HubSpot Reports Q3 2017 Results

Consolidated Balance Sheets

(in thousands)

September 30,

December 31,

2017

2016

Assets

Current assets:

Cash and cash equivalents

$

176,743

$

59,702

Short-term investments

315,130

54,648

Accounts receivable —net of allowance for doubtful accounts of $622 and $617

   at September 30, 2017 and December 31, 2016, respectively

48,790

38,984

Deferred commission expense

11,228

9,025

Restricted cash

—

162

Prepaid hosting costs

1,411

5,299

Prepaid expenses and other current assets

17,726

8,433

Total current assets

571,028

176,253

Long-term investments

35,669

35,718

Property and equipment, net

40,601

30,201

Capitalized software development costs, net

8,566

6,523

Restricted cash

5,106

321

Other assets

4,044

950

Intangible assets

6,362

16

Goodwill

14,950

9,773

Total assets

$

686,326

$

259,755

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

4,749

$

4,350

Accrued compensation costs

11,611

11,415

Other accrued expenses

25,753

16,033

Deferred rent

157

159

Deferred revenue

118,366

95,426

Total current liabilities

160,636

127,383

Deferred rent, net of current portion

18,173

10,079

Deferred revenue, net of current portion

1,792

1,171

Other long-term liabilities

3,626

2,422

Convertible senior notes

293,563

-

Total liabilities

477,790

141,055

Commitments and contingencies

Stockholders'equity:

Common stock

36

36

Additional paid-in capital

482,964

365,444

Accumulated other comprehensive income (loss)

83

(864)

Accumulated deficit

(274,547)

(245,916)

Total stockholders'equity

208,536

118,700

Total liabilities and stockholders' equity

$

686,326

$

259,755

Consolidated Statements of Operations

(in thousands, except per share data)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

Revenues:

Subscription

$

93,164

$

66,505

$

255,030

$

182,357

Professional services and other

4,562

4,084

14,041

12,166

Total revenue

97,726

70,589

269,071

194,523

Cost of revenues:

Subscription

12,933

10,655

36,834

29,550

Professional services and other

6,077

5,157

17,839

15,428

Total cost of revenues

19,010

15,812

54,673

44,978

Gross profit

78,716

54,777

214,398

149,545

Operating expenses:

Research and development

18,828

12,100

48,087

33,182

Sales and marketing

57,904

41,193

155,284

115,531

General and administrative

14,110

11,435

41,730

31,674

Total operating expenses

90,842

64,728

245,101

180,387

Loss from operations

(12,126)

(9,951)

(30,703)

(30,842)

Other expense:

Interest income

1,274

224

2,311

604

Interest expense

(5,063)

(97)

(7,947)

(277)

Other expense

(26)

(365)

(251)

(900)

Total other expense

(3,815)

(238)

(5,887)

(573)

Loss before income tax benefit (expense)

(15,941)

(10,189)

(36,590)

(31,415)

Income tax benefit (expense)

5,358

(326)

8,411

(318)

Net loss

$

(10,583)

$

(10,515)

$

(28,179)

$

(31,733)

Net loss per share, basic and diluted

$

(0.29)

$

(0.30)

$

(0.77)

$

(0.91)

Weighted average common shares used in computing basic and diluted net loss per share:

37,047

35,393

36,639

35,038

Consolidated Statements of Cash Flows

(in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2017

2016

2017

2016

Operating Activities:

Net loss

$

(10,583)

$

(10,515)

$

(28,179)

$

(31,733)

Adjustments to reconcile net loss to net cash and cash
equivalents provided by operating activities

Depreciation and amortization

4,146

2,769

11,123

7,992

Stock-based compensation

12,110

8,695

34,419

23,401

Benefit for deferred income taxes

(5,581)

—

(9,125)

(165)

Amortization of debt discount and issuance costs

4,799

—

7,482

—

(Accretion) amortization of bond discount premium

(692)

136

(747)

547

Noncash rent expense

1,344

744

4,343

2,693

Unrealized currency translation

(153)

(82)

(348)

(146)

Changes in assets and liabilities, net of acquisition

Accounts receivable

(9,671)

(4,755)

(8,510)

(5,140)

Prepaid expenses and other assets

2,555

(762)

(5,363)

(3,386)

Deferred commission expense

(110)

(77)

(2,011)

(80)

Accounts payable

1,883

431

1,556

733

Accrued expenses

(131)

1,800

6,838

3,737

Deferred rent

(21)

(41)

3,581

(75)

Deferred revenue

7,906

6,929

20,561

18,715

Net cash and cash equivalents provided by operating activities

7,801

5,272

35,620

17,093

Investing Activities:

Purchases of investments

(267,359)

(23,212)

(572,636)

(44,323)

Maturities of investments

276,000

22,045

313,060

43,388

Purchases of property and equipment

(4,017)

(2,081)

(15,089)

(13,350)

Capitalization of software development costs

(1,966)

(1,661)

(5,306)

(4,173)

Acquisition of a business and purchase of technology

(9,415)

—

(9,415)

—

Purchases of strategic investments

(2,200)

—

(2,800)

—

Restricted cash

—

—

(4,587)

—

Net cash and cash equivalents used in investing activities

(8,957)

(4,909)

(296,773)

(18,458)

Financing Activities:

Employee taxes paid related to the net share settlement of stock-based awards

(1,057)

(478)

(3,154)

(1,820)

Proceeds related to the issuance of common stock under stock plans

2,924

2,977

10,409

9,145

Repayments of capital lease obligations

(269)

(209)

(787)

(528)

Proceeds of the issuance of convertible notes, net of issuance costs paid of $10,767

(12)

—

389,233

—

Purchase of note hedge related to convertible notes

—

—

(78,920)

—

Proceeds from the issuance of warrants related to convertible notes, net of issuance costs of $200

—

—

58,880

—

Net cash and cash equivalents provided by financing activities

1,586

2,290

375,661

6,797

Effect of exchange rate changes on cash and cash equivalents

691

125

2,533

427

Net increase in cash and cash equivalents

1,121

2,778

117,041

5,859

Cash and cash equivalents, beginning of period

175,622

58,661

59,702

55,580

Cash and cash equivalents, end of period

$

176,743

$

61,439

$

176,743

$

61,439

Reconciliation of non-GAAP operating income (loss) and operating
margin

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(in thousands, except percentages)

GAAP operating loss

$

(12,126)

$

(9,951)

$

(30,703)

$

(30,842)

Stock-based compensation

12,110

8,695

34,419

23,401

Amortization of acquired intangible assets

38

20

54

64

Acquisition related expenses

439

-

439

-

Non-GAAP operating income (loss)

$

461

$

(1,236)

$

4,209

$

(7,377)

GAAP operating margin

(12.4%)

(14.1%)

(11.4%)

(15.9%)

Non-GAAP operating margin

0.5

%

(1.8%)

1.6

%

(3.8%)

Reconciliation of non-GAAP net income (loss)

Three Months Ended September 30,

Nine Months Ended    September 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

GAAP net loss

$

(10,583)

$

(10,515)

$

(28,179)

$

(31,733)

Stock-based compensation

12,110

8,695

34,419

23,401

Amortization of acquired intangible assets

38

20

54

64

Acquisition related expenses

439

—

439

—

Amortization of debt discount and debt issuance costs

4,799

—

7,482

—

Deferred income tax benefit from convertible notes and business combination

(5,552)

—

(9,093)

—

Non-GAAP net income (loss)

$

1,251

$

(1,800)

$

5,122

$

(8,268)

Non-GAAP net income (loss) per share:

Basic

$

0.03

$

(0.05)

$

0.14

$

(0.24)

Diluted

$

0.03

$

(0.05)

$

0.13

$

(0.24)

Shares used in non-GAAP per share calculations

Basic

37,047

35,393

36,639

35,038

Diluted

39,443

35,393

38,763

35,038

Reconciliation of non-GAAP expense and expense as a percentage of revenue

(in thousands, except percentages)

Three Months Ended September 30,

2017

2016

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

$

12,933

$

6,077

$

18,828

$

57,904

$

14,110

$

10,655

$

5,157

$

12,100

$

41,193

$

11,435

Stock -based compensation

(163)

(591)

(3,110)

(5,015)

(3,231)

(139)

(438)

(2,341)

(3,473)

(2,304)

Amortization of acquired intangible assets

(38)

—

—

—

—

(13)

—

—

(7)

—

Acquisition related expenses

—

—

(439)

—

—

—

—

—

—

—

Non-GAAP expense

$

12,732

$

5,486

$

15,279

$

52,889

$

10,879

$

10,503

$

4,719

$

9,759

$

37,713

$

9,131

GAAP expense as a percentage of revenue

13.2

%

6.2

%

19.3

%

59.3

%

14.4

%

15.1

%

7.3

%

17.1

%

58.4

%

16.2

%

Non-GAAP expense as a percentage of revenue

13.0

%

5.6

%

15.6

%

54.1

%

11.1

%

14.9

%

6.7

%

13.8

%

53.4

%

12.9

%

Nine Months Ended September 30,

2017

2016

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

$

36,834

$

17,839

$

48,087

$

155,284

$

41,730

$

29,550

$

15,428

$

33,182

$

115,531

$

31,674

Stock -based compensation

(455)

(1,707)

(9,013)

(13,889)

(9,355)

(363)

(1,238)

(6,371)

(9,368)

(6,061)

Amortization of acquired intangible assets

(47)

—

—

(7)

—

(44)

—

—

(20)

—

Acquisition related expenses

—

—

(439)

—

—

—

—

—

—

—

Non-GAAP expense

$

36,332

$

16,132

$

38,635

$

141,388

$

32,375

$

29,143

$

14,190

$

26,811

$

106,143

$

25,613

GAAP expense as a percentage of revenue

13.7

%

6.6

%

17.9

%

57.7

%

15.5

%

15.2

%

7.9

%

17.1

%

59.4

%

16.3

%

Non-GAAP expense as a percentage of revenue

13.5

%

6.0

%

14.4

%

52.5

%

12.0

%

15.0

%

7.3

%

13.8

%

54.6

%

13.2

%

Reconciliation of non-GAAP subscription margin

(in thousands, except percentages)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

GAAP subscription margin

$

80,231

$

55,850

$

218,196

$

152,807

Stock -based compensation

163

139

455

363

Amortization of acquired intangible assets

38

13

47

44

Non-GAAP subscription margin

$

80,432

$

56,002

$

218,698

$

153,214

GAAP subscription margin percentage

86.1

%

84.0

%

85.6

%

83.8

%

Non-GAAP subscription margin percentage

86.3

%

84.2

%

85.8

%

84.0

%

Reconciliation of free cash flow

(in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

GAAP net cash and cash equivalents provided by operating activities

$

7,801

$

5,272

$

35,620

$

17,093

Purchases of property and equipment

(4,017)

(2,081)

(15,089)

(13,350)

Capitalization of software development costs

(1,966)

(1,661)

(5,306)

(4,173)

Free cash flow

$

1,818

$

1,530

$

15,225

$

(430)

(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.

(c)

Acquisition related expenses, such as transaction costs and retention payments, are expenses that are not necessarily reflective of operational performance during a period. We believe that the exclusion of this these expenses provides for a useful comparison of our operating results to prior periods and to our peer companies.

(d)

In May 2017, the Company issued $400 million of convertible notes due in 2022 with a coupon interest rate of 0.25%. The imputed interest rate of the convertible senior notes was approximately 6.95%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense provides for a useful comparison of our operating results to prior periods and to our peer companies.

(e)

The deferred income tax benefit from the convertible notes issued in May 2017 is a non-cash item created by the difference in the carrying amount and tax basis of the convertible notes. This taxable temporary difference resulted in the Company recognizing a $9.4 million deferred tax liability which was recorded as an adjustment to additional paid-in capital on the consolidated balance sheet.  The creation of the deferred tax liability is recognized as a component of equity and represents a source of future taxable income which supports the realization of a portion of the income tax benefit associated with historical net operating losses.  The deferred income tax benefit from the convertible notes is a non-cash item that is unique to the issuance of the Company's convertible notes, and we believe the exclusion of this deferred tax benefit provides for a useful comparison of our operating results to prior periods and to our peer companies. 

The deferred income tax benefit from the business combination entered into in September 2017 is a non-cash item created by the difference in the carrying amount and tax basis of the assets and liabilities acquired.  This taxable temporary difference resulted in the Company recognizing a $2.2 million deferred tax liability which was recorded as an adjustment to goodwill on the consolidated balance sheet.  The creation of the deferred tax liability represents a source of future taxable income which supports the realization of a portion of the income tax benefit associated with historical net operating losses.  The deferred income tax benefit from the business combination is a non-cash item that is unique to the business combination, and we believe the exclusion of this deferred tax benefit provides for a useful comparison of our operating results to prior periods and to our peer companies.