Sales and marketing software maker HubSpot (NYSE:HUBS) reported results ahead of analysts' expectations in Q2 FY2023, with revenue up 25.5% year on year to $529.1 million. Guidance for next quarter's revenue was also better than expected $533 million at the midpoint, 1.21% above analysts' estimates. HubSpot made a GAAP loss of $118.9 million, down from its loss of $56.4 million in the same quarter last year.
HubSpot (HUBS) Q2 FY2023 Highlights:
- Revenue: $529.1 million vs analyst estimates of $505.5 million (4.68% beat)
- EPS (non-GAAP): $1.34 vs analyst estimates of $0.99 (34.9% beat)
- Revenue Guidance for Q3 2023 is $533 million at the midpoint, above analyst estimates of $526.6 million
- The company lifted revenue guidance for the full year from $2.08 billion to $2.12 billion at the midpoint, a 1.68% increase
- Free Cash Flow of $59.6 million, down 30% from the previous quarter
- Customers: 184,924, up from 177,298 in the previous quarter
- Gross Margin (GAAP): 83.5%, up from 81.3% in the 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 over the last two years, growing from $310.8 million in Q2 FY2021 to $529.1 million this quarter.
This quarter, HubSpot's quarterly revenue was once again up a very solid 25.5% year on year. However, its growth did slow down a little compared to last quarter as the company increased revenue by $27.5 million in Q2 compared to $32 million in Q1 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that HubSpot is expecting revenue to grow 20.1% year on year to $533 million, slowing down from the 30.9% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 18.2% over the next 12 months.
HubSpot reported 184,924 customers at the end of the quarter, an increase of 7,626 from the previous quarter. That's a little slower customer growth than last quarter but in line with what we've observed in past quarters, suggesting that the company still has decent sales momentum.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 83.5% in Q2.
That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, HubSpot's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. HubSpot's free cash flow came in at $59.6 million in Q2, up 166% year on year.
HubSpot has generated $251.2 million in free cash flow over the last 12 months, a solid 12.8% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from HubSpot's Q2 Results
Sporting a market capitalization of $28.6 billion, more than $1.53 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that HubSpot is attractively positioned to invest in growth.
It was good to see HubSpot beat analysts' revenue expectations this quarter. We were also glad that its full-year revenue and non-GAAP operating profit guidance (both of which were raised from previous) came in higher than Wall Street's expectations. On the other hand, its slowdown in customer growth was a slight negative. Zooming out, we think this was a solid quarter, showing that the company is staying on track. The market was likely expecting more, and the stock is down 4.24% after reporting, trading at $530.16 per share.
Is Now The Time?
When considering an investment in HubSpot, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think HubSpot is a good business. We'd 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.
HubSpot's price to sales ratio based on the next 12 months of 12.0x indicates that the market is certainly optimistic about its growth prospects. There's 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.Wall Street analysts covering the company had a one year price target of $546.3 per share right before these results, implying that they saw upside in buying HubSpot even in the short term.
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