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 company’s operating performance.

Documenting assumption for HubSpot’s 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.

MARKETING BUDGET Budgets are most variable for mid-size companies

# of employees

0

5

10

15

20

25

30

35

Less than $25k

$25k-$100k $100k-$500k $500k-$1M $1M-$5M More than $5M

MID-SIZED COMPANIES MARKETING BUDGET BY INBOUND VS. OUTBOUND

Running inbound correlates to larger budget

0%  

20%  

40%  

60%  

80%  

100%  

More than 1000 201 to 1000

26 to 200

11 to 25

Less than 10

Competitive Landscape

Inbound  Marke4ng  

ADOBE

• Adobe’s 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, ad-tech platform Auditude in 2011, and digital marketing firm Neolane in 2013, Adobe has begun to assemble a credible portfolio of marketing technologies.

• 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.

IBM

• 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).

Competitive Landscape

Inbound  Marke4ng  

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 ELOQ’s 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 Marketo’s technology is the firm’s ability to quickly assemble who a prospect is once they reveal themselves by providing some personally identifiable information. Customers: Marketo’s customer base leans more towards technology firms which is a natural consequence of its California headquarters.

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 brand’s 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).

HubSpot’s 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:

–  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 •  An efficient marketing method

–  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 firm’s reach in a broadly dispersed addressable opportunity

HubSpot’s growth strategy •  Grow its existing customers base:

-  Currently over 11,600 customers in more than 70 countries and representing various industries.

-  The firm’s 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.

HubSpot’s 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).

28.6

51.6

77.6

2011 2012 2013

-24.4 -18.7

-34.3

2011 2012 2013

EBIT

Financial Forecasts

EBIT & Margin (‘14-’18)

Sales & Growth (‘14-’18)

108.2 138.7 174.1

217.6

272.1

39,4% 28% 26% 25% 25%

0%

10%

20%

30%

40%

50%

0

50

100

150

200

250

300

2014E 2015E 2016E 2017E 2018E

Sales Growth (%)

-34.2 -35.4 -30.6

7.6

40.8

-32% -26%

-18%

4%

15%

-40%

-30%

-20%

-10%

0%

10%

20%

-40

-20

0

20

40

60

2014E 2015E 2016E 2017E 2018E

EBIT Margin (%)

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

•  Cost efficiencies will see EBIT

margin expansion to 41% in FY’18 •  This will translate into profit

generation in 2017

•  The company will not pay taxes until 2017

HubSpot’s Acquisitions History •  Since 2011, HubSpot has acquired 4 businesses •  HubSpot’s strategy has been to focus on its inbound marketing platform and services to make them more efficient •  This has increased HubSpot’s 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 user’s 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 HubSpot’s 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 FY’15 EV/SALES multiple of 1.8x

•  On a relative valuation basis using trading multiples of Hubspot’s 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) 31-déc-13 31-déc-14 31-déc-15 31-déc-16 31-déc-17 31-déc-18 Terminal Period Total Turnover 78 108 139 174 218 272   growth (%) 39,4% 28,2% 25,5% 25,0% 25,0%       EBIT -34 -34 -35 -31 8 41   margin (%) -44,1% -31,6% -25,5% -17,6% 3,5% 15,0%       Depreciation & Amortisation 3,8 7,2 9,6 5,7 10,1 11,2       Tax 7,2 7,2 7,4 6,4 (1,6) (8,6)   Capital Expenditure 4,4 6,5 6,9 8,7 10,9 13,6   Capex/Sales (%) -5,6% -6,0% -5,0% -5,0% -5,0% -5,0%       Change in Working Capital 0,0 (1,4) 5,6 6,4 7,9 9,8   Working Capital / Sales (%) 0,0% 1,3% -4,1% -3,7% -3,7% -3,6%       Free Cash Flow -28 -28 -20 -21 13 40 40     Discount Factor 0,88 0,77 0,67 0,59 0,52 0,52     Terminal Value 1 091     Present Value -24,3 -15,1 -14,0 7,8 20,6 566 Enterprise Value (m) 541   Net Debt as at (Dec 2013) -12,643   Market Capitalisation ($m) 553,98   No. Shares (m) 31,39   Share Price ($) 17,6            

Relative Valuation - Trading         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 0 3,010

Long term debt 5.37 32,860

Cash only 3.61 3520 10,720

Net Debt 1,76 25,150

EBITDA 40.54 720,6 24,970

SALES 95.92 90 4120 99,751

Enterprise value 1,302 871 181,200

Entreprise value/sales 13,57x 9,68x 45,48x 1,82x

Enterprise value/EBITDA 32,11x 7,96x 7,26x

•  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 à $1,053M.

APPENDIX

Financial Assumptions Hubspot Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.

Financial Assumptions 31-déc-11 31-déc-12 31-déc-13 31-déc-14 31-déc-15 31-déc-16 31-déc-17 31-déc-18

Income statement

Sales growth % 80,7% 50,4% 39,4% 28,2% 25,5% 25,0% 25,0%

COGS as % of sales 42,3% 32,6% 37,4% 32,3% 30,0% 28,0% 26,5% 25,0%

Annual depr. as % of previous PPE 146,9% 146,9% 146,9% 146,9% 146,9% 146,9%

SG&A as % of sales 143,2% 103,7% 106,7% 99,3% 95,5% 89,6% 70,0% 60,0%

Amortization of other intangibles amount 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Non-recurring items amount 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Effective tax rate 0,0% 0,0% 0,0% 0,0% 0,0%

Shareholder info

Dividend per share growth rate 0,0% 0,0% 0,0% 0,0% 0,0%

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%

Balance sheet: non-current assets

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: 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 30,5% 31,8% 30,0% 30,0% 30,0% 30,0% 30,0%

Other long-term liabilities % of sales 0,0% 2,6% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8%

Balance sheet: equity

Common stock amount 0,0 101,2 101,3 101,3 101,3 101,3 101,3 101,3

Share repurchases $ amount (show as positive) 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Debt (£/$ amount)

Loans due for repayment 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Other long-term debt repayment 0,0 0,0 0,0 0,0 0,0 0,0 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 Hist. Hist. Hist Proj. Proj. Proj. Proj. Proj.

Income Statement 31-déc-11 31-déc-12 31-déc-13 31-déc-14 31-déc-15 31-déc-16 31-déc-17 31-déc-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

Depreciation & Amortization 2,463 3,764 7,2 9,6 5,7 10,1 11,2

EBITDA (27,0) (25,8) (25,0) 17,7 52,0

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

Interest Expense 0,0 0,1 0,0 0,5 1,5 2,5 2,8 2,1

Profit before taxes (24,4) (18,8) (34,2) (34,6) (36,9) (33,1) 4,8 38,7

Taxes 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

Shareholder information

Diluted weighted average shares outstanding 4,1 4,7 5,1 5,1 5,1 5,1 5,1 5,1

Diluted earnings per share ($5,93) ($4,00) ($6,70) ($6,78) ($7,21) ($6,47) $0,94 $7,57

Dividends per share $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00

Dividends 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Balance Sheet

Hubspot Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.Balance Sheet 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18AssetsCurrent assets

Cash and cash equivalents 41.1 12.6 0.0 0.0 0.0 0.0 0.0Accounts receivable 5.2 7.2 10.8 13.9 17.4 21.8 27.2Prepaid expenses 0.9 4.5 5.2 6.2 7.3 8.7 10.2Other current assets 3.3 4.3 6.0 7.6 9.6 12.0 15.0

Total current assets 0.0 50.5 28.7 22.0 27.7 34.3 42.4 52.4

Non-current assetsNet PP&E 2.6 7.2 6.5 3.9 6.9 7.6 10.0Goodwill 9.3 9.3 9.3 9.3 9.3 9.3 9.3Other intangibles 0.3 0.1 0.1 0.1 0.1 0.1 0.1Other assets 2.9 5.2 7.1 9.2 11.5 14.4 18.0

Total assets 0.0 65.7 50.6 45.2 50.2 62.2 73.9 89.8

LiabilitiesCurrent liabilities

Short term debt 0.0 0.0 23.4 52.5 82.7 71.4 26.2Accounts payable and accruals 2.2 2.5 1.2 1.4 1.6 1.9 2.2Accrued expenses 8.4 12.3 10.5 12.5 14.6 17.3 20.4Deferred Revenues 15.7 24.7 32.5 41.6 52.2 65.3 81.6

Total current liabilities 0.0 26.3 39.5 67.5 107.9 151.2 155.9 130.5

Non-current liabilitiesTotal long-term debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other long-term liabilities 1.3 3.0 4.1 5.3 6.6 8.3 10.3

Total liabilities 0.0 27.6 42.5 71.6 113.2 157.8 164.2 140.8

EquityCommon stock 101.2 101.3 101.3 101.3 101.3 101.3 101.3Retained earnings (63.2) (93.2) (127.7) (164.3) (196.9) (191.6) (152.3)

Cash Flow Statement

Hubspot Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.Cash Flow Statement 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

Net Income -34.5 -36.5 -32.7 5.3 39.3Depreciation 7.2 9.6 5.7 10.1 11.2Amortisation 0.0 0.0 0.0 0.0 0.0Change in OWC (1.4) 5.6 6.4 7.9 9.8Change in other assets (2.0) (2.0) (2.3) (2.9) (3.6)Change in other liabilities 1.1 1.2 1.3 1.7 2.1Cash from Operating Activities -29.6 -22.1 -21.5 22.2 58.8

Capex 6.5 6.9 8.7 10.9 13.6Cash from Investing Activities -6.5 -6.9 -8.7 -10.9 -13.6

Change in Common Stock 0.0 0.0 0.0 0.0 0.0Change in Treasury Stock 0.0 0.0 0.0 0.0 0.0Dividends 0.0 0.0 0.0 0.0 0.0Long Term Debt Repayment 0.0 0.0 0.0 0.0 0.0Cash from Financing Activities 0.0 0.0 0.0 0.0 0.0

Net Cash Flow (36.0) (29.0) (30.3) 11.3 45.2

Beginning Cash 12.6 (23.4) (52.5) (82.7) (71.4)Ending Cash 12.6 (23.4) (52.5) (82.7) (71.4) (26.2)

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