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

Okay. Good morning, everyone. I'm Mark Murphy, software analyst with JPMorgan. And it is a fantastic pleasure to be here this morning with Kate Bueker from -- CFO of HubSpot, as well as Chuck MacGlashing, who runs Treasury and IR. Kate and Chuck, thank you so much for being with us today.

Thank you for having us, Mark.

Yes. Thanks for having us, Mark.

Absolutely. [Operator Instructions] I was wondering, Kate and Chuck, if you want to give a super brief introduction of yourselves and the company or if you had any kind of opening statements that you want to deliver.

I mean no opening statement. I think just, I guess, a little bit about the company for those who are not familiar. HubSpot is a leading CRM for scaling businesses, which means that we have the platform -- primary platform for customer relationship information. And we fuel marketing, sales, service and operations with this sort of common data platform. As of the end of the first quarter, we had about 114,000 customers.

Excellent. So I want to kind of dive right into what's been developing for the business here in the last several quarters, where you are now guiding for 40% revenue growth to. We refer to it as $1 billion, but it's really over $1.2 billion in revenue this year, Kate. And I think back to the time of the IPO. HubSpot's been a company we've been very fond of for a very long time. I'm not sure I ever could have seen this coming, where you'd have this trajectory at this point in the evolution of the company. And in fact, I went back and I looked at this. When HubSpot was 1/3 of this size, the growth was actually in the 30s, right? So 3x larger, growing a bit faster. When you think about what's happened, what is there maybe that has surprised you? And can you just help us understand some of the ingredients that are coming together to drive this?

Sure. Yes, we're obviously happy to see the performance of the business holding so strong. I think there's a few things that I would highlight as, I guess, what you call ingredients to the success that we're seeing. The first is just we're seeing a really strong demand environment throughout the back half of 2020 and into Q1. We've seen a really solid macro environment and demand for the product. And on top of that, what we're seeing is customers are continuing -- or businesses are continuing to evolve their front office to really be a digital-first front-office experience, and we have seen that trend sort of continue again into Q1. And I think the other things that make -- put us in a position to sort of take advantage of those sort of strong macro trends are, number one, our product is just really good. The value proposition of the product is very strong. And it's a real, call it -- like it's an ideal fit for the challenge that businesses are having in converting their front office to be digital first. And then finally, we're executing really well on the go-to-market side. In particular, we have driven alignment in how we're going to market and how sort of the product is positioned in the market. And we're seeing good success as a result of that. In terms of surprises, because there certainly were a couple over the last 12 months, I think I would highlight maybe 1 or 2. The first thing that I would highlight is in -- early on, we tried to make some changes that helped our customers adapt very quickly at the onset of the pandemic. And one of the things that we did was to create the Starter Growth Suite at a $50 price point. So at the sort of low tier, we created a really easy product for people to buy and get started with HubSpot. And we -- it had a really big impact. In particular, it had a really big impact on the pace of new customer additions. And we thought it would be helpful, but we didn't really understand the degree of impact that would have and just how important Simplicity was at that -- or is at the low end of our product portfolio. And then I guess the other thing that has been a positive surprise for us is around retention. And I've had probably tens of conversations with you personally on this one and certainly lots of investor conversations. But over time since the IPO, we've seen our net revenue retention and our customer dollar retention improve but really improve gradually over time. And what we have seen -- what we saw in, call it, the back half of 2020 is a real step function of retention up both on a gross and net basis. And yes, I think we were a bit surprised at the pace of the improvement that we saw.

Okay. So that's very helpful, this framework. You saw digital first. You've got -- the product is obviously in an excellent state, executing well on the go-to-market. You had a surprise with that Starter addition, cutting it to $50. You've had a positive surprise on retention more recently. So -- but I want to ask you on the topic of this digital-first mentality. Did you ever get a sense that the -- there was an irony in the pandemic actually giving some of your customers, maybe some of your prospects just more time to rethink what they're doing? Let's rethink the environment. Let's rethink the technology. Let's rethink the way we're going to market and engaging customers.

It's a really good question. I think it's really -- it's hard to get real data on that. I think it's -- we've certainly had conversations with the team on the sales for -- to try to get at least some anecdotal perspective on what they are seeing. And I guess I would say a couple of things. At the beginning, I think it was a real reaction. Like there was a -- there was an acute realization that people needed to change the way that they were going to do business if they were going to sort of survive and thrive. And so at the beginning of the pandemic, I think what you saw was a very quick reaction. But over time, one girl's point of view is that you did see what you're describing, which is people actually had time to breathe and think about what they wanted to have their front office look like over the long term and had time to make the kinds of investments in tools and systems and process changes to set them up for the future.

Okay. So now, Kate, one term I didn't hear you mention yet, at least you didn't mention it directly, is project Mainsail. And so I think I was thinking back to what had happened in -- I think it was about 2 years ago, right? The -- HubSpot had a system outage. And you were redirecting some of the R&D efforts for a couple of quarters into this project Mainsail. I think Brian Halligan referred to it as just tightening up the platform. Is there some portion of the acceleration today that -- where you would actually go back and say, look, there is a little bit of a lag effect there coming off of project Mainsail, like kind of allowing you to move faster with some of the product releases?

Yes. Another, I think, really good question. I think at the time, I feel like it was a very brave decision for us because we really were sort of taking a step backwards. And we thought it would position us well to take 2 steps forward. And I do think that some of what we're seeing is related to project Mainsail. I would highlight a couple of things. So the first thing is the investments that we made, first and foremost, were focused on driving better performance of the application and better overall reliability of our infrastructure. And what we have -- we obsess internally about customer NPS, and what we found is that there is a really, really tight correlation between customer NPS and the overall reliability of your product. And so I do think that some of the positive momentum that we have seen in customer NPS over the last couple of years is as a result of the Mainsail investments. The other thing that I would say is as our engineers sort of went in and made the sort of Mainsail investments, they also took the opportunity to like fix a bunch of the paper cuts, in particular, around the user experience that were really hard in sort of a normal environment to prioritize. And so a lot of the things that were just like a little bit awkward in the product in terms of how people -- how the user experience was were fixed as part of this Mainsail process. And as we think about usability as a real core differentiator for HubSpot, I think you're seeing, again, a benefit in the Mainsail investments that we're making. And then I guess the last thing that I would say is we -- our hope was that the innovation could happen more quickly post Mainsail because you get in there, you sort of clean up your code and it's easier to innovate on top of it. And I do think that what we're seeing is that coming to fruition. If you just think about the innovation coming out of HubSpot over -- since the beginning of 2020, call it, you have Marketing Hub Enterprise, you have Sales Hub Enterprise. We launched the CMS. We launched Operations Hub. So there's been a lot of new product innovation. And I do believe it's happened more quickly because of the investments we've made on the Mainsail side.

Very helpful. Questions are pouring in, and I just want to acknowledge that I do see those, and I will try to get to some of those in just a moment. So I wanted to ask you as well because I -- up front, you mentioned the change to the Starter Growth Suite, that, that pricing change is $50. But you're alluding to a bit as well what's happening, I think, on the other end of the spectrum. Marketing Hub Enterprise, Sales Hub Enterprise, these are things that got refreshed and overhauled and upgraded last year. Are you surprised by the breadth of uptake with some of these enterprise product additions? I guess just especially during a pandemic, you wouldn't think -- why wouldn't the opposite happen during a pandemic?

Chuck, do you want to start?

Maybe -- I think I'll I take that, Kate.

Yes.

Yes. I mean it's probably easy for us to sit here and say now sort of a year removed with the business acting as well as it is to say that we weren't terribly surprised to see the way that 2020 played out. But I think if you kind of rewind once again back to 2019, we were coming out of project Mainsail. As we look into 2020, we obviously had a pretty good sense for the product refreshes around Marketing Hub Enterprise, dropping ABM into that, which was going to be huge or at least we thought it would be. We knew that Sales Hub Enterprise with custom objects is going to come at inbound. And then of course, the introduction of CMS Hub Pro and Enterprise with all of the advanced reporting that were wrapped around all of that stuff. It felt like 2020 was shaping up to be a pretty strong year on the product front. And when you combine that, Mark, with -- the product side with the investments that we have been making, quite frankly, for a while around go-to-market to improve the productivity of our 200 to 2,000 segment, the reps that serve our customers there, and then also gain efficiencies at the sort of that 2 to 25 segment with a lighter touch and more e-comm, once again it kind of felt like 2020 was going to be a pretty good year. Obviously, the pandemic hit us. We introduced the COVID relief plays that Kate talked about. We saw a lot of pressure in those early days. But once we sort of got through that acute phase of the pandemic and got into sort of May and June of last year, those early headwinds seemed to have abated. And the digital transformation tailwinds that we've talked quite extensively about began to sort of drive a lot of new business for us but also strength and addition upgrades out of that professional layer, which has really been kind of the workhorse for the HubSpot business historically where 55% to 60% of our ARR sits. And we were starting to see some nice addition upgrades out of that into Enterprise as a result of some of these new products, right? And I think it was really just kind of a function of customers realizing that they needed to fundamentally change the way that they sold, serviced and supported their customers for this new normal environment that we've entered.

So Chuck, you touched on this concept of custom objects. And I think, clearly, we have some awareness that there has been -- there's pull-down market, but there's pull-up market. How is that -- how is this kind of changing the overall algorithm for HubSpot? I think one of the questions we get is just, what is really the upper bound for size of company that HubSpot can handle or that you want to handle? Is it -- or is there a certain size in terms of the number of sales reps that you feel comfortable handling today?

Yes. I mean -- listen, like at the highest level, what we're trying to do here is make sure that all companies, right, both large and small, within that 2 to 2,000 segment are able to match their businesses in HubSpot and, specifically, their entire sales processes within Sales Hub. And so if you kind of pair our already easy-to-use UI with powerful features like custom objects, I think we're a pretty difficult CRM platform to compete with in the mid-market. And I think things like custom objects and more advanced features, they do a few things for us. First, they expand the usage out of what used to be a single salesperson using Sales Hub to entire sales departments. They expand the sales use cases we support, which improves things like customer retention and opens up share of wallet. And I think all of this ultimately leads to more of that upmarket for us and RFPs and just a lot of goodness around organic word of mouth and sort of traffic coming our way. In terms of like that upper bound, when I personally like think back on the last 10 to 15 years, one of the key ingredients to HubSpot's success, it's really been around focus, right? Like it's focus on that front office opportunity. It's focus on B2B. It's focus on the 2 to 2,000-employee segment. It's a maniacal focus on helping our customers grow better. And I think Kate's example was the perfect one around Mainsail and sort of that initiative of like we knew we needed to take a step back there for our customers to be able to take a couple of steps forward to help them grow better. And so listen, Mike, we are focused on that 2 to 2,000 segment. It's where we want to do well. It's where we want to dominate. It's not to say that we don't evaluate deals above 2,000 employees. If a company finds HubSpot, the use cases make sense, we have confidence that we can deliver a ton of value and expectations around our product roadmap are aligned, we can absolutely sell into and support those types of customers. That said, like winning 7- and 8-figure deals and putting up sort of metrics each quarter around like what percentage of our bookings that represents is just not a North Star metric for us. And I think it served us well historically. I think it will serve us well going forward.

Okay. Super helpful. Appreciate the color. Hey, Kate, your intuition was correct, so -- that people would ask about retention. So let me take one that came in offline here. "Can you break down the components that are driving gross retention higher?"

It's interesting. So we refer to gross retention as customer dollar retention. And it's, simply put, like how many customers are staying on the platform, full stop. When you see a big step-up, it's natural to ask the question like what is driving this. And so we've spent a lot of time internally trying to dig in and understand the drivers. And after much work, I think the answer is pretty simple, which is people are using the product more. And if the product is being used, we -- well, I'll start back. We have this concept called primary colors. So we build on a common platform. And a primary color, one example would be email. Another example would be workflows. And so these primary colors can then be used within each of our hubs. And so when we looked at it, what we found was that people are using more of -- more number of primary colors. And the more that they're using, the more that they're retaining. And so it's frankly just pretty simple.

Okay. Well, we like simple answers. That's very helpful. Here is an interesting one maybe you don't hear all the time. "What percentage of new customers are CRM first this year versus last year? And when do you anticipate Sales Hub overtaking Marketing Hub in revenue?"

Yes.

A specific date and timestamp on that, please.

So one of the numbers that we've shared is -- and these are rough, right? But 1/3 of our gross new customers come through marketing only, 1/3 of our gross new customers come through sales only and then 1/3 of our gross new customers are basically buying the entire thing or 2 or more products together up front. And so if I understand that question around is sales kind of a front door and is it starting to rival marketing in the way that people find HubSpot through our CRM, like I think the resounding answer there is absolutely.

Okay. Well said. Let's see what else we had. "Does the acquisition of Slack by Salesforce mean anything for HubSpot either on the developer side or the end user side?"

It's an interesting question. I think we have a deep integration with Slack. I think we will continue -- and by the way, we also have an integration with Salesforce, and we hope to continue to provide that openness across our platform and theirs. I think that the impact will be bigger upmarket than in that mid-market where, as Chuck said, we are focused. But we're certainly paying attention. I think it will be fine.

Okay. Very good. So maybe we can move on to Service Hub for a moment. I was thinking back to the last Analyst Day. We're always trying to anticipate what will happen at the next Analyst Day. But you had given us the stat on Service Hub. Middle of last year, that was a $30 million-plus business, and -- but it was growing about 100%. And so we understand that, that one's a bit earlier. Can you help us to maybe appreciate what is the core differentiation of HubSpot Service Hub versus any of the competing products? How is your vision different?

Yes. I mean that's what we get for giving you guys stats, Mark. You guys keep asking for them. And then ultimately, we have to answer the questions.

We get excited.

Look, we're really happy with the trajectory of Service Hub. Well, I think we've talked pretty consistently about the fact that if you look at the ARR trajectory of it, it's ahead of Sales Hub at this point in its life cycle, which is really encouraging to us. And I think it just speaks to the momentum that we've had with that product and coming up on 3 years. When I think about where that product shines and where we're ultimately going to look to invest to unlock future opportunity, I think there is probably 3 core areas. The first is like on the core support side. I think Service Hub today and even off maybe asking our customers or our partners but at least from what we can tell is already a very robust help desk product. And the good news is we're not done investing in core support despite competing well and winning deals as a result of the investments that we've made here. I'd call out improvements to our customer portal, things like SLA functionality, the addition of calling, like all that stuff has helped and is what's contributing to a bigger and bigger installed base, growing much faster than the overall. Second, I would say that I think there is still a ton of opportunity left to differentiate across the entire customer journey from not only core support but in the services and customer success. And I think that ultimately, we're just beginning to sort of scratch the surface there. And in typical HubSpot fashion, right, like it would -- it's not surprising to hear this, but I think a big part of our future opportunity is going to lie in our investments toward sort of that true connected experience across Service Hub, Marketing Hub, Sales Hub, Operations Hub, the presentation layer in CMS and then capturing all of that data in one source of truth throughout the entire customer journey and through our CRM platform, right? And so [ TLDR ], we're a few years into this. It's a big installed base already. It's growing very quickly. And it still feels like we're super early innings on this.

With -- so kind of mimicking this other question that was asked, the one in my mind was -- so when we look at the evolution of Salesforce, Service Cloud has actually pulled ahead of Sales Cloud, right? And clearly -- so they had a different sequencing in terms of how they approached all these markets. But Service Cloud pulled ahead. I'm not sure a lot of people would envision that. Does the proportionality work out the same in the SMB market? So in other words, is the service opportunity in the very, very, very long run, could that exceed the sales opportunity for you?

They are both huge opportunities. I think that what we would envision is sales and service could be bigger than marketing over the really, really, really long term. But I don't know that we would parse across the sort of other two.

Yes. And, I mean, there is kind of a blurring of the lines between sales and service as you think about sort of customer success and where things like ABM sort of fit, right? Like you can make an argument that that's marketing. You can make an argument that it's on the sales side of things. The other thing I'd say, too, Mark, is we -- and I don't know what Salesforce's mix of business for multiproduct was early on in the -- at this point in their life cycle. But with us approaching, I think it was 57% of our installed base that's using 2 or more products. We're not necessarily thinking about like the hubs in isolation and driving each one of them as much as we are trying to get folks to utilize the entire CRM suite at the starter layer, the professional layer, the enterprise layer.

Okay. Makes sense. But that -- to make sure that I've got a clear understanding, you're saying Sales Hub plus Service Hub in its totality, that, that opportunity will be larger than marketing?

Could be larger than marketing. Look, I think Chuck is making a very good point, which is the lines of -- across the front office are blurring together, right? I think marketing is a very big opportunity. I think sales is a very big opportunity. And I think customer success is a very big opportunity. I also think CMS is a very big opportunity and also part of that front-office experience in a way that people haven't necessarily thought about it before. I do think all the lines are blurring. And I think the main point to take away is that in any one of those spaces, our market share is really small.

Yes. Okay, which speaks to the runway of opportunity. Well, so Kate, since you just mentioned CMS Hub, I wanted to touch on it because, again, if we go back, you had given us the update that the middle of last year, a $25 million business. I mean it had just been -- it was just getting started. It was growing about 45% year-over-year. But I seem to recall after that there were some comments about the kind of the new ACV coming in was a much stronger trajectory than that. Is it safe to assume that we've got a pretty high volume of companies today that are looking at this environment and saying this is the time to overhaul the website, this is the time to kind of modernize our website with the shift to online and then maybe -- so maybe that's driving a little better trajectory for CMS Hub?

Yes. I mean CMS is performing quite well. I think more and more people think about the website as being -- as I said, being part of the overall experience in a -- and sort of the doorway to the customer experience. I also think that, increasingly, people are recognizing the benefit of having a CMS tied to a CRM in order to power very personal experiences as prospects and customers come on to the website. So like as an example, because our CMS is built on the same CRM platform, you can present in a very easy way a differentiated experience for prospects who have come through one campaign versus another campaign or customers who are VIP customers can see different content when they come on the website. And it's much easier to create those kind of experiences when you're doing it on a common customer relationship management platform.

Okay. Let me pivot to another one that came in online, which is saying, "If this makes sense to you, what is the profile of customers that are net new to HubSpot and are landing with the operations of the newest hub?"

Yes.

Yes. I mean we're -- the information that we've shared, I think, is 6 selling days at the end of April where we added 500 customers. So like we'll just kind of preface it up front with -- and is a small number and things could change. In terms of the mix of business, the majority of the units have been Starter customers -- CRM starter suite customers. But the majority of the MRR that we've seen is that, that sort of professional layer where people -- or customers are either buying the entire CRM professional suite or it's an attached sale into a multi-hub customer that already has marketing sales service today.

So that stat on 500 customer adds, was it -- that is essentially in 6 selling days?

So we launched on April 21. Then the stat that we gave was through the end of April.

It was 2 weeks, right?

Well, interesting. Like it was April -- we launched on April 21. And then of course, the end of the quarter was, what, like April 29 or 30. I always get a little mixed up on -- so from a business selling day -- yes, April 30, so it was 7 selling days -- 8 selling days.

Yes. Okay. Let me see because we're down to about 2.5 minutes. I want to ask you about kind of some of the energy that's building in the free level and the starter tier because I would think you have a lens into this, which we now know, as you've described, was a pretty interesting leading indicator for the business. And you did see a lot of that business convert. As you're looking around today, where do you see energy and adoption that maybe is building in new areas or surprising areas in the free and starter tiers where you're looking at it and saying, that could really be a precursor to paid adoption? Is there anything that's jumping out?

Yes. It's an interesting question. I don't think there is anything really surprising happening there. I think what we are doing on the free and starter is internalizing lessons that we learned over the last 12 months. And the biggest lesson that we learned over the last 12 months is that simplicity is sort of super, super important at that starter tier. And so we launched a starter tier of the CRM suite at $75, which is, again, just -- includes all of the full suite of products, including Operations Hub and is just super easy to get started with. The other thing that you will continue to see out of HubSpot is a -- that we will add features and functionality into starter and free over time. We'll innovate at the top end, and we will continue to push features down over time. You saw us add email to starter in the last couple of years. You've seen us add email. You've seen us add landing pages. We just launched an Operations Hub starter. So there is a lot of value at that starter tier and a really simple way to get started. So I think it's just -- it continues to be early days, and I think the opportunity there will continue to expand.

Okay. Well, I can't thank you enough for taking the time to join us today. Always a great pleasure, always much appreciated. All the best to Brian as well in his recovery process. And we can't wait -- hopefully, looking forward to 1 year from now, this will be an in-person event back in Boston. Maybe you'll give us a bit of an in-person event at INBOUND this fall. We'll wait and learn more about that. But thank you so much and hope you have a wonderful day.

Thank you.

Thanks so much, Mark. Thanks for having us.