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Hubspot (NYSE:NYSE:HUBS) Q2 Sales Beat Estimates, Upgrades Full Year Guidance


Full Report / August 25, 2021
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Started in 2006 by two MIT grad students, HubSpot is a software as a service platform that helps small and medium-size businesses sell, market themselves, and get found on the internet.

Hubspot (NYSE:HUBS) Q2 FY2021 Highlights:

  • Revenue: $310.7 million vs analyst estimates of $296 million (4.99% beat)
  • EPS (non-GAAP): $0.43 vs analyst estimates of $0.32 (35.2% beat)
  • Revenue guidance for Q3 2021 is $326 million at the midpoint, above analyst estimates of $318.6 million
  • The company lifted revenue guidance for the full year, from $1.24 billion to $1.27 billion at the midpoint, a 2.25% increase
  • Free cash flow of $25.5 million, down 58.2% from previous quarter
  • Customers: 121,048, up from 113,925 in previous quarter
  • Gross Margin (GAAP): 79.7%, in line with previous quarter


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 $203.6 million, to $310.7 million.

Hubspot Total Revenue

This was a standout quarter for Hubspot with quarterly revenue up an absolutely stunning 52.6% year on year. which is above average for the company. Quarter on quarter the revenue increased by $29.4 million in Q2, which was roughly in line with the Q1 2021 increase. 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 32.2% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Hubspot reported 121,048 customers at the end of the quarter, an increase of 7,123 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

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 79.7% in Q2.

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 Q2 Results

Sporting a market capitalisation of $27.2 billion, more than $1.21 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 were impressed by the exceptional revenue growth Hubspot delivered this quarter. And we were also excited to see it that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see the slowdown in customer growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is down -1.7% on the results and currently trades at $580 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 is a number of reasons why we think Hubspot is a great business. First, its revenue growth has been strong. 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 19.6. And looking at the tech landscape today, Hubspot's qualities stand out. We like the stock at this price, even more so considering the company is actually trading at a multiple lower than many similar companies with similar growth rates.

The Wall St analysts covering the company had a one year price target of $608 per share right before these results, implying that they saw upside in buying Hubspot even in short term.