HUBSPOT INC

1. Organization and Operations

HubSpot, Inc. (the “Company”) provides a customer platform that helps businesses connect and grow better. The Company delivers seamless connection for customer-facing teams with a unified platform that includes three layers: AI-powered engagement hubs, a Smart customer relationship management product (“CRM”), and a connected ecosystem supporting the customer platform with a marketplace of integrations, templates, and expert partners, a community network, and an academy of educational content.

The engagement hubs include Marketing Hub, Sales Hub, Service Hub, Operations Hub, Content Hub and Commerce Hub, as well as other tools and integrations that enable companies to attract, engage, and delight customers throughout the customer experience.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2023, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2024. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 14, 2024. Other than the addition of the accounting policy related to derivatives as described in Note 6, there have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

In November 2023, the Financial Accounting Standards Board ("FASB") issued guidance enhancing the disclosures of reportable segment information, primarily about significant segment expenses. The new standard will be effective for the Company for the annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. Upon adoption, the guidance should be applied retrospectively to all prior periods presented in the financial statements. The adoption of this standard only impacts disclosures and is not expected to have a material impact on the Company's consolidated financial statements.

In December 2023, the FASB issued guidance enhancing income tax disclosure requirements by requiring specified categories and greater disaggregation within the rate reconciliation table, disclosure of income taxes paid by jurisdiction, and providing clarification on uncertain tax positions and related financial statement impacts. The new standard will be effective for the Company on January 1, 2025, with early adoption permitted. The adoption of this standard only impacts disclosures and is not expected to have a material impact on the Company's consolidated financial statements.

In November 2024, the FASB issued guidance that requires the disclosure about specific types of expenses included in the expense captions presented on the face of the income statement. The new standard will be effective for the Company for the annual periods beginning January 1, 2027, and for interim periods beginning January 1, 2028, with early adoption permitted. The Company is currently evaluating the impact of adoption of the standard on its consolidated financial statements.

Revision of Previously Issued Financial Statements

During the financial close process for the first quarter of 2024, the Company identified an error related to the calculation of contractual credits in one of its third-party vendor agreements which impacted the Company's previously issued financial statements beginning with the quarter ended December 31, 2021. The error impacted subsequent annual and quarterly reporting periods through December 31, 2023. The Company assessed the materiality of the error, in consideration of both quantitative and qualitative factors, and concluded that it is not material to any previously presented interim or annual financial statements. The Company revised its financial statements for the periods impacted. In connection with the revisions, the Company also corrected a previously identified immaterial error related to the recording of certain deferred tax balances.

Changes to the interim consolidated statements of operations for the three and nine months ended September 30, 2023, as a result of the error, were as follows (in thousands, except per share data):

2. Revenues

Disaggregation of Revenue

The Company provides disaggregation of revenue based on geographic region (Note 14) and based on the subscription versus professional services and other classification on the consolidated statements of operations as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Deferred Revenue and Deferred Commission Expense

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue. Deferred revenue during the nine months ended September 30, 2024 increased by$45.8 million resulting from$715.5 million of additional invoicing and was offset by revenue recognized of$669.7 million during the same period.$397.8 million of revenue was recognized during thethree months ended September 30, 2024 that was included in deferred revenue at the beginning of the period.$626.9 million of revenue was recognized during the nine months ended September 30, 2024 that was included in deferred revenue at the beginning of the period. As of September 30, 2024, approximately$939.7 millionof revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceedone year. The Company expects to recognize revenue on approximately 90% of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.

Additional contract liabilities of$6.4 million and$4.5 million were included in accrued expenses and other current liabilities on the consolidated balance sheet as of September 30, 2024 and December 31, 2023.

The incremental direct costs of obtaining a contract, which primarily consist of sales and Solutions Partner commissions paid for new subscription contracts, are deferred and amortized on a straight-line basis over a period of approximately two to four years. Thetwo tofour-year period has been determined by taking into consideration the type of product sold, the commitment term of the customer contract, the nature of the Company’s technology development life-cycle, and an estimated customer relationship period. Sales and Solutions Partner commissions for upgrade contracts are deferred and amortized on a straight-line basis over the remaining estimated customer relationship period of the related customer. Deferred commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred commission expense, and the remaining portion is recorded as long-term deferred commission expense.

Deferred commission expense during the three months ended September 30, 2024 increased by$26.5 million as a result of deferring incremental costs of obtaining a contract of$57.7 million and was offset by amortization of$31.2 million during the same period. Deferred commission expense during the nine months ended September 30, 2024 increased by$63.2 million as a result of deferring incremental costs of obtaining a contract of$159.4 million and was offset by amortization of$96.2 million during the same period.

3. Net income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), shares issued pursuant to the Employee Stock Purchase Plan (“ESPP”), performance restricted stock units (“PSUs”), and the Conversion Option of the 2025 Notes (the “Conversion Options”) (Note 9) are considered to be potential common stock equivalents.

A reconciliation of the denominator used in the calculation of basic and diluted net income (loss) per share is as follows:

The Company uses the if-converted method when calculating any potential dilutive effect of the Conversion Options, which assumes conversion of outstanding convertible securities at the beginning of the reporting period or date of issuance, if the convertible security was issued during the period.

Since the Company incurred net losses for the nine months ended September 30, 2024 and the three and nine months ended September 30, 2023, diluted net loss per share is the same as basic net loss per share. All of the Company’s outstanding stock options,

RSUs, PSUs, and shares issuable under the ESPP, as well as the Conversion Options were excluded in the calculation of diluted net loss per share as the effect would be anti-dilutive for these periods.

The following table contains all potentially dilutive common stock equivalents.

4. Fair Value of Financial Instruments

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

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Level 1 — Quoted prices in active markets for identical assets or liabilities.

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Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at September 30, 2024 and December 31, 2023:

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At September 30, 2024 and December 31, 2023, Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. Certain non-marketable investments measured at fair value on a non-recurring basis are classified as Level 3 as their fair value measurements may include a combination of observable and unobservable inputs.

Foreign currency derivative assets and liabilities are classified as Level 2 and are valued using observable inputs, such as quotations on forward and spot rates for currencies, interest rates and credit derivative market rates.

As of September 30, 2024, the fair value of the 2025 Notes was$864.2 million. The fair value was determined based on the quoted price of the 2025 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy.

For certain other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

Restricted cash is comprised of money market funds related to landlord guarantees for leased facilities. These restricted cash balances have been excluded from our cash and cash equivalents balance on our consolidated balance sheets.

Strategic investments that consist of non-controlling equity investments without readily determinable fair values in privately held companies for which the Company does not have the ability to exercise significant influence are measured under the measurement alternative method. These investments are accounted for under the cost method of accounting. Under the cost method of accounting, the non-marketable equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the statement of operations. The Company holds$63.7 million of strategic investments without readily determinable fair values at September 30, 2024 and$41.1 million of strategic investments without readily determinable fair values at December 31, 2023. These investments are included in other assets on the consolidated balance sheets.

In the nine months ended September 30, 2024, the Company adjusted the fair value of its strategic investments and recognized a gain of $18.6 million and also recorded an impairment of the carrying value of its strategic investments of $4.1 million, resulting in a net gain of $14.5 million, which is reported in the consolidated statements of operations as other income. There were no adjustments to the carrying value of the strategic investments resulting from impairments or observable price changes in the three and nine months ended September 30, 2023.

The following tables summarize the composition of our short- and long-term investments at September 30, 2024 and December 31, 2023.

For all of our securities for which the amortized cost basis was greater than the fair value at September 30, 2024, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. The Company further assesses whether the decline in fair value below amortized cost is due to credit or non-credit related factors by considering the extent to which fair value is less than amortized cost, credit ratings, the financial health of the industry and sector of the issuer, the overall risk profile of the securities, overall macroeconomic conditions, and more. As of September 30, 2024, no allowance for credit losses in investments was recorded.

Contractual Maturities

The contractual maturities of short-term and long-term investments held at September 30, 2024 and December 31, 2023 are as follows:

5. Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows for thenine months ended September 30, 2024 and 2023.

6. Derivatives

Cash flow hedges

The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuation from certain forecasted revenue transactions billed in currencies other than the U.S. Dollar. These transactions are designated as cash flow hedges. The foreign currency forward contracts have maturities 12 months or less. Hedge effectiveness is assessed at inception and at each reporting period utilizing statistical regression analysis. The derivatives are subject to master netting arrangements and are disclosed on a gross basis on the consolidated balance sheets. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in accumulated other comprehensive income ("AOCI") and are reclassified into revenues in the same periods when the hedged transactions are recognized in earnings. Cash flows from the settlement of these forward contracts are classified as operating activities on the consolidated statements of cash flows. As of September 30, 2024, the Company had designated cash flow hedge forward contracts with notional amounts equivalent to $28.1 million.

The following summarizes the fair value of derivative financial instruments as of September 30, 2024 and December 31, 2023:

The following table presents the activity of foreign currency forward contracts designated as hedging instruments and the impact of these derivatives on AOCI:

The effect of hedges on the consolidated statements of operations was as follows:

As of September 30, 2024, the Company estimates the net amount of unrealized gain (losses) before tax on the foreign currency contracts expected to be reclassified into revenue over the next 12 months is approximately $0.3 million.

7. Property and Equipment

Property and equipment consists of the following:

Depreciation and amortization expense on property and equipment was$7.8 million for the three months ended September 30, 2024,$21.9 million for the nine months ended September 30, 2024,$7.7 million for the three months ended September 30, 2023, and$21.8 million for the nine months ended September 30, 2023.

8. Capitalized Software Development Costs

Capitalized software development costs, exclusive of those recorded within property and equipment, consisted of the following:

These capitalized software development costs are associated with software developed for the Company's customer platform. Capitalized software development costs recorded within property and equipment are associated with software developed for Company use.

Amortization of capitalized software development costs, exclusive of costs recorded within property and equipment, was$21.0 million for the three months ended September 30, 2024,$54.8 million for the nine months ended September 30, 2024,$12.6 million for the three months ended September 30, 2023, and$33.1 million for the nine months ended September 30, 2023.

9. Convertible Senior Notes

2025 Convertible Senior Notes and Capped Call Options

In June 2020, the Company issued $400 million aggregate principal amount of 0.375% convertible senior notes due June 1, 2025 (the “2025 Notes”) in a private offering and an additional $60 million aggregate principal amount of the 2025 Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers. The interest rate is fixed at 0.375% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $450.1 million.

Each $1,000 of principal amount of the 2025 Notes will initially be convertible into 3.5396 shares of the Company’s common stock (the “Conversion Option of the 2025 Notes”), which is equivalent to an initial conversion price of approximately $282.52 per share, subject to adjustment upon the occurrence of certain specified events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2025 Notes at any time. The 2025 Notes will be convertible at the option of the holders prior to the close of business on the business day immediately preceding March 1, 2025 under certain circumstances as described in the indenture governing the 2025 Notes (the “Indenture”). Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The 2025 Notes are classified as short-term debt and the Company expects to settle the principal amount of the 2025 Notes in cash. Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended September 30, 2024 was equal to or greater than 130% of the applicable conversion price on each applicable tradingday, the 2025 Notes are convertible at the option of the holders thereof during the calendar quarter ending December 31, 2024. As of November 1, 2024, the Company hasnot received any conversion notices.

The net carrying amount of the liability component of the 2025 Notes is as follows:

Interest expense related to the 2025 Notes is as follows:

In connection with the offering of the 2025 Notes, the Company purchased capped call options (“Capped Call Options”) with respect to its common stock for $50.6 million. The Capped Call Options are purchased call options that give the Company the option to purchase up to approximately 1.6 million shares of its common stock for $282.52 per share, which corresponds to the approximate initial conversion price of the 2025 Notes. The Capped Call Options were purchased in order to offset potential dilution to the Company’s common stock upon any conversion of the 2025 Notes, subject to a cap of $426.44 per share, and expire concurrently with the 2025 Notes. The $50.6 million paid for the Capped Call Options is recorded in stockholders’ equity as a reduction in additional paid-in capital and the Capped Call Options are not accounted for as separate derivative financial instruments.

10. Commitments and Contingencies

Contractual Obligations

The Company leases its office facilities under non-cancelable operating leases that expire at various dates through February 2035. Certain leases contain optional termination dates. The table below only includes payments up to the optional termination date. If the Company were to extend leases beyond the optional termination date, the future commitments would increase by approximately$80.4 million.

Included in the table below is an operating lease commitment for a lease that has not yet commenced of approximately $5.7 million.

Future minimum payments under all operating lease agreements as of September 30, 2024 are as follows:

The Company has entered into certain non-cancelable vendor commitments, which require the future purchase of goods or services. Future minimum payments under all non-cancelable vendor commitments as of September 30, 2024 are as follows:

Legal Contingencies

From time to time, the Company may become a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, and threatened claims, breach of contract claims, tax, and other matters. The Company currently has no material pending litigation.

11. Leases

The Company leases office facilities under non-cancelable operating leases that expire at various dates through February 2035. During the nine months ended September 30, 2024, the Company modified various leases of office spaces globally. The Company recorded a reduction in right-of-use assets of $6.9 million and an increase in lease liabilities of $0.9 million for these leases during the period upon the lease modification.

Operating lease expense and cash payments related to operating lease liabilities for the three andnine months ended September 30, 2024 and 2023 are as follows:

The Company subleases some of its unused spaces to third parties. Operating sublease income generated under all operating lease agreements for the three andnine months ended September 30, 2024 and 2023 are as follows:

12. Changes in Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated other comprehensive income (loss), which is reported as a component of stockholders’ equity, for thenine months ended September 30, 2024 and 2023.

13. Stock-Based Compensation Expense

The following two tables show stock-based compensation expense by award type and where the stock-based compensation expense is recorded in the Company’s consolidated statements of operations:

Effect of stock-based compensation expense on income by line item:

Capitalized software development costs excluded from stock-based compensation expense were$10.7 million for the three months ended September 30, 2024,$29.7 million for the nine months ended September 30, 2024,$6.9 million for the three months ended September 30, 2023, and$21.0 million for the nine months ended September 30, 2023. Also excluded from stock-based compensation expense in the nine months ended September 30, 2023 was $1.0 million incurred in connection with the Restructuring Plan. See Note 15 for more details.

14. Segment Information and Geographic Data

The Company operates asone operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements. Revenueand long-lived assets by geographic region, based on the physical location of the operations recording the sale or the asset, are as follows:

Revenues by geographical region:

Revenue derived from customers outside the United States (international) was approximately 47% of total revenue in the three and nine months ended September 30, 2024 and 2023.

Total long-lived assets by geographical region:

15. Restructuring Plan

On January 25, 2023, the Company's board of directors authorized a restructuring plan (the “Restructuring Plan”) that was designed to reduce operating costs and enable investment in key opportunities for long-term growth while driving continued profitability. The Restructuring Plan included a reduction of the Company’s workforce by approximately 7% and a global lease consolidation to create higher density across our workspaces.

The Company incurred restructuring charges of$1.0 million in the three months ended September 30, 2024 and$2.8 million in the nine months ended September 30, 2024 consisting of variable facilities related costs on unused space. During the nine months ended September 30, 2023, the Company terminated and abandoned various leases of office spaces globally. The Company recorded a reduction in right-of-use assets of $44.6 million and an increase in lease liabilities of $6.3 million for these leases during the period upon the lease terminations or abandonments. In the three months ended September 30, 2023, the Company incurred $0.8 million of restructuring charges in connection with these leases. In the nine months ended September 30, 2023, the Company incurred $93.3 million of restructuring charges, composed of $66.4 million related to facilities and $26.9 million for severance, employee related benefits, and other costs, including $1.0 million of stock-based compensation expense. The charges are recorded to the restructuring line item within the consolidated statements of operations.

Future variable facilities related costs for vacated properties will continue to be recorded to restructuring charges. As of September 30, 2024, the Company didnot have any remaining liabilities accrued related to the Restructuring Plan.

16. Subsequent Event

On October 30, 2024, the Company acquired all outstanding shares of Cacheflow Inc. (“Cacheflow”), a B2B subscription billing management and configure, price, quote (“CPQ”) solution, for cash consideration of approximately $65.0 million, subject to customary post-closing adjustments and conditions. The acquisition will expand its commerce capabilities for subscription billing and quote-to-cash automation to help customers close deals faster. Due to the limited amount of time since the date of acquisition, the Company is in the process of finalizing the accounting for this transaction and expects to complete the preliminary purchase price allocation in the fourth quarter of 2024. This acquisition is expected to have an insignificant impact on the Company’s 2024 revenue.