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

Okay. Thank you, [indiscernible] This is Tom Roderick from Stifel, application software analyst here at Stifel. And today, we've got, all the way from Boston, which was meant to be right in the backyard of this conference in Boston, it's HubSpot. We'll have a great conversation today nonetheless, and I'm joined this morning by CFO, Kate Bueker; and Chuck MacGlashing, the Treasurer and Director of Investor Relations for HubSpot. So Kate and Chuck, thank you so much for joining us today. Really looking forward to this conversation. Why don't I just sort of turn the floor over to you for 3 to 5 minutes, if you want, to just take a brief opportunity to give an overview of HubSpot, the products that you sell, the markets that you're in, who your customers are and how you think about the size of your addressable market? And then we'll sort of dive into more topical questions for the day. But thanks again for being here.

Yes, sure. Why don't I start? And then Chuck, I would invite you to add anything that I have missed. HubSpot is a platform that is anchored on our CMS that allows our customers to create end-to-end modern delightful customer experiences for their end customers. And we do that through a series of applications. We have tools in the marketing space, in the sales space, in the services space and most recently in the website space with our new CMS Hub that allow our customers to really create a seamless experience for customers from -- throughout the customer life cycle. So from the attracting of the customer to the engaging in the sales cycle to onboarding those customers and servicing them over time. We have, for all of the history of HubSpot, focused on the SMB market, and we define that really as customers sized 2 to 2,000 employees. We are looking for customers who want to grow with us. And we have a diverse set of customers. We have 78,000-plus customers as of the end of the first quarter in 100-plus geographies or 100-plus countries throughout the world. A very diverse set of industries. They are mostly B2B customers, and they are mostly mid-market. So even though we define the sort of target addressable market as 2 to 2,000, it's really that sort of 20 to like 200 that is the real sweet spot for HubSpot.

Outstanding, yes. And it's a pretty wild world the last 3 months has become, insofar as if you had taken a long sailboat journey and didn't have any access to the Internet for the last 3 months, you might come back and see that the HubSpot stock is back above $200 and say, well, okay, everything is just the same as it ever was and easy to forget all the turmoil of the last 3 months. So I want to dive into 2 of the things that you just talked about there, Kate, one being the emphasis on the SMB segment of where HubSpot sells and the other being the emphasis on B2B. Talk to us a little bit more about what that really means because I know, over time, it's been lost on a lot of potential investors and a lot of people out there that HubSpot is much more B2B-centric and much more kind of focused on the M in SMB than S. So as everybody's been worried about Main Street USA melting down and unemployment, what do those things mean to you? And how does the market look now relative to what it did 3 months ago?

Yes. Again, why don't I start and then I'll ask Chuck to add on here. I think when people think about Main Street melting down, I think you're thinking about your local restaurant or retail store. Those tend to be B2C customers. And we have some B2C in our portfolio but the vast majority of our customers are in that B2B. And we have seen that, that is a set of customers who are, frankly, everyone's on this path to try to adapt their businesses into this new reality. And if you listened to our earnings call, you heard Brian describe the pandemic as sort of this hurricane that was coming at us 200 miles an hour in the back half of March. And what happened over the next month or so is maybe that headwind has dissipated a little, although it's still sort of pretty significant headwind. But there was a bit of a tailwind in the new business side that really had sort of 2 things. One is a set of new industries that emerged as a result of the pandemic, think about like distance learning or things like that. And then there's a set of customers that needed to figure out how to change the way they did business to adapt to the new reality. And again, going back to the set of tools, we have a set of tools across marketing that are designed to create an inbound marketing experience for end customers. We have a set of tools on the sales side that are designed to enable a light touch inside sales motion. We have a set of services tools that are designed to enable sort of a seamless management of that customer interaction with sort of your company. And they all live on this common platform, so the view of their end customers has never been clearer. And so well, there -- don't mistake, there is still on-net a headwind to the business. There are some -- underlying, there are some positives and negatives.

Yes. That makes a ton of sense. Maybe we could just put a little bit of a finer point on it. I think kind of going back to your earnings call, you highlighted, and I want to come back to why February and January were so strong for you, I think we all understand why some headwinds started to really pick up in March. But to hit on that point, you did highlight at the time that what was slightly above 100% in net dollar retention dipped down into the low 90s at the end of March, and then that's expected to be a bit lower for the second quarter as a whole. Take us through the dynamic of how that plays out. And in particular, I guess I'm asking about the dynamic between churn and contraction and the delay in how those items sort of persist into the net dollar retention number. It seems like the economy's gotten better, but is there just a simple delay factor that will create that figure going lower, even as the economy improves throughout the second quarter?

Chuck, do you want to take that one?

Yes, sure. Fee rate, Tom. I mean, we talked quite extensively on the quarter or on the Q1 call about kind of the dynamics at play throughout the first few months of the year, which was January and February, net revenue retention above 100%. Customer dollar retention was also quite strong and that bled into March. And of course, the COVID situation began to really kind of play out in mid-March. And we saw a spike in cancellations and downgrades towards the end of March, which is what you would expect, just given the panic in the markets and the panic among customers about what the future held. As we progressed into April and we're able to put forward some customer-facing plays that allowed our frontline customer success reps to give discounts to customers and heavily impacted businesses, extensions on billings terms, we cut the price of our Growth Starter Suite (sic) [ Starter Growth Suite ] by 50%. We made some prepayments to partners. We did a bunch of really proactive plays for our customers and partners that created a phenomenon that caused downgrades to begin to spike in the April time frame. And what we began to see towards the end of April was really a shift away from cancellation towards more downgrading. That was occurring through customers that were downgrading into lower editions of the product. It was customers that were cleaning up their databases, maybe cutting back on seats within our sales and service products. And that's basically the way that it played out through the quarter. We expect that cancellation, at least for the foreseeable future, will remain at elevated pre-COVID levels. It's likely that given how proactive we were with these programs and really not blocking the exit for customers, allowing customers to downgrade before they come up for renewal, it's likely that we probably pulled forward some downgrades here into Q2 as a result of these plays. And I think we're cautiously optimistic that as we get into the back half of the year and into 2021 and economies and markets begin to open back up, that we can see some improvement in those metrics.

Yes. That's great color, Chuck. One of the things you just hit on is the proactive move that you guys made on the pricing front. And you talked about it on the earnings call. We can all see it on the website itself for pricing, particularly at the Starter and in some of the products at the professional level, where it looks like you've made a proactive move to take pricing down by about 20%. What's the thought on how long you keep this pricing discount for? And I guess the follow-on to that would simply be better pricing usually leads to some better customer acquisition dynamics. Are you seeing in real time a pickup in new customer acquisition that is intriguing to you on the lower pricing points, in the lower end products?

Yes. First, let me just -- to make sure that we're clear. The pricing change that we made was to our Growth Starter Suite. And we reduced the price of that from what would have been, I want to say, $116 to $50. And frankly, we have been surprised at the, I would say, the slope of that elasticity curve on pricing. We talked about the fact that Q1 was a record new customer addition quarter. There's some contribution certainly from this new pricing. And we also talked about the fact that April customer adds were also very healthy, in large part driven by this new price point. So we're looking really closely at how those cohorts of customers behave over time. It's obviously still early, but we are paying a lot of attention to the retention statistics, the upgrade rates of that customer set relative to historical starter customers. And we have not made a decision around the sort of future pricing around that Growth Starter Suite, and we will as we understand the economics a little bit better.

Great. I wanted to go back to where we sat here sort of pre-pandemic, if you go back to January, February. The conversation that I know that you both were having with a lot of investors was, hey, a lot of discussion around, did you underhire last year? How's the hiring coming? How's your sales capacity? And it seemed like that was playing out pretty darn well in the first 2 months of the year. Take us through what you were seeing that was driving a lot of that success that sort of led to greater than 100% net dollar retention. First 2 months of the year, it sounded like there was a lot of momentum. Would love to hear about how some of the investments you made last year on the platform and on people impacted the business on a more normalized environment.

Yes. I would say there's 3 things that we were really excited about coming into 2020 that said the strong performance in the first few months of the year. The first one was that we had made a lot of investment in what we call the main sale last year, which was shoring up the foundation of the product, making sure that the performance, the reliability were top -- met an SLA internally that we had set, that the usability of the product was improved. And what we saw was an impact on our Net Promoter Score that was very positive. We -- over -- we have seen Net Promoter Scores in the last period of time here that are record highs for us. The second thing is that we had gotten an operational cadence on the recruiting side that was working. And we had caught up on recruiting, we had really strong sales capacity, and we felt very good about our ability to sort of execute against the market opportunity coming into 2020. And then the third thing was we were really bullish on the product road map. And you've seen us make a number of product announcements over the first part of this year. We announced the Marketing Hub Enterprise in January. We announced the CMS Hub in the beginning of April. We've announced account-based marketing over the course of May. And so we had this road map on the product side that we are also very excited about. And it really did fuel a great couple of months for us as we started 2020. What I like about it is that -- no one loves the pandemic, and I would certainly much, much rather be operating in a healthy economic environment, but I think going into the downturn from a position of strength has really helped us here, and I think it will help us come out the other side stronger.

I'm glad you hit on that, Kate, because that's one of the angles of the conversation I wanted to address. Everybody's gotten hurt by this. HubSpot's had a great balance sheet, historical approach of going to the market organically. How do you think about the value of your balance sheet? And you just raised another $400 million with a convert. What do you want to do with that balance sheet in the current environment because it does give you an opportunity to some of the less capitalized competitors and other just competitors' full stock to be very aggressive right now?

Yes, I'll ask my treasurer to answer that question.

That's a good question. Listen, I think it provides us with a lot of flexibility, Tom. And just to be clear, with the recent convert, we actually didn't raise too much. It was more like $100 million to $150 million when everything was said and done because we repurchased a pretty significant percentage of the existing bond. And so the genesis behind the more recent convert was really about liability management than it was raising an incremental $400 million. That said, listen, like we look at deals. We've been building out our corporate development and business development functions over the last couple of years. We have a team out in San Francisco that's designated towards vetting deals and evaluating opportunities. But at the end of the day, we feel like we're pretty good at building software. And it's a big piece of the competitive advantage that we delivered at the mid-market, which is we haven't cobbled together a bunch of discrete assets on the outside and stitched them together because small and medium businesses just don't have the technical resources and the sophistication and quite frankly, the patience to be able to handle those types of solutions. And I think that's -- it's a big differentiator for HubSpot. It's going to continue to be a differentiator for us going forward. And so anything that we evaluate has to come through the lens of the customer and making sure that it doesn't disrupt that end-to-end consumer-grade UI. It needs to make strategic sense and be a technology that's -- where we don't have in-house experience that can maybe pull forward the future in terms of introducing technologies to our customers. It's going to make financial sense, which for the last 10 years, it's been hard to pencil out deals that make a lot of financial sense. And then I would say, lastly, it's going to make cultural sense. It's going to be a team that we feel like can integrate into HubSpot and be a team that's going to stick around and build a big business that can help millions of organizations grow better. So I think we're glad that we have it. It's always better to have the cash on your balance sheet when you're evaluating things than to have it be -- to have the financing tied to an M&A transaction. But we're also not going to rush and do a deal to buy revenue, for instance.

Yes. I want to keep you...

No. I think that was very well said.

Perfect. Well, I'll keep you both on that topic for just a second because I would love to hear about how the PieSync acquisition has integrated thus far, how your customers are utilizing it and how you kind of think about PieSync strategically in the crux of putting the entire platform together.

Yes. I mean I think it's -- listen, it's early. It's been about a year since we bought it. For those of you that aren't familiar with PieSync, it's really HubSpot's largest acquisition to date, a deal that we did back in '19 for about $25 million. For the purposes of the time, like -- I won't get into the nitty-gritty details of PieSync, the technology. But essentially, what it does is it's a data synchronization engine that runs in the background. And essentially, what it provides is for 2-way dynamic synchronization of data between third-party applications. And as some of you may know, we've made pretty significant investments in our platform and opening up our APIs and the documentation around those APIs to allow third-party software providers to build on top of HubSpot. And one of the -- PieSync was one of those partners and helps to sort of move the data around HubSpot's platform for these third-party applications. And we began to see them get a decent amount of traction with the technology. We didn't have in-house capability as related to this. We saw that by doing the acquisition, it was something that was going to be in the background, that wasn't going to disrupt the customer experience. And so we've made the purchase. It had a decent amount of penetration in the HubSpot ecosystem when we purchased it. That's moved up over time. And overall, from a monetization perspective, it's something that can be purchased within our ecosystem, but it doesn't drive a significant percentage of revenue for us today. We really have been -- we're spending time investing in the platform and the team and trying to drive forward the product road map, but I think there will be a point in time down the road to think a little bit more carefully about how we'll monetize this and how big it can be for us over time.

Great. Wonderful. That's excellent. I want to take just a second here and remind the webcast audience. If you would like to submit a question, go ahead, I can incorporate those into the discussion. Just go into the Wall Street Webcasting portal and submit your question via text in that fashion. So Kate, let's talk about products just a little bit. I'd love to understand a little bit more what the CMS suites or the CMS addition as a new hub is being embraced by your customers. Tell us a little bit more about what the full paid-for product on CMS is looking like, what the new features are and how customers are thinking about that?

Yes, sure. So we announced the new CMS Hub at the beginning of April. But for those of you who know the company well, you may remember that we have had CMS as an add-on for a number of years, and a good number of our customers leveraged our CMS add-on. And it was one of those things that people kept asking for more, and we thought there was a really good opportunity there. And so over the last 12 to 18 months, we have invested, in a material way, in building this new CMS Hub, and we launched a professional and an enterprise version of the CMS Hub at the beginning of April. And really, the focus of the CMS Hub is for companies who want a bit of sophistication in their website, who don't, again, have -- there's a consistent flavor across our products, who don't have a bunch of developers in-house to build and manage. So it is a hosted website. It is one that you don't need extensive coding expertise in order to stand up and manage. And it has a number of sophisticated features that allow you to provide some customization to the end users, which is nice because it is connected right into that marketing platform, and there's a lot of areas where you could see some benefits there. And so the focus customer is really that mid-market, that 20 to 200 that we have talked about as our sweet spot. And over time, you may see us expand from there but that's the current focus.

So when you're pitching this product to customers, when they're evaluating this, what's the typical profile of what a customer might already have in place? Have they been managing their content themselves? What does that look like in terms of where you start to compete? Obviously, on the marketing side, you've been pushing upstream a little bit more against the likes of perhaps a Marketo over the years. Does this sort of get you into, more broadly, Adobe's world at the lower end of their mid-market? Or is it a different set of competitors that you'd be looking to displace?

Yes. I would say, and Chuck, please jump in if you have color here. It's probably a bit below -- the Adobe product is pretty sophisticated. What we -- we're targeting that 20 to 200. Many of those customers may have already had a website. And there's a sort of a normal refresh cycle, so they could either be graduating from some of the like low-end solutions and/or they're likely on probably like the -- what am I -- they're on sort of the mid-market open source website, which is a good portion of that market. The open source project is called WordPress. It is a hosted product, which means you have to have a server in order to -- and developers to build a website. And so many people who host their website on WordPress leverage one of the associated hosting services. And we just think that this is -- our CMS is a much more modern way, a much more modern technology on which to build your website. Chuck, what would you add to that?

Excellent. That's great detail.

No, I think that's great.

So Kate, can we just get into the -- just the guidance that you've laid out for the year? The first question, I think a lot of investors were really surprised when you laid out full year guidance. Obviously, you had a pretty strong -- thought about your ability to do that and seeing some real-time metrics. But take us through your thinking in terms of why you wanted to lay out full year guidance. And any regrets on doing so a month later?

Well, so no regrets. I think it was -- we wanted to give investors as much sort of information as we could about the business. And I think we try to do that consistently, which is the sort of underlying theme. Behind the scenes, I would say there were many, many scenarios run, and so we did a lot of analysis around potential outcomes for the business. And we landed on a set of guidance that we were comfortable with across a variety of economic scenarios for 2020. Chuck, what would you add?

No. I mean, I think that's it. I mean, there were pros and cons, Tom. I can see why some companies that were on the earlier reporting side that maybe only had the second half of March to evaluate versus companies like HubSpot that reported in early May that got to kind of see the way that April played out and a bit of the way that May was tracking. And of course, we have internal dashboards that give us a sense for the leading indicators for HubSpot's business that I think give us a whole bit more confidence. We've got an absolute crack SD&A team that ran every scenario for us under the sun around what had happened to cancellations, how those are tracking. Same for downgrades, what we needed to believe new business would look like in the back half of the year. And ultimately, like that just helped us to triangulate to this range of $800 million to $810 million and come away from that analysis feeling as though it's a range that we're comfortable with, that reflects all of the data that we had through May 6 as well as to a point that Kate made on the call, a wider range of outcomes for the back half of the year, to be able to sort of make that range. And listen, like at the end of the day, it's -- you never totally know with these things, you make decisions with the best information that you have, but we felt like more transparency and giving investors as much visibility into the business and into the variables that we were considering was going to be a better overall way of approaching this than simply pulling back on guidance, saying that we had no visibility and revisiting it a couple of quarters from now.

Yes. I think you guys were early on being able to provide that full year look, and I think it's played out pretty well in the last month, so that's been great. Probably just about 5 minutes left, 4, 5 minutes left to go through a few more questions. If you have any from the webcast, feel free to shoot them at me. I want to keep on that theme though of some of the underlying metrics that gave you some of that visibility. Maybe we could talk about the overall value of the growth stack and what that has meant for your dollar retention. I'll leave this to either one of you who wants to tackle it, but I would love to hear a little bit more about how the growth stack is sort of impacting that net dollar retention. And then the second part of that is, how is that impacting your ASRPC? Seems like pricing or average subscription revenue per customer has been moving in the right direction. How much of that do you ascribe to adoption of the growth stack?

Yes. I mean, historically, Growth Suite adoption and multiproduct adoption has been a tailwind to both net revenue retention, customer dollar retention, ASRPC, like it's just been really all good. Of course, everything changed in mid-March and -- despite the fact that we continue to see strong momentum with multi-product adoption for new customers as it relates to -- or particularly influenced by some of the pricing changes that we've made. Unfortunately, it's being overwhelmed by the headwind that Brian and Kate talked about on the call around an uptick in cancellations, an uptick in downgrades that, of course, have pressured net revenue retention to fall into the low 90s as in Q1 and what's likely to be in the 80s in Q2. I think if you kind of take a step back and take a bit of a longer view on ASRPC and net revenue retention, we still feel like there's a lot of room to drive multi-product adoption where we've, of course, introduced a new hub in CMS Hub and an enterprise version of that. So there should be opportunities over time to move some of our legacy add-on CMS customers up to enterprise. There should -- there's another opportunity to cross-sell that product into our 78,000-strong customer base. And so like -- we feel like the trends are in place. There's still a lot of opportunity to drive those metrics higher over the medium to long term, but there are these headwinds during the short term that will likely weigh on revenue retention. And even ASRPC, like we talked a little bit upfront about the fact that we moved pricing down on the Starter Growth Suite, it's driving a ton of net customer additions. We made -- we had a record customer net addition number in the first quarter, but it's going at a lower price point. And so one of the things that Kate talked about on the call was likely some pressure to ASRPC here in the short term as a result. And that's -- it's a trade-off that we're willing to accept because if the upgrade rates on those customers hold anywhere near what they've held at historically, then there's going to be a nice upgrade opportunity over time that will benefit ASRPC and revenue retention at the same time.

Outstanding. Let me ask a bit of a futuristic question to wrap things up. I know you get a lot of tactical near-term questions around the investor discussion right now. But as you both look at the next, let's call it, 3 to 5 years, I mean, the world of inbound marketing has now become the world of SMBs and medium-sized businesses of all kinds, really leveraging your whole platform. What does that future look like 3 to 5 years from now for HubSpot as a company? How much of this is still kind of HubSpot, the inbound marketing company as opposed to HubSpot, the operating system of the small business? Tell us how you guys think about the sort of longer-term future of what the industry becomes.

I mean, I think that we are -- yes, why don't you start, Chuck, and then I will -- I'll add.

It's hard to manage the Q&A, Tom, over a phone line to get to one another. Yes. I don't know. I mean, I think, listen, we started this thing, I believe it was 14 years ago to the day yesterday, Brian and Dharmesh started HubSpot, which is quite incredible when you think back on it and of course, came public in 2014, so a little under 6 years ago. And I think we've done a pretty good job of moving from what was a marketing application to a suite company really over the last 5 to 6 years. We've invested quite heavily in the platform and the ecosystem of applications that can plug-and-play into HubSpot. And so I think we're early innings on this journey from moving from a suite to an overall front office platform. And I think over the next 3 to 5 years, our hope is that we can be that entire end-to-end front office, all on 1 front office platform for many hundreds of thousands of businesses that will use us for marketing, sales, service, their website, likely additional hubs down the road and then plug and play with our ecosystems of applications where HubSpot isn't providing features and functionality.

Yes. I certainly agree with Chuck's sentiment. I feel like we are marching down the path of from single app to platform. And I think we have made a lot of smart choices along the way in terms of how we've built the product that will enable us to be, sort of really well positioned to create an experience for that platform that is super simple and really easy to use. And that is, frankly, hard work to do. And I think we have work to do, to continue to drive functionality around the existing hubs that we have today, but we have many ideas for other ways to add value to our customers over time.

Excellent. I think that's a great place to wrap it up. So Kate and Chuck, really, really enjoyable conversation. Thanks for being here with us, and thanks for everybody for being on the line. We'll let you all get to your next meeting, so we'll wrap it up there. Thanks again, guys.

Thank you very much.

Thanks for the time and support, Tom.