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HubSpot (NYSE:HUBS) Surprises With Q3 Sales, Provides Encouraging Quarterly Guidance


Full Report / November 03, 2021
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Sales and marketing software maker HubSpot (NYSE:HUBS) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 48.5% year on year to $339.1 million. Guidance for next quarter's revenue was $357 million at the midpoint, which is 1.27% above the analyst consensus. HubSpot made a GAAP loss of $13.7 million, improving on its loss of $22.4 million, in the same quarter last year.

HubSpot (HUBS) Q3 FY2021 Highlights:

  • Revenue: $339.1 million vs analyst estimates of $326.5 million (3.87% beat)
  • EPS (non-GAAP): $0.50 vs analyst estimates of $0.44 (14.8% beat)
  • Revenue guidance for Q4 2021 is $357 million at the midpoint, above analyst estimates of $352.5 million
  • Free cash flow of $38.2 million, up 49.5% from previous quarter
  • Customers: 128,144, up from 121,048 in previous quarter
  • Gross Margin (GAAP): 79.4%, down from 81.3% 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.

Although the share of digital commerce is rising every year, the majority of the small and medium sized businesses have still not fully embraced it. It is this digitization of SMBs, together with the rise of social media platforms and other customer engagement channels that has been fueling the demand for online marketing and sales platforms such as HubSpot.

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 $228.3 million, to $339.1 million.

HubSpot Total Revenue

And unsurprisingly, this was another great quarter for HubSpot with revenue up an absolutely stunning 48.5% year on year. Quarter on quarter the revenue increased by $28.4 million in Q3, which was in line with Q2 2021. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Analysts covering the company are expecting the revenues to grow 30.3% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that HubSpot reported 128,144 customers at the end of the quarter, an increase of 7,096 on last quarter. That's in line with the customer growth we have seen last quarter but a bit below what we have typically seen over the last year, suggesting that sales momentum may be slowing a little.

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, licences, technical support and other necessary running expenses was at 79.4% in Q3.

HubSpot Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good 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 a pressure from competition to lower prices.

Key Takeaways from HubSpot's Q3 Results

With a market capitalization of $37 billion, more than $1.17 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth HubSpot delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $776.74 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. There are a number of reasons why we think HubSpot is a great business. While we would expect growth rates to moderate from here, 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 very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from HubSpot given its price to sales ratio based on the next twelve months is 23.8. Looking at the tech landscape today, HubSpot's qualities stand out and there's no doubt that it is a bit of a market darling. We'd argue that its often wise to hold on to quality businesses long term, but we do want to mention that there seems to be a lot optimism priced in at the moment.

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