HubSpot Reports Q4 and Full Year 2020 Results
CAMBRIDGE, Mass., Feb. 11, 2021 /PRNewswire/ -- HubSpot, Inc. (NYSE: HUBS), the customer relationship management (CRM) platform for scaling companies, today announced financial results for the fourth quarter and full year ended December 31, 2020.
Financial Highlights:
Revenue
Fourth Quarter 2020:
-- Total revenue was $252.1 million, up 35% compared to Q4'19.
-- Subscription revenue was $244.3 million, up 36% compared to Q4'19.
-- Professional services and other revenue was $7.7 million, up 9%
compared to Q4'19.
Full Year 2020:
-- Total revenue was $883.0 million, up 31% compared to 2019.
-- Subscription revenue was $853.0 million, up 32% compared to 2019.
-- Professional services and other revenue was $30.0 million, up 5%
compared to 2019.
Operating Income (Loss)
Fourth Quarter 2020:
-- GAAP operating margin was (3.0%), compared to (4.4%) in Q4'19.
-- Non-GAAP operating margin was 9.8%, compared to 9.5% in Q4'19.
-- GAAP operating loss was ($7.6) million, compared to ($8.2) million in
Q4'19.
-- Non-GAAP operating income was $24.6 million, compared to $17.7 million
in Q4'19.
Full Year 2020:
-- GAAP operating margin was (5.8%), compared to (7.0%) in 2019.
-- Non-GAAP operating margin was 8.5%, compared to 8.1% in 2019.
-- GAAP operating loss was ($50.8) million, compared to ($47.0) million in
2019.
-- Non-GAAP operating income was $74.9 million, compared to $54.9 million
in 2019.
Net Income (Loss)
Fourth Quarter 2020:
-- GAAP net loss was ($15.4) million, or ($0.34) per basic and diluted
share, compared to ($10.3) million, or ($0.24) per basic and diluted
share in Q4'19.
-- Non-GAAP net income was $20.1 million, or $0.44 per basic and $0.40 per
diluted share, compared to $17.9 million, or $0.42 per basic and $0.38
per diluted share in Q4'19.
-- Weighted average basic and diluted shares outstanding for GAAP net loss
per share was 46.0 million, compared to 42.8 million basic and diluted
shares in Q4'19.
-- Weighted average basic and diluted shares outstanding for non-GAAP net
income per share was 46.0 million and 49.9 million respectively,
compared to 42.8 million and 46.9 million, respectively in Q4'19.
Full Year 2020:
-- GAAP net loss was ($85.0) million, or ($1.90) per basic and diluted
share, compared to ($53.7) million, or ($1.28) per basic and diluted
share in 2019.
-- Non-GAAP net income was $64.5 million, or $1.44 per basic and $1.32 per
diluted share, compared to $58.4 million, or $1.39 per basic and $1.26
per diluted share in 2019.
-- Weighted average basic and diluted shares outstanding for GAAP net loss
per share was 44.8 million, compared to 42.0 million basic and diluted
shares in 2019.
-- Weighted average basic and diluted shares outstanding for non-GAAP net
income per share was 44.8 and 48.7 million respectively, compared to
42.0 million and 46.5 million, respectively in 2019.
Balance Sheet and Cash Flow
-- The company's cash, cash equivalents and investments balance was $1,282
million as of December 31, 2020.
-- During the fourth quarter, the company generated $61.3 million of
operating cash flow, excluding the $0.4 million used for the repayment
of our convertible notes, compared to $47.9 million during Q4'19.
-- During the fourth quarter, the company generated $45.8 million of free
cash flow, compared to $24.4 million during Q4'19.
-- The company generated $138.0 million of operating cash flow in 2020,
excluding the $49.0 million used for the repayment of our convertible
notes, compared to $119.0 million in 2019.
-- The company generated $79.1 million of free cash flow in 2020 compared
to $65.1 million in 2019.
Additional Recent Business Highlights
-- Grew total customers to 103,994 at December 31, 2020, up 42% from
December 31, 2019.
-- Total average subscription revenue per customer was $9,758 during the
fourth quarter of 2020 down 3% compared to the fourth quarter of 2019.
"I am exceptionally proud of how the HubSpot team closed out the year in 2020," said Brian Halligan, CEO of HubSpot. "During the quarter we surpassed 100,000 total customers, and in December we crossed $1 billion in annual recurring revenue -- two great milestones that reflect the determination of our team and the strength of our customer relationships."
Business Outlook
Based on information available as of February 11, 2021, HubSpot is issuing guidance for the first quarter of 2021 and full year 2021 as indicated below.
First Quarter 2021:
-- Total revenue is expected to be in the range of $260 million to $265
million.
-- Non-GAAP operating income is expected to be in the range of $17 million
to $19 million.
-- Non-GAAP net income per common share is expected to be in the range of
$0.28 to $0.30. This assumes approximately 50.3 million weighted average
diluted shares outstanding.
Full Year 2021:
-- Total revenue is expected to be in the range of $1,160 million to $1,170
million.
-- Non-GAAP operating income is expected to be in the range of $98 million
to $102 million.
-- Non-GAAP net income per common share is expected to be in the range of
$1.51 to $1.59. This assumes approximately 50.7 million weighted average
diluted shares outstanding.
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 ir.hubspot.com.
Conference Call Information
HubSpot will host a conference call on Thursday February 11, 2021 at 4:30 p.m. Eastern Time (ET) to discuss the company's fourth quarter financial results and its business outlook. To register for this conference call, please use this dial in registration 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. Participants who wish to register for the conference call webcast please use this link.
Following the conference call, a replay will be available at (800) 585-8367 (domestic) or (416) 621-4642 (international). The replay passcode is 8694405. 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 CRM platform that provides software and support to help companies grow better. The platform includes marketing, sales, service, and website management products that start free and scale to meet our customers' needs at any stage of growth. Today, more than 100,000 customers across more than 120 countries use HubSpot's powerful and easy-to-use tools and integrations to 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 first fiscal quarter of and full year 2021; 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, our workforce and operations, 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 a CRM 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)
December 31, December
31,
2020 2019
Assets
Current assets:
Cash and cash equivalents $
378,123 $
269,670
Short-term investments 873,073 691,834
Accounts receivable 126,433 92,517
Deferred commission expense 44,576 32,078
Prepaid expenses and other current assets 34,716 23,625
Total current assets 1,456,921 1,109,724
Long-term investments 30,697 53,776
Property and equipment, net 101,123 83,649
Capitalized software development costs, net 24,943 16,793
Right-of-use assets 275,893 234,390
Deferred commission expense, net of current portion 28,296 19,110
Other assets 13,893 9,824
Intangible assets, net 10,282 11,752
Goodwill 31,318 30,250
Total assets $
1,973,366 $
1,569,268
Liabilities and stockholders
'
equity
Current liabilities:
Accounts payable $
13,540 $
12,842
Accrued compensation costs 44,054 26,318
Accrued expenses and other current liabilities 37,184 28,686
Convertible senior notes 7,837
Operating lease liabilities 30,020 23,613
Deferred revenue 312,866 231,030
Total current liabilities 445,501 322,489
Operating lease liabilities, net of current portion 279,664 244,216
Deferred revenue, net of current portion 3,636 3,058
Other long-term liabilities 10,811 8,983
Convertible senior notes, net of current portion 471,099 340,564
Total liabilities 1,210,711 919,310
Stockholders' equity:
Common stock 46 44
Additional paid-in capital 1,241,167 1,048,380
Accumulated other comprehensive income (loss) 4,603 (336)
Accumulated deficit (483,161) (398,130)
Total stockholders' equity 762,655 649,958
Total liabilities and stockholders
'
equity $
1,973,366 $
1,569,268
Consolidated Statements of Operations
(in thousands, except per share data)
For the Three Months Ended Year Ended December 31,
December 31,
2020 2019 2020 2019
Revenues:
Subscription $
244,323 $
179,086 $
853,025 $
646,266
Professional services and other 7,742 7,100 30,001 28,594
Total revenue 252,065 186,186 883,026 674,860
Cost of revenues:
Subscription 37,369 27,960 130,685 98,510
Professional services and other 9,925 8,015 36,274 31,448
Total cost of revenues 47,294 35,975 166,959 129,958
Gross profit 204,771 150,211 716,067 544,902
Operating expenses:
Research and development 55,564 42,757 205,589 158,237
Sales and marketing 127,851 90,418 452,081 340,685
General and administrative 28,997 25,194 109,225 92,971
Total operating expenses 212,412 158,369 766,895 591,893
Loss from operations (7,641) (8,158) (50,828) (46,991)
Other expense:
Interest income 623 4,646 7,773 19,429
Interest expense (7,226) (5,872) (37,049) (22,818)
Other expense 441 380 (711) (393)
Total other expense (6,162) (846) (29,987) (3,782)
Loss before income tax expense (13,803) (9,004) (80,815) (50,773)
Income tax expense (1,613) (1,298) (4,216) (2,973)
Net loss $
(15,416) $
(10,302) $
(85,031) $
(53,746)
Net loss per share, basic and diluted $
(0.34) $
(0.24) $
(1.90) $
(1.28)
Weighted average common shares used in 45,983 42,844 44,757 42,025
computing basic and diluted net loss per share:
Consolidated Statements of Cash Flows
(in thousands)
For the Three Months Year Ended December 31,
Ended December 31,
2020 2019 2020 2019
Operating Activities:
Net loss (15,416) $
(10,302) $
(85,031) $
(53,746)
Adjustments to reconcile net loss to net cash and cash equivalents provided
by operating activities
Depreciation and amortization 9,993 7,545 37,060 28,793
Stock-based compensation 31,466 24,095 121,488 97,754
Loss on early extinguishment of 2022 Convertible Notes 14 10,507
Repayment of 2022 Convertible Notes attributable to the debt discount (373) (49,048)
(Benefit) provision for deferred income taxes (1,449) (848) (2,185) (799)
Amortization of debt discount and issuance costs 6,702 5,606 24,890 21,790
Accretion of bond discount 59 (3,271) (3,657) (14,160)
Unrealized currency translation (831) 37 (952) (156)
Changes in assets and liabilities
Accounts receivable (29,592) (14,082) (29,971) (15,428)
Prepaid expenses and other assets 5,570 2,921 (17,026) (3,296)
Deferred commission expense (7,937) (4,115) (19,288) (9,666)
Right-of-use assets 8,824 8,347 31,406 22,657
Accounts payable 627 (1,724) 3,697 3,927
Accrued expenses and other liabilities 12,240 6,320 26,020 7,819
Operating lease liabilities (10,105) (993) (31,621) (15,781)
Deferred revenue 51,133 28,355 72,624 49,265
Net cash and cash equivalents provided by operating activities 60,925 47,891 88,913 118,973
Investing Activities:
Purchases of investments (139,915) (336,853) (1,517,357) (1,304,847)
Maturities of investments 338,961 376,752 1,352,231 1,066,366
Sale of investments - 10,932
Purchases of property and equipment (9,521) (19,175) (37,274) (40,372)
Capitalization of software development costs (5,955) (4,335) (21,599) (13,474)
Purchases of strategic investments (500) (2,500) (553)
Acquisition of a business, net of cash acquired - (23,314) (23,314)
Net cash and cash equivalents provided by (used in) investing 183,070 (6,925) (215,567) (316,194)
activities
Financing Activities:
Proceeds from issuance of 2025 Convertible Notes, net of issuance costs - 450,123
paid of $9.9 million
Proceeds from settlement of Convertible Note Hedges related to the 2022 1,062 363,554
Convertible Notes
Payments for settlement of Warrants related to the 2022 Convertible Notes - (327,543)
Repayment of 2022 Convertible Notes attributable to the principal (1,627) (235,993)
Payments for Capped Call Options related to the 2025 Convertible Notes - (50,600)
Proceeds from common stock offering, net of offering costs paid of $365 - 342,628
Employee taxes paid related to the net share settlement of stock-based (2,787) (1,480) (7,424) (6,247)
awards
Proceeds related to the issuance of common stock under stock plans 8,115 4,652 30,371 23,578
Repayment of debt - (333) (333)
Repayments of finance lease obligations - (35) (28) (284)
Net cash and cash equivalents provided by financing activities 4,763 2,804 222,460 359,342
Effect of exchange rate changes on cash, cash equivalents and restricted cash 4,470 1,451 6,831 (720)
Net increase in cash, cash equivalents and restricted cash 253,228 45,221 102,637 161,401
Cash, cash equivalents and restricted cash, beginning of period 127,924 233,294 278,515 117,114
Cash, cash equivalents and restricted cash, end of period $
381,152 $
278,515 $
381,152 $
278,515
Reconciliation of non-GAAP operating
income and operating margin
(in thousands, except percentages)
Three Months Ended Year Ended December 31,
December 31,
2020 2019 2020 2019
GAAP operating loss $
(7,641) $
(8,158) $
(50,828) $
(46,991)
Stock-based compensation 31,466 24,095 121,488 97,754
Amortization of acquired intangible assets 159 839 2,419 3,201
Acquisition related expenses 640 876 1,832 971
Non-GAAP operating income 24,624 $
17,652 $
74,911 $
54,935
GAAP operating margin (3.0) (4.4) (5.8) (7.0)
% % % %
Non-GAAP operating margin 9.8 9.5 8.5 8.1
% % % %
Reconciliation of non-GAAP net income
(in thousands, except per share amounts)
Three Months Ended Year Ended December 31,
December 31,
2020 2019 2020 2019
GAAP net loss $
(15,416) $
(10,302) $
(85,031) $
(53,746)
Stock-based compensation 31,466 24,095 121,488 97,754
Amortization of acquired intangibles assets 159 839 2,419 3,201
Acquisition related expenses 640 876 1,832 971
Non-cash interest expense for amortization of debt discount and debt 6,702 5,606 24,890 21,790
issuance costs
Loss on early extinguishment of 2022 Convertible Notes 14 10,507
Impairment of strategic investment 250
Income tax effects of non-GAAP items (3,423) (3,184) (11,898) (11,616)
Non-GAAP net income $
20,142 $
17,930 $
64,457 $
58,354
Non-GAAP net income per share:
Basic $
0.44 $
0.42 $
1.44 $
1.39
Diluted $
0.40 $
0.38 $
1.32 $
1.26
Shares used in non-GAAP per share calculations
Basic 45,983 42,844 44,757 42,025
Diluted 49,922 46,912 48,739 46,492
Reconciliation of non-GAAP expense and expense as a percentage of revenue
(in thousands, except percentages)
Three Months Ended December 31,
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 $
37,369 $
9,925 $
55,564 $
127,851 $
28,997 $
27,960 $
8,015 $
42,757 $
90,418 $
25,194
Stock -based compensation (1,294) (651) (10,303) (13,568) (5,650) (836) (531) (8,085) (9,324) (5,319)
Amortization of acquired intangible (139) (20) (839)
assets
Acquisition related expenses (285) (355) (262) (614)
Non-GAAP expense $
35,936 $
9,274 $
44,976 $
114,263 $
22,992 $
26,285 $
7,484 $
34,410 $
81,094 $
19,261
GAAP expense as a percentage of 14.8 3.9 22.0 50.7 11.5 15.0 4.3 23.0 48.6 13.5
% % % % % % % % % %
revenue
Non-GAAP expense as a percentage of 14.3 3.7 17.8 45.3 9.1 14.1 4.0 18.5 43.6 10.3
% % % % % % % % % %
revenue
Year Ended December 31,
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 $
130,685 $
36,274 $
205,589 $
452,081 $
109,225 $
98,510 $
31,448 $
158,237 $
340,685 $
92,971
Stock -based compensation (4,408) (2,536) (39,366) (50,552) (24,626) (3,127) (2,829) (33,748) (36,599) (21,451)
Amortization of acquired intangible (2,340) (79) (3,201)
assets
Acquisition related expenses (1,287) (545) (357) (614)
Non-GAAP expense $
123,937 $
33,738 $
164,936 $
401,450 $
84,054 $
92,182 $
28,619 $
124,132 $
304,086 $
70,906
GAAP expense as a percentage of 14.8 4.1 23.3 51.2 12.4 14.6 4.7 23.4 50.5 13.8
% % % % % % % % % %
revenue
Non-GAAP expense as a percentage of 14.0 3.8 18.7 45.5 9.5 13.7 4.2 18.4 45.1 10.5
% % % % % % % % % %
revenue
Reconciliation of non-GAAP subscription margin
(in thousands, except percentages)
Three Months Ended December Year Ended December 31,
31,
2020 2019 2020 2019
GAAP subscription margin $
206,954 $
151,126 $
722,340 $
547,756
Stock -based compensation 1,294 836 4,408 3,127
Amortization of acquired intangible assets 139 839 2,340 3,201
Non-GAAP subscription margin $
208,387 $
152,801 $
729,088 $
554,084
GAAP subscription margin percentage 84.7 84.4 84.7 84.8
% % % %
Non-GAAP subscription margin percentage 85.3 85.3 85.5 85.7
% % % %
Reconciliation of free cash flow
(in thousands)
Three Months Ended Year Ended December 31,
December 31,
2020 2019 2020 2019
GAAP net cash and cash equivalents provided by $
60,925 $
47,891 $
88,913 $
118,973
operating activities
Purchases of property and equipment (9,521) (19,175) (37,274) (40,372)
Capitalization of software development costs (5,955) (4,335) (21,599) (13,474)
Repayment of 2022 Convertible Notes attributable to 373 49,048
the debt discount
Free cash flow $
45,822 $
24,381 $
79,088 $
65,127
Reconciliation of operating cash flow
(in thousands)
Three Months Ended Year Ended December 31,
December 31,
2020 2019 2020 2019
GAAP net cash and cash equivalents provided by $
60,925 $
47,891 $
88,913 $
118,973
operating activities
Repayment of 2022 Convertible Notes attributable to 373 49,048
the debt discount
Operating cash flow, excluding repayment of $
61,298 $
47,891 $
137,961 $
118,973
convertible debt
Reconciliation of forecasted non-GAAP operating income
(in thousands, except percentages)
Three Months Ended Year Ended
March 31, 2021
December 31, 2021
GAAP operating income range ($17,096)-($15,096) ($73,212)-($69,212)
Stock-based compensation 33,500 169,065
Amortization of acquired intangible assets 248 988
Acquisition related expenses 348 1,159
Non-GAAP operating income range
$17,000 -$19,000
$98,000-$102,000
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
March 31, 2021
December 31, 2021
GAAP net loss range ($23,892)-($22,642) ($107,263)-(102,263)
Stock-based compensation 33,500 169,065
Amortization of acquired intangible assets 248 988
Acquisition related expenses 348 1,159
Non-cash interest expense for amortization of debt discount and 6,610 27,363
debt issuance costs
Income tax effects of non-GAAP items (2,814)-(3,064) (14,812)-(15,812)
Non-GAAP net income range
$14,000-$15,000
$76,500-$80,500
GAAP net income per basic and diluted share ($0.51)-($0.49) ($2.27)-($2.16)
Non-GAAP net income per diluted share
$0.28-$0.30
$1.51-$1.59
Weighted average common shares used in computing GAAP basic 46,477 47,303
and diluted net loss per share:
Weighted average common shares used in computing non-GAAP 50,300 50,659
diluted net loss 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, operating 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:
1. 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.
2. Expense for the amortization of acquired intangible assets is excluded
from non-GAAP expense and income measures as HubSpot views amortization
of these assets as arising from pre-acquisition activities determined at
the time of an acquisition. While these intangible assets are evaluated
for impairment regularly, amortization of the cost of purchased
intangibles is a non-cash expense that is not typically affected by
operations during any particular period. Valuation and subsequent
amortization of intangible assets can also be inconsistent in amount and
frequency because they can significantly vary based on the timing and
size of acquisitions and the inherently subjective nature of the degree
to which a purchase price is allocated to intangible assets. We believe
that the exclusion of this amortization expense provides for a useful
comparison of our operating results to prior periods, for which we have
historically excluded amortization expense, and to our peer companies,
which commonly exclude acquired intangible asset amortization. It is
important to note that although we exclude amortization of acquired
intangible assets from our non-GAAP expense and income measures, revenue
generated from such intangibles is included within our non-GAAP income
measures. The use of these intangible assets contributed to our revenues
earned during the periods presented and will contribute to future periods
as well.
3. 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, which commonly exclude these
expenses.
4. 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 non-cash interest expense provides for a useful
comparison of our operating results to prior periods and to our peer
companies.In 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 cash used in operating activities. Throughout the remainder
of 2020 and until the maturity of the notes that are due in 2022, the
Company has repaid, and will continue to repay early conversions of these
notes. 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.
5. 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.
6. 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.
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SOURCE HubSpot
