Last year was an impressive one for inbound marketing and sales specialist HubSpot (NYSE: HUBS). Even as the broader market as represented by the S&P 500 struggled and ended the year down 6%, HubSpot gained more than 40%.
What caused this stock to significantly top Wall Street? The company's consistent ability to exceed its guidance and analysts' consensus estimates, followed by the subsequent increase of its forecast, were cheered by investors, sending the stock to new heights.
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Another year provides the company with another opportunity to wow shareholders when HubSpot reports the financial results of its fourth quarter after the market close on Tuesday, Feb. 12. Let's look at the company's third-quarter results and a couple of recent developments to see if they provide any insight into what investors can expect when HubSpot reports earnings.
Another beat and raise
For the third quarter, HubSpot reported revenue of $131.8 million, up 35% year over year, and sailing past the high end of its guidance and analysts' consensus estimates. Adjusted diluted earnings per share (EPS) of $0.17 were more than triple expectations of $0.05.
Both segments of the business contributed to the better-than-expected results. Subscription revenue topped $125 million, up 35% year over year, while professional services and other revenue jumped to more than $6 million, up 39% versus the prior-year quarter.
HubSpot's spending discipline resulted in operating margins that continued to expand. On a GAAP basis, operating margin of negative 11.4% improved from negative 12.4% year over year. Adjusted operating margin of 4.4% climbed more than eightfold from 0.5% in the prior-year quarter.
The company's customer base grew to 52,505, up 40% year over year, while the total average subscription revenue per customer declined to $9,959, down 4%. This was the result of significant growth in HubSpot's recently relaunched lower-priced starter products, which are designed to attract new customers. As they tend to stay on for the longer term, most customers eventually increase their spending.
There have been a couple of recent announcements that will be of interest to HubSpot investors.
Late last year, the company announced that it had been recognized as a Gartner Peer Insights Customers' Choice for CRM Lead Management. In order to qualify for this achievement, a company must have at least 50 published reviews with an average overall rating of 4.2 stars or higher. At the time of the announcement, HubSpot boasted 1,251 verified peer reviews, with an overall rating of 4.4 stars.
HubSpot also announced that it was expanding its existing collaboration with Amazon Web Services. HubSpot already provides a number of benefits to mutual customers, like access to HubSpot for Startups and preferred pricing on its Growth Suite software, as well as a host of other perks. The companies will now provide additional benefits to those members, as well as those using HubSpot Connect. AWS will co-invest in building out an ecosystem for HubSpot partners, while providing tailored content for developers.
While neither of these announcements will have a direct impact on the financial results, it is an indication of the ongoing work that HubSpot is doing to build close relationships with its customers.
Another better-than-expected quarter?
After last quarter's positive results, HubSpot again raised its forecast. For the fourth quarter, the company is now anticipating revenue of $137 million at the midpoint of its guidance, which would represent year-over-year growth of 29%. This would translate to adjusted EPS of about $0.30.
While we don't want to fall into short-term thinking, understanding Wall Street's sentiment toward a company can help provide context to investors' reactions to the results. Analysts' consensus estimates are calling for revenue of $137.3 million, up 29% year over year, with EPS pegged at $0.30, up 150% versus the prior-year quarter, with both coming in near management's forecast.
HubSpot seems to have mastered the art of conservative guidance, and there isn't any reason to believe that the current quarter will be any different. The company's unerring focus on attracting new customers and serving existing ones has boosted its performance thus far.
That will likely continue to be the case when HubSpot reports earnings after the market close on Tuesday, Feb. 12.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and HubSpot. The Motley Fool owns shares of and recommends Amazon and HubSpot. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.