HubSpot's sales beat is bigger than its full-year upgrade

HubSpot reported more sales and profit than it had forecast for the third quarter. Its outlook for the remaining months is less upbeat: the marketing and customer-management software company expects revenue growth to slow, despite lifting its annual targets.

A beat that barely lifted the annual target

Revenue reached $947.6 million, up 17% from a year earlier, against an August forecast of $924 million to $925 million. HubSpot reaffirmed that range on October 6, after the quarter had ended, when it announced a workforce reduction.

The beat extended to profit. Adjusted operating income reached $214.2 million, compared with the $187 million to $188 million forecast. Adjusted earnings per share were $3.81, above the expected $3.25 to $3.27.

Research by Ticker Byline shows that most of the quarterly revenue outperformance did not carry through to the annual forecast. Our comparison of the original August ranges and the latest outlook puts the quarterly beat at $23.1 million against the midpoint, while the annual midpoint rose $4 million.

The August annual and third-quarter forecasts, combined with first-half results, implied roughly $965 million of fourth-quarter revenue. HubSpot now explicitly expects $945 million to $947 million. The earlier figure is the remainder calculated from those August numbers; the new range is management's forecast specifically for Q4.

The latest quarter's 17% sales growth therefore gives way to expected growth of about 12% in the final quarter.

Customers and profits are still growing

The business continued to add customers, reaching 311,704 at September 30, up 12%. Lower-priced Starter plans helped bring in customers, while adoption of more expensive Professional and Enterprise products supported higher average subscription revenue per customer.

Profitability improved, too. Reported operating income rose to $71.9 million from $11.2 million. The adjusted operating margin reached 22.6%, up from 19.9%, with stock-based compensation the largest item removed from the adjusted measure.

There is pressure underneath that improvement. Adjusted subscription gross margin, the share of subscription sales left after related service costs and the company's adjustments, fell to 85.4% from 86.7%. Hosting costs rose as the customer base and platform usage grew, including use of AI features. Software-development amortization also increased.

The annual adjusted operating-profit target nevertheless rose to $772 million to $773 million from $762 million to $766 million. HubSpot is projecting better profits across the year, alongside a more restrained sales finish.

The restructuring bill arrives after the strong quarter

The roughly 7% workforce reduction was announced in October. HubSpot expects $65 million to $75 million of charges, mostly recognized in the fourth quarter. Those costs are excluded from its adjusted profit forecast.

Cash generation remains substantial. Operating cash flow reached $659.6 million in the first nine months, although $973.7 million of cash share repurchases exceeded the $495.5 million left after property, equipment and capitalized software spending. Cash and investments totaled $1.31 billion at September 30.

Our HubSpot company profile follows those cash flows, the restructuring and its completed Futurepedia acquisition. The next results will test whether HubSpot can meet its higher profit target while sales growth slows and the restructuring costs move into the accounts.