Hubspot (HUBS): How Do They Make Money?

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As discussed here, if you want to have winning stock pitches, you need to nail the How Do They Make Make Money question. Here is an example of one I put together for Hubspot stock HUBS 590.16 -4.70 -0.79%. Yes, for a 5-page stock pitch it would be shorter, but given that I had an entire blog post to work with here, I thought I would try to be a bit more comprehensive.

Introduction

HUBS is a Software-as-a-Service (SaaS) business founded in 2006 by Brian Halligan and Dharmesh Shah. It IPO’d in 2014 (HUBS S-1).  The company’s first product was Marketing Hub, which was based on a growth strategy for digitally-oriented SMB businesses that the founders literally wrote the book on, called Inbound Marketing. HUBS’ product offerings have expanded over time, and today the company sells a cloud-based software platform with a suite of 5 applications that help about 170,000 small enterprises operate and grow by leveraging HUBS’ digital infrastructure. 

The apps all work together from a shared, CRM database that easily integrates with outside products.  HUBS charges recurring monthly subscription fees for this service.  Customers usually start with free products and transition to paid as they pursue more functionality and need to accommodate more data as they grow. A company of any size can, in minutes, simply put the charge on a personal credit card or set up a monthly ACH autopayment and then manage it via their account login. Simple, lots of high gross margin recurring revenue, and a dreamy working capital position for HUBS!

What’s The Job-To-Be-Done that HUBS Is Hired For?

The below excerpt is taken from HUBS’ first conference call as a public company in 2014. It captures the essence of the Franken-system problem Halligan describes, which they are still helping solve today:

Brian Halligan HubSpot, Inc. – Co-Founder, Chairman and Chief Executive Officer:

 I want to say a brief word about what HubSpot is, as some of you may be new to our story.

HubSpot’s an inbound marketing and sales software-as-a-service company based in Cambridge, Massachusetts. We started HubSpot because we noticed that the traditional marketing playbook was broken. Email blasts were blocked by spam protection. Cold calls were blocked by caller ID. TV ads were blocked by DVRs, et cetera, et cetera. Humans had radically changed the way they shop and bought products, and HubSpot’s vision was to help companies transform the way they go to market to match the way humans actually behave.

The road to transform your marketing without using HubSpot, a company would have to buy blogging software, a new website, search engine optimization software, social media management software and marketing automation software and then have a team of IT people try to glue it all together. We call this a Franken-system. What HubSpot does is, not only teach companies how to transform their marketing, but gives them an all-in-one system to enable mere mortals to pull this type of marketing off: one platform to learn, one phone number to call, one payment to make and one password to remember.

Here’s a youtube link to a short interview with Brian Halligan from 2019 where he discusses the company’s history and its mission. 

What’s HUBS Selling?

Here are the five apps, or “hubs” as the company calls them, which comprise the essence of HUBS’ product offering, aka its platform:

Hubspots (HUBS) product list for stock pitch

Below are the basics of each, including hyperlinks to the company’s detailed product descriptions. Text in quotes was taken directly from the “Our CRM Platform” section of the Hubspot 2022 Annual Report:

At the core of all the hubs is a CRM database – it ties everything together, and once a company is on it, it can use new products and functionality as soon as HUBS pushes them to production. From the Hubspot 2022 Annual Report:

The core of our CRM Platform is a single database of lead and customer information that allows businesses to track their interactions with contacts and customers, manage their customer activities, and report on their pipeline and sales. This allows a complete view of lead and customer interactions across all of our integrated Hubs, giving our CRM Platform substantial power. This integration makes it possible to personalize every aspect of the customer interaction across web content, social media engagement, and email messages across devices, including mobile. 

This makes the HUBS products very sticky, driving recurring revenue and tremendous operating leverage for the company as they expand their offerings.

It’s also important to highlight that running through all of these products are artificial intelligence and payment processing capabilities, which are just getting going now but probably have a lot to do with where the product offerings and earnings of HUBS are going in the future. Since a stock’s intrinsic value is a reflection of future earnings power, these topics have a lot to do with HUBS’ valuation today, and in fact, recent investor enthusiasm for AI has been cited as the reason for a run-up in tech valuations over the past few months. Links here to a conference and an earnings call in which HUBS describes its thinking on AI and its initiatives in the area.

Some Revenue Numbers

This post is not about the financial analysis or valuation of HUBS, but here are some numbers from the 2021 Analyst Day showing approximate sales levels for each hub:

Hubspot Annual Recurring Revenue (ARR) By Hub – 2021

HubARR ($mm’s)
Marketing840
Sales290
Service60
CMS45
Operations8
Total1,243

Pricing

HUBS charges around  $15 to $3,500 per month to businesses, based on the number of users and number of hubs used. Here is an example of pricing for their highest-selling product, Marketing Hub – you can see the pricing of the other hubs on their respective sell sheets in the next section.

Example of Hubspot (HUBS) product pricing for How Do They Make Money section of stock pitch

Per HUB’s 1Q23 earnings call gross retention percentage is in the high-80s, and net retention is about 107%.  Growth investors heavily focus on retention rates, but that is beyond the scope of this post, where we are just trying to get a flavor for the business.

How Are The Hubspot Products Sold?

Per the 2022 Analyst Day, 39% of sales occur through solutions partners (agencies that earn commissions when they sell HUBS products to clients), and 61% are direct to the customer. Direct is comprised of inbound marketing (heavy emphasis on product-led growth) and inbound direct sales, which involves sales representatives.

Readers are likely familiar with sales funnels and how they work, but there is a lot on the Internet about them for those who don’t.   HUBS excels at getting customers to love and depend on their free products via inbound marketing and then trading up to paid products – and more of them – over time (aka conversion). You can get a sense of this dynamic by looking at the sell sheet links below for each of the five apps.  They list the functionality of the free (“free” or “starter” tools”) vs. paid (“premium edition, “professional,” or “enterprise level”) versions of each of the hubs. HUBS is very strategic about the feature mixes as a means of moving users from the left to the right columns on these sheets to grow revenue from existing users.

Sell Sheet Links:

Marketing

Sales 

Service

CMS

Operations

In addition to converting free users to paid, HUBS wants to sell existing users more hubs over time. This is a big part of its growth story. There is a lot going on in the slide below from the HUBS 2021 Analyst Day, but it’s worth taking a quick look at:

Hubspot (HUBS) SaaS platform expansion analysis for stock pitch

The point is that from 2017 to 2021, more HUBS customers are using multiple HUBS, and the company has also been successful in getting more customers to start with HUBS other than Marketing Hub, which indicates the appeal and therefore market for other HUBS products is widening. 

By now, you should have a pretty good idea of what HUBS does, allowing you and ultimately your readers to focus on other aspects of the stock pitch, like competitors, growth drivers, valuation, and downside risks.

In the next post, I will focus on HUBS’ ROIC calculation, adjust it for intangible investment, and take a look at how LTV/CAC ties into marginal productivity of capital, as these are highly relevant issues for evaluating Hubspot stock.

Also, be sure to check out Inbound, an annual conference that HUBS runs where you can learn a ton about the business and meet lots of customers, partners, and HUBS managers. A stream of the conference (September 5th – 8th, 2023) and presentation materials can be found here.

Quick Links

Hubspot 2022 Annual Report

Hubspot Analyst Day 2022

Hubspot Analyst Day 2021

Hubspot S-1 (2014)

Recent Interview With Dharmesh Shah

Link to the Clouded Judgment blog showing some discussions of HUBS and SaaS companies in general

Please email me with questions/comments/errors related to this post!