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March 07, 2015 – Comments (1) | RELATED TICKERS: HUBS

Hubspot (NYSE: HUBS) provides an integrated "cloud-based marketing and sales software platform that enables businesses to deliver an inbound experience. An inbound marketing and sales experience attracts, engages and delights customers by being more relevant, more helpful, more personalized and less interruptive than traditional marketing and sales tactics."

Hubspot focuses on  to mid-market B2B businesses, which they define as businesses that have between 10 and 2,000 employees.

Spending time working on SaaS companies in the early stages at my day job at for a Venture Development organization, Hubspot is a great example of a Software as a Service company in growth mode.

As a result, traditional financial metrics are really not useful for evaluating the value of the company. In any SaaS (Software-as-a-Service) company some really good key metrics are Cost of acquisition (CAC), Average revenue per Unit (ARPU), lifetime value (LTV) and Churn. From their recent annual report we find that infact they are tracking these key metrics and fortunately they are sharing them. 

Year Ended December 31,                              2014               2013             2012
Total customers                                            13,607             10,111          8,159
Average subscription revenue per customer     $8,926             $ 7,752        $6,580
Subscription dollar retention rate                      92.7%           82.9%           82.4%
Customer Acquisition Cost, or CAC                 $11,977           $11,645        $8,279

There are several trend lines that are interesting about the comapny:

The first, is that the average subscription revenue per customer is continuing to go up over time. This shows that the team is investing in product development and that it is in fact paying off as customers see more value.

Second, the retention rate is also going up, this one is actually a bit harder to judge because it is not actually telling us actual retention rate on a qty of customers, it is actually dollar averaged. So while this is a good number moving in the right direction it's actually off set a bit by the increased value of the customer subscriptions.

Third, is that the Cost of Acquisition is actually holding fairly constant, as the companiy grows. This is a bit counter intuitive. One would think that the Cost to acquire should drop, and in some cases it does. But reaching the next customer is sometimes, if not often more expensive. This added to the fact that doubleing marketing spend over the last few years often brings in inexperienced folks that have a ramp up time.

(Sales and marketing expense    $78.809M in 2014 vs $34.949M in 2012)

Ideally I'd like to see the CAC equal to the average subscription revenue or better. On this metric they have lost a little ground as a percentage of CAC recovered has dropped from 79% in 2012 to 74% in 2014. Not hurtful, but worth watching over time.

Another note worth watching with Hubspot is the lock-out since going public. Which may have an impact on stock price. A fairly sizable amount of stock is currently not tradable until April 8th. There is a high likelyhood, in my opinion, that the we can see glut of stock become freely available driving the price down artificially. This may make for a few bargains as this company continues to outperform in the inbound marketing automation space

"As of December 31, 2014, we have outstanding 31,430,769 shares of common stock. Of these shares, 5,750,000 shares are immediately freely tradable, and approximately 25,680,769 additional shares of common stock will be available for sale in the public market beginning on April 8, 2015 following the expiration of lock-up agreements. The representatives of the underwriters may release these stockholders from their lock-up agreements with the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market."

Given that Hubspot really has become thought leaders in this expanding marketing automation field it is highly likey that they will continue growth quite successfully.  And given that there are some of the same early investers that are in Zendesk I think this is a company to watch.

1 Comments – Post Your Own

#1) On April 08, 2015 at 12:20 PM, leon6749 (< 20) wrote:

I would like to follow HUBS with you, because I just became a customer of HUBS, and I may buy it's stock if I have success as a customer. So far, I have committed about $30k over the next 12 months to hire a digital design and strategy agency that is a Hubspot Partner. (I am a lawyer that is launching a website will sell flat fee legal services online.)

I think my experience as a customer can add a lot to the discussion. For example, I susptect that the large increase in SMA expenses YOY is that many new customers are signing up through a Hubspot Partner like the one I hired. In such cases, Hubspot shares the income from the new customer with the Hubspot Partner. This infrastructure of design and strategy agencies that partner with hubspot is growing fast. It is a huge cost, but it is also a tremendous network advantage. Developing an online inbound marketing business strategy is really hard. You really do need an agency to help you do it, and people who hire an agency are more likely to become successful online and long term HUBS customers. These agencies seem to want to use hubspot, not so much for the commission, but because of the reduced development costs and ease of implementation, which saves their customers time and money, and because of the functionality the HUBS platform provides. I don't know what the barrier to entry is to creating such a network of agencies, but I would think it's pretty high.

One question:  I don't understand the concept of "Subscription Dollar Retention Rate." Could you explain? 

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