Mediaboss Marketing

Ah, those sociable humans, they're always up to something online texting, tweeting, messaging, Googling.

HubSpot (HUBS) Chief Executive Brian Halligan says he's staying on top of all that, and making it work to his company's advantage.

XAutoplay: On | Off"We are really watching the way the marketplace and humans are changing, and building products to match that," Halligan said on a recent company earnings call.

HubSpot is an 11-year-old maker of sales and marketing software based in Cambridge, Mass., and it sells to small- and midsize businesses. Itsown pitch is that potential customers aka those sociable humans find businesses through digital channels like blogs, internet search engines and social media. HubSpot's expertise lies in attracting people to websites and optimizing content so that visitors are converted into paying customers.

Its mantra: Help customers create more personalized interactions with their prospective buyers to close the deal.The strategy has helped HubSpot see its revenue shoot up 38% to $171 million in the first six months of 2017.Shares are up 52% this year.

Analysts polled by Thomson Reuters expect 2018 revenue growth to slow to 25% from 34% this year. HubSpot could beat those earnings estimates if new initiatives gain traction, says Derrick Wood, an analyst at Cowen & Co.

"Their rate of growth has come down. Marketing tech in general is a tough market to scale. It's fragmented with lots of small vendors. So to come out as a single winner and take a lot of market share has been challenging,"said Wood, who has a neutral rating on the stock.

Further, HubSpot's main challenge is maintaining a sales growth rate that will support its valuation.

HubSpot has evolved into a multi-product company adding sales automation and customer relationship management (CRM) software. Many of HubSpot's customers have 10 to 50 employees, with some in the low hundreds. Analysts say HubSpot targets firms with up to 2,000 employees.

The company has focused on the midmarket as opposed to competing head-on for large corporate accounts vs. the likes of Oracle (ORCL), Salesforce.com (CRM), SAP and Adobe Systems (ADBE). That way HubSpot has avoided the cost of investing in its own sales staff to chase down and close deals, says Wood.

"What's different about these guys is the focus on midmarket. They have to keep the new-customer growth engine going. They're looking at new ways to acquire customers," said Wood. "Also going into new markets, like they're doing with sales force automation and CRM, is going to drive growth. But I don't think you'll see them go upmarket into (larger) enterprise (firms)."

HubSpot's customers mostly engage in business-to-business marketing. They buy online subscriptions to software that ranges from $2,500 to $30,000 annually. The average marketing customer spends about $13,000 a year.

HubSpot also has laid claim to what it calls "Inbound Marketing." Halligan and co-founder Dharmesh Shah wrote a book on using Google, social media and search-friendly blogs to attract customers via the internet.HubSpot sells tools that track the online activity of website visitors and personalize content as their interests are identified.

Halligan says people are spending less time texting, emailing back-and-forth, or searching on Google. Instead, Halligan says, they're using messaging platforms more, including Slack, in the workplace.

And, humans consume tons of video. So HubSpot helps its customers evaluate video platforms such as Facebook (FB) Live for marketing purposes.

"If you look how people spend their day, they're spending an awful lot of time on social media," Halligan said on the earnings call. "There are big shifts going on, and HubSpot's going to be there to help our customers through it."

HubSpot has used Twitter (TWTR), Facebook and Instagram to build its own follower base. In late September, HubSpot will host its annual "Inbound" user conference to rally the troops.

Still, there's more to HubSpot's marketing than social media engagement.HubSpot has built up sales channels, such as website design and marketing agencies, that point people toward its products. About 40% of revenue comes from customer-referral channels, says Wood.

HubSpot aims to borrow some techniques from Intuit (INTU) and Autodesk (ADSK), which have successfully targeted accountants and architects, as partners. HubSpot aims to partner with sales agencies.HubSpot also works with industry players. HubSpot has growing ties to Microsoft's (MSFT) LinkedIn and its sales tools.

IBD'S TAKE: HubSpot has formed a cup-with-handle chart pattern with a buy point of 76.20. The stock is hovering near its 50-day moving average. Alarm.com, Realpage, and Appfolio have the highestComposite Rating, aCAN SLIM investing metric, of companies in IBD's Computer Software-Specialty Enterprise group.

The company also provides help in integrating its software with Salesforce.com's biggerplatform. And, HubSpot's tools work with e-commerce payment platforms such as Shopify (SHOP).

HubSpot recently rolled out a $50 monthly marketing starter package. New visitors to its website are greeted with offers for free versions of HubSpot products. After using free versions for a while, or "freemiums," the company figures users will upgrade to paid products.

"If you roll the clock forward two, three, four years, that's just the way I think humans are going to buy products because they're going to want to try it and use it (first)," said Halligan on the earnings call. "This freemium thing is going to be here to stay."

Indeed, HubSpot has added two new board members one from software firm Atlassian (TEAM) and one from data storage provider Drop both of which use freemium business models.

HubSpot has more than 34,300 customers, up 40% from a year ago, with roughly 27,000 of them buying marketing tools. Average revenue per customer has been falling, however, due to the lower-priced offers.

Nate Cunningham, a Guggenheim Securities analyst, says HubSpot has a "greenfield" opportunity to target small companies that never bought marketing software. He says HubSpot needs to improve operating margins as it adds customers in new ways.

"The No. 1 determinant of HubSpot's growth is probably not competitive displacement, to gain share vs. Salesforce or IBM," said Cunningham. "It's more about how can they get people to try their product who never have had a marketing product before. I think greenfield is where the bulk of the opportunity is."

HubSpot had over 5,000 "Growth Stack" customers as of June 30, up from 3,000 at the start of the year. These high-spending customers buy more sales, CRM and marketing software tools. And, they're more likely to renew subscriptions annually as opposed to leaving.

Bhavan Suri, analyst at William Blair, says HubSpot is on the right track.

"We believe HubSpot's customer growth is a good indication of the health of the business," he said in a note to clients, "and provides significant up-sell and cross-sell opportunities longer term, which we believe could ultimately lead to an acceleration of the business as soon as next year."

Shares of HubSpot have been in decline while forming a deep handle, but were up 2.2% at Friday's close to 67.35.

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HubSpot: A Marketing Software Firm That Uses The Human Touch - Investor's Business Daily