HubSpot Reports Q2 2020 Results

CAMBRIDGE, Mass., Aug. 5, 2020 /PRNewswire/ -- HubSpot, Inc. (NYSE: HUBS), a leading growth platform, today announced financial results for the second quarter ended June 30, 2020.

Financial Highlights:

Revenue

    --  Total revenue was $203.6 million, up 25% compared to Q2'19.
        --  Subscription revenue was $196.4 million, up 26% compared to Q2'19.
        --  Professional services and other revenue was $7.2 million, down 3%
            compared to Q2'19.

Operating Income (Loss)

    --  GAAP operating margin was (6.7%), compared to (9.6%) in Q2'19.
    --  Non-GAAP operating margin was 9.4%, compared to 8.4% in Q2'19.
    --  GAAP operating loss was ($13.6) million, compared to ($15.7) million in
        Q2'19.
    --  Non-GAAP operating income was $19.2 million, compared to $13.8 million
        in Q2'19.

Net Income (Loss)

    --  GAAP net loss was ($29.4) million, or ($0.67) per basic and diluted
        share, compared to ($17.4) million, or ($0.41) per basic and diluted
        share in Q2'19.
    --  Non-GAAP net income was $16.7 million, or $0.38 per basic and $0.34 per
        diluted share, compared to $14.6 million, or $0.35 per basic and $0.31
        per diluted share in Q2'19.
    --  Weighted average basic and diluted shares outstanding for GAAP net loss
        per share was 44.1 million, compared to 42.1 million basic and diluted
        shares in Q2'19.
    --  Weighted average basic and diluted shares outstanding for non-GAAP net
        income per share was 44.1 million and 48.4 million respectively,
        compared to 42.1 million and 47.5 million, respectively in Q2'19.

Balance Sheet and Cash Flow

    --  At the beginning of June, the company successfully executed a $460
        million convertible bond offering with the concurrent repurchase of
        roughly 70% of the company's existing convertible bond due in 2022.
    --  The company's cash, cash equivalents and investments balance was $1,197
        million as of June 30, 2020.
    --  During the second quarter, the company generated $15.0 million of
        operating cash flow, excluding the $48.7 million used for the repayment
        of our convertible notes, compared to $13.7 million generated during
        Q2'19.
    --  During the second quarter, the company generated $0.8 million of free
        cash flow, compared to $3.4 million during Q2'19.

Additional Recent Business Highlights

    --  Grew total customers to 86,672 at June 30, 2020 up 34% compared to June
        30, 2019.
    --  Total average subscription revenue per customer was $9,466 during the
        second quarter of 2020, down 5% compared to Q2'19.

"The world is evolving this year -- from offline to online, from old to new -- at a far greater pace than anyone could have expected. At HubSpot, we feel well positioned to help companies navigate that change and come out stronger on the other side," said Brian Halligan, Chief Executive Officer. "The onslaught of the pandemic was certainly felt throughout our company, customers and partners this year, but I'm encouraged by the traction HubSpot made in the second quarter and the opportunity we see ahead. The situation, of course, is still quite fluid so we'll be watching things closely and adapting along with it."

Business Outlook
Based on information available as of August 5, 2020, HubSpot is issuing guidance for the third quarter of 2020 and full year 2020 as indicated below.

Third Quarter 2020:

    --  Total revenue is expected to be in the range of $210.0 million to $211.0
        million.
    --  Non-GAAP operating income is expected to be in the range of $7.5 million
        to $8.5 million.
    --  Non-GAAP net income per common share is expected to be in the range of
        $0.11 to $0.13. This assumes approximately 48.8 million weighted average
        diluted shares outstanding.

Full Year 2020:

    --  Total revenue is expected to be in the range of $828.0 million to $832.0
        million.
    --  Non-GAAP operating income is expected to be in the range of $52.0
        million to $54.0 million.
    --  Non-GAAP net income per common share is expected to be in the range of
        $0.92 to $0.96. This assumes approximately 48.5 million weighted average
        diluted shares outstanding.

While we continue to believe we are in a strong financial position to weather the impact to our business from COVID-19, many of our customers and prospects are still operating under very challenging circumstances and may re-evaluate their spend. As such, our third quarter 2020 guidance and updated full year 2020 guidance factor in the heightened uncertainty caused by the COVID-19 pandemic based on the information available to us as of August 5, 2020, and we undertake no obligation to update after such date. These statements are forward-looking, and actual results may differ materially, as further discussed below under the heading "Cautionary Language Concerning Forward-Looking Statements".

Use of Non-GAAP Financial Measures
In our earnings press releases, conference calls, slide presentations, and webcasts, we may use or discuss non-GAAP financial measures, as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure, are included in this press release after the consolidated financial statements. Our earnings press releases containing such non-GAAP reconciliations can be found in the Investors section of our website at ir.hubspot.com.

Conference Call Information
HubSpot will host a conference call on Wednesday, August 5, 2020, at 4:30 p.m. Eastern Time (ET) to discuss the company's second quarter financial results and its business outlook. To register for this conference call, please use this link or visit HubSpot's Investor Relations website at ir.hubspot.com. After registering, a confirmation email will be sent, including dial in details and a unique code for entry.

Following the conference call, a replay will be available at (800) 585-8367 (domestic) or (416) 621-4642 (international). The replay passcode is 3285702. An archived webcast of this conference call will also be available on HubSpot's Investor Relations website at ir.hubspot.com.

The company has used, and intends to continue to use, the investor relations portion of its website as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD.

About HubSpot
HubSpot is a leading growth platform. Over 86,000 total customers in over 120 countries use HubSpot's award-winning software, services, and support to transform the way they attract, engage, and delight customers. Learn more at www.hubspot.com.

Cautionary Language Concerning Forward-Looking Statements
This press release includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the third fiscal quarter and full year 2020; statements regarding the impact of the COVID-19 pandemic and related economic conditions on our business and results of operations; and statements regarding our positioning for future growth and market leadership. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts and statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or words of similar meaning. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation, risks associated with the impact of COVID-19 on our business, the broader economy, and our ability to forecast our future financial performance as a result of COVID-19; our history of losses; our ability to retain existing customers and add new customers; the continued growth of the market for an inbound platform; our ability to differentiate our platform from competing products and technologies; our ability to manage our growth effectively to maintain our high level of service; our ability to maintain and expand relationships with our solutions partners; our ability to successfully recruit and retain highly-qualified personnel; the price volatility of our common stock; and other risks set forth under the caption "Risk Factors" in our SEC filings. We assume no obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.



            
              Consolidated Balance Sheets
    (in thousands)




                                                                                  June 30,                 December

                                                                                                                    31,


                                                                                      2020                          2019




            
              Assets



            Current assets:



            Cash and cash equivalents                                                       $
        201,086                 $
         269,670



            Short-term investments                                                                934,992                        691,834



            Accounts receivable                                                                    86,184                         92,517



            Deferred commission expense                                                            36,121                         32,078



            Prepaid expenses and other current assets                                              37,936                         23,625




            Total current assets                                                                1,296,319                      1,109,724



            Long-term investments                                                                  61,095                         53,776



            Property and equipment, net                                                            89,993                         83,649



            Capitalized software development costs, net                                            21,391                         16,793



            Right-of-use assets                                                                   270,462                        234,390



            Deferred commission expense, net of current portion                                    20,831                         19,110



            Other assets                                                                           10,875                          9,824



            Intangible assets, net                                                                 10,075                         11,752



            Goodwill                                                                               29,935                         30,250




            
              Total assets                                                       $
        1,810,976               $
         1,569,268




            
              Liabilities and stockholders
              '
        equity



            Current liabilities:



            Accounts payable                                                                 $
        10,814                  $
         12,842



            Accrued compensation costs                                                             26,513                         26,318



            Accrued expenses and other current liabilities                                         28,211                         28,686



            Operating lease liabilities                                                            29,807                         23,613



            Deferred revenue                                                                      238,101                        231,030




            Total current liabilities                                                             333,446                        322,489



            Operating lease liabilities, net of current portion                                   275,210                        244,216



            Deferred revenue, net of current portion                                                2,914                          3,058



            Other long-term liabilities                                                             8,832                          8,983



            Convertible senior notes                                                              467,523                        340,564




            Total liabilities                                                                   1,087,925                        919,310




            Stockholders' equity:



            Common stock                                                                               46                             44



            Additional paid-in capital                                                          1,167,791                      1,048,380



            Accumulated other comprehensive loss                                                      461                          (336)



            Accumulated deficit                                                                 (445,247)                     (398,130)




            Total stockholders' equity                                                            723,051                        649,958




            
              Total liabilities and stockholders
           '
           equity          $
        1,810,976               $
         1,569,268



              
                Consolidated Statements of Operations
    (in thousands, except per share data)




                                                                             For the Three Months Ended June                       For the Six Months Ended June
                                                                                       
                30,                                 
                30,



                                                                  2020                                   2019                  2020                                       2019




              Revenues:



              Subscription                                             $
         196,415                          $
         155,876                                $
          387,643      $
           300,102



              Professional services and other                                 7,193                                   7,379                                         14,932                14,951




              Total revenue                                                 203,608                                 163,255                                        402,575               315,053




              Cost of revenues:



              Subscription                                                   30,400                                  23,578                                         60,135                44,879



              Professional services and other                                 8,377                                   7,564                                         16,926                15,841




              Total cost of revenues                                         38,777                                  31,142                                         77,061                60,720




              Gross profit                                                  164,831                                 132,113                                        325,514               254,333




              Operating expenses:



              Research and development                                       49,372                                  40,456                                         95,573                75,633



              Sales and marketing                                           102,600                                  84,079                                        204,928               158,984



              General and administrative                                     26,484                                  23,303                                         52,741                44,477




              Total operating expenses                                      178,456                                 147,838                                        353,242               279,094




              Loss from operations                                         (13,625)                               (15,725)                                      (27,728)             (24,761)




              Other expense:



              Interest income                                                 2,135                                   5,424                                          6,192                 9,598



              Interest expense                                             (16,809)                                (5,673)                                      (22,761)             (11,186)



              Other expense                                                    (91)                                  (672)                                       (1,143)                (684)




              Total other expense                                          (14,765)                                  (921)                                      (17,712)              (2,272)




              Loss before income tax expense                               (28,390)                               (16,646)                                      (45,440)             (27,033)



              Income tax expense                                            (1,011)                                  (711)                                       (1,677)              (1,424)




              Net loss                                                $
         (29,401)                        $
         (17,357)                              $
          (47,117)    $
           (28,457)




              Net loss per share, basic and diluted                     $
         (0.67)                          $
         (0.41)                                $
          (1.08)      $
           (0.69)



              Weighted average common shares used in computing               44,130                                  42,127                                         43,703                41,352
    basic and diluted net loss per share:



              
                Consolidated Statements of Cash Flows
    (in thousands)




                                                                                                             For the Three Months                                For the Six Months
                                                                                                   Ended June 30,                                 Ended June 30,



                                                                                             2020                                 2019                                  2020                                   2019




              
                Operating Activities:



              Net loss                                                                           $
              (29,401)                       $
           (17,357)                                 $
           (47,117)            $
           (28,457)



              Adjustments to reconcile net loss to net cash and cash equivalents provided

                by operating activities



              Depreciation and amortization                                                                   8,972                                    7,063                                             17,683                        14,035



              Stock-based compensation                                                                       31,374                                   28,663                                             58,837                        49,869



              Loss on early extinguishment of 2022 Convertible Notes                                         10,493                                                                    10,493



              Repayment of 2022 Convertible Notes attributable to the debt discount                        (48,675)                                                                 (48,675)



              Benefit for deferred income taxes                                                               (165)                                   (107)                                             (422)                        (135)



              Amortization of debt discount and issuance costs                                                5,959                                    5,415                                             11,662                        10,675



              Accretion of bond discount                                                                    (1,336)                                 (4,070)                                           (3,490)                      (6,821)



              Unrealized currency translation                                                                 (597)                                     263                                                184                          (18)



              Changes in assets and liabilities



              Accounts receivable                                                                           (3,850)                                 (3,851)                                             5,930                         3,907



              Prepaid expenses and other assets                                                             (5,313)                                 (7,216)                                          (20,420)                      (6,330)



              Deferred commission expense                                                                   (4,314)                                 (2,205)                                           (5,837)                      (5,539)



              Right-of-use assets                                                                             7,675                                    3,757                                             13,398                         9,262



              Accounts payable                                                                                  342                                       81                                              1,837                         4,992



              Accrued expenses and other liabilities                                                          5,883                                    5,359                                                444                         3,288



              Operating lease liabilities                                                                   (7,033)                                 (6,052)                                          (12,314)                     (10,162)



              Deferred revenue                                                                              (3,704)                                   3,954                                              7,128                        12,847




              Net cash and cash equivalents (used in) provided by operating                                (33,690)                                  13,697                                           (10,679)                       51,413
    activities




              
                Investing Activities:



              Purchases of investments                                                                    (527,139)                               (211,301)                                         (967,028)                    (597,802)



              Maturities of investments                                                                     327,127                                  158,925                                            710,002                       342,385



              Sale of investments                                                                            10,932                                                                    10,932



              Purchases of property and equipment                                                           (8,799)                                 (7,791)                                          (19,897)                     (12,056)



              Capitalization of software development costs                                                  (5,394)                                 (2,507)                                          (10,163)                      (5,328)



              Purchases of strategic investments                                                            (1,000)                                   (352)                                           (1,000)                        (352)




              Net cash and cash equivalents used in investing activities                                  (204,273)                                (63,026)                                         (277,154)                    (273,153)




              
                Financing Activities:



              Proceeds from issuance of 2025 Convertible Notes, net of issuance costs                       450,614                                                                   450,614
    paid of $9.4 million



              Proceeds from settlement of Convertible Note Hedges related to the 2022                       362,492                                                                   362,492
    Convertible Notes



              Payments for settlement of Warrants related to the 2022 Convertible Notes                   (327,543)                                                                (327,543)



              Repayment of 2022 Convertible Notes attributable to the principal                           (234,366)                                                                (234,366)



              Payments for Capped Call Options related to the 2025 Convertible Notes                       (50,600)                                                                 (50,600)



              Proceeds from common stock offering, net of offering costs paid of $365          -                                                                                                                   342,628



              Payments for common stock offering costs                                         -                                      (111)



              Employee taxes paid related to the net share settlement of stock-based                        (1,259)                                 (1,651)                                           (2,200)                      (2,735)
    awards



              Proceeds related to the issuance of common stock under stock plans                              8,354                                    5,048                                             15,208                        10,738



              Repayments of finance lease obligations                                                             2                                     (87)                                              (28)                        (205)




              Net cash and cash equivalents provided by financing activities                                207,694                                    3,199                                            213,577                       350,426




              Effect of exchange rate changes on cash, cash equivalents and restricted cash                   1,670                                      586                                              (144)                        (198)




              Net increase in cash, cash equivalents and restricted cash                                   (28,599)                                (45,544)                                          (74,400)                      128,488



              Cash, cash equivalents and restricted cash, beginning of period                               232,714                                  291,146                                            278,515                       117,114




              Cash, cash equivalents and restricted cash, end of period                           $
              204,115                         $
           245,602                                   $
           204,115             $
            245,602



     
                Reconciliation of non-GAAP operating income and operating margin

     
              (in thousands, except percentages)


                                                                                            Three Months Ended June 30,                      Six Months Ended June 30,



                                                                                    2020                       2019                     2020    2019




     GAAP operating loss                                                                $
      (13,625)                   $
        (15,725)              $
              (27,728)   $
        (24,761)



     Stock-based compensation                                                                 31,374                            28,663                             58,837            49,869



     Amortization of acquired intangible assets                                                  899                               800                              1,798             1,600



     Acquisition related expenses                                                                518                                32                                851                65




     Non-GAAP operating income                                                                19,166                      $
        13,770                 $
              33,758    $
          26,773






     GAAP operating margin                                                                     (6.7)                            (9.6)                             (6.9)            (7.9)
                                                                                                    %                                %                                 %                %



     Non-GAAP operating margin                                                                   9.4                               8.4                                8.4               8.5
                                                                                                    %                                %                                 %                %



              
                Reconciliation of non-GAAP net income                               Three Months Ended June 30,                        Six Months Ended June 30,


              (in thousands, except per share amounts)



                                                                                    2020                          2019                        2020  2019




              GAAP net loss                                                             $
          (29,401)                   $
          (17,357)            $
              (47,117)   $
          (28,457)



              Stock-based compensation                                                            31,374                              28,663                           58,837              49,869



              Amortization of acquired intangibles assets                                            899                                 800                            1,798               1,600



              Acquisition related expenses                                                           518                                  32                              851                  65



              Non-cash interest expense for amortization of debt discount and debt                 5,959                               5,415                           11,662              10,675
    issuance costs



              Loss on early extinguishment of 2022 Convertible Notes                              10,493                                                              10,493



              Impairment of strategic investment                                                                                                                        250



              Income tax effects of non-GAAP items                                               (3,160)                            (2,942)                         (6,013)            (5,611)




              Non-GAAP net income                                                         $
          16,682                      $
          14,611               $
              30,761    $
            28,141






              Non-GAAP net income per share:



              Basic                                                                         $
          0.38                        $
          0.35                 $
              0.70      $
            0.68



              Diluted                                                                       $
          0.34                        $
          0.31                 $
              0.64      $
            0.61



              Shares used in non-GAAP per share calculations



              Basic                                                                               44,130                              42,127                           43,703              41,352



              Diluted                                                                             48,367                              47,532                           47,988              46,394



     
                Reconciliation of non-GAAP expense and expense as a percentage of revenue



     (in thousands, except percentages)


                                                                                                                                                        
      
           Three Months Ended June 30,



                                                                                                                                                                   2020                                                                                                              2019



                                                                                                           COS,                        COS,        R&D      S&M                                G&A                                     COS,                       COS,     R&D                   S&M      G&A
                                                                                             Subscription                        Prof.                                                                                    Subscription                 Prof.
                                                                                                                             services                                                                                                             services &
                                                                                                                              & other                                                                                                                other



     GAAP expense                                                                                              $
        30,400                $
        8,377         $
             49,372                       $
            102,600                                $
             26,484                $
           23,578     $
             7,564      $
              40,456 $
             84,079 $
            23,303



     Stock -based compensation                                                                                    (1,075)                     (628)                 (10,111)                               (12,868)                                         (6,692)                         (822)               (666)               (10,553)          (10,523)          (6,099)



     Amortization of acquired intangible assets                                                          (879)                                                                                    (20)                                                                        (800)



     Acquisition related expenses                                                                                                                        (327)                                                                             (191)                                                                              (32)




     Non-GAAP expense                                                                                          $
        28,446                $
        7,749         $
             38,934                        $
            89,712                                $
             19,601                $
           21,956     $
             6,898      $
              29,871 $
             73,556 $
            17,204






     GAAP expense as a percentage of revenue                                                                         14.9                        4.1                      24.2                                    50.4                                             13.0                           14.4                  4.6                    24.8              51.5             14.3
                                                                                                                           %                         %                        %                                      %                                               %                             %                   %                      %                 %                %



     Non-GAAP expense as a percentage of revenue                                                                     14.0                        3.8                      19.1                                    44.1                                              9.6                           13.4                  4.2                    18.3              45.1             10.5
                                                                                                                           %                         %                        %                                      %                                               %                             %                   %                      %                 %                %


                                                                                                         
     
           Six Months Ended June 30,



                                                                                                                  2020                                                                                        2019



                                                               COS,                     COS,        R&D    S&M                               G&A                             COS,                COS,     R&D             S&M      G&A
                                                  Subscription                   Prof.                                                                          Subscription         Prof.
                                                                               services                                                                                           services &
                                                                                & other                                                                                              other



     GAAP expense                                                  $
      60,135               $
       16,926       $
             95,573                 $
         204,928                        $
              52,741          $
           44,879     $
            15,841 $
              75,633 $
              158,984 $
            44,477



     Stock -based compensation                                        (1,974)                  (1,234)               (18,819)                      (23,684)                                 (13,126)                 (1,437)             (1,685)          (17,644)           (18,327)          (10,776)



     Amortization of acquired intangible assets                       (1,759)                                                                          (39)                                                          (1,600)



     Acquisition related expenses                                                                                       (657)                                                                  (194)                                                          (65)




     Non-GAAP expense                                              $
      56,402               $
       15,692       $
             76,097                 $
         181,205                        $
              39,421          $
           41,842     $
            14,156 $
              57,924 $
              140,657 $
            33,701






     GAAP expense as a percentage of revenue                             14.9                       4.2                    23.7                           50.9                                      13.1                     14.2                  5.0               24.0                50.5             14.1
                                                                             %                        %                      %                             %                                        %                       %                   %                 %                  %                 %



     Non-GAAP expense as a percentage of revenue                         14.0                       3.9                    18.9                           45.0                                       9.8                     13.3                  4.5               18.4                44.6             10.7
                                                                             %                        %                      %                             %                                        %                       %                   %                 %                  %                 %



     
                Reconciliation of non-GAAP subscription margin



     (in thousands, except percentages)


                                                                          Three Months Ended June 30,                  Six Months Ended June 30,



                                                                  2020                     2019                  2020 2019




     GAAP subscription margin                                         $
     166,015                     $
     132,298            $
              327,508  $
     255,223



     Stock -based compensation                                             1,075                            822                          1,974       1,437



     Amortization of acquired intangible assets                              879                            800                          1,759       1,600




     Non-GAAP subscription margin                                     $
     167,969                     $
     133,920            $
              331,241  $
     258,260






     GAAP subscription margin percentage                                    84.5                           84.9                           84.5        85.0
                                                                                %                             %                             %          %



     Non-GAAP subscription margin percentage                                85.5                           85.9                           85.5        86.1
                                                                                %                             %                             %          %



          
                Reconciliation of operating cash flow



          (in thousands)




                                                               Three Months Ended June 30,                    Six Months Ended June 30,



                                                                                      2020               2019                                       2020 2019




          GAAP net cash and cash equivalents provided by                                  $
       (33,690)                                $
      13,697            $
        (10,679)  $
       51,413
      operating activities



          Repayment of 2022 Convertible Notes attributable to                                    48,675                                                              48,675
      the debt discount




          Operating cash flow, excluding repayment of                                       $
       14,985                                 $
      13,697              $
        37,996   $
       51,413
      convertible debt



           
                Reconciliation of free cash flow



           (in thousands)




                                                                         Three Months Ended June 30,                     Six Months Ended June 30,



                                                                                                2020                2019                                         2020 2019




           GAAP net cash and cash equivalents provided by operating                                 $
        (33,690)                                $
        13,697            $
         (10,679)  $
          51,413
      activities



           Purchases of property and equipment                                                             (8,799)                                     (7,791)                  (19,897)        (12,056)



           Capitalization of software development costs                                                    (5,394)                                     (2,507)                  (10,163)         (5,328)



           Repayment of 2022 Convertible Notes attributable to the debt                                     48,675                                                                 48,675
      discount




           Free cash flow                                                                              $
          792                                  $
        3,399              $
          7,936   $
          34,029



     
                Reconciliation of forecasted non-GAAP operating income


     (in thousands, except percentages)


                                                                                       Three Months Ended                Year Ended
                                                                           September 30, 2020
                                                                                                                December 31, 2020




     GAAP operating income range                                         ($22,680)-($21,680)               ($70,825)-($68,825)



     Stock-based compensation                                                                     29,400                           119,100



     Amortization of acquired intangible assets                                                      450                             2,405



     Acquisition related expenses                                                                    330                             1,320




     Non-GAAP operating income range                                           
              $7,500 -$8,500 
             $52,000-$54,000



              
                Reconciliation of forecasted non-GAAP net income and non-GAAP net income per share


              (in thousands, except per share amounts)




                                                                                                                          Three Months Ended               Year Ended
                                                                                                               September 30, 2020
                                                                                                                                                  December 31, 2020




              GAAP net loss range                                                                                       ($30,884)-($29,634)    ($106,542)-($104,042)



              Stock-based compensation                                                                                               29,400                          119,100



              Amortization of acquired intangible assets                                                                                450                            2,405



              Acquisition related expenses                                                                                              330                            1,320



              Non-cash interest expense for amortization of debt discount and debt issuance                                           6,526                           24,874
    costs



              Loss on early extinguishment of 2022 Convertible Notes                                                                                                 10,493



              Impairment of strategic investment                                                                                                                        250



              Income tax effects of  non-GAAP items                                                                             (322)-(572)          (7,300)-(7,800)




              Non-GAAP net income range                                                                            
              $5,500-$6,500 
            $44,600-$46,600






              GAAP net income per basic and diluted share                                                                   ($0.68)-($0.65)          ($2.38)-($2.32)



              Non-GAAP net income per diluted share                                                                  
              $0.11-$0.13   
              $0.92-$0.96







              Weighted average common shares used in computing GAAP basic and diluted                                                45,630                           44,750
    net loss per share:





              Weighted average common shares used in computing non-GAAP diluted net loss                                             48,770                           48,460
    per share:

HubSpot's estimates of stock-based compensation, amortization of acquired intangible assets, acquisition-related expenses, non-cash interest expense for amortization of debt discount and debt issuance costs, loss on early extinguishment of 2022 Convertible Notes, impairment of strategic investment, and income tax effects of non-GAAP items assume, among other things, the occurrence of no additional acquisitions, investments or restructurings, and no further revisions to stock-based compensation and related expenses.

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States of America, or GAAP. However, management believes that, in order to properly understand our short-term and long-term financial and operational trends, investors may wish to consider the impact of certain non-cash or non-recurring items when used as a supplement to financial performance measures in accordance with GAAP. These items result from facts and circumstances that vary in frequency and impact on continuing operations. In this release, HubSpot's non-GAAP operating income, operating margin, subscription margin, expense, expense as a percentage of revenue, net income, and free cash flow are not presented in accordance with GAAP and are not intended to be used in lieu of GAAP presentations of results of operations. Free cash flow is defined as cash and cash equivalents provided by or used in operating activities less purchases of property and equipment and capitalization of software development costs, plus repayments of convertible notes attributable to debt discount. We believe information regarding free cash flow provides useful information to investors in understanding and evaluating the strength of liquidity and available cash and the exclusion of repayments of convertible notes attributable to debt discount provides a comparable framework for assessing how our business performed when compared to prior periods and also aligns the non-GAAP treatment of our debt discount that is amortized as non-cash interest expense.

Management believes that these non-GAAP financial measures provide additional means of evaluating period-over-period operating performance. Specifically, these non-GAAP financial measures provide management with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that management believes might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, or reduce management's ability to make useful forecasts. In addition, management understands that some investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors. However, these non-GAAP financial measures have limitations as an analytical tool and are not intended to be an alternative to financial measures prepared in accordance with GAAP. In addition, it should be noted that these non-GAAP financial measures may be different from non-GAAP measures used by other companies. We intend to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. Management may, however, utilize other measures to illustrate performance in the future. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. A reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included above in this press release.

These non-GAAP measures exclude stock-based compensation, amortization of acquired intangible assets, acquisition related expenses, non-cash interest expense for the amortization of debt discount debt issuance costs, loss on early extinguishment of 2022 Convertible Notes, impairment of strategic investment, and account for the income tax effects of the exclusion of these non-GAAP items. We believe investors may want to incorporate the effects of these items in order to compare our financial performance with that of other companies and between time periods:

a. Stock-based compensation is a non-cash expense accounted for in accordance with FASB ASC Topic 718. We believe that the exclusion of stock-based compensation expense allows for financial results that are more indicative of our operational performance and provide for a useful comparison of our operating results to prior periods and to our peer companies because stock-based compensation expense varies from period to period and company to company due to such things as differing valuation methodologies and changes in stock price. b. Expense for the amortization of acquired intangible assets is a non-cash item, and we believe that the exclusion of this amortization expense provides for a useful comparison of our operating results to prior periods and to our peer companies. c. Acquisition related expenses, such as transaction costs and retention payments, are expenses that are not necessarily reflective of operational performance during a period. We believe that the exclusion of these expenses provides for a useful comparison of our operating results to prior periods and to our peer companies. d. In May 2017, the Company issued $400 million of convertible notes due in 2022 with a coupon interest rate of 0.25%. In June 2020, the Company issued $460 million of convertible notes due in 2025 with a coupon interest rate of 0.375%. The imputed interest rates of the convertible senior notes were approximately 6.87% and 5.71%, respectively. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense provides for a useful comparison of our operating results to prior periods and to our peer companiesIn June 2020, the Company used a portion of the proceeds from the issuance of the convertible notes due in 2025 to repay approximately $272.1 million of its convertible notes that were due in 2022. In connection with the repayment of these notes, the Company recorded a $10.5 million loss on early extinguishment of debt, which represents the difference between the fair value and carrying value of the debt extinguished. The amount of this charge may be inconsistent in size and varies depending on the timing of the repurchase of debt. In connection with the debt extinguishment, approximately $48.7 million of the repayment of convertible notes that is attributable to debt discount was classified as operating cash flow. These activities are not considered reflective of our recurring core business operating results. As such, we believe the exclusion of these expenses and payments provides for a useful comparison of our operating results to prior periods and to our peer companies. e. Strategic investments consist of non-controlling equity investments in privately held companies. The recognition of gains or losses can vary significantly across periods and we do not view them to be indicative of our fundamental operating activities and believe the exclusion of gains or losses provides for a useful comparison of our operating results to prior periods and to our peer companies. f. The effects of income taxes on non-GAAP items reflect a fixed long-term projected tax rate of 20% to provide better consistency across reporting periods. To determine this long-term non-GAAP tax rate, we exclude the impact of other non-GAAP adjustments and take into account other factors such as our current operating structure and existing tax positions in various jurisdictions. We will periodically reevaluate this tax rate, as necessary, for significant events such as relevant tax law changes and material changes in our forecasted geographic earnings mix.

Updated Non-GAAP Net Income Calculation

In our presentations of non-GAAP net income (which is a non-GAAP financial measure) in our earnings release for each of the quarters ending March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, and the year ended December 31, 2019, we did not include a hypothetical income tax effect due to a full valuation allowance on our U.S. deferred tax assets. We have elected to update our non-GAAP net income calculations (and our reconciliations to GAAP net loss) and non-GAAP net income per share for each of these quarters and the year ended December 31, 2019, and the updated information is provided below. No updates have been made to any other adjustments in the calculation of each of non-GAAP net income or non-GAAP net income per share for such periods, and our consolidated financial results as calculated under GAAP are not affected. Had we not updated our presentation of non-GAAP net income to reflect a hypothetical income tax effect in Q2'20, our Q2'20 non-GAAP net income would have been $19.9 million, our Q2'20 non-GAAP basic net income per share would have been $0.45, and our Q2'20 non-GAAP diluted net income per share would have been $0.41.



              
                Reconciliation of non-GAAP net income


              (in thousands, except per share amounts)


                                                                                             
     
     Three months ended                                                           Year ended



                                                                  March 31,                          June 30,                          September 30,          December 31,               March 31,                         December 31,
                                                                       2019                               2019                                    2019                   2019                      2020                                 2019




              GAAP net loss                                                $
          (11,100)                        $
           (17,357)                  $
             (14,987)                            $
           (10,302)                          $
           (17,716)     $
          (53,746)



              Stock-based compensation                                             21,205                                    28,663                                23,791                                        24,095                                      27,463                97,754



              Amortization of acquired intangibles assets                             800                                       800                                   762                                           839                                         900                 3,201



              Acquisition related expenses                                             32                                        32                                    30                                           876                                         333                   971



              Non-cash interest expense for amortization of debt                    5,260                                     5,415                                 5,509                                         5,606                                       5,703                21,790
    discount and debt issuance costs



              Impairment of strategic investment                                                                                                                                                                                            250



              Income tax effects of non-GAAP items                                (2,669)                                  (2,942)                              (2,820)                                      (3,184)                                    (2,854)             (11,616)




              Non-GAAP net income (1)                                        $
          13,528                           $
           14,611                    $
              12,285                             $
             17,930                          $
              14,079    $
              58,354






              Non-GAAP net income per share:



              Basic (2)                                                        $
          0.33                             $
           0.35                      $
              0.29                               $
             0.42                            $
              0.33      $
              1.39



              Diluted (3)                                                      $
          0.30                             $
           0.31                      $
              0.26                               $
             0.38                            $
              0.30      $
              1.26




     (1) 
              We previously reported non-GAAP net income of $16.2 million, $17.6 million, $15.1 million, $20.9 million, and $16.7 million for the three months ended March
                                                                                                                                                                                  31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively, and $69.8 million for the year ended December 31, 2019.



     (2) 
              We previously reported non-GAAP basic net income per share of $0.40, $0.42, $0.36, $0.49, and $0.39 for the three months ended March 31, 2019, June 30,
           2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively, and $1.66 for the year ended December 31, 2019.



     (3) 
              We previously reported non-GAAP diluted net income per share of $0.36, $0.37, $0.32, $0.45, and $0.35 for the three months ended March 31, 2019, June 30,
           2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively, and $1.50 for the year ended December 31, 2019.

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SOURCE HubSpot