Sales and marketing software maker HubSpot (NYSE:HUBS) reported Q1 FY2023 results that beat analyst expectations, with revenue up 26.8% year on year to $501.6 million. Guidance for next quarter's revenue was $504 million at the midpoint, which is 1.14% above the analyst consensus. HubSpot made a GAAP loss of $38.3 million, down on its loss of $9.34 million, in the same quarter last year.
HubSpot (HUBS) Q1 FY2023 Highlights:
- Revenue: $501.6 million vs analyst estimates of $475.7 million (5.46% beat)
- EPS (non-GAAP): $1.20 vs analyst estimates of $0.83 (44.8% beat)
- Revenue guidance for Q2 2023 is $504 million at the midpoint, above analyst estimates of $498.3 million
- The company lifted revenue guidance for the full year, from $2.06 billion to $2.08 billion at the midpoint, a 1.41% increase
- Free cash flow of $85.2 million, up 20.1% from previous quarter
- Customers: 177,298, up from 167,386 in previous quarter
- Gross Margin (GAAP): 83.6%, up from 81.6% 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).
As you can see below, HubSpot's revenue growth has been very strong over the last two years, growing from quarterly revenue of $281.4 million in Q1 FY2021, to $501.6 million.
This quarter, HubSpot's quarterly revenue was once again up a very solid 26.8% year on year. On top of that, revenue increased $32 million quarter on quarter, a very strong improvement on the $25.7 million increase in Q4 2022, which shows re-acceleration of growth, and is great to see.
Guidance for the next quarter indicates HubSpot is expecting revenue to grow 19.5% year on year to $504 million, slowing down from the 35.7% 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 17.8% over the next twelve months.
You can see below that HubSpot reported 177,298 customers at the end of the quarter, an increase of 9,912 on last quarter. That is a fair bit better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.
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 83.6% in Q1.
That means that for every $1 in revenue the company had $0.84 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 have followed 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 $85.2 million in Q1, up 36.1% year on year.
HubSpot has generated $214 million in free cash flow over the last twelve months, a solid 11.6% 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 Q1 Results
Sporting a market capitalization of $20.6 billion, more than $1.48 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 liked to see that HubSpot beat analysts’ revenue expectations pretty strongly this quarter. And we were also glad to see the acceleration in customer growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 4.96% on the results and currently trades at $438.72 per share.
Is Now The Time?
When considering HubSpot, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think HubSpot is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, 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.
The market is certainly expecting long term growth from HubSpot given its price to sales ratio based on the next twelve months is 9.5x. There are definitely 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 $453.4 per share right before these results, implying that they saw upside in buying HubSpot even in the short term.
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