HUBSPOT:

A BILLION DOLLAR COMPANY?

Table of Contents
Executive Summary
Industry Overview
Company Considerations

Business Model
Growth Strategy
Operating Performance
Recent Corporate Actions
Valuation

Trade Idea
Appendix

Executive Summary

This presentation evaluates the inbound and outbound marketing sector and within it, a growing
leader in the inbound marketing industry HubSpot.

Through my analysis, I have identified the fundamental drivers of the industry and company; to
evaluate the intrinsic price of HubSpot shares (HUBS). To do this I used a fully integrated financial
statement forecast model and discounted cash flow valuation.

I have observed the following key drivers with respect to the companys operating performance.
Documenting assumption for HubSpots growth, I have observed:
-
-
-

This marketing sector will be soon dominated by inbound marketing.

The future for HubSpot is to maintain its high growth and reach profitability in 2017.
HubSpot has made significant investments in growth through M&A, intellectual property, and
employment investments.

On a DCF basis, the company is fundamentally valued at $17,6. HubSpot shares are currently
trading on the New York Stock Exchange (NYSE) at a premium: $33,53 per share.

INDUSTRY OVERVIEW

Marketing Industry Overview

The marketing budget of companies depend on the size of the company.

As annual marketing budgets approach $100,000, the preference begins to flip from outbound
to inbound practices.
MID-SIZED COMPANIES MARKETING
BUDGET BY INBOUND VS. OUTBOUND

MARKETING BUDGET

Budgets are most variable for mid-size companies

Running inbound correlates to larger budget

100%
80%
60%
40%
20%
0%

35

# of employees
More than
1000
201 to 1000
26 to 200
11 to 25
Less than 10

30
25
20
15
10
5
0

Less than
$25k

$25k-$100k $100k-$500k $500k-$1M

$1M-$5M

More than
$5M

Competitive Landscape
IBM

ADOBE
Adobes impact in the Marketing Tech world is undervalued.
Main acquisitions: The firm pivoted into analytics in 2009 when it
purchased what is now the leader of analytics, Omniture. With the
addition of content management company, Day Software in 2010, adtech platform Auditude in 2011, and digital marketing firm Neolane in
2013, Adobe has begun to assemble a credible portfolio of marketing
technologies.

Market focusing: IBM focuses on significantly larger customers than

HubSpot, but IBM bears watching if only because it influences how
large firms think, and how it cascades down to the mid-market.
Acquisitions: Unica (marketing), DemandTec (retail analytics),
Emptoris (procurement), Kenexa (HR) and more recently, SilverPop
(marketing).

Future prospects: With the stock more highly valued due to the
valuation boost from a masterful transition to subscription, Adobe will
be able to buy more premium merchandise without incurring dilution.

Inbound
Marke4ng

Competitive Landscape
ELOQUA
Business efficiency: Eloqua struggled mightily while it was private.
When the new CEO Joe Payne decided to move in the Business
headquarters to Virginia, the company acquired a solid business.
Recent operation: Selling Eloqua to a strategic buyer, Oracle. Eloqua
sold the firm for $870 million (before Marketo came roaring up in
the rear view mirror, which would have spooked investors and
pressured ELOQs valuation)

MARKETO
Size: Marketo and HubSpot were similar-sized firms two years ago,
before Marketo hired a number of enterprise salespeople in order to
move up market.
Technology: The core of Marketos technology is the firms ability to
quickly assemble who a prospect is once they reveal themselves by
providing some personally identifiable information.
Customers: Marketos customer base leans more towards technology
firms which is a natural consequence of its California headquarters.

Inbound
Marke4ng

Marketo HUBS closest listed

peer
Company

HUBSPOT

MARKETO

SHARE PRICE

$33,53

$32,42

EPS

n.m.

n.m.

MARKET CAP

$1,05 B

$1,30 B

NET DEBT/ (CASH)

-$12,6 M

$1,76 M

SALES

$77,6 M

$95,9 M

EBITDA

-$27,0 M

$40,5 M

EV

$1, 037 M

$1,302 M

EV/EBITDA

n.m.

26,8x

EV/SALES

13,4x

12,7x

IPO

$100m in October 2014

$75m in April 2013

COMPANY
CONSIDERATIONS

Key Company Considerations

Traditional marketing methods are obsolete:

- Because of the emergence of always on Internet access.

- Buyers have more product information than sellers.
- Pop-ups, untargeted email, and inane websites are ineffective
and are increasingly detrimental to a brands identity.

Companies pain points include:

- Businesses need tools that help them navigate and optimize

their now ineffective spending on sales and marketing.
- Businesses are ready to invest:
Large total addressable market: Companies spend over $1 trillion
on sales and marketing worldwide annually.

Business Model

Subscription plans: The HubSpot platform is sold on a subscription basis through an annual
contract.

IT services: HubSpot offers to train its customers and other consulting services.

Revenue recognition: Subscription revenue is recognized ratably over the deal term (1-year) ;
professional services are recognizes as the services are rendered.

High visibility: 90% annual subscription dollar retention rate.

Bookings are relatively linear: The firm's monthly sales cadence minimizes the underlying
bookings volatility you see with many other software companies.

Geography revenue mix: 79% of revenue is generated in the US, 21% is generated internationally.

Package pricing:
-
-
-

Basic: $2,400/year (35% of customers).

Pro: $9,600/year (51% of customers).
Enterprise: $28,800/year (14% of customers).

HubSpots value proposition

An all-in-one inbound marketing platform

Other marketing software vendors provide siled databases and solutions

HubSpot provides a friendly user interface, on one database, with a single login one vendor
with one support line, not a combination of disparate point applications

Brand recognition:

An efficient marketing method

Dominant digital footprint: recognized as a thought leader in the marketing industry with a
leading brand name
Co-founders (Brian Halligan and Dharmesh Shah) leading recognition

Inbound leads are typically higher quality and lower cost, which makes for a compelling and
economic go-to-market strategy

Agency partner relationships

+2,000 agency partners worldwide. Dramatically expands the firms reach in a broadly
dispersed addressable opportunity

HubSpots growth strategy

Grow its existing customers base:

- Currently over 11,600 customers in more than 70 countries and representing various
industries.
- The firms target audience is the mid-market, namely firms with 10-2000 employees.
- Continue to leverage its inbound go-to market approach.
- Continue to grow its network of marketing agency partners.

Increase revenue from existing customers:

- By expanding customers use of its platform.
- By selling to other parts of customers organizations.
- By upselling additional offerings and features.

Continue expanding internationally:

- Currently representing 21% of revenues.

- Through additional investments in local sales, marketing and professional service
capabilities, as well as by leveraging its agency partners network.

HubSpots growth strategy

Continue to innovate and expand its platform:
Primarily resulting in R&D costs

Selectively pursue acquisitions:

Complementary businesses, technologies and
teams
HubSpot is currently loss making. Based on our forecasts,
the firm will generate profits in FY2017

Headline Operational Metrics

Historical Sales
With a mid-market focusing, HubSpot has
efficiently reached these businesses at scale
through its suited inbound go-to-market
approach and more than 2,000 marketing
agency partners worldwide. As a result,
revenue y-o-y increases of 81% in 2012 and
50% in 2013.
Operating incomes can be explained mainly
by the increasing investments in S&M, R&D,
customer services and G&A. In 2012, the
company transformed its platform.
HubSpot revenues are predominantly
subscriptions (91% in 2013) and some
professional services (9% in 2013).

77.6
51.6
28.6
2011

2012

2013

EBIT
2011

-24.4

2012

2013

-18.7
-34.3

Financial Forecasts
The company is forecasted to
grow its sales by 26% y-o-y
between 2014-2017

Sales & Growth (14-18)

Sales

Growth (%)

272.1

300
250
200
150

217.6

39,4%
108.2

28% 174.1
26%
138.7

40%
25%

25% 30%
20%

100

Cost efficiencies will see EBIT

margin expansion to 41% in FY18

50%

10%

50
0

0%
2014E

2015E

2016E

2017E

2018E

EBIT & Margin (14-18)

This will translate into profit

generation in 2017

EBIT

60

40.815%

40

4%

20

The company will not pay taxes

until 2017

Margin (%)

-18%
2015E
2016E
2017E
-26%
-32%

-20
-40

-34.2

-35.4

-30.6

10%
0%

7.6
2014E

20%

-10%
2018E

-20%
-30%
-40%

HubSpots Acquisitions History

Since 2011, HubSpot has acquired 4 businesses

HubSpots strategy has been to focus on its inbound marketing platform and services to make them more efficient
This has increased HubSpots expenses and has resulted in loss-making performance in the near-term. However we
predict these investments will yield profit generation in 2017

M&A Transaction History

Announced Date

Target

Description

Benefits

March 28th, 2013

CHIME

Financial terms
have not being
disclosed.

It brings the notifications from a users various

web apps together into a single feed.

March 28th, 2013

PrepWork

Financial terms
have not being
disclosed.

It sends automated briefing emails to prepare

users for upcoming meetings.

August 18th, 2011

Oneforty

Financial terms
have not being
disclosed.

It provides a comprehensive e-commerce

marketplace through the Twitter platform.

June 16th, 2011

Performable

Financial terms
have not being
disclosed.

It clients a view into the sales and marketing

performance across e-mail, web, social media and
mobile tools.

TRADE IDEA

Valuation Commentary

In order to calculate the intrinsic value of HubSpot, I used a 5-year discounted

cash flow forecast for FY14-18E. These forecasts incorporate assumptions I made
about HubSpots future prospects

Key assumptions used include:

-
-
-

WACC: 14%.
Terminal growth rate: 10%
Net cash position as at December 31st, 2013: $12,6M.

On our DCF basis, the company is fundamentally valued at $17,6 per share

HubSpot shares are currently trading on the New York Stock Exchange (NYSE) at
a premium: $33,53 per share
-

This implies FY15 EV/SALES multiple of 1.8x

On a relative valuation basis using trading multiples of Hubspots closest peer

Marketo which trades at 13.6x LTM sales, Hubspot is valued at $1,053m

Discounted Cash Flow Analysis

Financial Year (Dec. Year end)
Total Turnover
growth (%)

EBIT
margin (%)

Depreciation & Amortisation

Tax
Capital Expenditure
Capex/Sales (%)

Change in Working Capital

Working Capital / Sales (%)

Free Cash Flow

Discount Factor

Terminal Value

Present Value
Enterprise Value (m)
Net Debt as at (Dec 2013)
Market Capitalisation ($m)
No. Shares (m)
Share Price ($)

31-dc-13
78

31-dc-14
108
39,4%

31-dc-15
139
28,2%

31-dc-16
174
25,5%

31-dc-17
218
25,0%

31-dc-18
272
25,0%

-34
-44,1%

-34
-31,6%

-35
-25,5%

-31
-17,6%

8
3,5%

41
15,0%

3,8

7,2

9,6

5,7

10,1

11,2

7,2
4,4
-5,6%

7,2
6,5
-6,0%

7,4
6,9
-5,0%

6,4
8,7
-5,0%

(1,6)
10,9
-5,0%

(8,6)
13,6
-5,0%

Terminal Period

0,0
0,0%

(1,4)
1,3%

5,6
-4,1%

6,4
-3,7%

7,9
-3,7%

9,8
-3,6%

-28

-28

-20

-21

13

40

40

0,88

0,77

0,67

0,59

0,52

0,52

1091

-24,3
541
-12,643
553,98
31,39
17,6

-15,1

-14,0

7,8

20,6

566

Relative Valuation - Trading

The following peers have
been chosen on the following
basis:
- Closest peers (size,
activity, revenue).
- Actual/Potential major
position in the inbound
marketing market.
Implied enterprise value
from multiples:
EV/sales of Marketo
equals to 13.6x HubSpot
LTM sales $1,053M.

MARKETO

ELOQUA

ADOBE

IBM

Share price

32.42

74.89

157.68

EPS

-1.36

0,47

12.34

Market Cap

1,300

156,050

Short term debt

3,010

Long term debt

5.37

32,860

Cash only

3.61

Net Debt

1,76

EBITDA

40.54

SALES

95.92

90

Enterprise value

1,302

871

Entreprise value/sales

13,57x

9,68x

Enterprise value/EBITDA

32,11x

3520

10,720
25,150

720,6

24,970

4120

99,751
181,200

45,48x

1,82x

7,96x

7,26x

APPENDIX

Financial Assumptions
Hubspot
Financial Assumptions

Hist.

Hist.

Hist.

Proj.

Proj.

Proj.

Proj.

Proj.

31-dc-11

31-dc-12

31-dc-13

31-dc-14

31-dc-15

31-dc-16

31-dc-17

31-dc-18

80,7%

50,4%

39,4%

28,2%

25,5%

25,0%

25,0%

32,6%

37,4%

32,3%

30,0%

28,0%

26,5%

25,0%

146,9%

146,9%

146,9%

146,9%

146,9%

146,9%

Income statement
Sales growth %
COGS as % of sales

42,3%

Annual depr. as % of previous PPE

SG&A as % of sales
Amortization of other intangibles amount
Non-recurring items amount

143,2%

103,7%

106,7%

99,3%

95,5%

89,6%

70,0%

60,0%

0,0
0,0

0,0
0,0

0,0
0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

Effective tax rate

Shareholder info
Dividend per share growth rate

Balance sheet: current assets

Accounts receivable as % of sales

0,0%

10,1%

9,3%

10%

10%

10%

10%

10%

Inventories % of COGS

0,0%

5,4%

15,6%

15,0%

15,0%

15,0%

15,0%

15,0%

Other current assets % of sales

0,0%

6,4%

5,5%

5,5%

5,5%

5,5%

5,5%

5,5%

Capital expenditures % of sales

4,1%

0,6%

5,6%

6,0%

5,0%

5,0%

5,0%

5,0%

Other assets % of sales

0,0%

5,7%

6,6%

6,6%

6,6%

6,6%

6,6%

6,6%

Balance sheet: non-current assets

Balance sheet: liabilities

Accounts payable and accruals % of COGS

4,3%

3,3%

3,3%

3,3%

3,3%

3,3%

3,3%

Accrued expenses as % sales

7,8%

8,9%

8,9%

8,9%

8,9%

8,9%

8,9%

Deferred Revenues as % of sales

Other long-term liabilities % of sales

30,5%

31,8%

30,0%

30,0%

30,0%

30,0%

30,0%

0,0%

2,6%

3,8%

3,8%

3,8%

3,8%

3,8%

3,8%

0,0

101,2

101,3

101,3

101,3

101,3

101,3

101,3

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0
0,0

0,0
0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Balance sheet: equity

Common stock amount
Share repurchases $ amount (show as positive)

Debt (/$ amount)

Loans due for repayment
Other long-term debt repayment

0,0
0,0

Interest Rate (%)

Short term debt

3,00%

3,00%

3,00%

3,00%

3,00%

Loans due for repayment

2,00%

2,00%

2,00%

2,00%

2,00%

Other long-term debt repayment

0,00%

0,00%

0,00%

0,00%

0,00%

Cash

1,00%

1,00%

1,00%

1,00%

1,00%

Income Statement
Hubspot
Income Statement

Hist.

Hist.

Hist

Proj.

Proj.

Proj.

Proj.

Proj.

31-dc-11

31-dc-12

31-dc-13

31-dc-14

31-dc-15

31-dc-16

31-dc-17

31-dc-18

Net Sales

28,6

51,6

77,6

108,2

138,7

174,1

217,6

272,1

COGS

12,1

16,8

29,0

35,0

41,6

48,8

57,7

68,0

SG&A

40,9

53,5

82,8

107,5

132,5

156,0

152,4

163,2

EBIT

(24,4)

(18,7)

(34,3)

(34,2)

(35,4)

(30,6)

7,6

40,8

2,463

3,764

7,2

9,6

5,7

10,1

11,2

(27,0)

(25,8)

(25,0)

17,7

52,0

Depreciation & Amortization

EBITDA

Non-recurring items

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Interest Income

0,0

0,0

0,0

0,1

0,0

0,0

0,0

0,0

1,5

2,5

2,8

2,1

(36,9)

(33,1)

4,8

38,7

Interest Expense
Profit before taxes

0,0

0,1

0,0

0,5

(24,4)

(18,8)

(34,2)

(34,6)

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Profit after tax

(24,4)

(18,8)

(34,2)

(34,6)

(36,9)

(33,1)

4,8

38,7

Net income

(24,4)

(18,8)

(34,2)

(34,6)

(36,9)

(33,1)

4,8

38,7

4,1

4,7

5,1

5,1

5,1

5,1

5,1

5,1

($5,93)

($4,00)

($6,70)

($6,78)

($7,21)

($6,47)

$0,94

$7,57

$0,00

$0,00

$0,00

$0,00

$0,00

$0,00

$0,00

$0,00

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Taxes

Shareholder information
Diluted weighted average shares outstanding
Diluted earnings per share
Dividends per share
Dividends

Balance Sheet
Hubspot
Balance Sheet

Assets
Current assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Other current assets
Total current assets

Non-current assets
Net PP&E
Goodwill
Other intangibles
Other assets
Total assets
Liabilities
Current liabilities
Short term debt
Accounts payable and accruals
Accrued expenses
Deferred Revenues
Total current liabilities

Non-current liabilities
Total long-term debt
Other long-term liabilities
Total liabilities
Equity
Common stock
Retained earnings

Hist.
31-Dec-11

0.0

0.0

0.0

0.0

Hist.
31-Dec-12

Hist.
31-Dec-13

Proj.
31-Dec-14

Proj.
31-Dec-15

Proj.
31-Dec-16

Proj.
31-Dec-17

Proj.
31-Dec-18

41.1
5.2
0.9
3.3

12.6
7.2
4.5
4.3

0.0
10.8
5.2
6.0

0.0
13.9
6.2
7.6

0.0
17.4
7.3
9.6

0.0
21.8
8.7
12.0

0.0
27.2
10.2
15.0

50.5

28.7

22.0

27.7

34.3

42.4

52.4

2.6
9.3
0.3
2.9

7.2
9.3
0.1
5.2

65.7

50.6

6.5
9.3
0.1
7.1
45.2

3.9
9.3
0.1
9.2
50.2

6.9
9.3
0.1
11.5
62.2

7.6
9.3
0.1
14.4
73.9

10.0
9.3
0.1
18.0
89.8

0.0
2.2
8.4
15.7

26.3

0.0
2.5
12.3
24.7

39.5

23.4
1.2
10.5
32.5
67.5

52.5
1.4
12.5
41.6
107.9

82.7
1.6
14.6
52.2
151.2

71.4
1.9
17.3
65.3
155.9

26.2
2.2
20.4
81.6
130.5

0.0
1.3

27.6

0.0
3.0

42.5

0.0
4.1
71.6

0.0
5.3
113.2

0.0
6.6
157.8

0.0
8.3
164.2

0.0
10.3
140.8

101.2
(63.2)

101.3
(93.2)

101.3
(127.7)

101.3
(164.3)

101.3
(196.9)

101.3
(191.6)

101.3
(152.3)

Cash Flow Statement

Hubspot
Cash Flow Statement

Hist.
31-Dec-11

Hist.
31-Dec-12

Hist.
31-Dec-13

Proj.
31-Dec-14

Proj.
31-Dec-15

Proj.
31-Dec-16

Proj.
31-Dec-17

Proj.
31-Dec-18

Net Income
Depreciation
Amortisation
Change in OWC
Change in other assets
Change in other liabilities
Cash from Operating Activities

-34.5
7.2
0.0
(1.4)
(2.0)
1.1
-29.6

-36.5
9.6
0.0
5.6
(2.0)
1.2
-22.1

-32.7
5.7
0.0
6.4
(2.3)
1.3
-21.5

5.3
10.1
0.0
7.9
(2.9)
1.7
22.2

39.3
11.2
0.0
9.8
(3.6)
2.1
58.8

Capex
Cash from Investing Activities

6.5
-6.5

6.9
-6.9

8.7
-8.7

10.9
-10.9

13.6
-13.6

Change in Common Stock

Change in Treasury Stock
Dividends
Long Term Debt Repayment
Cash from Financing Activities

0.0
0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0
0.0

(36.0)

(29.0)

(30.3)

11.3

45.2

12.6
(23.4)

(23.4)
(52.5)

(52.5)
(82.7)

(82.7)
(71.4)

(71.4)
(26.2)

Net Cash Flow

Beginning Cash
Ending Cash

12.6

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