Hubs, Why all those analysts are jumping!

Since no one has picked up on Hubs’ incredible results, I’ll comment myself:

This is what their adjusted earnings have looked like:


2014:  -23  -21  -28  -25  =  -97
2015:  -18  -17  -27  -12  =  -74
2016:  -11  -07  -05  -13  =  -36
2017:  +03  +07  +03       =  +20 estimate

Casual observers, who haven’t been following Hubspot, won’t understand what they are seeing, or what it means. Hubspot runs a big conference every year, usually falling in the the third quarter, in September, which normally impacts earnings by a negative 10 or 12 cents for that quarter. A glance above, at 2015 earnings will give you a great example when losses went from 18 and 17 cents in the Mar and June quarters, to 27 cents in the Sept quarter (probably would have been 15 cents without the conference), and back to just 12 cents in the Dec quarter, continuing a steady progression of decreasing losses.

In 2016, the conference was a few days later, at the beginning of October, so it fell into the December quarter, so the big loss switched around, and we had losses of 11 cents, 7 cents, 5 cents, and then a jump in December to 13 cents (without the conference, it probably would have been a loss of 1 cent). Are you with me so far?

This year we went positive 3 cents, positive 7 cents, and this quarter positive 3 cents, in spite of the conference, so it would have been at least 15 cents without the conference. That was a huge move. And next quarter, without the conference that held results back in 2016, they should make at least 18 cents as I see it, and move from a nominal loss of 13 cents to a positive 18 cents. And end up with earnings of 31 cents for the year!

Thus for the year, from 2014 to 2015, losses decreased by 23 cents. From 2015 to 2016 they decreased by 38 cents. From 2016 to 2017 my guess is that they may move by 67 cents. This is accelerating. I did add to my large position today.

I hope that this has been helpful.

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

50 Likes

Saul: for a beginner at HUBS…what is this conference for? why are they spending on that?

tj

Saul: for a beginner at HUBS…what is this conference for? why are they spending on that?

tj
Like you, I never attended one, but to answer your question I googled Hubspot Inbound Convention and got loads of stuff for you to read:

https://www.google.com/search?source=hp&ei=zaD8WaXCOKvNj…

For me, if management is growing the company as fast as they are, and they think it’s important, I figure they know more about it than me.

Best

Saul

4 Likes

As a former IT professional I can assure you that these vendor conferences are the norm, not the exception. Some of them are very pricey, I remember attending a conference at one time (in the 80s if I recall correctly) with entertainment by the Beach Boys (sorry, I forgot the name of the sponsor, I think they went out of business anyway).

The big names for entertainment and speaker positions are there in order to draw customers to the conference. The purpose is part information sharing and part religion. The company wants user to share the effective and innovative ways they’ve used the product. Users have a way of discovering use cases the vendor never thought of. They also give the company a way of demonstrating new product features and taking the temperature of users with respect to their development road map which is usually shared at a high level.

The secondary purpose is to develop the and foster a community of users - that’s what I mean by religion. It’s a lot easier to swap out a product than it is to change one’s connection to a community.

3 Likes

I have started a HUBS position today, partially prompted by this post and the other post of the analyst price target raises. Hubspot has been on my watch list for a while, and I went ahead and took a bite today.

1 Like

Interesting observation, Saul. Do you think that the impact of the conference will become smaller and smaller as the revenue gets larger and larger???

Chris

Interesting observation [on Hubs], Saul. Do you think that the impact of the conference will become smaller and smaller as the revenue gets larger and larger??? Chris

Hi Chris,
If the conference costs the same, and the number of shares is similar, it will still be about 12 cents per share, but that 12 cents will be less significant as earnings build. My guess would be the conference will cost a little more as they get bigger, and the number of shares will be a little higher, so it will still cost about 12 cents. The key take-away though is that what looked like an 8 cent improvement was really a 20 cent improvement (because they had the extra 12 cent cost of the conference in the quarter this year, but not last year). If they keep up the pace they will make over over 30 cents in 2017, and well over $1.10 in 2018, which will surprise the heck out of people who haven’t been paying attention. That’s still a high PE at their current stock price, but people will be looking forward to $2.10+ in 2019.

Saul

5 Likes

I’m looking at the Additional Recent Business Highlights from the earnings release, trying to get a feel for the business:

Grew total customers to 37,450 at September 30, 2017, up 47% from September 30, 2016.
Total average subscription revenue per customer was $10,332 during the third quarter of 2017.

And this from the earnings release one year ago:

Grew total customers to 21,658 at September 30th, 2016, up 29% from September 30th, 2015.
Increased average subscription revenue per customer during the third quarter of 2016 to $12,320 from $10,607 in the third quarter of 2015.

First, the number of customers is up 79%, not 47% (37,450/21,658 - 1). There are some other numbers that don’t add up. Specifically, the average recurring revenue per customer doesn’t add up.

Here are revenue numbers in millions:


Rev    Mar       Jun    Sep      Dec    Tot
2015    38.2    42.9    47.7    53.1    181.9
2016    59.0    65.0    70.6    76.4    271.0
2017    82.3    89.1    97.7

Grth    Mar     Jun     Sep      Dec    Tot
2016    54.5%   51.3%   48.0%   43.9%   48.9%
2017    39.5%   37.1%   38.4%        

Subscription Revenues, which make up over 95% of total revenues


SubR    Mar    Jun    Sep    Dec    Tot
2015    34.9   39.3   44.1   49.6   167.9
2016    54.9   60.9   66.5   72.4    
2017    77.5   84.4   **93.2**

Grth    Mar    Jun    Sep    Dec    Tot
2016    57.2%  55.1%  50.8%  46.0%  51.7%
2017    41.1%  38.5%  40.1%

And the negative earnings before taxes has accelerated.


EBT	Mar	Jun	Sep	Dec	Tot
2015	-10.8	-11.4	-13.4	-10.1	-45.6
2016	-10.1	-11.1	-10.2	-13.6	-45.0
2017	-7.9	-12.8	**-15.9**		

Here are customer numbers in thousands (I still need to read the earlier earnings releases):


#Cust    Mar   Jun    Sep    Dec
2016    19.3   20.4   21.7   23.2
2017    31.3   34.3   37.5    

Grth    Mar    Jun    Sep    Dec
2017    62%    68%    73%    

Here are the average quarterly subscription revenue per customer in thousands:


AvSu    Mar    Jun    Sep    Dec
2015    9.7    10.1   10.6   11.1
2016    11.5   12.0   12.3   12.6
2017    10.4   10.2   10.3    

If I take the subscription revenues above and multiply it by the average revenues per customer, I should get subscription revenues (I don’t get this):


AvSu    Mar    Jun    Sep    Dec    
2016    222.1  244.9  266.8  292.5
2017    323.8  351.1  **386.6**
37,450 X $10,332 = $386.6 million. Subscription revenues were $93.2 million.

And if I take the subscription revenues and divide it by the average revenues per customer, I should get the number of customers (I get a different number here too):


Pcust    Mar     Jun       Sep      Dec
2015    3,587    3,878    4,157    4,456
2016    4,780    5,086    5,398    5,751
2017    7,483    8,248    **9,026**
$92.5 million / $10,332 = 9,026 customers, not 37,450.

So it looks like they give the number of total customers of 37,450 (at a specific time), most of which probably don’t pay anything. The CRM product is free “forever” and the Marketing Hub and Sales Hub products start at $0. It looks like there were 9,026 paying customers in the quarter, paying each, on average, $10,332 for a total subscription revenue of $97.7 million.

Basically, the number of customers is growing really fast, albeit a lot faster than revenues.

Here is something interesting. Gross margins are high and slightly creeping up higher:


GP	Mar	Jun	Sep	Dec	Tot
2015	27.7	31.7	35.2	39.4	134.0
2016	45.0	49.8	54.8	59.6	
2017	65.2	70.5	78.7					
					
%	Mar	Jun	Sep	Dec	Tot
2015	72.6%	73.7%	73.8%	74.2%	73.7%
2016	76.3%	76.6%	77.6%	77.9%	77.2%
2017	79.2%	79.1%	80.5%	

Hubspot has a $3 billion market cap, selling for about 9X sales, 80% gross margins and revenues growing at about 38%. It has about 35k customers, most of which don’t pay for anything, and almost 10k customers that pay about $10k per quarter (decreased from $12.3k or almost 11% YoY). It looks like Hubspot’s losses (EBT) accelerated YoY. So they may take a bit longer to get to profitability than analysts expect. Maybe this is the answer to your question.

I need to think about this stuff some more.

DJ

16 Likes

DJ,

They used to have just Marketing customers, and it was either in the March or June quarter that they added an entire new line (I think Sales). Some customers are for both, but the ones that are in Sales, I think, have lower revenue per customer. It’s complicated but you’ll have to look back at the conference calls and press releases to get it clear.

Saul

3 Likes
*First, the number of customers is up 79%, not 47% (37,450/21,658 - 1). There are some other numbers that don’t add up. Specifically, the average recurring revenue per customer doesn’t add up.*

They used marketing customers and total customers. Looks like they are now only reporting total customers. Here are some of the historical numbers:

```
	   Cust	Cust Gr	Mktg Cust   MktgCust Gr	 Avg Sub Rev/Cust Avg Sub Rev/Mktg Cust 
						
12/31/15		18116			                     $11,135 
3/31/16			19322			                     $11,494 
6/30/16			20444			                     $11,978 
9/30/16			21658			                     $12,320 
12/31/16		23226	    28%		                     $12,592 
3/31/17	  31262		24775	    28%	        $10,357 	     $12,598 
6/30/17	  34326		26560	    30%	        $10,228 	     $12,773 
9/30/17	  37450	 47%			        $10,332 	

```

3 Likes

They used to have just Marketing customers, and it was either in the March or June quarter that they added an entire new line…

They used marketing customers and total customers. Looks like they are now only reporting total customers.

Thanks for the explanations about the different user counts. But the table in your message, from 9/30/17, has 37,450 customers and $10,332 average subscription revenue per customer. These numbers cannot be directly related, because the resulting quarterly revenue would be over $380 million.

Is there a way to determine how they define the users? Maybe they segment the users in a way that is not evident in the earnings releases.

DJ

These numbers cannot be directly related, because the resulting quarterly revenue would be over $380 million.

Annual revenue, DJ, not quarterly. $380M is their run rate. The $10,332 is average annual subscription revenue per customer. They say “during the third quarter” because it’s an average that fluctuates quarterly, heck, daily even, as they get more customers at different billing levels, and as customers grow from one level to another.

Bear

2 Likes

$380M is their run rate

I thought this may be the case. But TTM revenues is $345 million. Perhaps this is their way of saying next quarter is going to bring in about $111 million, which would get us to the $380 million TTM and would reflect slightly accelerated quarterly growth, albeit lower for the full year:


Rev	Mar	Jun	Sep	Dec	Tot
2015	38.2	42.9	47.7	53.1	181.9
2016	59.0	65.0	70.6	76.4	271.0
2017	82.3	89.1	97.7	**110.9	380.0**			
					
Grth	Mar	Jun	Sep	Dec	Tot
2016	54.5%	51.3%	48.0%	43.9%	48.9%
2017	39.5%	37.1%	38.4%	**45.1%	40.2%**

Thanks for the help.

DJ

Run rate would be 97.7 X 4 = $390.8M. Not TTM.

1 Like

Run rate would be 97.7 X 4 = $390.8M. Not TTM.

Or the subscription revenue → 93.2 X 4 = $372.7 million.

:slight_smile:

Or the subscription revenue → 93.2 X 4 = $372.7 million.

Obviously you’re getting really close. The difference would be, not all the 37,450 were with them for the whole quarter.

Bear

Interesting - out of curiosity have you read the book Disrupted? It may be a bit of a case of seeing how the sausage is made but it raised some questions around the time of the IPO.