HubSpot : Reports Q3 2020 Results

CAMBRIDGE, Mass., Nov. 5, 2020 /PRNewswire/ -- HubSpot, Inc. (NYSE: HUBS), a leading customer relationship management (CRM) platform, today announced financial results for the third quarter ended September 30, 2020.

Financial Highlights:

Revenue

• Total revenue was $228.4 million, up 32% compared to Q3'19.
• Subscription revenue was $221.1 million, up 32% compared to Q3'19.
• Professional services and other revenue was $7.3 million, down 12% compared to Q3'19.

Operating Income (Loss)

• GAAP operating margin was (6.8%), compared to (8.1%) in Q3'19.
• Non-GAAP operating margin was 7.2%, compared to 6.1% in Q3'19.
• GAAP operating loss was ($15.5) million, compared to ($14.1) million in Q3'19.
• Non-GAAP operating income was $16.5 million, compared to $10.5 million in Q3'19.

Net Income (Loss)

• GAAP net loss was ($22.5) million, or ($0.49) per basic and diluted share, compared to ($15.0) million, or ($0.35) per basic and diluted share in Q3'19.
• Non-GAAP net income was $13.6 million, or $0.30 per basic and $0.28 per diluted share, compared to $12.3 million, or $0.29 per basic and $0.26 per diluted share in Q3'19. 
• Weighted average basic and diluted shares outstanding for GAAP net loss per share was 45.6 million, compared to 42.5 million basic and diluted shares in Q3'19.
• Weighted average basic and diluted shares outstanding for non-GAAP net income per share was 45.6 million and 49.0 million respectively, compared to 42.5 million and 47.9 million, respectively in Q3'19.

Balance Sheet and Cash Flow

• The company's cash, cash equivalents and investments balance was $1,228 million as of September 30, 2020.
• During the third quarter, the company generated $38.7 million of operating cash flow, compared to $19.7 million generated during Q3'19.
• During the third quarter, the company generated $25.3 million of free cash flow, compared to $6.7 million during Q3'19.

Additional Recent Business Highlights

• Grew total customers to 95,634 at September 30, 2020 up 39% compared to September 30, 2019.
• Total average subscription revenue per customer was $9,669 during the third quarter of 2020, down 3% compared to Q3'19.

"We're happy that the tailwinds continued to strengthen last quarter for HubSpot," said Brian Halligan, Chief Executive Officer. "The year is not over, but I believe the growth we've seen in the third quarter is both a sign of the ongoing digital transformation of the mid-market and a reflection of newly heightened expectations when it comes to how easy CRM platforms need to be to match rapidly changing times."

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

Fourth Quarter 2020:

• Total revenue is expected to be in the range of $235.0 million to $237.0 million.
• Non-GAAP operating income is expected to be in the range of $13.0 million to $15.0 million.
• Non-GAAP net income per common share is expected to be in the range of $0.21 to $0.23. This assumes approximately 49.6 million weighted average diluted shares outstanding.

Full Year 2020:

• Total revenue is expected to be in the range of $866.0 million to $868.0 million.
• Non-GAAP operating income is expected to be in the range of $63.5 million to $65.5 million.
• Non-GAAP net income per common share is expected to be in the range of $1.13 to $1.15. This assumes approximately 48.7 million weighted average diluted shares outstanding.

Our fourth 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 November 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 Thursday November 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 [phone] (domestic) or [phone] (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. Over 95,000 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 fourth 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)
		September 30,				December 31,
		2020				2019
Assets
Current assets:
Cash and cash equivalents		$	124,895			$	269,670
Short-term investments			1,059,615				691,834
Accounts receivable			94,122				92,517
Deferred commission expense			39,666				32,078
Prepaid expenses and other current assets			40,516				23,625
Total current assets			1,358,814				1,109,724
Long-term investments			43,550				53,776
Property and equipment, net			95,352				83,649
Capitalized software development costs, net			22,839				16,793
Right-of-use assets			278,825				234,390
Deferred commission expense, net of current portion			23,712				19,110
Other assets			11,719				9,824
Intangible assets, net			10,013				11,752
Goodwill			30,597				30,250
Total assets		$	1,875,421			$	1,569,268
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	14,116			$	12,842
Accrued compensation costs			40,079				26,318
Accrued expenses and other current liabilities			31,891				28,686
Operating lease liabilities			30,252				23,613
Deferred revenue			256,034				231,030
Total current liabilities			372,372				322,489
Operating lease liabilities, net of current portion			283,373				244,216
Deferred revenue, net of current portion			3,082				3,058
Other long-term liabilities			9,682				8,983
Convertible senior notes			474,048				340,564
Total liabilities			1,142,557				919,310
Stockholders' equity:
Common stock			46				44
Additional paid-in capital			1,198,332				1,048,380
Accumulated other comprehensive loss			2,231				(336)
Accumulated deficit			(467,745)				(398,130)
Total stockholders' equity			732,864				649,958
Total liabilities and stockholders' equity		$	1,875,421			$	1,569,268

 

Consolidated Statements of Operations (in thousands, except per share data)
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2020				2019				2020				2019
Revenues:
Subscription	$	221,058			$	167,078			$	608,702			$	467,180
Professional services and other		7,327				6,543				22,259				21,494
Total revenue		228,385				173,621				630,961				488,674
Cost of revenues:
Subscription		33,181				25,671				93,316				70,550
Professional services and other		9,422				7,592				26,348				23,433
Total cost of revenues		42,603				33,263				119,664				93,983
Gross profit		185,782				140,358				511,297				394,691
Operating expenses:
Research and development		54,456				39,847				150,026				115,480
Sales and marketing		119,299				91,283				324,230				250,267
General and administrative		27,488				23,300				80,228				67,777
Total operating expenses		201,243				154,430				554,484				433,524
Loss from operations		(15,461)				(14,072)				(43,187)				(38,833)
Other expense:
Interest income		958				5,185				7,150				14,783
Interest expense		(7,062)				(5,760)				(29,823)				(16,946)
Other expense		(7)				(89)				(1,152)				(773)
Total other expense		(6,111)				(664)				(23,825)				(2,936)
Loss before income tax expense		(21,572)				(14,736)				(67,012)				(41,769)
Income tax expense		(926)				(251)				(2,603)				(1,675)
Net loss	$	(22,498)			$	(14,987)			$	(69,615)			$	(43,444)
Net loss per share, basic and diluted	$	(0.49)			$	(0.35)			$	(1.57)			$	(1.04)
Weighted average common shares used in computing basic and diluted net loss per share:		45,627				42,531				44,346				41,749

 

Consolidated Statements of Cash Flows (in thousands)
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2020				2019				2020				2019
Operating Activities:
Net loss	$	(22,498)			$	(14,987)			$	(69,615)			$	(43,444)
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities
Depreciation and amortization		9,384				7,213				27,067				21,248
Stock-based compensation		31,186				23,790				90,022				73,659
Loss on early extinguishment of 2022 Convertible Notes	—				—					10,493			—
Repayment of 2022 Convertible Notes attributable to the debt discount	—				—					(48,675)			—
(Benefit) provision for deferred income taxes		(314)				184				(736)				49
Amortization of debt discount and issuance costs		6,526				5,509				18,188				16,184
Accretion of bond discount		(226)				(4,068)				(3,716)				(10,889)
Unrealized currency translation		(305)				(175)				(121)				(193)
Changes in assets and liabilities
Accounts receivable		(6,311)				(5,253)				(380)				(1,346)
Prepaid expenses and other assets		(2,176)				113				(22,596)				(6,217)
Deferred commission expense		(5,514)				(12)				(11,351)				(5,551)
Right-of-use assets		9,184				5,048				22,582				14,310
Accounts payable		1,233				1,203				3,070				6,195
Accrued expenses and other liabilities		13,336				(2,333)				13,780				955
Operating lease liabilities		(9,202)				(4,626)				(21,516)				(14,788)
Deferred revenue		14,364				8,063				21,492				20,910
Net cash and cash equivalents provided by operating activities		38,667				19,669				27,988				71,082
Investing Activities:
Purchases of investments		(410,414)				(370,192)				(1,377,442)				(967,994)
Maturities of investments		303,268				347,229				1,013,270				689,614
Sale of investments		—			—					10,932			—
Purchases of property and equipment		(7,856)				(9,141)				(27,753)				(21,197)
Capitalization of software development costs		(5,481)				(3,811)				(15,644)				(9,139)
Purchases of strategic investments		(1,000)				(201)				(2,000)				(553)
Net cash and cash equivalents used in investing activities		(121,483)				(36,116)				(398,637)				(309,269)
Financing Activities:
Proceeds from issuance of 2025 Convertible Notes, net of issuance costs paid of $9.9 million		(491)			—					450,123			—
Proceeds from settlement of Convertible Note Hedges related to the 2022 Convertible Notes	—				—					362,492			—
Payments for settlement of Warrants related to the 2022 Convertible Notes	—				—					(327,543)			—
Repayment of 2022 Convertible Notes attributable to the principal	—				—					(234,366)			—
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 awards		(2,437)				(2,032)				(4,637)				(4,767)
Proceeds related to the issuance of common stock under stock plans		7,048				8,188				22,256				18,926
Repayments of finance lease obligations	—					(44)				(28)				(249)
Net cash and cash equivalents provided by financing activities		4,120				6,112				217,697				356,538
Effect of exchange rate changes on cash, cash equivalents and restricted cash		2,505				(1,973)				2,361				(2,171)
Net increase in cash, cash equivalents and restricted cash		(76,191)				(12,308)				(150,591)				116,180
Cash, cash equivalents and restricted cash, beginning of period		204,115				245,602				278,515				117,114
Cash, cash equivalents and restricted cash, end of period	$	127,924			$	233,294			$	127,924			$	233,294

Reconciliation of non-GAAP operating income and operating margin (in thousands, except percentages)	Three Months Ended September 30,							Nine Months Ended September 30,
	2020			2019				2020			2019
GAAP operating loss	$	(15,461)		$	(14,072)			$	(43,187)		$	(38,833)
Stock-based compensation		31,186			23,791				90,022			73,659
Amortization of acquired intangible assets		462			762				2,260			2,362
Acquisition related expenses		340			30				1,191			95
Non-GAAP operating income		16,527		$	10,511			$	50,286		$	37,283
GAAP operating margin		(6.8)	%		(8.1)	%			(6.8)	%		(7.9)	%
Non-GAAP operating margin		7.2	%		6.1	%			8.0	%		7.6	%

Reconciliation of non-GAAP net income (in thousands, except per share amounts)	Three Months Ended September 30,							Nine Months Ended September 30,
	2020			2019				2020			2019
GAAP net loss	$	(22,498)		$	(14,987)			$	(69,615)		$	(43,444)
Stock-based compensation		31,186			23,791				90,022			73,659
Amortization of acquired intangibles assets		462			762				2,260			2,362
Acquisition related expenses		340			30				1,191			95
Non-cash interest expense for amortization of debt discount and debt issuance costs		6,526			5,509				18,188			16,184
Loss on early extinguishment of 2022 Convertible Notes		—			—				10,493			—
Impairment of strategic investment		—			—				250			—
Income tax effects of non-GAAP items		(2,462)			(2,820)				(8,475)			(8,431)
Non-GAAP net income	$	13,554		$	12,285			$	44,314		$	40,425
Non-GAAP net income per share:
Basic	$	0.30		$	0.29			$	1.00		$	0.97
Diluted	$	0.28		$	0.26			$	0.92		$	0.87
Shares used in non-GAAP per share calculations
Basic		45,627			42,531				44,346			41,749
Diluted		48,961			47,869				48,348			46,622

Reconciliation of non-GAAP expense and expense as a percentage of revenue
(in thousands, except percentages)
	Three Months Ended September 30,
	2020																2019
	COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A				COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A
GAAP expense	$	33,181		$	9,422		$	54,456		$	119,299		$	27,488			$	25,671		$	7,592		$	39,847		$	91,283		$	23,300
Stock -based compensation		(1,140)			(652)			(10,244)			(13,300)			(5,850)				(854)			(614)			(8,019)			(8,947)			(5,357)
Amortization of acquired intangible assets		(442)			—			—			(20)			—				(762)			—			—			—			—
Acquisition related expenses		—			—			(340)			—			—				—			—			(30)			—			—
Non-GAAP expense	$	31,599		$	8,770		$	43,872		$	105,979		$	21,638			$	24,055		$	6,978		$	31,798		$	82,336		$	17,943
GAAP expense as a percentage of revenue		14.5	%		4.1	%		23.8	%		52.2	%		12.0	%			14.8	%		4.4	%		23.0	%		52.6	%		13.4	%
Non-GAAP expense as a percentage of revenue		13.8	%		3.8	%		19.2	%		46.4	%		9.5	%			13.9	%		4.0	%		18.3	%		47.4	%		10.3	%

	Nine Months Ended September 30,
	2020																2019
	COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A				COS, Subscription			COS, Prof. services & other			R&D			S&M			G&A
GAAP expense	$	93,316		$	26,348		$	150,026		$	324,230		$	80,228			$	70,550		$	23,433		$	115,480		$	250,267		$	67,777
Stock -based compensation		(3,114)			(1,885)			(29,063)			(36,984)			(18,976)				(2,291)			(2,298)			(25,663)			(27,275)			(16,132)
Amortization of acquired intangible assets		(2,201)			—			—			(59)			—				(2,362)			—			—			—			—
Acquisition related expenses		—			—			(1,001)			—			(190)				—			—			(95)			—			—
Non-GAAP expense	$	88,001		$	24,463		$	119,962		$	287,187		$	61,062			$	65,897		$	21,135		$	89,722		$	222,992		$	51,645
GAAP expense as a percentage of revenue		14.8	%		4.2	%		23.8	%		51.4	%		12.7	%			14.4	%		4.8	%		23.6	%		51.2	%		13.9	%
Non-GAAP expense as a percentage of revenue		13.9	%		3.9	%		19.0	%		45.5	%		9.7	%			13.5	%		4.3	%		18.4	%		45.6	%		10.6	%

Reconciliation of non-GAAP subscription margin
(in thousands, except percentages)
		Three Months Ended September 30,							Nine Months Ended September 30,
		2020			2019				2020			2019
GAAP subscription margin		$	187,877		$	141,407			$	515,386		$	396,630
Stock -based compensation			1,140			854				3,114			2,291
Amortization of acquired intangible assets			442			762				2,201			2,362
Non-GAAP subscription margin		$	189,459		$	143,023			$	520,701		$	401,283
GAAP subscription margin percentage			85.0	%		84.6	%			84.7	%		84.9	%
Non-GAAP subscription margin percentage			85.7	%		85.6	%			85.5	%		85.9	%

Reconciliation of operating cash flow
(in thousands)
		Three Months Ended September 30,							Nine Months Ended September 30,
		2020			2019				2020			2019
GAAP net cash and cash equivalents provided by operating activities		$	38,667		$	19,669			$	27,988		$	71,082
Repayment of 2022 Convertible Notes attributable to the debt discount			—			—				48,675			—
Operating cash flow, excluding repayment of convertible debt		$	38,667		$	19,669			$	76,663		$	71,082

Reconciliation of free cash flow
(in thousands)
		Three Months Ended September 30,							Nine Months Ended September 30,
		2020			2019				2020			2019
GAAP net cash and cash equivalents provided by operating activities		$	38,667		$	19,669			$	27,988		$	71,082
Purchases of property and equipment			(7,856)			(9,141)				(27,753)			(21,197)
Capitalization of software development costs			(5,481)			(3,811)				(15,644)			(9,139)
Repayment of 2022 Convertible Notes attributable to the debt discount			—			—				48,675			—
Free cash flow		$	25,330		$	6,717			$	33,266		$	40,746

Reconciliation of forecasted non-GAAP operating income (in thousands, except percentages)
	Three Months Ended December 31, 2020						Year Ended December 31, 2020
GAAP operating income range	($19,075)-($17,075)						($60,435)-($58,435)
Stock-based compensation		31,590						120,200
Amortization of acquired intangible assets		155						2,415
Acquisition related expenses		330						1,320
Non-GAAP operating income range	$13,000 -$15,000						$63,500-$65,500

Reconciliation of forecasted non-GAAP net income and non-GAAP net income per share (in thousands, except per share amounts)
	Three Months Ended December 31, 2020				Year Ended December 31, 2020
GAAP net loss range	($26,856)-($25,606)				($94,838)-($93,588)
Stock-based compensation		31,590				120,200
Amortization of acquired intangible assets		155				2,415
Acquisition related expenses		330				1,320
Non-cash interest expense for amortization of debt discount and debt issuance costs		6,685				24,874
Loss on early extinguishment of 2022 Convertible Notes		—				10,493
Impairment of strategic investment		—				250
Income tax effects of non-GAAP items	(1,304)-(1,554)				(9,814)-(10,064)
Non-GAAP net income range	$10,600-$11,600				$54,900-$55,900
GAAP net income per basic and diluted share	($0.58)-($0.56)				($2.12)-($2.09)
Non-GAAP net income per diluted share	$0.21-$0.23				$1.13-$1.15
Weighted average common shares used in computing GAAP basic and diluted net loss per share:		45,957				44,750
Weighted average common shares used in computing non-GAAP diluted net loss per share:		49,621				48,666

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:

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 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 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.
    
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