Last week, marketing, sales and services platform HubSpot, Inc. (NYSE: HUBS) reported strong financial results for the third quarter ended September 30, 2018. Among the highlights were total revenue of $131.8 million, a 35 percent increase year-over-year, and subscription revenue of $125.5 million, also a 35 percent increase year-over-year. Total customers grew by 40 percent to 52,505, but total average subscription revenue per customer dropped 4 percent to $9,959 in the third quarter.
Chief financial officer Kate Bueker explained the reason for the drop on the November 7 earnings call, transcribed by Seeking Alpha:
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“As I shared at our Investor Day in September, the largest driver of the decline in average subscription revenue per customer is the significant customer growth from our relaunched marketing starter product. Average subscription revenue per customer and in our Sales Hub and our Marketing Hub Starter continue to have positive growth year-over-year,” Bueker said.
Subscription revenue now makes up 95.2 percent of total HubSpot revenue. Professional services and other revenue make up the remainder at $6.3 million, a 39 percent increase over the third quarter of 2017. International revenue grew 52 percent. It now comprises 38 percent of total revenue.
“Q3 was another strong quarter for HubSpot with 35 percent revenue growth, 4 percent non-GAAP operating margins, and over 52,000 customers growing 40 percent from the prior year. These very strong numbers are the result of two big plays HubSpot began investing in a couple of years ago. They’re starting to pay off,” said Brian Halligan, HubSpot chairman and CEO in the earnings call.
“First is our investment in growing HubSpot from a single app company to a full suite company for manically increasing the value deliver to a customer. The second is our move from a funnel to a flywheel model to operate our business. The old funnel model use customers as an output on the flywheel model recognizes the central role customers themselves play in driving your growth to upgrade, and especially word-of-mouth,” Halligan said.
Other financial highlights for the quarter include:
- As of September 30, 2018, deferred revenue was $162.6 million, a 35 percent increase year-over-year.
- Non-GAAP operating margin was 4.4 percent for the quarter, compared to 0.5 percent in Q3 2017.
- Non-GAAP operating income was $5.9 million, compared to $0.5 million for the same period last year.
- Non-GAAP net income was $7.4 million, or $0.19 per basic and $0.17 diluted share, compared to $1.3 million, or $0.03 per basic and diluted share, in Q3 2017.
- HubSpot reported cash, cash equivalents and investments of $574.5 million as of September 30, 2018.
- HubSpot landed its first multi-year contract with a value of more than $1 million. The client is a midsized customer with under 2,000 employees.
- The company introduced Service Hub to add value to their customers, as well as other new and upgraded products.
- The company grew to 2,594 employees, a 32 percent increase over the prior year period.
- HubSpot was named the #1 place to work for employee happiness in the U.S.
The company offered the following guidance, going into the fourth quarter of 2018:
- Total revenue between $136.5 million and $137.5 million
- Non-GAAP operating income between $11.5 million and $12.5 million
- Non-GAAP net income per share between $0.29 to $0.31, assuming 43.2 million weight average diluted shares outstanding
The company offered the following guidance for the full year 2018:
- Total revenue between $505.5 million and $506.5 million, an increase from previous guidance of $496.8 million and $498.8 million
- Non-GAAP operating income between $29.5 million and $30.5 million, an increase from previous guidance of $24.3 million to $26.3 million
- Non-GAAP net income per share between $0.80 to $0.82, up from previous guidance of $0.63 to $0.67, assuming 42.3 million weight average diluted shares outstanding.
Investors have had mixed reactions to HubSpot’s third quarter financials. On November 7, the day earnings were reported, stocked peaked at $144.12 per share for the month. It dropped all the way to $126.66 per share on November 14, but as of 5:40 p.m. Eastern yesterday, it had rebounded a bit to $133.89 per share.
HubSpot is in growth mode, as evidenced by its increase in customer growth, R&D spending, a significant increase in staffing to support its changing product and service mix. Like other technology stocks, HubSpot took a hit this fall, but its financial report should allay investors’ fears that the company is on the right track. Yes, their average revenue per user is down slightly, but that is due to a shift in strategy, not to a lack of confidence in HubSpot products. It looks like the company will finish the year strong.