Since HubSpot (HUBS) reported its Q1 results on May 6, the stock has risen as much as 32%, hitting a new all-time high last week at $231.17. So far this year, shares of HubSpot—a provider of cloud-based software for digital marketing, sales and customer service—are up 40% versus a gain of 8.9% for the Nasdaq Composite. More accommodative pricing is helping the company add new customers at a rapid pace.
For a company that has many smaller customers, the strong performance of the stock in this tough economy might be perplexing. But HubSpot’s customer base is more mid-market than very small, with the vast majority of accounts having between 20 and 200 employees. HubSpot has seen increased churn, but the bulk is occurring in accounts with fewer than 20 employees.
It’s helpful that HubSpot is focused on businesses that sell to other businesses, not to consumers. Also, it’s encouraging that the most-challenged customers are downgrading instead of canceling. Downgrades are preferable to cancellations because these same accounts could then upgrade once things get back to more normal levels.
HubSpot even made it easier for customers to downgrade, offering a free CRM product that now has many more features. The company also temporarily cut the price of its Starter Growth Suite product by 55%. The Professional Growth Suite is now 25% lower. The reduced pricing is helping with new customer acquisition. In Q1, HubSpot added nearly 5,300 new customers, a quarterly record. The total customer base now stands at 78,776, up 30% from the year-ago level.
It’s beneficial that HubSpot does not have much exposure to those industries that are highly impacted by Covid-19, as they represent only a single-digit percentage of the installed base. And some trends are working in HubSpot’s favor—including more businesses moving to online marketing from offline. Also, more organizations are recognizing the benefits of inbound marketing versus outbound, with less interest in traditional advertising.
In Q1, HubSpot’s total revenue of $199 million was up 31%, accelerating from growth of 29% in the previous quarter. Subscription revenue rose 32%. The international unit, representing 42% of total revenue, saw growth accelerate 200 basis points sequentially to 41%. Billings of $207 million rose 30%, matching the Q4 growth rate. Deferred revenue gained 25% to $242.2 million. HubSpot was able to maintain its gross margin of 82% compared to a year ago.
Given the greater churn at the lower end of the customer base, HubSpot issued conservative guidance. For Q2, revenue guidance represents growth of 20%. The company reduced its 2020 top-line outlook, with the new range at $800 million to $810 million (representing growth of 19.2% at the midpoint) versus $840.5 million to $844.5 million previously. The 2020 outlook assumes a challenging economic environment through Q2 and takes into consideration a range of possible outcomes for the second half.
Looking past the pandemic, there’s a bullish takeaway from HubSpot’s latest customer acquisition strategy. All of the new accounts being added at the lower end will create a prime up-sell pool down the road, giving the company plenty of opportunities to move Starter accounts up to the pricier Professional and Enterprise versions. In addition, there’s cross-sell potential in getting new Marketing Hub users to sign up for Sales Hub and Service Hub as well.
While there’s been an increase in the number of new customers adopting HubSpot’s full platform up front via Starter versions, one of the company’s main goals is to drive more organizations to the lucrative Enterprise versions. For example, the newly relaunched Marketing Hub Enterprise offering starts at $3,200 a month, well above the monthly fee of $50 for the Starter version. The Enterprise versions of Sales Hub and Service Hub start at $1,200 a month.
HubSpot’s revamped Marketing Hub Enterprise includes a new revenue attribution reporting feature that makes the company more competitive against Marketo (owned by Adobe). HubSpot used to lose deals to Marketo because it didn’t offer attribution reporting, which enables users to see which specific marketing activities actually lead to new customer additions. The updated version also includes account-based marketing, adaptive testing and better targeting.
At recent prices, HubSpot’s enterprise value is 11 times the 2020 consensus revenue estimate of $806.6 million. That’s a relatively attractive valuation in cloud software. For 2021, analysts expect the company’s top-line growth to reaccelerate to 20.9%.
It’s notable that T. Rowe Price, Fidelity, Lone Pine Capital and Wellington Management were all big Q1 buyers of HubSpot. Fidelity remains the #1 institutional holder, with 5.97 million shares.