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HubSpot's First-Quarter Sales Jump as Subscription Revenue Climbs

By Chris Neiger - Updated May 11, 2018 at 1:41PM

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The company is successfully turning freemium customers into paying ones as it continues to build out new products and services.

Cloud-based sales and marketing platform specialist HubSpot (HUBS -4.93%) saw its total sales spike 39% in the first quarter to $114.6 million. That outpaced the high end of the company's own revenue guidance for the quarter by more than $4 million. The company said that strong growth was driven by both expanding subscription and professional services sales.

Increases in spending, including a 97% spike in the company's research and development costs, led to higher operating expenses and a GAAP earnings loss of $15.4 million in the quarter. But HubSpot's non-GAAP earnings (which back out expenses like stock-based compensation) came in at $6.4 million in the quarter, or $0.15 per diluted share, which was up from $1.2 million in the first quarter 2017.

People working in an office.

Image source: Getty Images.

HubSpot results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Sales

$114.6 million

$82.3 million

39%

Net income

($15.4 million)

($8.1 million)

N/A

Earnings per share

($0.41)

($0.22)

N/A

Data source: HubSpot.

What happened with HubSpot this quarter?

  • HubSpot's subscription revenue reached $108.6 million, which was up 40% from the year-ago quarter.
  • Professional services and other revenue came in at $6 million, up 25% compared to the first quarter of 2017.
  • Sales from the company's international customers climbed 67% year over year and represented 36% of revenue in the first quarter.
  • The company ended the first quarter with 44,894 total customers, which was up 44% year over year. The average subscription revenue per customer was $10,016.
  • The company's R&D spending reached $26.3 million in the quarter, up from $13.3 million in the year-ago quarter.
  • HubSpot's non-GAAP operating margin was 4.9%, up from 1.6% a year ago.
  • The company generated $17.9 million of free cash flow, which was an increase from the $11.6 million in the first quarter of 2017.
  • HubSpot launched its new all-in-one customer service platform, called Service Hub, and views the product as one of its key services. 

What management had to say

CEO Brian Halligan spoke extensively about the company's newly launched Service Hub. The new customer service platform helps companies easily keep track of conversations with customers through chats and email, manages customers' requests, and allows them to quickly find the help they need through online articles or through direct contact with a company.

Halligan said on the analyst earnings call that "People's expectations of service have dramatically changed over the last couple of years," and that HubSpot aims to help its clients adapt to these changes through Service Hub.

The new product also appears to mark a shift in how HubSpot spends some of its money. Halligan said on the call that HubSpot will start focusing a bit more on R&D spending to develop new products and will spend less on sales and marketing. Part of that shift was already apparent in the first quarter, as R&D spending jumped 97% year over year.

Halligan said: "Today, with the launch of Service Hub, we now have three strong pillars in our suite, on top of the CRM that's scaling extremely well with our freemium entry point. [CFO John Kinzer] mentioned that we cranked up our R&D investment, and I think that you're really going to start seeing some of those investments pay off."

Looking ahead

HubSpot's management expects sales to be in the range of $117 million to $118 million in the second quarter, and non-GAAP operating income to be between $5.3 million and $6.3 million. Guidance for non-GAAP earnings is in the range of $0.14 to $0.16 per share. 

The company's management also revised its full-year revenue estimate up from the previous range of $481 million to $485 million, to the new forecast of $489 million to $492 million. The updated guidance is likely due to the company's stronger than expected sales performance in the first quarter. 

Halligan is optimistic about the company's trajectory and said toward the end of the call: "When I think of HubSpot and the game we're playing today, it doesn't feel like we're in the seventh or eighth inning. It feels like we're still in the second or third inning of the HubSpot journey."

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends HubSpot. The Motley Fool has a disclosure policy.

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