HubSpot, Inc. (HUBS) Earnings Call Transcript & Summary

All right, everybody. Good afternoon, and thank you for joining us today. So my name is Stan Zlotsky from the Morgan Stanley software research team. And with us this afternoon, we have the pleasure of hosting Kate and Chuck from HubSpot. Kate, Chuck, how are you guys?

Good. Thanks. Hi.

Good. Thanks for having us.

Thank you so much for having us -- thank you for joining us rather. So before we get started, very quick, please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

So guys, we're asking all the companies this wonderful question but I realize you only -- you reported earnings just 2 weeks ago. How are you thinking about the impact of the coronavirus? You do have the international exposure and it's one of your faster-growing businesses but what -- I'm guessing you're just monitoring the situation.

Yes. That's absolutely right. This is obviously, first and foremost, a human crisis. And so we're obviously aware of that. But from a business perspective, you're right on, we announced earnings 2 weeks ago. At the time, there was no global impact on demand to note, and we did say that on the call. We're obviously actively monitoring the situation. We're a little bit cautious in the actions that we're taking internally. We have Partner Day upcoming that we have decided to do remote. But frankly, the company has been a very remote-first culture for a long time. And so our team really knows how to like get stuff done from anywhere. And so we are business as usual, actively working and near term, really still very much accomplishing the business. That said, if this does turn into a recession, our customers, like everyone's customers, will feel the impact, but we feel like we're well positioned financially to weather that.

Does the fact that you guys have this SMB exposure rather than a lot of software companies, big enterprise exposures, big supply chains that stretch globally, does it -- is it fair to say maybe you guys are almost a little bit less sensitive, a little bit more insulated because of the SMB exposure?

I mean I think we've heard the case be made and I think we're hopeful that that's ultimately the case. I think the reality is that we've been in an economic bull market for the better part of the last 10, 12 years. I don't think there have been very many examples of seeing significant pullbacks macroeconomically and sort of what that means to models and spending levels. Now that said, I mean one thing that gives me confidence in our model and I feel like will allow us to hold up better than, say, the way that we're positioned 5 years ago is that if you think back to sort of HubSpot at our IPO, we're a business with 10,000 customers, single application, 3 different flavors. And it was a piece of software to the extent that you went into a recession, that would be quite easy to sort of cancel. And you fast forward to today and 40% of our business is now on multiple products. And in most cases, we own the underlying CRM for those multiproduct customers. And so in those cases, those customers are running their entire front office on HubSpot. And so I think it will take a pretty significant pullback in spending levels and a pretty difficult economic environment to rip that out entirely. So we'll have to see.

Right. That makes a lot of sense as well. And Chuck, you actually transitioned very nicely, right? If we go back to the days of IPO of HubSpot, right, back then, you were just a single-product company, just -- well, although it's a great product, right, the marketing automation product, but it was still just one product, right? Today, you have this entire suite that addresses the front office of an SMB. When you think about where the suite of these products is going in 2020 and beyond, how are you thinking about your product road map for the broader suite?

Yes. Why don't I start and you can dive in. I think there are a number of places where you're going to see product innovation in the near term or over the next few years. There's still work to be done in each of the hubs that we do have, right? So Marketing Hub, which is the one that's been around since the IPO, you would argue is the most mature of all the hubs. But there's a lot of innovation over the last couple of years has been at that premium tier, so the lower end of the market. There's a lot of work to be done still at that sort of more upmarket tier in the Marketing Hub. You saw 3 launch the Marketing Hub Enterprise product in January. That's sort of the start of that. On the Sales Hub, I think there's work to be done certainly upmarket. There's work to be done at the Starter level as well. And the Service Hub is really a version 1 of that product. We think there's some core functionality up and down the stack that we have a line of sight to and we're executing against. That said, we do have ideas and we've said consistently we have lots of ideas for new hubs. And over the next couple of years, you will see us introduce one or more hubs. And so I think it's going to be a combination of things.

Got it. And you mentioned that there's still a lot of work from a product perspective, right, to really build out the enterprise pieces of your Sales Hub and Service Hub and frankly even the Marketing Hub, right? How far upmarket do you want to take those capabilities?

Why don't I start and you add. The -- we have said consistently that we have a target market from 2 to 2,000 employees. And what has happened historically is that we -- our marketing or sales or service customers get to a certain number of employees and they sort of upgrade. And we want them to stay with us longer. We are not foundationally changing that target market. We want to get our customers early. We want to grow with them, and we just want to grow with them longer.

Got it.

I think Brian likes to joke that our customers tend to sort of graduate from us in high school and I think he wants to keep them through graduate school or maybe get their PhD or something like that, so just a bit longer.

It's -- I think that's a really good goal. And you mentioned -- Kate, you mentioned the freemium model within HubSpot. And that's really worked very well, right? So last year, you added e-mail. It was one of the features that you added into your free CRM tier, right?

Yes.

What -- maybe walk us through what was the reasoning or the thinking behind adding such powerful functionality into essentially the free version of the product.

Yes. So if you just take a step back, the whole purpose of the freemium model is to really broaden the funnel for potential new customers. So it is a foundational lead gen engine into the business. And as such, you want to make sure that there's real value in the products that you are launching and maintaining in that free tier. And we found that the addition of e-mail into that free product, the Marketing Free product, was a critical missing component. And so we added it to that -- the product really had real value.

And I think we've had a history too, Stan, of dropping features and functionality into the high end of the portfolio and then letting that trickle down into professional starter and to the free layers. Another example we give is A/B testing was something that was only traditionally available within Marketing Hub Enterprise, and that's something that we've brought down into Marketing Hub Professional. And I think you should look for us to continue to do that.

The trickle down?

Rightsizing the value that we're providing within the additions. But to Kate's point, it's solidifying the low end and making sure that we're providing a ton of value to bring lots of leads up and through that we can ultimately upsell and cross-sell core versions of the product.

And when you introduce these types of -- I mean e-mail marketing is, like I say, a pretty important functionality to do. Do you see any kind of upticks in the conversion rates that you recognize a result of really getting so many leads into the pipeline on this powerful new product and then subsequently kind of graduation of them from free products to paid products? Have you seen any upticks in that conversion rate?

So what we're really looking for actually by introducing free e-mail into the free products is a broadening of the free user base. And we did see some very positive traction as it relates to that. I think the conversion rates from free into the paid tiers have frankly stayed pretty consistent. Those are the levers that our growth team is playing with. There are a number of things that they can move around with respect to moving features, as Chuck talked about, moving limits, et cetera. And they have goals in mind around one sort of volume of leads coming into any point in the funnel into the conversion rates from there.

Got it. Maybe changing gears slightly. The latest product that was added to the broader HubSpot platform is Service Hub, right? When you think about the kind of trajectory that Service Hub could have as it matures, would it resemble something like what we saw with the Sales Hub? Or it's also possible that it could be slightly slower just because of -- given the reseller community and the partner community that you have for -- in your core marketing products and how they would be -- would they be able to make the jump, so to speak, to also sell service?

And I'll take that first part.

Yes.

You can add some color around the partner stuff. So I mean I think the simple answer is that we expect the Service Hub trajectory to be quite strong. It has been since its adoption. It's ahead of the Sales Hub curve, which is quite frankly what you would expect given that we have more sales reps that are selling it, more partners that are selling it, more opportunities to cross-sell it across a larger installed base. But we've been quite happy with the overall trajectory of that. One thing I would say is that with our focus on Project Mainsail in 2019 and sort of shoring up the foundation of the application, we didn’t slow new feature and functionality development across the entire portfolio, and Service Hub was carried or had an impact to their product road map as well. I think we're quite excited about the teams transitioning beyond Project Mainsail and getting back to new feature and functionality development for Marketing Hub, for Sales Hub and Service Hub. And I think that it has the ability to be a big piece of business for us over the next 3 to 5 years. I don't know if you want to talk about changes to partner channel.

Yes. So we announced some changes to our partner program in January. If you think about the history of the company and you sort of laid out the history of the company as really being founded as a marketing product, our partner channel was very much aligned with that marketing product orientation. So most of if not all of our partners were marketing agencies who naturally used the product and we're like natural resellers and servicers of the product, not unlike accountants are for Intuit, for example. And as we've moved from a single hub marketing to sales and service, some of those partners, really that sort of top 20%, have come with us on that journey, right? They have recognized that the world is changing to one where it really is the customer experience and not just the marketing experience that is important, and they have been -- they are successful in selling and also servicing our customers across the suite. That said, our partner program was a much less natural fit for the traditional CRM integrators, for sales coaches, et cetera. And we had a bit of a pilot program running for sales partners specifically over the last couple of -- or last year to 18 months. And we've had some success there. And what that program really did was lower the entry bar for partnership with HubSpot and focus on a different set of certifications and qualifications. And so we have relaunched the partner program in January to include like called the best of those breeds, so it's a much more flexible program in terms of entry point and requirement.

Great. So moving on through the hubs. The Sales Hub, right, that's been a very strong performing area for you guys and a big contributor to your overall top line growth. Overall, right, as we move forward, how do you think about continuing to differentiate the Sales Hub among this very crowded landscape of CRM tools, CRM, SFA kind of tools?

Yes. I mean I think the good and the bad is that it's been quite crowded for some time, right, really, for the last 10 or 15 years. And the way that we found a way to differentiate and build a decent-sized business that's growing quite fast is through really a leading-edge consumer experience. It's through integrating it organically with our Marketing Hub and our Service Hub so that you're getting sales reps, all of that context that comes with an end-to-end customer experience. And then more recently, I think it's with the investments that we've made into our ecosystem, right, and taking this leading-edge CRM that we basically give away and wrapping hundreds of third-party applications that consider plug-and-play with it to make it even more powerful. So I think it's really those 3 things that have made it successful as it is. And I suppose kind of back to the point that Kate made early on in the conversation, it should be no surprise that those are the areas that we're looking to invest, continue to invest quite aggressively in over the next couple of years to continue to drive growth.

Well, Chuck, you brought up the platform and I think that's a great segue. That's been a big focus area for you guys, right? And you've really been building out that -- the platform strategy to have this kind of almost like an ecosystem of apps. How are you guys thinking about that into 2020 and 2021? And how does PieSync acquisition fit into that broader strategy?

Yes. I mean we're really excited about the opportunity. And truth be told, if we were sitting here 5 years ago having this conversation, what you probably would have heard from me was that HubSpot wanted to be this all-in-one platform. And what that meant to us at that period of time was we want to be kind of everything to everybody, right? We want marketing, sales, service and everything that's at the left and the right of it. The growing realization over the last couple of years has been the proliferation of applications within an SMB company has grown more quickly than we could ever invest to keep up with. The average -- a 50-person company SMB has 30 to 40 applications in their environment. And so I would say in the 2018 -- '17, '18 time frame, we began to transition, sort of open up the platform in a way to expose our APIs, do a better job of investing into the documentation so that folks could build atop our platform. And what you've seen as a result is quite strong growth in terms of the applications that can kind of plug and play with HubSpot today. I think there's over 350 applications today that can plug and play. We have over 1 million cumulative downloads or installs of applications into the CRM that our customers use. And then on average, I think it's 6 to 7 applications per customer that's getting integrated on top of the HubSpot CRM for an average customer. And so we're investing aggressively to get to a point where it's not just hundreds of applications that plug and play but thousands that plug and play nicely with HubSpot. And while not a 2020 opportunity, to the extent that we get the value equation right, we feel like there's the possibility to sort of monetize this over time.

And how would that -- almost like this app ecosystem be monetized hypothetically? Would it be almost like a take rate off of the sales percentage of developers?

That -- we are early days in those conversations. That's certainly one option and one that many people pursue, yes?

Got it.

I think on the PieSync side, it's important to point out one of the core advantages of having sort of this ecosystem and all of the apps actually plug and play together is that you have one central place where all data is stored. And that's often a very, very hard problem to make sure that you get the data in one place and then you keep it in sync. And what PieSync has is the technology that make sure that the data stays consistent or synced up across 2 applications in a bidirectional way, which, as the financial leader, I hear is a very hard and challenging engineering problem. And so what that has allowed us to do is really open up the platform to other technical partners where we can sync their data very easily in and out of HubSpot.

That makes sense. Kate, you do a great job of explaining R&D technology contracts as a CFO.

Thank you. I'll take it as a compliment.

So maybe getting into something that will be much more in your wheelhouse, international investments, right? You got -- it's about 40% of your revenue now is international and a very well -- very rapidly growing area of the business. How do you think about your international moving forward? And it certainly feels like it's an underpenetrated opportunity. But as far as balancing where the incremental dollars -- investment dollars are flowing, whether it should be going internationally or in the U.S., how do you think about all these opportunities?

Yes. We certainly look at unit economics as the primary way to judge where we're going to put investment. We do think there's a lot of opportunity to grow domestically. We think there's a lot of opportunity to grow internationally. On the international front, we have a set of markets that we've been operating in for a decent amount of time that have a core critical mass. We have a whole set of markets for whom we're really just starting to get to -- get the flywheel spinning actually to get the critical mass and really get the engine running. So we will continue to make investments in both of those areas.

Got it. The -- maybe just taking a step back, right, there's been an increasing -- at least in software, right, there's really been an increasing number of SMB-focused vendors, right? Because when you -- if you think about it very holistically, 10 years ago before SaaS really proliferated, it was -- maybe 15 years ago, it was really hard for...

We're all getting old now to say like 20 years ago.

I know. Yes. Yes. Guiding on a couple of 5s.

Yes, 20, 25 years ago.

Before we get too depressed. So there's really a lot of SMBs attacking -- I'm sorry, a lot of software vendors attacking the SMB market. How do you, as a customer -- as a company, decide which SMB segments you focus on? Because there could always be like subsegments, right? Is it the -- I mean I know you guys talk about the 20 to 10. But what about even like maybe below 20? Like is that not an attractive area? Or is there something specific about potentially not -- something about that segment that you're not interested in? Is it the economics or something like that?

I can -- you want me to start?

Go ahead. Yes.

Yes. No, I think there's been competition that fall into the market for a very long time. I think what we -- the reason that we focus that sort of 2 to 2,000 is that we want to -- we want our customers who have real growth aspirations and we will -- we want to get them early and then we want to grow with them. And we believe that -- sort of that 2 person, as low of a limit as that is, does provide sort of at least a bar that correlates to growth aspiration.

Got it. Got it. Okay. I'm going to throw out one and then we'll see if there are any questions in the audience. Net revenue retention, you guys, since going IPO, have done an outstanding job of really driving that number. I think back at IPOs were somewhere in the mid-80s, and now it's essentially at 100. How do -- how should we think about net revenue retention moving forward? And do you need to continue to bring out brand-new hubs to drive that number and you actually -- well, maybe not drive it but continue to sustain that number above 100? Or is this kind of like the new normal is the 100 level?

Do you -- I can -- go ahead.

I'll take it.

Go ahead. I will...

I haven't spoken for a minute.

Yes. Go ahead. I'll dive in.

I mean new products help, right, as evidenced by the back half of '18 and changing pricing can help as well. But to your point, right, like as the products get better, there are opportunities to sort of up move it up. But over time and you've seen that since our IPO, right, where it was in the mid-90s and I think we've consistently moved it up over time, although there are quarters where it can kind of move around. Ultimately, it just comes down to the strength of the products and the opportunity within the installed base. And I don't see any reason why 100% isn't sustainable. And to the extent that there are opportunities to take it higher, we, of course will endeavor to achieve that.

Got it. All right. Well, let's see if there are any questions in the audience. No. All right. Easy enough. We'll -- I'll keep right on rolling. So getting into some financial numbers, some financial questions, your 2020 guidance calls for about mid-20s type of revenue growth and you just provided the guidance 2 weeks ago. If we were -- as we sit here today and we look at these numbers, if we were to see upside to those numbers, where would that come from? Would they come from faster pace of customer acquisition, better retention numbers, maybe revenue per customer expansion? How should we think about those different levers?

I mean I think it's really hard to say here, is it March 2…

2 weeks later.

Yes, 2 weeks into giving guidance at this point. I mean, Stan, you've been covering us for long enough to know that from time to time, the business can mix more upmarket. From time to time, it can mix more downmarket. And to the extent that it heads in one direction or the other, you can see outsized growth in customers or ASP and of course their -- and to the point we're just talking about their retention implications as well. And so I mean my personal hope, to the extent that the demand environment holds up and we execute at the level that I think that we can, is that you would see upside across all of that. But it's really hard to sort of dimension quarter-to-quarter and year-to-year because you just don't necessarily know where the demand is going to come from. I don't know if you'd add anything to that but...

No.

So maybe, I mean, just one last one from my end. I feel like no Q&A is complete without a question on margins. So margins for this year, inasmuch as last year, you fell behind on hiring a little bit and then you caught up very quickly. Are you almost in a way compensating to the -- on the other end, where you're over-hiring now as in like you're trying to hire faster than you would and -- so as not to fall behind? And as a result, maybe is that pressuring some of the -- putting pressure on -- some pressure on the margins heading into 2020?

No. No. So we have said consistently that we wanted to build a business that was making the right long-term decisions. The right long-term decision, in our view, for 2020 was to have a sort of normal course year of hiring, where you hired a reasonable number of people across each of the quarters. But what that meant was given the significant ramp in hiring in the back half of the year was that the margins were going to be pressured particularly in the front half of the year. And in addition to the overall guidance for the year, we also shared that the majority of the margin pressure was focused in the first half of the year, where we saw sort of 3 points of margin pressure, where the back half of the year will be mostly -- more like margin neutral.

Right. Okay. All right. Well, I think this is a great place for us to stop. Kate, Chuck, thank you so much for your time today.

Thank you.

Thank you. Thanks for having us.