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

Okay. Good morning, everyone. Thank you so much for joining us. I am Mark Murphy, software analyst with JPMorgan. And I am very pleased to be hosting HubSpot CEO, Brian Halligan; CFO, Kate Bueker. I believe Treasurer, Chuck MacGlashing, is lurking in the shadows in the background somewhere. So hello to you as well, Chuck. The plan here is I'm going to kick it off with a handful of questions, but we can also take questions from the audience. The way you would do that would be by clicking the Q&A button that you would probably see at the bottom of your screen there, and then you would type in your question. We believe you can do that anonymously, and then I will be able to pose those questions to Kate and Brian. So again, Kate and Brian and Chuck, thank you for joining us.

Maybe we could begin with just a very quick version of yourselves and HubSpot for the benefit of anyone in the audience who might not be familiar.

Sure. I can start. It's nice to see you all. Brian Halligan. I'm the co-founder and CEO at HubSpot. We started the company 14 years ago. And the basic thesis behind the company was that humans were changing the way they shopped for products, made decisions, bought products online, particularly B2B businesses were changing that. And there was a shift underfoot. Instead of using old school kind of outbound marketing techniques of cold calling and spamming people and doing trade shows and doing advertising, we imagined a new way to do marketing. We called it inbound marketing to try to match the way they go to market with the day people actually shopped and bought, pulling people in from Google organically, from social media, to the blogosphere, et cetera, et cetera. And when we have that at our hub, we've kind of said, gee, this is hard to do. You have to buy search engine optimization software, social media management software. You have to buy a content management system, and you have to buy a blogging software, eventually a CRM and marketing automation. Just super complicated. And so we said, let's build a modern platform called HubSpot to enable people to transform the way they go to market to match the way people actually buy these days. And that was 14 years ago. And the good thing about humans is they continue to change the way they shop and buy. They probably haven't changed as fast as they have in the last 4, 5 weeks, in fact. And our value prop has continued to evolve. So we started really as a marketing product. We've added sales and service products and the CRM product. So kind of a full front-office platform to help people grow online.

Yes. The last 4 to 5 weeks have been interesting. Brian, so HubSpot created this inbound marketing movement, this whole category, many years ago now. Clearly, that's become a big global phenomenon, we notice. We're pretty much at a point where every marketing automation company talks about inbound and how they've adopted it as well. Can you help us understand what inning this whole inbound movement is in? And how is this concept of inbound evolving as it starts to -- as it matures over time?

I still think it's pretty early, second, third inning of the inbound, changes that are going on, I would say. There was a quote I saw. It was an analyst out there named Benedict Evans that I like. He sent a really good newsletter, and I'll probably butcher, but he said, "Nothing changes in a decade, and then you get a decade worth of changes in a month." And that seems to be what's going on now. And so the inbound revolution, the inbound movement seems to have sped up. The future has kind of been moved in over the last few weeks. But still feels early. There's still a lot of old school marketing and selling and servicing going on in a mindset that's still enrooted in 10, 15 years ago that needs to change. It's still pretty early in the game.

So Brian, when we took HubSpot public many years ago, it really was a marketing platform, first and foremost. The -- you've been evolving steadily over time into more of a complete front-office platform, right? So today, you have marketing, you have sales, you have service. You have those 3 core pillars. You have other hubs you've been introducing and continue to introduce. How has that shift into more of a platform kind of changed the conversation with customers? Has it elevated your standing with those customers and kind of in a strategic way as compared to being limited to one area?

Yes, it has. I think our first few years, 4 years in business, we helped people turn total strangers on the Internet into visitors to your website. And then we moved into the business and helping you turn those visitors into leads and then helped you move those leads into qualified leads and customers. And then we moved into helping you delight those customers and keep them around for a long time. And so our value prop -- it's just the value we provide to a company has mushroomed over time. And I think it's -- and I think that the timing is good because you're not going to throw your website out. You're not going to throw your accounting system out. You may think twice about your lead generation system. But if you're running your front office on HubSpot where your CRM, it's a core, core piece of technology. It's how you run your company, and that's how people think about HubSpot. We are that platform that they run their front office on. So yes, the value has gone through the roof over time. The products improved, footprints improved. And I think I'm really glad we did that.

Kate, how do you think it changes the financial profile of the business, this movement into more pillars, more of a full front-office platform? Does it -- HubSpot likes to talk about the growth stack. I mean, does it change the growth rate? Does it change profitability? Does it change retention, in your view?

Yes. I mean, I guess, one of the ways that we see the impact on our financials is as we're delivering more value to our customers, we see more and more of them adopting multiple of the hubs. And so you talked about the steady increase that we've seen in the multiproduct customers on the stack. There are a bunch of benefits there. We talked about the retention benefits associated. There's like a logic, a natural logic there that says, if our customers are using more of the platform, more engaged with HubSpot, they're likely to be stickier. It also, frankly, provides a nice cross-sell, upsell motion for our installed base that we didn't have before, which is a good financial win for us. And then I think the one place where we are most surprised as it relates to the change from single product to multiple products was just the sheer volume of customers who are actually adopting the platform upfront. We've seen that over the last year, but we've also seen that, in particular, over the last 4 to 5 weeks. Some of it is very purposeful. We dramatically lower the price of our Starter Growth Suite to make it easy, both for our existing customers to stay on the platform and also for new customers to start with HubSpot in this sort of economic challenge. So that is another way that we see the financial impact.

To be clear, you actually have more of the multiproduct adoption happening upfront in the last 4 to 5 weeks because of those changes?

We have a lot of starter, multiproduct adoption. That is a big driver of our new customer acquisition over the last couple of months.

And Kate, have you shared with us -- or are you able directionally and qualitatively to share how you're allocating R&D across those 3 pillars? And I know these aren't the only 3 hubs. But directional changes, where the emphasis is being placed on innovation?

And maybe I'll start, Brian, and you can jump in here. I think as we sort of like just take a step back and think about investments for HubSpot overall, one of the key themes that you have seen over the last, frankly, 3 or 4 years is a continued increase in investment in R&D. If you turn the clock back to 2016, R&D spending as a percentage of revenue was something like 15%. And we ended 2019 with R&D as a percentage of revenue, '19, we said, probably is still going to go up a little bit from there over the near term anyway. So we continue to believe that investing in R&D and driving that innovation engine is critical for the long-term growth of the company. So that -- I would just start there. In terms of where we put the R&D spending, I think we run a process every year for -- around planning that starts at the highest level, very strategic. We look at where do we want to be in 3, 5 years. What are the big themes? What are the big steps that we need to make to get there? And then the product and engineering team sort of takes those high-level learnings and creates their compass for the next 12 to 18 months that marks sort of the key areas of investment over that period of time. So there is a process that happens every year to allocate that investment, really ground it in the core strategy of the business.

I'd add to that, Mark. I would say a couple of things in terms of where we allocate the R&D dollars. Somebody recently described in our engineering organization that HubSpot is a little bit like chipotle. And the thing about chipotle is you show up and you look at the menu, and whether you order a burrito, a taco, a salad or a chimichanga, it's all the same stuff in the product. They just kind of wrap it and cook it a different way. So we have an awesome burrito stand in HubSpot. Underneath HubSpot are the shared services. There's web pages, there's e-mail, there's social, there's chat. There's a whole bunch of these shared services. And then the hubs, the applications themselves, are just kind of wrapping those in unique ways. And so a lot of our R&D goes into the ingredients down underneath and less than you might think in the actual hubs themselves. I think one of our core competitive advantages that seems to be getting stronger over time is as we look at the alternatives in the marketplace, they're complicated. It's hard to pull the stuff off to have a great customer experience and all that technology come together, you end up having to buy a lot of different products that don't really work very well together in systems together, or you go to a vendor that's really built their product through a bunch of acquisitions. And if you're a normal company, it's hard. I mean you have to learn all these different user interfaces. You have to figure out how to sync all these databases. It's bare. And so I think our patient approach, building kind of from the ground up has served us very well.

Okay. Well, I love the analogy and I want to come back to that. I want to ask you about the beans and the rice investments kind of underneath the chili. So I think of that as being project main sales. So I'll try to come back to that in a moment. But actually, what you just said, I wanted to ask you about as well because, Brian, we've loved your vision of easy-to-use and powerful at the same time. And the -- I'm kind of stealing your words here, but that you've explained the history of software, it could be powerful or it could be easy to use. You have to pick one or the other. You haven't been able to achieve both. And we do get that feedback from your customers, from your partners, powerful, easy to use at the same time. What we don't understand is how do you do that. Like what is the design principle that you -- how do you make something powerful but you don't have feature bloat or the user interface doesn't become confusing?

Okay. That -- by the way, I want to give props to the person I first heard that from. This is a gentleman named George Hu, that's the COO at Twilio. And he refers to this phenomenon as the tyranny of or. You can either have it really easy to use or really powerful. And it's the tyranny, you can't have both. And I think for a number of reasons, we've been able to kind of break that tyranny of or. Part of it is we didn't acquire a bunch of companies and glue this stuff together. It's all one system. The other part is it's a burrito stand, so it's all kind of mixed in below. The other is a large opinionated bet on user research and design. We have an outsized bet on user research and design here, and it's a real strength of ours. It's an obsession with Net Promoter Score, and Net Promoter Score's been going through the roof these days. And it's all kind of comes together. It's a nice little suit we have. Our product team is really on fire these days. That's what I would say about that tyranny of or. We have always been easy. This year is -- we're getting the end of the power, like in -- we made a big announcement in January of Marketing Hub Enterprise kind of 2.0, and that took our always easy marketing product and added a bunch of really sophisticated powerful features, and we did it in a very elegant way. And I'll give you an example. There is a feature that every company wanted us to build called attribution reporting. We've lost on that feature. We have a historical competitor, Marketo. That was the one thing they beat us up on. And it's a very hard thing. It's basically your company. You're JPMorgan, and you're trying to get customers and you're doing all kinds of different marketing activities and selling activities all over the growth book. You're trying to figure out what the heck actually works and what led to those customers and really closing the loop on that and attributing your marketing activities. Anyway, the product team took it on. They looked at it in a very first principles approach, and they absolutely nailed it, and they think they nailed it because of that investment in user research and design and the burrito stand, it all just kind of comes together. So that was January. And then you probably saw, Mark, in early April, we announced a new content management system, CMS Hub Enterprise. Our management system has always been easy. Now it's much more powerful. So this is going to be the year of always easy and now much more powerful.

Okay. So that's how you do that. We -- easier said than done. So I wanted to go back. There was an investor call we hosted back in March. It was with one of your Diamond tier partners across the pond. And he said -- here are a couple of quotes. He is stunned by how good the product is, very easy to switch between marketing, sales and service. You don't feel like they're just bolting stuff on. And so we were listening to this, and I thought it's a good reminder that you've really not been acquisitive, I mean, very minimally. And you've kind of made analogies to the Apple's ecosystem where you have an iPhone, you have an iPad and a Mac, and they're all working in concert. Can you walk us through how that vision relates back to HubSpot? And then, Kate, are there financial model benefits that we're touching on, on that if we didn't cover that already?

Yes. Some people -- actually, I had an executive in Salesforce say, oh, you're just using the hub -- the Salesforce playbook. Actually, we're not. We're using the Apple playbook. It's hard to copy Apple because they're pretty close, but from all the information we can get, we're kind of trying to follow their playbook. They very much have the burrito stand underneath, whether all of their devices and that great operating system. And then they weave that together in different devices, and they continue to add features. Now Apple does acquisitions. They do lots, tons of little acqui-hires and little pieces of technology and weaves them together in great talent and builds an unbelievable user experience. That's sort of our touchdown. We're trying to kind of play that game. And for now, it's working really well. I don't think that means we'll never do an acquisition, but I think we'll have to be very thoughtful about the acquisition because we don't want to dilute our core competitive advantage of just really ease-of-use, real elegance, all the stuff works together so nicely, very similar to Apple. So we'll think long and hard before we bolt on something to HubSpot.

That's extremely helpful. I'm starting to get a couple of questions in the Q&A. I want to encourage more people as well to ask questions in Q&A. I'm going to try to get to that in about 5 or 6 minutes. So we'll come back to it. I do want to ask you, though, in the interim, the inbound conference, I always tell people it's my favorite event of the year. I love being in Boston at that time and the amount of energy and passion. At the beginning, I said you're doing something right if you can get 5,000 people to your conference. Of course, now it's way over 20,000. I am curious, though, coming up mid-August in Boston, I looked a week or 2 back, it was still going to be physical. I think we're wondering, does it go virtual? Are you still holding out some hope? And if it is virtual, can you drive the same kind of bookings out of it with the same level of efficiency? Or is there going to be a little bit of a difference this year?

Yes. Maybe I'll start. We have not made a formal announcement about inbound yet, but we are working to finalize the plan for this year. So I would say just stay tuned, coming soon to a theater near you. We're working hard to make sure that it's a good event, and we're respectful of the situation.

I think if we did just in theory virtually, I think what you'd see is -- we were expecting north of 25,000 live this year. I suspect if we get it virtually, we'd have a number much, much larger than that. And yes, of course, it will be a little less engaged, but we'd be able to reach more people. And so there will be a trade-off there. But I don't think it will be a disaster in terms of a conversion event for prospective customers and existing customers, if that's kind of what you're asking.

Okay. If it helps, we're way off at this JPMorgan TMC conference in terms of attendance virtually. So I'm sure you've seen that at some of the other tech events, so that makes sense to us. Now, Brian and Kate, I think the question du jour here really is this unemployment environment. I would have bet I would never see something quite like this. You've got this, you as well. You've got this SMB customer base. 33 million people in the U.S. filed for unemployment in a span of 7 weeks. I know the continuing claims number is a little lower, but I mean it's an incredible number. Let me just ask you with this at a high level, what kind of runs through your mind as you're observing this? And what do you think is the right way to be responding to that environment?

I can take that, Kate. Well, the first thing that runs through my mind is empathy. I'm empathetic to those -- all those people are out of work, and it's not just out of work. You look at the food bank lines, it's really sad. So I guess that's my first reaction to it. In terms of HubSpot, we're being impacted by the -- certainly being impacted by it. We've got -- I've been describing in the last few weeks of -- last couple of weeks of March, first week in April, we just had a 200-mile an hour headwind on the business. Last 3 weeks of April, that headwind probably went down to 125 miles an hour and a bit of a tailwind to merge, maybe 100-mile an hour tailwind. And the tailwind is really a combination of people who are positively impacted by COVID-19, whether you're a temperature scanner or an online MBA or a myriad of companies that need to do online marketing and online selling, that's a bit of a tailwind. And then just a realization, I think, across all companies that if you're doing off-line marketing, gosh, not a great time for off-line marketing, really good time for your online marketing. Not a great time for outbound marketing, really good time for inbound marketing. Not a great time for outside selling, really good time for inside selling. And people have -- this is weird, but people have a little bit more time. They're at home. They're like, all right, we've been running on spreadsheets, let's get our act together and finally put that CRM in place and get automation set up and let's do it right. So there's a little tailwind there that we're starting to enjoy. In terms of our -- when you first see the numbers and you think about who's impacted, you might think, oh, HubSpot's SMB, they're going to get crushed by this. And we're definitely impacted. But we're more M than S. We're more mid-market. I segment it as 2 to 20 employees as one segment, 20 to 200 employees, 200 to 2,000 employees. The vast majority of our business is that 20 to 200. So that's not a little tiny business that kind of blows through the wind. They're certainly impacted. The other thing I would say is the industries hardest hit, restaurants, hospitality, airlines, cruise lines. Those weren't industries that we were big in. They're relatively small. We're mostly B2B, and we're mostly mid-market. So we've definitely been impacted. We're slowed by it, but we're not catching the teeth of it. We're kind of catching the side of it in terms of impact.

Okay. So it's still a net headwind, it sounds like if I run your math there.

It is.

But it is not the kind of headwind it was...

That's just a CEO math, just for the record, not a CFO math. But I think the conclusion is the same.

I think I got negative 25, but I [indiscernible] like 200.

Well, it's getting interesting -- sorry, Kate, I'm rambling. But it's getting interesting what happens because there's a bit of a tailwind going on. We're not -- I mean, okay, here's one thing I would say about HubSpot. Maybe the best 9 weeks of the 14 years of HubSpot were the first 9 weeks of this year. We were way over planned. We've had new products coming out. We're on headcount. We were homing. And then this thing hit. And so now we're back. It hit, huge headwind, then there's this mix of tailwind and headwind. We're not back to where we were the first 9 weeks of the year. We're not. There's a tailwind there and there's a headwind. The headwind is an interesting headwind. The kits -- there's a certain line of cancellations going on, not as bad as we expected, but we're almost encouraging people to downgrade. We made our starter suite of products much less expensive. So we kind of encouraged people just downgrade and weather the storm on our starter suite, and then you can upgrade later. We also gave a lot of flexibility to our frontline employees to give 90- or 180-day discounts to people. And so we're a little bit artificially increasing downgrades for the next 90, 180 days. But as all those customers come up to the other side, we should see sort of an artificial increase in upgrades. So we're in an interesting moment where there's a bit of a headwind. Some of that headwind will turn into a bit of a tailwind in Q3 and Q4.

Okay. Well said. Kate, is there anything else to add on SMB exposure? I think as Brian said, the airlines, the cruise lines, the major hotels, they're not going to be the HubSpot customers or they're not SMBs. We do get questions on, well, what about a chain of restaurants? What about a chain of yoga studios or something like that? How is that overall exposure? Is there anything else about it that you think we might not understand?

Yes. I guess I would just add a couple of facts. The examples that you're giving, in general, are B2C companies. And I think Brian said it, but it's worth reemphasizing we are primarily B2B focused, not B2C focused. The other thing just in terms of color is if you looked at the impacted and the severely impacted industries and kind of sum them up, we are comfortably in the single digits in terms of the exposure there, single-digit percentage of the installed base.

Okay. Very helpful. Let me -- I think we're down to about 7 or 8 minutes. Let me take a couple of questions that have come in. And -- okay, there's a quick one. What percentage of revenue is coming in from Asia this year?

Kate, do you want to take that?

Yes. I think -- I'm not sure that we actually ever share that. The international business is just over 40% of our revenue. Of that, EMEA is a larger component than Asia is. And if you looked at our business in Asia Pac, the largest geography there is Australia, New Zealand, which, frankly, has been probably a bit less impacted than some of the other areas in that part of the world. So that's probably the color I would share there.

Okay. The next one we had gotten, what percentage of customers are currently using the CMS, either as an add-on or as the new stand-alone hub? I imagine it's too early for this new hub, but is there a specific sales motion to go upsell existing customers to the enterprise tier?

Let's take a step back and talk about the CMS Hub. CMS is content management system, for folks who aren't steeped in all the lingo. It's a little bit like from the very early days of HubSpot, we had a content management system, but it was, I would just call, lightly funded all along. It was an add-on. And about a year ago, we started talking to customers who used it and seeing how they used it. And we started talking to people about how they can create an unbelievably disruptive customer experience. And the website is just part of it. And so we said, let's double down on content management systems. So we doubled down on some of the ingredients down the burrito stand. We rewrapped it into its own hub, but we turned that add-on into CMS Hub Pro. We created a new SKU, CMS Hub Enterprise. And we basically promoted it from sort of an afterthought, so like a major hub on the level of marketing, sales and service. We think it makes sense to be its own hub because Marketing Hub is the decision maker. It's the CMO or the Head of Marketing. Sales Hub is the Head of Sales. Service Hub is the Head of Service. There's typically this different group inside of marketing, and sometimes it lives in IT. It needs the decision on the website. And so we said, let's pull that together and make it separate. And so far, so good. It's been doing really, really well in the first month that's been out there. So feeling good about it.

Okay. Good to hear. What do you see currently in terms of churn rates and upsell rates, especially in small to mid-market customers? Speaking from the Q&A.

I'll start. I think what we shared on the call was -- and I think we'll ground people in what we normally share, which is our net revenue retention is in and around 100% for the business. And we saw that in January and February, which, frankly, is great. Tends to be -- Q1 tends to be seasonally a little bit less strong than Q4, for example. So we are in and around that 100%. Great. March hits and the revenue retention went from 100% to 90%. Low 90s is what we shared on the call. We've seen further headwinds going into Q2, and we expect that Q2 net revenue retention will be lower than that. I think the difference between March and what we're seeing in Q2 is the composition of where that headwind is coming from. At that -- those last 2 weeks of March really was almost half and half incremental cancellations and incremental downgrades. And given the customer actions that we've taken, we've really seen that shift in Q2. And so the incremental sort of pressure that we're seeing on the retention is coming much more in the form of increased downgrades than it is coming in the form of incremental churn. And what we shared on the call is that it's more like 70-30 downgrades canceled than what we saw in the back half of March.

Okay. Now -- and relating to that, the next question I see on here, how much of the pricing discounts being offered are voluntary versus the customer asking?

Well, I think it depends on the time frame. So what happens is you saw this -- that wave of people at the very early stages that was sort of this real inbound interest, where it's like my business is -- I need some help and I need some help right now. And so there was a lot of reactive conversations that were happening in the very beginning. And that has shifted, and we're doing much more of a proactive set of conversations with our customers over time. That conversation is something -- we have a strong team of customer success, representatives who are actively engaged with our customer base on a regular basis. And so that is -- it is a normal part of the cadence that they would have these conversations with the customers, and they are just sort of enhancing that conversation in a more -- in a proactive way now.

Okay. Extremely helpful and very logical. Brian, we probably have about 1 minute left. Let me just ask you, what is happening at the top of the funnel for the free tier, which could maybe help you drive some future growth? Because I think you had pivoting -- you've been pivoting to a low-touch model for quite some time. Are you seeing that benefit in this environment?

What we're trying to do in the crisis is not waste it. And so one of our big plays we run, Kate alluded to it, is we have a starter layer of products. You can buy that whole starter layer for $50 per month. And typically, that was like $100 and -- I forget. It's a large discount on it. And that product is capturing a lot of people who are having a tough time with COVID-19 and want to downgrade. It's capturing a huge number of people who are coming into the business for the first time. So our customer count is going up with that. And we think we'll be like a coiled spring. And when this is over, we're going to have a lot of starter customers, and we're getting pretty good moving those starter customers up into the Pro and Enterprise SKU. So liking where we're sitting on that. Where the low-touch model is working, it's working down there in the starter SKU.

Okay. I want to thank you very kindly for the time. I have this very odd craving for kind of a carnitas. I don't know why. I just think I need to run out and grab one. But thank you so much for joining us. Always a pleasure, and we'll talk soon.

Thank you.

Take care.