Here's Why HubSpot Is on Cloud Nine Today

By Sean Williams Markets Fool.com

What happened

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Shares of HubSpot (NYSE: HUBS), a developer of cloud-based marketing and sales software platforms for enterprise customers, surged as much as 12% during Wednesday's trading session, after the company reported its first-quarter earnings results following the closing bell on Tuesday.

So what

For the quarter, HubSpot reported revenue of $82.3 million, a 40% year-over-year increase, with its bread-and-butter subscription revenue rising 41% to $77.5 million. In step with its sales growth, HubSpot increased its total customer count by 40% to 31,262 as of March 31, with its marketing customer count improving 28% to 24,775. Wall Street's consensus had been calling for just $79.3 million in Q1 revenue.

Image source: Getty Images.

On an adjusted basis, HubSpot generated a $0.03-per-share profit ($1.2 million in net income), which compares favorably to the $3.9 million, or $0.11 per share, it lost in the prior-year quarter. The Street had been expecting an adjusted $0.08-per-share loss, meaning HubSpot topped expectations by a veritable mile ($0.11 per share).

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But it wasn't done there. The company's second-quarter and full-year guidance found the mark as well.

The company's Q2 forecast calls for $85 million to $86 million in sales and an adjusted bottom line of between zero and a loss of $0.02 per share. While its sales forecast is ever-so-slightly above the consensus, its bottom-line projections are nicely ahead of the Street's projected $0.05-per-share loss.

For the full year, HubSpot lifted its guidance to a range of $355.5 million to $359.5 million from $349 million to $353 million. It also significantly narrowed its annual per-share loss estimate to a range of $0.04 to $0.10, from $0.22 to $0.30.

Image source: Getty Images.

Now what

This was an all-around solid quarter, and the reaction by investors seems justified.

However, investors would also be wise to expect some bumps in the road as HubSpot pours its operating cash flow back into the business (which seems like a smart move given that cloud-based sales and marketing are still maturing as a whole). For instance, after the closing bell, HubSpot announced a $300 million convertible senior offering that boosts its balance sheet, but could wind up diluting shareholders in the future if bondholders convert their positions to common stock.

On the other hand, HubSpot has the potential for annual growth of more than 20% over the next three to five years, and it could very easily be generating in excess of $1 in cash flow per share by 2018 or 2019, which should allow for substantial reinvestment into its cloud software platform. Current and prospective shareholders probably aren't going to get a good read on HubSpot by analyzing its quarterly or annual earnings per share. Instead, focus on its sales growth and its cash-flow-per-share generation. If both keep growing by leaps and bounds, HubSpot's stock could head even higher.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.