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

All right. Thanks again for joining us here. I'm Walter Pritchard, software analyst at Citi. Happy to have HubSpot here, Brian Halligan, who's Founder and CEO; and then Chuck MacGlashing, who's the Head of Investor Relations. I'm going to through some questions that I prepared, and then happy to involve everyone in the Q&A. There should be a window in your conference interface on the left-hand side that says questions. You can click on that and type in any question you have, and we can incorporate that into the discussion that we'll have here. So Brian, thanks for joining us, and Chuck, thanks for joining.

Thanks for having us, Walter.

Yes. Thanks for having us.

So I wanted to start out, we've got -- this environment we're in is just unprecedented. And you've reported, I think, 2 quarters now operating in the COVID pandemic. Can you talk about sort of the puts and takes of what you've seen, things that have helped drive your business and things that have been more challenging and have the other side of the impact?

Sure. I think it's been pretty clean for us between the end of March, Walter, and the end of May, it was all headwind. Headwind on the retention side, headwind on the new business side. Not overnight, but relatively quickly, it kind of flipped into a tailwind on new and nonretention. Around the beginning of June through when we reported earnings, things really started to turn around and on both sides. So it's really been the tale of 2 cities for us. It's been very interesting. We put a number in place -- a number of plays in at the beginning of COVID around packaging, around giving people short-term discounts, around some partner things we've done that I think have helped us weather the storm pretty well. And not just weather the storm, but maybe even had our sales in the right spot to catch that tailwind when the wind started picking up. So that's sort of how I see the world at this point.

And how do you think about where the -- to the extent you've seen incremental spend come to HubSpot, what's been the source of that during COVID? How has that been different than what you've seen in the past if you're able to sort of attribute that?

Yes. I guess I would just say for 14 years, we've been evangelizing this idea of moving from outbound to inbound, from off-line to online, from outside to inside sort of this transformation to digitizing your go-to-market. And it's exactly what people want today. A lot of people are suffering with COVID. A lot of people who have lost their jobs, has been a disaster for certain companies. We happen to be pretty well positioned to almost take advantage of some of the changes that are going on. Those old-school methods, the off-line methods, they obviously just don't work during COVID. We're all stuck at home and working over Zoom. So we seem to be well positioned. I remember, Walter, at the beginning of COVID, I sat down with my Head of Product and Engineering, and we combed through our road map for the next 9 months and said, "Well, what are we going to change?" We just changed a bunch of stuff. The world is about to really flip on us. We were kind of building the product people needed for a COVID, post-COVID world. We made a bunch of packaging changes, but we largely just did not touch our road map. We feel like we're building kind of an ideal platform for the future. What sort of happened in the demand environment a little bit, I think, is maybe not exactly sure, but 2 things may be happening. The people who didn't buy during the dip or people who downgraded, maybe there was some demand that could kind of got pushed out. I think there's also an effect, Walter, where people who are kicking the tires on this idea of inbound or kicking the tires of moving to inside sales and digitizing their go-to-market, they're just speeding their plans up. They're moving it in. It's a compelling event. And maybe the plan they had in 2021 or 2022, they said, "We got to get going now on it."

Got it. So stepping back, and it's actually interesting that you -- there isn't, on the product side, much change in how you're operating. You've undertaken an effort over the last couple of years to expand outside of the marketing area that you started. What sort of the lens you look through to decide which of these areas in the front office makes sense for HubSpot to go after directly? You have partners in other areas. But what sort of -- what's been the decision criteria there more broadly?

Yes. We've typically built -- we have this all-in-one approach. We're a little bit -- well, we're not like Apple, Apple's in a league of its own, but we're inspired by Apple, where we think people are like this idea of all in one and everything just working well together. So if you roll the clock way back, Walter, when we first started HubSpot 14 years ago, the competition really was you build your website on WordPress, and you build a blog. And you put in a marketing automation, e-mail marketing system. You put in a social media tool. You put in search engine optimization, analytics. And just to do like kind of modern inbound marketing, you all of a sudden have 10 different applications with 10 different user interfaces and 10 different databases. And it was just a mess of a project for mere mortal to pull off. And our original value prop was not only transform the way you go-to-market, but here's that modern platform that a mere mortal mid-market company can pull this type of marketing off. And that's kind of been our approach over the last several years. We've looked at a market and we said, "Let's do the all in one." So we've done that in marketing. We said, "Well, we sell to the VP of Marketing. Could we build something for the VP of Sales?" Well, what does that VP of Sales need? When you look at the VP of Sales in the old days, they would buy a CRM system, salesforce.com, Oracle, something like that. But they would also buy outreach tools for the sales rep, calendaring tools for the sales rep. They'd buy forecasting tools. They'd buy database intelligence tools. They'd have to cobble all this stuff together into kind of a very complicated system. We said, "How do we build that all in one and make it very easy to use for people to set up, same with services, same with website?" And so when we look across the front office, and we're sort of limiting our view these days to the front office because we think that market is huge and underpenetrated, particularly in our part of the market, there's still large swaths of area where we think we can improve our existing hubs in large swaths of area, where we can build cool new additional hubs that will really help our customers grow better.

And how do you think about -- I mean, I understand the inside model and so forth. How do you think about the B2C marketing area? Has your product been dragged into that market at all by your customers? And is that market just generally attractive for you?

Yes and no. I would -- I don't have the number at my fingertip, but I'm guessing low 80s percent of our customers are pure B2B. A bunch of our customers are B2B and B2C, and so they use a little bit of both. And a lot of those customers use Shopify with HubSpot. That integration's pretty interesting. And then a bunch of our customers are B2C, but it's a consumer buying something really expensive, like you're buying a timeshare or you're buying an expensive rental home or you're buying a, I don't know, one of these new sprinter trucks that they trip out so you can drive around the country with your family and more considered purchase where there's a sales rep involved. So to that extent, we're in B2C. We think there's a lot of opportunity in B2B. There's a lot of people talking about B2C. And certainly, they're getting a tailwind. Shopify is getting an unbelievable tailwind there. But a lot of the same tailwinds are applying on the B2B side, where much more of that selling process has to be done online and digital. I kind of look at the market like for myself, let me give you a weird analogy. I've gained a few lbs during COVID. And so I'm trying to move down the food chain, a heavy meat-based diet, animal-based diet. And then one step down the food chain is you get animal products, but although you got some vegetables and grains surrounding it on the plate. And then one step further is yes, it's mostly vegetables and grains and fruits, maybe a little tiny bit of meat. And then all the way down that food chain, you've got sort of no meat on your plate. Businesses need to move down the food chain, too, where maybe a business today is all of their interactions with our customers are man-to-man contact, human to human, like you can we talk to a rep, you got a question, anything you're talking to a human, other than very basic stuff. One step down that food chain, you've got a company where, yes, humans are talking to customers, customers are talking to humans, but computers are helping a lot. You're investing in automation. You're investing in bots. You're investing in stuff to make those humans far more productive that are engaging with their customers. One further step down is largely that interaction with your prospects and customers is computer to computer. People are searching on your site, they're in your communities, that type of thing. And humans are augmenting computers in smart ways. And then all the way down is completely self-service, like Google. It's hard to talk to a human at Google, if you're a user there. So we kind of are helping customers slide down that food chain. A lot of our customers are kind of position 2, moving to position 3 or position 1, moving to position 2.

Got it. Got it. That makes sense. And also, you've been very disciplined. You said 80-something percent B2B. You've been pretty disciplined about developing product for a certain segment of the market from a size of company perspective. And you do have customers, I think, that kind of drag your product up as they grow. How do you think about that targeting over the medium term? And how much you will sort of continue to grow with your customers as they go up -- some of them go upstream?

Yes. We sort of have 3 segments. We have 2 to 20 small business, 20 to 200 mid-market, 200 to 2,000, we call it, enterprise. It's really -- most people would call it mid-market. We originally built our go-to-market and our product for that middle, the 20 to 200. And we have great product market fit. We have great go-to-market fit in there as well. We've gotten much better in the 2 to 20, particularly with some of the changes made in COVID with the new packaging around Starter. And this year has been a year where we're really investing in that top tier. We've done some hires on the go-to-market side to improve and enhance up there. And you've seen the product improve up there. The Marketing Hub Enterprise had a big step function improvement in relaunch. CMS Hub Enterprise was launched, like lots of room and innovation to happen up there. And this year, I think you're seeing nice results. We're attracting more customers up there. And we're upgrading more pro customers to enterprise tier. We're not losing as many of those enterprise customers, so let's say, the Salesforce or the Microsoft or Adobe, those companies up there. We're retaining them longer, and they're happier up there. And so making progress on that third tier and the bottom tier in the short and medium term.

How do you think about sort of the relative, I don't know, economics and attractiveness of those 2? Obviously, that middle segment, you are in that segment. But that low end and that high end, does one have a more attractive long-term customer profile? I mean, they're very different types of customers. But how do you think about the relative merits of investments in those 2 areas?

They're both attractive, like we look at unit economics. So what does it cost us to acquire a 10-person company versus what does it cost us to acquire a 500-person company, then we look at what is the relative total item value of that customer. And they're actually relatively similar because a lot of those 10-person companies grow, and they grow with us and upgrade. So we get the value and the total lifetime value. They're both quite attractive to us. And I think you'll see us invest in both a lot of investment this year, though, in that tier of products in that 200 to 2,000. We don't want customers graduating off of HubSpot when they're 500 employees. And we had a lot of that. There's a -- we have a good competitor called Marketo that was acquired by Adobe. And I used to make a joke, Walter, that Marketo didn't need to do any marketing. They just called on our biggest customers, and they upgraded them. And that was kind of their strategy for a long time. That's not really working anymore. We've been -- it's more flipped the other way. We've been ripping and replacing other products in that segment.

Yes. Got it. When you -- so let's talk about on the Starter side, you've changed the pricing and packaging. How do you sort of isolate the benefits that you've seen in that segment of the market where products become easier to use, pricing has been more -- less friction. And then probably that's a segment of the market that was just underpenetrated. And you've seen some awareness built around COVID that they need to have these solutions. How do you sort of isolate the benefits that you've seen in that lower end of the market?

Yes. So just to refresh everyone's memory, back when COVID first started, we allowed companies to buy our marketing starter, sales starter, service starter as a bundled kind of a Starter Suite. And we allowed them to buy it at $50 a month. And I think the price tag before was $120-something, I forgot the exact number, but it's a big discount with the idea that a lot of people would need our help during COVID. Maybe some people would downgrade to that, but lots of new people would need to come online. That play has worked far better than we anticipated when we drew it up on the whiteboard initially. Far more companies have purchased it. The usage on the product has been strong. The customers who are buying it are of a pretty good profile. The upgrade rates aren't as strong as previous cohorts but are pretty solid actually. And so we're feeling pretty good about that segment. And what we want to watch is like can we get somebody in -- 10 employees and keep them all the way to 1,000, 2000, whatever employees and grow better alongside them. That's the idea. Can we get them -- can we be the first CRM system they buy? And can we grow with them? It's hard to go in and rip out a giant dynamics implementation. Maybe someone loves it, maybe someone hates it. Let's say they hate it for whatever reason. Ripping that thing out is a big project. So we're really focused on some of that, but a lot of how do we get in early and grow together with them. And that's been happening.

Got it. Got it. And so on the -- I think another thing that's been happening is you have -- and with that starter, they all used to -- if I go back 5 years ago, they all start with HubSpot with marketing. And with starter, they can start in any of the hubs, they sort of define them all. And other -- and you've also talked a bit more about seeing even outside of that starter bundle, customers starting with HubSpot in areas outside of marketing. Can you help us understand how common that is that you think customers are starting with you outside of that? And sort of how does that change the way that you lead them through adoption of everything and the economics of that customer?

I don't have the numbers in my fingertip, but I'm going to guess people who end up buying a full suite, maybe 1/3 of them start with the full suite, 1/3 of them start with marketing and then buy the full suite, 1/3 of them start in sales and then buy the full suite. So there's multiple front doors in the HubSpot. One of the things we did when we built the sales product was we said, "Let's not build it, like let's not build a new product that's more like an acquisition where you built it and you just cross-sell it into our customers." What we challenged the team to do when they built it was make it so awesome. It's a front door in itself, and this is a way to get new customers in. And that team really delivered on it. That is a massive front door for us.

Got it. How do you think about in that area? I mean, there have been lots of sales. You were early in marketing and really kind of built the market as it happened. On the sales side, there's been other products out there, whether it be Salesforce or lesser-known companies. The companies that are coming to you in sales, are they mostly greenfield? Did they try out some of these other products and weren't happy with them? Help us understand sort of where the adoption is coming from on the sales side.

I got somebody at my doors, weird COVID times this happens. Chuck, can you answer that, and I'll be right back?

Yes, sure thing.

Go ahead.

I think it's going to depend on the slice of the market that's worth talking about here, Walter. If it's a 200- to 2,000-employee company, they've clearly used the CRM, likely a household name that you've heard of. And they're likely not happy with it for a variety of different reasons and are looking to switch off the platform to something new. If it's in the, call it, 2 to 200 segments or maybe more like 2 to 100, there's some combination of folks that are using a point solution CRM down market that could be freemium, low priced, not tied into their website, not tied into their marketing and service efforts. And they're looking to sort of consolidate onto a single stack. And then there are -- at the lower end at 2 to 20, there's a fair amount of customers that are just using Excel spreadsheets and e-mail to sort of manage their customer relationships. And that worked for them when they had more time than budget. But as these companies become bigger and they hire a Head of Marketing and a Head of Sales and a Head of Customer Service, they tend to grow into a set of resources where they have more budget than they have time, right? And things like Excel and e-mail break in that type of environment. And so it sort of depends on what segment of the market that you're talking about.

Got it. That makes sense. And Brian, I think we got a pretty good answer on that one on the sales side. Curious kind of similar question on the CMS side, where content management systems range from their dedicated products that are mostly targeted at larger customers. And then you have things like Wix and so forth that are sort of CMS is integrated into a website tool. How many of the customers that you're seeing adopt your product are pretty unsophisticated kind of greenfield-ish? And how many are you sort of selling against something that's an incumbent product for them that they might be somehow tied to?

Mostly, they have a website made fully by our CMS. I'd like, in the future, to be able to say the same thing I'd say about CRM, like we're the first like grown-up CRM people buy and then they grow with us. That's not the case yet with our CMS. I think in the future, it can be. The CMS industry, Walter, is a funny industry. It's largely dominated by open-source companies that are open-source projects even and there's companies attached to them. And those open-source projects started a long time ago during kind of client server times. And the projects are still kind of client server. And so you need a security person paying attention to it. You need to put patches in there. You need a server somewhere for them. The bottom end of the website CMS market has -- Wix has done a really nice job down there. Squarespace is another one. They're not public, but it's a really good company. And they've made it for mere mortals, and you don't need to serve it, basically SaaS-ified it. We want to kind of play that game in the mid-market, where there's a little bit more power developing in there, build really cool experiences. So we're starting down the journey on that, and I think it's a really nice opportunity for us. And I think you'll see that business grow really nicely over time.

Got it. Okay. Great. And then on the freemium side of your business, I mean you've -- that's been a decent generator of paid business for you, not something I think we have a ton of visibility into how large it is and so forth. How that, I guess, especially with starter, how has the freemium model sort of evolved for the company? And I guess, is that a sort of area that you're doubling down on? Do you find more productive channels in other areas? Just curious the use of that.

Going really well. The majority of our customers now use our free product before they buy it. They may be using it as a trial, they may be actually using it, but that's turned into a great, great channel. I also just think like I'm a non-sequitur, but people have been talking about the consumerization of the enterprise. That's been a buzzword. For 150 years, people are using that phase, and it's finally happening. Like just in the last couple of years, it's happening. And if you look at HubSpot, that's our playbook. On the product side, it's consumer-like on the front end, and it's enterprise-like power on the back end. Same thing with our go-to-market. It's consumer-like on the front end, kind of enterprise-like on the back end. And when I say that, inside of companies, decisions used to be made by a CIO and be very centralized in RFPs and reviews, but even decent-sized companies now like those decisions are out into the line of business and with ops people. And those ops people and those users and those VPs of Marketing, VPs of Sales, they expect to be able to evaluate and use products before they buy them, similar to the way you do with Spotify or any other product you would buy on the market on the consumer side. The go-to markets are being consumerized. Zoom, Slack, Grid, this type of model. That's sort of the game we're playing. And I think when we look back 5 years from now and look at today, that will be one of the things that, oh, I'm starting to really master that consumerization of the front end and consumerization of the go-to-market in a way that really worked.