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

To those on the West Coast, my name is Alex Zukin. I cover enterprise software here at RBC. I'm thrilled to be joined by the entire HubSpot team. So thank you all for joining, Brian, Kate, Chuck. It's a pleasure to be here with you virtually.

Pleasure to be with you. Thanks for having us.

Thanks, Alex.

And I guess I will tell you -- well, I have my questions. You guys have seen them, and I'll scroll through them, but I like to add a little bit. But I will tell you, my last call back that I had after your earnings call with Chuck was probably one of the best ones I've ever had with HubSpot. And I want to kind of go in the theme, which it seems like something really changed that you were not expecting to change throughout the course of this year where, at first, the pandemic was something that was creating a headwind for your business. And now you've emerged, and it's a tailwind for the business. So what do you think, as you looked at all the data, as you spoke to the customers, what happened, where are we and where are we going?

I can take that. Well, I would actually say, Alex, we anticipated having a really good year this year. We did a lot of hard work in 2019 to prepare for this year. We knew the product was going to have a big year with a bunch of new releases and whatnot. And the year started out really nicely, January and February really were strong for us. December -- last December was, too. COVID hit, and it hit us hard. I mean, it was it strong headwind for us on retention and new. And then it really just started to turn. First week of June, it turned and it kind of turned, honestly, and it churned. Within a few days, it shifted, and it's been blowing nicely behind us for -- through -- we commented on earnings, through October. It was -- business was good. And I give credit -- half the credit to a COVID tailwind and half the credit to we were really well positioned to take advantage of it. We had our sales up pointing in the right direction. Our execution leading up to this year and getting ready for this year has been really solid. Sales execution has been good. And so I think our strong performance that you guys have seen in the last couple of quarters is half a function of a tailwind and half a function of we're really kind of hitting on all cylinders as a company these days.

What led to the turn? So when you think -- when you structurally analyze the business and you've seen now that turn progress, is there anything that you can point to as kind of what has solidified as the driving force behind this tailwind? How long do you think it can last? Is it temporal? Because I get a lot of the questions of as we go from remote work to return to work, there's tough comps, there's tailwinds turned to headwinds. How do you feel -- again, driven by that structural turn, what is it? How do you feel about that durability?

I feel like the durability of our value prop and execution is very good. As I look into next year and I look at our go-to-market model and I look at our product pipeline and our value proposition, our competitive positioning, I feel really good about that better than I've ever felt about it. I think that's sustainable over multiple years. We've made some bets as a company in 2018 and '19 that are really paying off now. In terms of the tailwind, it's -- I mean, I don't know how long the tailwind lasts. I can say that, ironically, sales and marketing budgets have shrunk. If you look at sales and marketing budgets across our target market that shrunk, there's been some interesting analysis to come out of it, but they've certainly shifted, and budgets have shifted from outside field sales to more inside sales in light touch sales and product-led sales, of course. They've shifted from outbound marketing. Live conferences, trade shows, things like that, billboards and airports, things like that, too, inbound and everything's moved from off-line to online. So all of those trends have -- are trends that we've been calling for a long period of time. And we thought they would happen over the next 5, 6 years in a certain way, and they just have sped up. And I don't think the world is going back to -- you may not like to hear this because you're running conference right now. I don't think the world is rushing back to in-person conferences, in outbound marketing and outside selling. I think some of the changes that have happened just sped the -- sped progress up a little bit, and I think some of that's here to say. But it's hard to say. I mean, it's pretty -- predicting the future is a hard thing. I try to control, and we, as a company, try to control what we can control. It's hard to control the economy or the progression of the disease or whatnot. But what we can control is our value prop, our product, our -- the level of delight of our customers, our competitive positioning, our lead generation, our selling skills, and those have all been improving a lot.

That makes sense. And you're a pretty good predictor of the future based on where you started with inbound and what's coming through right now in the market. So I'll put you kind of on the spot again on this point, which is the evolution of the sales and marketing category that we've witnessed to the points you just made of the shifting priorities, the shifting spending patterns from even -- in a contracting budget, the reprioritization of dollars to areas that elevate ultimately your value proposition. What plays are you running right now from a product perspective that you think either are underappreciated or that are going to put you into this position of strength and power to kind of tackle this durability question that we constantly discuss?

Sure. I saw -- I read some interesting analysis recently that looked at publicly traded SaaS companies and then cut them by more traditional go-to-market models, enterprise outside selling versus inside versus kind of product-led, and that's kind of a spectrum from sort of product-led, and it kind of bleeds together. And the new breed of companies are doing so, so well out there, and I put HubSpot in that camp. They've all got a lightweight flywheel motion that's product-led. They've all got a -- an incredibly delightful end-to-end customer experience, whether that's HubSpot or Zoom or it's Datadog or -- you name it, there's been kind of a revolution in go-to-market models that are -- did really just embrace the way people want to buy today. People want to try the product before they want to buy it. The buyers are making department-level decisions or even enterprise-level decisions. And the centralized CIO is much less involved than they used to be in those decisions. And I think what's underestimated HubSpot is how hard we've leaned into making it delightful buying process. We moved from a relatively traditional inside sales model with an inbound sales motion, and we get all our leads through content marketing to -- we're a freemium company now. We're a product-led model, and we got about half our businesses through content in HubSpot style inbound marketing. But the other half is really coming through our freemium motion, and it works. It works really well. It sets customers up for success more. It decentralizes the sale. It's very disruptive relative to very traditional CRM vendors that we've competed with that have been around a long, long time. So that may be underestimated. I think it's also underestimated how big our community is. The HubSpot's sphere is vast. It's not just us 4,000 HubSpotters. We have a similar number of partners, and those partners can be broken out into implementers and resellers of our product like agency partners and CRM implementers and folks like that. And there's another huge group of partners. There's 600 of them now. They're software partners that connect their application into HubSpot or build their application on to HubSpot. So there's more to HubSpot than HubSpot. There's a large community in group around us helping to propel us. I think that gives us a strong moat, and it gives us a competitive advantage over the long haul.

Makes sense. One of the things that also, at least, I was pretty focused, I've always been focused on it, but it's retention, the dynamics around your market. When we were coming in to COVID, the bare case on Hub Spot was, well, their SMB focus, it's marketing. So marketing budgets get cut. SMBs get impacted. Retention spike -- or churn spikes. And it actually, to your point around prioritization initiatives, it felt like coming out of the last quarter, retentions actually counterintuitively or intuitively improved. And so I want you to talk about how this crisis has kind of changed those -- maybe hardened the underlying structural positioning of the company around the kind of metrics like retention, like expansion, like sales cycle, dynamism, like the ability to sell more into every one of those customers. Which of those aspects has surprised you or maybe not surprised you? And which ones do you think investors should be particularly focused on?

That's a great question. So if you go from early June through October, the retention rates have been really very strong for us, and they've been strong on kind of both sides on the customer dollar retention, just retaining the existing customers really good. And then the upsell has been really good. And I'm not shocked that's happening for numerous reasons. We've made huge baseline investments in product design and usability and user research and huge technology investments in HubSpot that we're just getting returns on them now. And this year is a good example. We've had a whole bunch of releases, they've been impactful, and our Net Promoter Score of our customers -- so our Net Promoter Score of our customers has been flat for like 130 years. And then a couple of years ago, we said, "All right. Let's get serious about this." We, as sellers and marketers, I think, give ourselves too much credit for our ability to sell a market. Much of the convincing that happens to a new HubSpot prospect that becomes a customer, they go to G2.com, and they look what everyone else says. They probably use HubSpot in their previous company. They have friends who use HubSpot. The major -- the convincing yes, we're good at selling and marketing. We've got a good partner channel, but it's word of mouth, and it's very much a word of mouth-driven industry, this CRM industry. And our word of mouth has popped. Our Net Promoter Score has gone up about 15 points over the last couple of years. And so I guess we're -- I mean, it just makes sense. Our customers are happy. They're referring more people. There's more products, so they're buying more products and running more of their business on HubSpot. Like, it makes sense to me that those retention rates would start to move up. The other thing I would say about our retention rates is I think a lot of people consider HubSpot selling to small businesses. We really don't. SMB is a loaded word. I kind of split the market up into -- there's some people who sell to really small businesses. And like we have -- there's a company here in Boston called the Constant Contact. They used to sell into those small businesses, went public. And whatever endurance, it's a long tough story on that. Square sells to small businesses. Shopify started selling to small businesses. And it's a lot of 1-person, 2-person companies. GoDaddy spends a lot of time down there. That's not us. We don't really live down there. Intuit kind of lives down there, coming up a little bit. We live in a, like, next tier up where it's from 5 to a couple thousand employees, a real company. They have a dedicated marketer, dedicated sales approach, they're growth oriented. So we don't have like a lot of restaurants or entertainment or hospitality stuff that's been churning at a high rate. We're mostly B2B, and we're kind of midmarket. We're a little bit, Alex, like a very modern version and a front office version of what NetSuite did. NetSuite was a pretty good company. They went public. They sold to Oracle and whatnot. And I think of HubSpot as a very modern version of that in a much bigger market, the front office being much bigger. That's kind of where we sit in the market. So it's less prone to the out of business reason for churning than folks might think.

One more future-oriented question I want to run by you, and then we'll get to -- we'll dive into more tactical ones. And for all those on the call -- we're on the call, on the stream, please feel free to put in questions as well. I will try to get them in as much as I can. But one of the things, Brian, that I've been thinking about, if I look back at the last couple of years of SaaS and what were the real multiple expanders, platform and AI or data, right, and analytics, throw some of those in there. Right now, it very much feels like the cutting edge is marketplaces or -- and transactional revenue streams and payments, maybe a little bit of commerce. How do you see those 3 elements within the HubSpot business over the course of the next 3 to 5 years? Are there places you can make there? Are those too far afield for you? What's your thought on that?

Sorry. Give me the 3 again, marketplaces, payments...

Marketplaces, payments or other transactional type of revenue streams. And I don't remember what the third one I said was. But let's start with those 2.

We can start with those 2. If I kind of step back and think about HubSpot, a lot of people say, "Oh, Salesforce.com sort of took that Oracle business model and CRM disruptive in the cloud. And geez, they just followed -- and then on HubSpot, you're just following the Salesforce.com playbook." We're not doing that. We're -- and then it's going to sound counterintuitive, but we're following the Apple playbook. We had our off-site this year in June, and we have one investment banker come in and give us stories of companies that grew by M&A., and the CRM industry is full of those. Oracle, Salesforce, and the Adobe folks are doing that. Even the Zendesk guys are starting to do that, and that's a tried and true playbook. It works pretty well. A lot of people think we should do it. We had another banker come in and say, "Oh, what companies haven't done that?" And there's actually not a ton of examples. ServiceNow has largely done that in a pretty good way. We'll see if they keep doing that. Apple has done that. And the way we think about our product development process is very similar to Apple. We spent a lot of time at the platform level building what we call primary colors. And then we expose those primary colors in different ways through our applications, marketing and sales and service and our website products. And it's a very patient person's game. I mean, we can go a lot faster if we're buying these hubs and whatnot, but we've been patient. And we think some of that patience is starting to play off because we think one thing that's unique that you see in some of these new companies are doing well is they have a consumer-like customer experience in a consumer-like UI to their product. And this consumerization of enterprise software that's been talked about for a decade, it's here, and there's a handful of us kind of doing it. And we're going to stick to our guns and keep building, and we think we're very good at building product. And so when I think of our Apple story, and we're no Apple, it's much bigger, more impressive company, quite frankly, than we are, but we aspire there. Like I think of the iPhone. The iPhone now -- I just bought a new iPhone. It's got a new camera, but it's basically the same phone, all the same features. It's not -- there's a little minor stuff that's updated. But when you bought an Apple, iPhone 3 or a 4, holy ****, between each version, it was like a new phone with all these amazing new capabilities. That's HubSpot. We're like a version 3 or 4. And so next year and the year after, it's going to be amazing capabilities and amazing returns on the assets we've built. Now in terms of marketplaces, we have a nascent marketplace now. We have this application marketplace. That's going to get a lot of investment over the long hark of history. That will get a lot better. It'll be a lot more robust. There's lots of opportunity there. It's not something we're looking to monetize in the short term. But over the long term, it certainly could be. And then payments, payments is something we're interested in. It's something over the long hark of history might come into HubSpot. And I think of it less in terms of just payments and more in terms of we want to solve the whole CRM problem. We want to enable our customers to build beautiful end-to-end experiences for their customers. And part of the crappy part of almost every experience is the end, it's the proposal and the quote and the purchase order and the payment. It's kind of a mess. And so at some point in the future, we'd like to clean that up for our customers, enable them to make that better. It so happened -- if it so happens that payments is part of that, and there's an additional revenue stream there, that could be interesting as well. It's something we've considered.

RevOps is another category that seemingly has attracted a significant amount of both dollars from a ventures perspective, both increasing, again, part of the stack that's getting more prioritization. You've got the outreach as the Saleslock. You've got other parts of that stack with the size mix and the demand basis. But -- and the public company like ZoomInfo. Where is the -- what is the -- how does that fit into your vision strategy portfolio over time in terms of easing and scaling that workflow for your customer base?

Yes. The risk of wearing the Apple analogy, when I grew up, it was sort of the Mac versus Windows. Maybe many of you were kind of grew up in the theater industry when that was the dynamic. I think that dynamic really kind of exists today where we're trying to be the Mac. And like I look at Outreach and Sales Hub, I think they're very good companies and very well run. We offer like 90% of that functionality as part of HubSpot. Like your ability to create a sequence, ability to do calendaring inside of HubSpot, all those kind of sales acceleration tools, we build that inside of HubSpot, so you don't need to go and do a contract with a third-party company and integrate the thing. And it's got a different UI. It's all kind of built-in one in a super slick way. The Demandbase stuff is kind of interesting. That's one where we'll probably do basic capabilities. Like you can do account-based marketing inside of HubSpot. So for example, if you're from RBC and you're in our database and you visit our website, it will be customized. You'll get targeted in your advertising and stuff like, really, in account-based view of someone. Basic levels of that we'll do inside of HubSpot. Demandbase just built a really slick integration into HubSpot, so you can use that for more advanced use cases. ZoomInfo is an area we likely won't get into. That part of the -- we want to use data. We want to be careful about it. We want to be -- we just want to be very careful on the data sets, the data we want to use and create leverage with, but we don't want to go over the line on privacy things. And so we have a nascent partnership with ZoomInfo. That's pretty cool. We want to be careful how much of that data we mix in. We want to be the squeaky, squeaky clean inbound player in the industry.

Kate, let's talk margins. Let's talk investment dollars to kind of satisfy -- satiate the growth appetite that Brian has and, quite frankly, a lot of your investors have over the long term. Talk about hiring, talk about where you are and talk about what -- as you think about the margin, we've probably overachieved a little bit on margin this year. How does that flow through over the next a few years as thematically talking about this category?