Hi Andy. Thanks for making us all think carefully about this one. Chris posted a great answer not too long ago. Here’s mine.
First of all, I own Hubspot for qualitative reasons. It’s one of the few stocks we discuss here that I actually hear about outside the Motley Fool or other investing sites. I hear about them on Podcasts and articles on the marketing world, and the sense I get is that for the needs of a certain type and size business, Hubspot is not just a leader, but the leader in their area. Dominant. And they only cost 2.5B or so.
But you are focused on the financials, so I will do likewise.
Leading vs Trailing Indicators
First, again with a nod to Chris and his recent contributions to the board, I think we need to remember that revenue growth is a trailing indicator, and one main leading indicator here is customer growth – in this case I’ll focus on marketing customers for now, which used to be all they reported.
In Q2 2017, Hubspot’s marketing customers were up 7.2% sequentially and 30% YoY.
In Q2 2016, Hubspot’s marketing customers were up 5.8% sequentially and 29% YoY.
So if you look at customers, growth accelerated YoY.
Revenue Growth
So as you asked, Andy, why did revenue increase less than they did last year? The obvious culprit is Marketing Revenue Per User (MRPU), another leading indicator of how total revenue will go.
In Q2 2017, MRPU was up 1.4% sequentially and 6.6% YoY.
In Q2 2016, MRPU was up 4.2% sequentially and 18.3% YoY!
Not even close. Maybe this is because as they’re adding more customers faster, more of them sign up for the smaller subscriptions (for now). I don’t think we need to worry it will turn negative (remember that current customers are always upgrading), but I think single digit MRPU growth is reasonable as long as they’re adding customers this fast.
But isn’t this exactly what we want to see? Adding customers is more important than current revenue per customer, and as those (larger numbers of) customers mature, eventually we may see MRPU trend up once again. And that’s not to even say anything about Hubspot eventually raising prices.
Conclusion
New customer growth is 30%, and it doesn’t appear to be falling. I looked back at Sep 2014, their first quarter after going public, and it was 31%. So your concerns that overall growth rate will fall to 20% are unfounded unless we see that leading indicator (customer growth) start to fall. And even if it does fall, if we see MRPU tick back up, it could cancel it out a bit.
All this to say, I think revenue growth will level off above 30% for a long time.
Bear
PS - Oh and I didn’t even mention the freemium stuff. Perhaps that will cause even more customer growth, which would just be gravy!
PPS - Oh and regarding profitability someday, one thing I noticed is that they are adding customers more efficiently all the time – they spend a lot but they’re not wasting money. If you divide their S&M spend for the quarter by the customers added, you’ll see it was less in Q2 than in any of the last 4 quarters. (And of course, even with the slow down they grow total revenue faster than total expenses, and since Rev - Exp = profit, that trend should work out at some point.)