# On the rate of revenue growth slowing down

So revenue growth is slowing. Why would you own this company?

I don’t get what you are saying. Are you saying you shouldn’t buy the company (Hubspot) because revenue growth is slowing? Revenue growth is slowing for just about EVERY GROWTH COMPANY! It’s the law of big numbers. The only exceptions are companies who suddenly come out with a big new product and briefly grow revenues at a higher rate than the year before, but that usually only lasts for a short period of time.

Think of it this way: New company starts out.

Year 1: Revenue is \$0.1 million the first year (only open a few months). Rate of growth is 0.1 divided by zero, which is infinity.
Year 2: Revenue is \$5.0 million. This is \$4.9 million more than the year before, but RATE of growth falls from infinity to 4900%.
Year 3: Revenue is \$15.0 million. This is \$10 million more than the year before, but RATE of growth falls from 4900% to 200%.
Year 4: Revenue is \$30.0 million. This is \$15 million more than the year before, but RATE of growth falls from 200% to 100%.
Year 5: Revenue is \$50.0 million. This is \$20 million more than the year before, but RATE of growth falls from 100% to 67%.

Note that:
One: Revenue is not falling. Revenue is not flat. Revenue is growing.
Two: Revenue is not growing less each year. Revenue is growing by a larger dollar amount each year than it grew by the year before!
Three: Yes the “rate” of growth falls each year, but so what? That’s an artificial percentage number due to the law of big numbers (the base is continually bigger), and it happens to almost every company.

Let’s look at a real life example: Shopify

Revenue growth in 2015 was 95%
Revenue growth in 2016 was 90%
Revenue growth first half of 2017 was 75%

Wow, rate of growth is falling! Terrible, huh? We better not buy Shopify?..But:

In the first half of 2015, revenue grew \$39.7 million from the year before.
In the first half of 2016, revenue grew \$77.2 million from the year before.
In the first half of 2017, revenue grew \$119.7 million from the year before.

Gives you a different picture, doesn’t it? In two years the year-over-year revenue growth in dollars tripled! (From \$40 million to \$120 million). Maybe we should buy Shopify after all!

I’m just saying you have to look at other factors besides the rate of revenue growth slowing down. The rate of revenue growth is almost always slowing down. You need more reasons than that!

Best,

Saul

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Let’s look at a real life example: Shopify

Revenue growth in 2015 was 95%
Revenue growth in 2016 was 90%
Revenue growth first half of 2017 was 75%

So your argument is that since shopify went from 95% growth to 75% growth that nobody should be worried that HUBS went from 57% growth to 37% growth and will be in the 20% range by 2018? I am not sure why you would compare Shopify to HUBS since HUBS Tam is so much smaller than Shopify.

In the first half of 2015, revenue grew \$39.7 million from the year before.
In the first half of 2016, revenue grew \$77.2 million from the year before.
In the first half of 2017, revenue grew \$119.7 million from the year before.

Gives you a different picture, doesn’t it? In two years the year-over-year revenue growth in dollars tripled! (From \$40 million to \$120 million). Maybe we should buy Shopify after all!

Saul, I never said that Shopify wasn’t a great company. So I am not sure where that came from. I tried to start a discussion on HUBS, I am sorry if that upset you, but I think Hubs is a terrible investment. Their growth is slowing way down. Next quarter they are not even going to be AEPS positive and they may not be FCF positive. As Mauser said if they can keep growth in the 30% range they could be a great investment but if they slip down into the 20% range and are not even profitable, well good luck on that. They just changed their business model to a freemium model so they are really growing the customer count but if they can’t grow their Revenue faster they are going to have problems.

So lets look at HUBS. They grew Revenue in Q116 compared to Q115 by 20.8 million. In Q117 they grew revenue by 23.3 million compared to Q116. Now look at your Shop numbers and look at HUBS. Big difference isn’t there. Also Hubs is an 11 year old company and still having a problem keeping their AEPS positive.

HUBS does not equal Shop by any stretch of the imagination. Give me Shop all day long.

Andy
Sold all my Hubs today.

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http://nectafy.com/what-is-hubspot/

what is hubspot?

HubSpot (a company based out of Cambridge, Massachusetts) develops and markets a software (of the same name—HubSpot) with two separate platforms; one for marketing and one for sales.

What’s more, this methodology—inbound marketing—could very possibly go against everything you’ve ever known about marketing.

Andy, the reason that Hubs guided down in the 3rd quarter is that they have their big expensive conference in the 3rd quarter this year, while last year they had it in the 4th quarter (atypically).

Saul

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Andy, the reason that Hubs guided down in the 3rd quarter is that they have their big expensive conference in the 3rd quarter this year, while last year they had it in the 4th quarter (atypically).

Ok I didn’t know that Saul, but they are also trying a new model and allowing people to try their product for free. Also if you read the article that Puddinhead put out the analysts are guiding for growth in the 20ish range next year. If they are not profitable in the 30ish range, what makes you comfortable holding in the 20ish range?

Andy

I am not sure why you would compare Shopify to HUBS since HUBS Tam is so much smaller than Shopify.

Andy,

As I read it, Saul isn’t comparing HUBS to SHOP; he’s just using SHOP as an example to illustrate how a company can make more and more money each quarter and still have a slowing rate of revenue growth.

Forget SHOP. Look at his first example, New company:

Year 1: Revenue is \$0.1 million the first year (only open a few months). Rate of growth is 0.1 divided by zero, which is infinity.
Year 2: Revenue is \$5.0 million. This is \$4.9 million more than the year before, but RATE of growth falls from infinity to 4900%.
Year 3: Revenue is \$15.0 million. This is \$10 million more than the year before, but RATE of growth falls from 4900% to 200%.
Year 4: Revenue is \$30.0 million. This is \$15 million more than the year before, but RATE of growth falls from 200% to 100/%.
Year 5: Revenue is \$50.0 million. This is \$20 million more than the year before, but RATE of growth falls from 100% to 67%.

In other words,
From Yr 1 to Yr 2, NEWC’s revenue increases by \$4.9 million, or 4900% revenue growth.
From Yr 2 to Yr 3, NEWC’s revenue increases by \$10 million, which is only (only!) 200%
From Yr 3 to Yr 4, NEWC’s revenue increases by \$15 million, which is only 100%
From Yr 4 to Yr 5, NEWC’s revenue increases by \$20 million, which is only 67% revenue growth.

So while the rate of revenue growth is indeed dropping precipitously, NEWC is increasing its \$\$ revenue by larger and larger amounts.

I think that’s the point Saul is trying to make: a decline in rate of revenue growth is not a good metric for how fast the company is growing.

Saul, please correct me if I’m mistaken…

regards,
Jack

p.s. Rate of growth is 0.1 divided by zero, which is infinity.

Where can I get me some of that? lol

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Hi Jack,
But to use Shopify to explain Hubs or to use NEWC to explain Hubs seems a little strange. Look at HUBS and tell me why you like HUBS. Let me put it this way. A company can have Revenues of 20 or 30% and still go bankrupt. If you are not at least FCF positive you are burning cash. Also, if I ask you why you are invested in HUBS when you see the slow growth and your answer is LOOK at shopify that really does not answer the question does it? Two different companies with, in my opinion two very different outlooks.

Andy
Still wondering why anyone is invested in HUBS and needs to justify that by bringing up Shopify.

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That’s an artificial percentage number due to the law of big numbers

I have to humbly disagree. It’s as real as can be. If the world’s larges corporation’s revenue increases 8.4%, then by golly it grew by 8.4% even if its compare period started well into the billions. That’s a lot of iPhones!

Speaking of artificial percentages, as far as HUBS (and all of our fast-growing disruptors) go, I wonder how many of us are forgetting to calculate dilution. Many were concerned about Shopify’s recent new offering (understandable IMO) but just for example, HUBS’ share count has grown even more. (16.7% over the last 5 years.) I know, all tech likes to give away the store, but it is a major consideration to me and I like to know what part of the store disappears each year. That’s a lot of sandwiches!

Make mine a corned beef & swiss on rye, mustard, extra pickles. Or preferably, another share of SHOP, please.

Dan

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Andy,

I went back and re-read your HUBS post. In that post you were concerned about the rate of growth getting smaller. That was the gist of it. Shopify was used as an example because Saul assumes you are invested in that stock as many of us on this board are. His point was that this well run company growing like a weed also has slowing rate of growth and that maybe you should use some other metric besides that to evaluate and then dump a stock. He wasn’t justifying his position in anything by bringing up SHOP. He was just pointing out that the one metric you were very focused on might not be as big of a deal as you thought it was. At least that’s how I took his post. Personally, I thought it was a useful financial teaching moment.

You also mentioned being FCF negative later in the thread. Both valid concerns but Netflix comes to mind when negative FCF is mentioned. They have been FCF negative for forever (ok, almost forever) and will be for the foreseeable future. A concern? Sure it is. Am I dumping my 38% position? Nope. Too many other positives IMO (however, it is down from over 50% not that long ago in my exuberance to go all in on SHOP, ANET, LGIH, UBNT and ATVI in the last year or so and it could go lower but I’m on the TLND fence currently).

That said, I have no position in HUBS and don’t plan one at the current time and I have no idea if it’s a good investment or not as I have never analyzed them.

Cheers,
MC
Long all mentioned stocks except HUBS/TLND

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MC:

One thing I have noticed since I posted about HUBS is that not one post has stated why HUBS is going to be a superior investment. Everyone is posting about why HUBS might be a great investment because they think it might have some relationship to another company to.

If I was to show you Netflix’s numbers and ask you why you were invested in them you probably wouldn’t say because they are blowing through cash like Amazon. I would expect something like Netflix has already captured the United States market and is now growing across Europe and will become one of the major media companies in the world, with their own content.

When people can not defend a company that they are invested in, for it’s own merits. It tells me the stock is a story stock. I do not want to be invested in a story stock.

Did you see FB recent report? Now that is a stock I like. Huge company growing Revenue and Earnings at a high rate. I would like to stand here and tell everyone that HUBS is like FB

Andy

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Hi Andy,

Thanks for bringing up HUBS. I currently own shares. Here’s what I see:

1. They are trading at 7.3x sales so they are similarly valued to other fast growing companies like WIX and TWLO and TLND on this metric.

2. Full year revenue growth and full year recurring revenue growth was 42% and 44%, respectively. This basically the same as TLND and a little lower than WIX but in the ballpark.

3. TTM CFFO was \$35.4M and more than 10% of TTM revenue. Some of this is due to SBC, but SBC isn’t that high (\$40.3 in past 4 quarters) or 1.6% of the current market cap.

4. Customer count grew by 30% over the past year. That’s better than MULE, SPLK, and NEWR but worse than WIX, TWLO, SHOP, and TLND.

5. Revenue guidance I have for them is for \$93.3M and \$99.1M for the last 2 quarters of the fiscal year. That implies y/y growth of 32% (Q3) and 30% (Q4). I’m not sure where you’re getting 20% revenue growth as it’s been higher than that and they’ve guided higher. I think that’s probably a better chance that they will beat guidance rather than miss guidance.

6. Did you listen to the last earnings call? They talked about the freemium model. I didn’t think they were going to move any paying customers to free customers but rather they were going to try to use freemium as a customer acquisition approach. HUBS’s is in the business of helping other companies acquire customers so I think they probably will be good at that themselves. In fact, this is one of the reason why I bought the shares.

7. This is not one of my top holdings but I didn’t see anything in the last quarter’s results to make me want to sell my shares. I didn’t increase on the post-earnings drop because I want to continue to watch how they do and see if their freemium tactic increases customer acquisition.

Chris

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So while the rate of revenue growth is indeed dropping precipitously, NEWC is increasing its \$\$ revenue by larger and larger amounts.

I think that’s the point Saul is trying to make: a decline in rate of revenue growth is not a good metric for how fast the company is growing.

Saul, please correct me if I’m mistaken…

Thanks Jack, you got it exactly right!

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Hi Chris,

2) Full year revenue growth and full year recurring revenue growth was 42% and 44%, respectively. This basically the same as TLND and a little lower than WIX but in the ballpark.

I agree if you look at YOY it looks much better but if you look quarter to quarter you can definitely see the decline.

3) TTM CFFO was \$35.4M and more than 10% of TTM revenue. Some of this is due to SBC, but SBC isn’t that high (\$40.3 in past 4 quarters) or 1.6% of the current market cap.

Right but next quarter they are guiding for FCF to be flat.

4) Customer count grew by 30% over the past year. That’s better than MULE, SPLK, and NEWR but worse than WIX, TWLO, SHOP, and TLND.

All of these are not paying customers though Chris. They do not break out the free customers from the paying customers.

5) Revenue guidance I have for them is for \$93.3M and \$99.1M for the last 2 quarters of the fiscal year. That implies y/y growth of 32% (Q3) and 30% (Q4). I’m not sure where you’re getting 20% revenue growth as it’s been higher than that and they’ve guided higher. I think that’s probably a better chance that they will beat guidance rather than miss guidance.

The company is guiding for 92.8 to 93.8 million Revenue for next quarter. That puts growth around 32%. But they are also guiding for a loss of 9 cents next quarter. Where I am getting growth in the 20% is this post by Puddinhead. You can read it here.

http://discussion.fool.com/new-america-hubs-32807764.aspx

6) Did you listen to the last earnings call? They talked about the freemium model. I didn’t think they were going to move any paying customers to free customers but rather they were going to try to use freemium as a customer acquisition approach. HUBS’s is in the business of helping other companies acquire customers so I think they probably will be good at that themselves. In fact, this is one of the reason why I bought the shares.

I understood it that they were going to allow any customer to try any of their products. This didn’t alarm me because it may allow them to acquire more customers. They have been doing this for about a year. This coincides with the slow down of their Revenue growth. Maybe I am wrong Chris and they will start growing again but a company that is Slowing their Revenue growth while earnings are going negative is a bad sign to me. So that is why I sold.

Andy

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The company is guiding for 92.8 to 93.8 million Revenue for next quarter. That puts growth around 32%. But they are also guiding for a loss of 9 cents next quarter. Where I am getting growth in the 20% is this post by Puddinhead. You can read it here.

Well, Andy, I looked at the linked post and it said that analysts polled project revenue growth of 25% in 2018. So how do you get to 20% which is substantially lower? Is it just because 25 is in the 20s??? Seems like you’re making it look like it’s worse than it really is.

More important, don’t you want to be your own analyst? Why use the opinions of others (analysts or whoever)? Why should their opinions of the future be gospel? The future hasn’t happened and relying on the opinions of other points to several things:

1. someone hasn’t done enough of their own homework hence the reliance on opinions of others.

2. someone does not have enough confidence in their own assessment

Yes, growth of HUBS revenue has slowed in the past. There are four important questions related to slowing growth:

a) is the rate of slowing acceptable or not.

b) what do you think will happen in the future; will growth reaccelerate, continue its path of deceleration, or increase its deceleration.

c) what is your level of confidence in your view of the future (“b” above).

d) how does the company’s growth and overall attractiveness compare to other investments that you could move into.

Right but next quarter they are guiding for FCF to be flat.

For me this is not concerning because they are still managing to company to maximize growth (which they believe will maximize increases in shareholder value) as opposed to maximizing for FCF or profitability.

Chris

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If I was to show you Netflix’s numbers and ask you why you were invested in them you probably wouldn’t say because they are blowing through cash like Amazon.

if it matters, I had this impression for years - but if you scan Amazon’s cash flow statement, they are actually hugely cash flow positive and have been so for a very long time. In fact, they are one of the few companies that actually leads with the cash flow statement in their annual report (most companies lead with the BS) and the generation of cash flow over GAAP earnings has been a corporate priority from inception - you can see this in Bezo’s first shareholder letter listed below. Amazon generates cash flow much higher than reported earnings by 1) running higher depreciation totals than PPE requirements (not sure why), 2) non-cash stock based compensation, most importantly 3) huge and expanding increases in unearned revenue (payments ahead of service) which is akin to the float that a Berkshire Hathaway gets and will continue to be a growing asset as long as Amazon can continue its growth ways.

http://media.corporate-ir.net/media_files/irol/97/97664/repo…

If it matters, I don’t know diddly about Hubspot, but a glance at the last Q’s cash flow statement shows they are cash flow positive, driven by very large stock based compensation (eventually people will take this seriously but it can take a very long-term for it to come into play) and deferred revenue.

When people can not defend a company that they are invested in, for it’s own merits. It tells me the stock is a story stock. I do not want to be invested in a story stock.

two small points from me:

1 - EVERY STOCK is a “story” stock. It is up to you to figure out if the story has merit, and that depends on how well you understand the business but that understanding is often necessarily subjective.

2 - ‘people’ on Saul’s board are ‘people’; most owners can own it for all sorts of other reasons, some valid and some not - that’s what makes a market

just 2c

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More important, don’t you want to be your own analyst? Why use the opinions of others (analysts or whoever)? Why should their opinions of the future be gospel? The future hasn’t happened and relying on the opinions of other points to several things:

Exactly Chris, and you’re assuming that is the only thing that made me sell. Don’t you take all opinions and make your own opinion or do you just throw out every opinion that disagrees with you and take only the opinions that agree. I think that the rate of growth is going to keep going down. Until it flattens out hopefully in the 20ish range (hope that is better way to word it). I think there are better places for my money.

Andy

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Exactly Chris, and you’re assuming that is the only thing that made me sell. Don’t you take all opinions and make your own opinion or do you just throw out every opinion that disagrees with you and take only the opinions that agree. I think that the rate of growth is going to keep going down. Until it flattens out hopefully in the 20ish range (hope that is better way to word it). I think there are better places for my money.

I do throw out opinions that don’t make good sense to me but I try to consider opinions that do make good sense. Again, your argument didn’t make sense to me.

Now, it appears to me that this debate has ruffled your feathers. Try not to take it personally. Everyone knows my view on HUBS so I’m not going to spend any more time on this.

Chris

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I think there are better places for my money.
there are always better places for your money. Unless you picked that one stock that went up the most of all those thousands of stocks during that exact time span.

the rate of growth is going to keep going down It probably will. But the same is true of most companies once they go public. The “think"here is actually more of a” guess", because the future has not happened yet. Of course the same is true of other stocks.

I own HUBS but it is not really high conviction.

So assuming readers had HUBS, and sold it, which exact stock should they buy with the money?

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So assuming readers had HUBS, and sold it, which exact stock should they buy with the money?