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HubSpot (NYSE:HUBS) Surprises With Q2 Sales But Full Year Guidance Underwhelms


Full Report / September 28, 2022
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Sales and marketing software maker HubSpot (NYSE:HUBS) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 35.7% year on year to $421.7 million. However, guidance for the next quarter was less impressive, coming in at $425.5 million at the midpoint, being 2.85% below analyst estimates. HubSpot made a GAAP loss of $56.3 million, down on its loss of $24.5 million, in the same quarter last year.

HubSpot (HUBS) Q2 FY2022 Highlights:

  • Revenue: $421.7 million vs analyst estimates of $409.3 million (3.02% beat)
  • EPS (non-GAAP): $0.44 vs analyst estimates of $0.42 (3.54% beat)
  • Revenue guidance for Q3 2022 is $425.5 million at the midpoint, below analyst estimates of $438 million
  • The company dropped revenue guidance for the full year, from $1.72 billion to $1.69 billion at the midpoint, a 1.88% decrease
  • Free cash flow of $22.3 million, down 64.2% from previous quarter
  • Customers: 150,865, up from 143,689 in previous quarter
  • Gross Margin (GAAP): 81.2%, up from 79.7% same quarter last year

Started in 2006 by two MIT grad students, HubSpot (NYSE:HUBS) is a software as a service platform that helps small and medium-size businesses sell, market themselves, and get found on the internet.

The platform integrates with a company’s website and database and provides easy-to-use tools to capture visitor’s information, automate email marketing, and create content marketing and sales campaigns. Companies using HubSpot are able to analyze their customers' behaviour and optimize the marketing based on who the customers are and what they need.

Hubspot pioneered the concept of inbound marketing, a strategy where companies attract customers by creating interesting content on topics their customers care about rather than buying ads. Practicing what they preach the company is attracting customers mainly by creating free online content and tools. That seems to be a fit for their business model because with the large number of smaller customers it would be too expensive to hire a classic enterprise sales team to sell to them.

For example, instead of cold calling potential customers or spending money on paid advertising, a typical mom-and-pop coffee shop could set up an online website and use tools provided by HubSpot to make their brand more visible on search sites such as Google. Google displays the coffee shop as part of the search results whenever people search for a good place to buy coffee, thereby providing more visibility which could eventually lead to sales.

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality, coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrate data analytics with sales and marketing functions.

Being the pioneer in the inbound marketing niche has helped HubSpot manage competition from companies such as Zoho and Salesforce (NYSE:CRM).

Sales Growth

As you can see below, HubSpot's revenue growth has been impressive over the last year, growing from quarterly revenue of $310.7 million, to $421.7 million.

HubSpot Total Revenue

And unsurprisingly, this was another great quarter for HubSpot with revenue up 35.7% year on year. Quarter on quarter the revenue increased by $26.1 million in Q2, which was in line with Q1 2022. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates HubSpot is expecting revenue to grow 25.4% year on year to $425.5 million, slowing down from the 48.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 26.3% over the next twelve months.

Customer Growth

You can see below that HubSpot reported 150,865 customers at the end of the quarter, an increase of 7,176 on last quarter. That is a little slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent sales momentum.

HubSpot Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. HubSpot's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.2% in Q2.

HubSpot Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like HubSpot to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that HubSpot is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. HubSpot's free cash flow came in at $22.3 million in Q2, down 12.4% year on year.

HubSpot Free Cash Flow

HubSpot has generated $201.4 million in free cash flow over the last twelve months, a solid 13.2% of revenues. This strong FCF margin is a result of HubSpot asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from HubSpot's Q2 Results

Sporting a market capitalization of $16.7 billion, more than $1.24 billion in cash and with positive free cash flow over the last twelve months, we're confident that HubSpot has the resources it needs to pursue a high growth business strategy.

We enjoyed seeing HubSpot’s impressive revenue growth this quarter. On the other hand, it was unfortunate to see that HubSpot's revenue guidance for the full year missed analyst's expectations. Overall, this quarter's results were mixed. The company currently trades at $275 per share.

Is Now The Time?

HubSpot may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think HubSpot is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its strong free cash flow generation gives it re-investment options.

HubSpot's price to sales ratio based on the next twelve months is 8.8x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about HubSpot and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $448.2 per share right before these results, implying that they saw upside in buying HubSpot even in the short term.

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