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HubSpot (NYSE:HUBS) Exceeds Q1 Expectations But Stock Drops


Full Report / June 27, 2022
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Sales and marketing software maker HubSpot (NYSE:HUBS) reported Q1 FY2022 results topping analyst expectations, with revenue up 40.5% year on year to $395.5 million. However, guidance for the next quarter was less impressive, coming in at $409.5 million at the midpoint, being 0.58% below analyst estimates. HubSpot made a GAAP loss of $9.34 million, improving on its loss of $23.1 million, in the same quarter last year.

HubSpot (HUBS) Q1 FY2022 Highlights:

  • Revenue: $395.5 million vs analyst estimates of $383 million (3.27% beat)
  • EPS (non-GAAP): $0.54 vs analyst estimates of $0.47 (14.7% beat)
  • Revenue guidance for Q2 2022 is $409.5 million at the midpoint, below analyst estimates of $411.9 million
  • The company reconfirmed revenue guidance for the full year, at $1.72 billion at the midpoint
  • Free cash flow of $62.5 million, down 20.1% from previous quarter
  • Customers: 143,689, up from 135,442 in previous quarter
  • Gross Margin (GAAP): 81.5%, up from 80.5% 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 $281.3 million, to $395.5 million.

HubSpot Total Revenue

And unsurprisingly, this was another great quarter for HubSpot with revenue up 40.5% year on year. But the growth did slow down a little compared to last quarter, as HubSpot increased revenue by $26.2 million in Q1, compared to $30.1 million revenue add in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates HubSpot is expecting revenue to grow 31.7% year on year to $409.5 million, slowing down from the 52.6% 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 30.9% over the next twelve months.

Customer Growth

You can see below that HubSpot reported 143,689 customers at the end of the quarter, an increase of 8,247 on last quarter. That is a fair bit better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.

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 81.5% in Q1.

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. Significantly up from the last quarter, 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.

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 $62.5 million in Q1, roughly the same as last year.

HubSpot Free Cash Flow

HubSpot has generated $204.6 million in free cash flow over the last twelve months, a solid 14.4% 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 $18.7 billion, more than $1.23 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. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $345 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 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 measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, HubSpot's qualities as a business really stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $659.6 per share right before these results, implying that they saw upside in buying HubSpot even in the short term.

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