www.hubspot.com.

Following the conference call, a replay will be available until 11 pm on August 10, 2016 at (855) 859-2056 (domestic) or (404) 537-3406 (international). The replay pass code is 43638681. An archived webcast of this conference call will also be available in the "Investor" section of HubSpot's web site at www.hubspot.com. The company has used, and intends to continue to use, the investor relations portion of its website as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD.

About HubSpot

HubSpot is a leading inbound marketing and sales platform. Over 20,000 customers in over 90 countries use HubSpot's award-winning software, services, and support to create an inbound experience that will attract, engage, and delight customers. Learn more at www.hubspot.com .

The tables at the end of this press release include a reconciliation of generally accepted accounting principles ("GAAP") to non-GAAP operating loss, operating margin, subscription margin, expense, expense as a percentage of revenue, and net loss for the second quarter ended June 30, 2016 and 2015. An explanation of these measures is also included below under the heading "Non-GAAP Financial Measures."

Cautionary Language Concerning Forward-Looking Statements

This press release includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning our financial guidance for the third fiscal quarter of 2016 and full year 2016, our position to execute on our growth strategy in the mid-market, and our ability to expand our leadership position and market opportunity for our inbound platform. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts and statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or words of similar meaning. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation, our history of losses, our ability to retain existing customers and add new customers, the continued growth of the market for an inbound platform; our ability to differentiate our platform from competing products and technologies; our ability to manage our growth effectively to maintain our high level of service; our ability to maintain and expand relationships with our marketing agency partners; our ability to successfully recruit and retain highly-qualified personnel; the price volatility of our common stock, and other risks set forth under the caption "Risk Factors" in our Quarterly Report on Form 10-Q filed on May 4, 2016 and our other SEC filings. We assume no obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

Consolidated Balance Sheets
(in thousands)

	June 30,		December 31,
	2016		2015
Assets
Current assets:
Cash and cash equivalents	$	58,661	$	55,580
Short-term investments		58,831		48,972
Accounts receivable — net of allowance for doubtful accounts of $306 and $371 at June 30, 2016 and December 31, 2015, respectively		25,643		25,142
Deferred commission expense		8,128		8,114
Prepaid hosting costs		1,224		3,047
Prepaid expenses and other current assets		9,206		4,899
Total current assets		161,693		145,754
Long-term investments		30,507		40,566
Property and equipment, net		28,034		18,161
Capitalized software development costs, net		4,990		4,655
Restricted cash		370		363
Other assets		1,111		1,007
Intangible assets, net		56		100
Goodwill		9,773		9,773
Total assets	$	236,534	$	220,379
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	2,707	$	2,588
Accrued compensation costs		11,442		11,371
Other accrued expenses		15,406		12,313
Capital lease obligations		714		542
Deferred rent		194		86
Deferred revenue		76,507		64,407
Total current liabilities		106,970		91,307
Capital lease obligations, net of current portion		259		277
Deferred rent, net of current portion		8,164		6,345
Deferred revenue, net of current portion		675		732
Other long-term liabilities		14		10
Total liabilities		116,082		98,671
Commitments and contingencies
Stockholders' equity:
Common stock		35		34
Additional paid-in capital		342,435		322,833
Accumulated other comprehensive loss		(446)		(805)
Accumulated deficit		(221,572)		(200,354)
Total stockholders' equity		120,452		121,708
Total liabilities and stockholders' equity	$	236,534	$	220,379

Consolidated Statements of Operations
(in thousands, except per share data)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Revenues:
Subscription	$	60,916	$	39,273	$	115,852	$	74,212
Professional services and other		4,058		3,668		8,082		6,895
Total revenue		64,974		42,941		123,934		81,107
Cost of Revenues:
Subscription		9,985		7,484		18,895		14,424
Professional services and other		5,210		3,789		10,271		7,314
Total cost of revenues		15,195		11,273		29,166		21,738
Gross profit		49,779		31,668		94,768		59,369
Operating expenses:
Research and development		11,278		8,158		21,082		15,658
Sales and marketing		39,140		26,291		74,338		50,188
General and administrative		10,391		8,541		20,239		16,255
Total operating expenses		60,809		42,990		115,659		82,101
Loss from operations		(11,030)		(11,322)		(20,891)		(22,732)
Other (expense) income:
Interest income		201		101		380		108
Interest expense		(93)		(79)		(180)		(109)
Other (expense) income		(202)		(55)		(535)		572
Total other (expense) income		(94)		(33)		(335)		571
Loss before income tax benefit (provision)		(11,124)		(11,355)		(21,226)		(22,161)
Income tax benefit (provision)		60		(37)		8		(89)
Net loss	$	(11,064)	$	(11,392)	$	(21,218)	$	(22,250)
Net loss per share, basic and diluted	$	(0.32)	$	(0.34)	$	(0.61)	$	(0.69)
Weighted average common shares used in computing basic and diluted net loss per share:		35,023		33,208		34,858		32,432

Consolidated Statements of Cash Flows
(in thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Operating Activities:
Net loss	$	(11,064)	$	(11,392)	$	(21,218)	$	(22,250)
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities
Depreciation and amortization		3,022		1,818		5,223		3,565
Stock-based compensation		8,474		5,642		14,705		10,783
Provision for deferred income taxes		(168)		—		(165)		26
Amortization of bond premium discount		190		190		411		192
Noncash rent expense		837		24		1,949		192
Unrealized currency translation		188		159		(63)		(289)
Changes in assets and liabilities
Accounts receivable		(732)		(667)		(385)		(2,118)
Prepaid expenses and other assets		(221)		(2,201)		(2,624)		(3,352)
Deferred commission expense		296		(18)		(3)		(14)
Accounts payable		1,106		800		302		(310)
Accrued expenses		3,091		3,890		1,937		4,542
Deferred rent		(11)		265		(34)		265
Deferred revenue		3,634		3,068		11,786		9,531
Net cash and cash equivalents provided by operating activities		8,642		1,578		11,821		763
Investing Activities:
Purchases of investments		(12,142)		(52,499)		(21,111)		(78,283)
Maturity of investment		12,468		—		21,343		—
Purchases of property and equipment		(4,628)		(158)		(11,269)		(1,183)
Capitalization of software development costs		(1,078)		(1,022)		(2,512)		(1,792)
Acquisition of a business		—		—		—		(600)
Net cash and cash equivalents used in investing activities		(5,380)		(53,679)		(13,549)		(81,858)
Financing Activities:
Secondary offering proceeds, net of offering costs paid of $573		—		—		—		33,679
Payment of offering costs		—		(435)		—		—
Employee taxes paid related to the net share settlement of stock-based awards		(384)		(7,852)		(1,342)		(7,852)
Proceeds related to issuance of common stock under stock plans		3,176		5,223		6,168		6,189
Repayments of capital lease obligations		(177)		(25)		(319)		(49)
Net cash and cash equivalents provided by (used in) financing activities		2,615		(3,089)		4,507		31,967
Effect of exchange rate changes on cash		(235)		50		302		(358)
Net increase (decrease) in cash and cash equivalents		5,642		(55,140)		3,081		(49,486)
Cash and cash equivalents, beginning of period		53,019		129,375		55,580		123,721
Cash and cash equivalents, end of period	$	58,661	$	74,235	$	58,661	$	74,235

Reconciliation of non-GAAP operating loss and operating margin	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
(in thousands, except percentages)

GAAP operating loss	$	(11,030)	$	(11,322)	$	(20,891)	$	(22,732)
Stock-based compensation		8,475		5,642		14,705		10,783
Amortization of acquired intangible assets		20		26		44		44
Non-GAAP operating loss	$	(2,535)	$	(5,654)	$	(6,142)	$	(11,905)

GAAP operating margin		(17.0%)		(26.4%)		(16.9%)		(28.0%)
Non-GAAP operating margin		(3.9%)		(13.2%)		(5.0%)		(14.7%)



Reconciliation of non-GAAP net loss	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
(in thousands, except per share amounts)

GAAP net loss	$	(11,064)	$	(11,392)	$	(21,218)	$	(22,250)
Stock-based compensation		8,475		5,642		14,705		10,783
Amortization of acquired intangibles		20		26		44		44
Non-GAAP net loss	$	(2,569)	$	(5,724)	$	(6,469)	$	(11,423)

Non-GAAP net loss per share, basic and diluted	$	(0.07)	$	(0.17)	$	(0.19)	$	(0.35)
Weighted average common shares used in computing basic and diluted GAAP and non-GAAP net loss per common share:		35,023		33,208		34,858		32,432

Reconciliation of non-GAAP expense and expense as a percentage of revenue
(in thousands, except percentages)

	Three Months Ended June 30,
	2016																2015
	COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A				COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A
GAAP expense	$	9,985		$	5,210		$	11,278		$	39,140		$	10,391			$	7,484		$	3,789		$	8,158		$	26,291		$	8,541
Stock -based compensation		(131)			(477)			(2,272)			(3,469)			(2,126)				(92)			(347)			(1,629)			(2,077)			(1,497)
Amortization of acquired intangibles		(13)		$	—		$	—			(7)		$	—				(19)		$	—		$	—			(7)		$	—
Non-GAAP expense	$	9,841		$	4,733		$	9,006		$	35,664		$	8,265			$	7,373		$	3,442		$	6,529		$	24,207		$	7,044

GAAP expense as a percentage of revenue		15.4	%		8.0	%		17.4	%		60.2	%		16.0	%			17.4	%		8.8	%		19.0	%		61.2	%		19.9	%
Non-GAAP expense as a percentage of revenue		15.1	%		7.3	%		13.9	%		54.9	%		12.7	%			17.2	%		8.0	%		15.2	%		56.4	%		16.4	%



	Six Months Ended June 30,
	2016																2015
	COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A				COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A
GAAP expense	$	18,895		$	10,271		$	21,082		$	74,338		$	20,239			$	14,424		$	7,314		$	15,658		$	50,188		$	16,255
Stock -based compensation		(224)			(800)			(4,030)			(5,895)			(3,756)				(159)			(604)			(3,262)			(4,132)			(2,626)
Amortization of acquired intangibles		(31)		$	—		$	—			(13)		$	—				(30)		$	—		$	—			(14)		$	—
Non-GAAP expense	$	18,640		$	9,471		$	17,052		$	68,430		$	16,483		`	$	14,235		$	6,710		$	12,396		$	46,042		$	13,629

GAAP expense as a percentage of revenue		15.2	%		8.3	%		17.0	%		60.0	%		16.3	%			17.8	%		9.0	%		19.3	%		61.9	%		20.0	%
Non-GAAP expense as a percentage of revenue		15.0	%		7.6	%		13.8	%		55.2	%		13.3	%			17.6	%		8.3	%		15.3	%		56.8	%		16.8	%

Reconciliation of non-GAAP subscription margin
(in thousands, except percentages)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

GAAP subscription margin	$	50,931			$ 31,789		$	96,957		$	59,788
Stock -based compensation		131			92			224			159
Amortization of acquired intangible assets		13			19			31			30
Non-GAAP subscription margin	$	51,075		$	31,900		$	97,212		$	59,977

GAAP subscription margin percentage		83.6	%		80.9	%		83.7	%		80.6	%
Non-GAAP subscription margin percentage		83.8	%		81.2	%		83.9	%		80.8	%

Non-GAAP Financial Measures

In this release, HubSpot's non-GAAP operating loss, operating margin, subscription margin, expense, expense as a percentage of revenue, net loss, and free cash flow are not presented in accordance with GAAP and are not intended to be used in lieu of GAAP presentations of results of operations.

Management presents these non-GAAP financial measures because it considers them to be important supplemental measures of performance. Management uses the non-GAAP financial measures for planning purposes, including analysis of the company's performance against prior periods, the preparation of operating budgets and to determine appropriate levels of operating and capital investments. Management also believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating the company's financial and operational performance. However, these non-GAAP financial measures have limitations as an analytical tool and are not intended to be an alternative to financial measures prepared in accordance with GAAP. We intend to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. A reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included above in this press release.

These non-GAAP measures exclude share-based compensation and amortization of acquired intangible assets. We believe investors may want to exclude the effects of these items in order to compare our financial performance with that of other companies and between time periods:


(a)	Stock-based compensation is a non-cash expense accounted for in accordance with FASB ASC Topic 718. We believe that the exclusion of stock-based compensation expense allows for financial results that are more indicative of our operational performance and provide for a useful comparison of our operating results to prior periods and to our peer companies because stock-based compensation expense varies from period to period and company to company due to such things as differing valuation methodologies and changes in stock price.

(b)	Expense for the amortization of acquired intangible assets is a non-cash item, and we believe that the exclusion of this amortization expense provides for a useful comparison of our operating results to prior periods and to our peer companies.

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SOURCE HubSpot

Investor Relations Contact: Charles MacGlashing, (857) 829-5429, investors@hubspot.com; Media Contact: Laura Moran, (857) 829-5688, lmoran@hubspot.com

About HubSpot

HubSpot (NYSE: HUBS) is a leading customer relationship management (CRM) platform that provides software and support to help companies grow better. The platform includes marketing, sales, service, operations, and website management products that start free and scale to meet our customers' needs at any stage of growth. Today, nearly 115,000 customers across more than 120 countries use HubSpot's powerful and easy-to-use tools and integrations to attract, engage, and delight customers.

Named Glassdoor's #4 Best Place to Work in 2021, HubSpot has been recognized for its award-winning culture by Great Place to Work, Comparably, Fortune, Entrepreneur, Inc., and more. HubSpot was founded in 2006 and is headquartered in Cambridge, Massachusetts. The company's thousands of employees work across the globe in HubSpot offices and remotely.

Learn more at www.hubspot.com.

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