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

All right. Thanks all for joining us today. I'm Parker Lane, software applications analyst here at Stifel. And with us today is Kate Bueker, Chief Financial Officer of HubSpot and Chuck MacGlashing, Vice President, Treasury and Investor Relations. Thanks for joining us today.

Thank you. Thanks for having us, Parker.

Thanks for having us, Parker.

Yes. That's great. Kate, I guess the best place to start is a classic conference question. For those that are less familiar with HubSpot, maybe give us a quick overview of the business, where you've come from, how long you've been around. And then maybe just in the context of COVID being such a prevalent aspect of the story over the last year, how things have trended since COVID was really the initial shock of it and what you're expecting for the rest of the year?

Yes. Thanks. I appreciate the opportunity, because I want to acknowledge this is -- we are celebrating our 15th anniversary of the company this quarter. So we are -- we're happy to be here. The company today is a leading CRM platform for -- targeted at the mid-market or scaling companies. And on top of that core CRM, we have a set of tools to enable a modern, seamless customer experience through tools and marketing, sales, customer success and website solution as well as our latest hub, which is focused on the operations persona. And then I guess the last part of your question was around sort of business and life for HubSpot in the pandemic. I would just acknowledge that this is not an easy time for anyone around the world. There are a series of things around the pandemic that have been taxing for lots of people and lots of companies. From a business perspective, the transition of lots of companies from a, I call it, traditional front office into a front office that's led digitally has been a positive impact on our business. We have seen over, I would say, the last year to 18 months, I guess, 9 months or so, like really solid demand, so back half of 2020 into the first quarter of this year, we continued to see companies across the globe make that transition of their go-to-market to be a digital-first go-to-market, and we are benefiting from that. We think our platform is really the ideal solution. In addition to those macro factors, our execution both on the product side and the go-to-market side has helped us fuel the growth of that -- against that opportunity. We've introduced a number of new products across the portfolio over that period of time and really do believe that our platform is the ideal solution for the mid-market to make that transformation. And our go-to-market execution has been really solid against that opportunity.

Yes. Maybe we can pick up on that. Obviously, a tremendous acceleration in customer growth over the last year because of some of those things you just pointed to there. One of the questions we consistently get is how long can this acceleration occur? I mean, is this going to be a very durable customer growth story going forward? Is there any reason that customers would revert back to their old ways? Or do you anticipate -- we see this really, really strong level of net adds each quarter to persist in the future?

Why don't I maybe pick up on that and...

Yes.

So thanks for the question, Parker. Listen, we have 114,000 customers, I think, exiting the first quarter. You're right. We've seen strong net customer addition growth over the last 9 months or so. But quite frankly, since starting the company, I think about kind of the 3 ways that customers find HubSpot, one way is through our own content and customers that are sort of raising their hand within content to speak to sales. Second way is through our product-led motion where folks are starting out on freemium or lower price paid products and then either touchlessly upgrading into core versions of the product or raising their hand to speak to a sales rep. And then the third, of course, is through our partner channel. The common denominator in all of that is that customers are finding us, right? And in many ways, we're chasing the demand that we see quarter-to-quarter. And so we tried to signal to you folks coming out of the last call was that we feel like we're -- we've broken out of the mold of adding that sort of 2 to 3 or even 4,000 customers per quarter because end demand is good. We've introduced some new products that are resonating with customers and quite frankly, the execution on the sales and marketing side has been quite phenomenal. With that said, quarter-to-quarter, what we tried to highlight was that for the purposes or for reasons due to mix and due to new products and quarters where we maybe sell more into the installed base, I think what you're going to see is volatility around net customer additions with the trade-off between that and ASRPC. And ultimately, we as a team are trying to solve for is the fastest level of subscription growth that we can drive for the business. And so Kate talked about a range of 7,000 to 9,000 net customer additions going forward. I think that's a good range to sort of be thinking about that is quite a bit higher than the levels that we've been used to, but also reflects the fact that quarter-to-quarter, you could see some volatility for the reasons I mentioned.

Yes. As you think about that giant cohort of customers that came in, in the last year, particularly at the low end of the market, as we get to an environment where offices are reopening, more in-person activities are happening, people are returning and buying things in person again instead of the Internet, what are you expecting and seeing in real time from a churn perspective, from an upsell perspective? I guess, particularly at the low end of the market where you've had some really attractive price points that have really fueled demand.

Yes. So that -- as you point out, we introduced the Starter Growth Suite at the relative beginning of the pandemic. And one of the things that surprised us was the amount of impact that, that sort of lower price point and really simple value proposition had in terms of like how strongly it resonated with the market. And that was one of the initial drivers in the increase in the new customer additions that Chuck highlighted. We pay a lot of attention to that, and have since those early cohorts came onto our platform. And what we have found is that those cohorts are generally similar in terms of the kinds of companies as what we had seen historically. They tend to upgrade at rates that are similar to what we had seen coming from our starter to professional and enterprise additions over time. We have sort of hit that 1-year anniversary for some of those larger cohorts, they're renewing at rates that we feel good about. And so that is another positive. I think the one thing that I would highlight for you that you didn't really ask is that a lot of the upgrade motion of those cohorts happens relatively earlier than at a renewal date. So it's really -- we have seen that happened over the last 12 months as those cohorts have come on the platform and started to use it, get value and then upgrade.

Yes. That makes a lot of sense. And as we think about HubSpot becoming more of a multiproduct company, obviously, a few new products came in, in the last year here. What's the level of urgency you're seeing in the end markets for each of these solutions? I think about marketing, that's obviously the most mature and you've got a very big base there. Is there the same level of urgency for service, for sales, operations, CMS? Or is it a little bit different across the board?

Yes -- go ahead, Chuck.

Yes. I'd be interested to get your answer on this, too, Kate. I mean, I think there's just fundamentally the urgency to digitize and get online and market to your customers in the way that they want to be marketed to and sell to them in the way that, quite frankly, you need to sell to them and have a website that has the ability to sort of service them to things like CAC, has created a level of urgency that didn't exist pre-pandemic and that has continued. In terms of the overall hubs, it feels like it's sort of been reflected across the board. Now the selling motion for a Marketing Hub Enterprise or Sales Hub Enterprise deal is obviously going to vary quite a bit from the starter versions of our product, folks that are evaluating our CMS product. It's typically on sort of a cadence for when you consider revamping your website altogether. And I don't think we've seen much of a change in terms of like that front door for how folks find HubSpot that's quite a bit more diverse today than it was, say, 5 years ago, where basically, and these are rough numbers, 1/3 of our customers will find us through marketing only, 1/3 will find us through sales only and then 1/3 will find us through buying multiple products from us upfront, which can include that CRM suite. Kate, I don't know if you would add anything to that.

I think you hit it. There was certainly like a very heightened urgency at the very early stages of the pandemic. But what we have seen is a continued desire for customers in our sort of 2 to 2,000 to take that journey and transform their front office. And we, through Q1, continued to see that happen.

Yes. Maybe you could touch on Operations Hub for a moment, the newest product you have out there. Can you, I guess, give us a sense of what PieSync brought to the table versus what was internally developed there? And then how those initial conversations have gone with the customers? I think you had about 500 at last count, but how much of a demand are you seeing for that particular module? And why was now the right time to come out with that solution?

Yes. It's a good question. The existing conversations, I think, have gone quite well. We did talk on our Q1 call about the fact that 500 customers had purchased that product really from our April 21 launch date through the end of April, which is only 8 or 9 days there. So quite happy with the momentum that we saw out of the gate. Just as important, I think the feedback from our partners in and around our product kickoff launch was extremely positive. The NPS was in the 80s for that event, which I don't think we've ever accomplished for a new product launch, which I just think speaks to the opportunity that our partners see within their customer base. And I think we're seeing really good signs when we think about things like activation and usage across those early cohorts, although I would say all of that with a caveat that it's still super early, right, like we're, I don't know, 45 days into this thing. In terms of PieSync, the way to think about that is it's the engine that's powering really the underlying automation elements of the hub. So think of it as a sort of data sync that connects outside applications and really that ecosystem of applications that surround HubSpot into our CRM, which is an important feature. With that said, Operations Hub is much more than just the sort of dynamic bidirectional sync. There are really complex automation processes that you can run with Operations Hub and utilizing things like custom code actions with just a few lines of JavaScript that customers can sort of run on top of HubSpot that can create some really cool use cases for the way that customers basically ingest it into HubSpot, the way that they organize it, clean it up and then ultimately generate insights off of that data.

Yes. Maybe you can talk about pricing of that solution. I know Dharmesh has said in the past, pricing is always very tricky, particularly when you have a new solution coming out. Numerous price points in place, certain discounts out there. But if I compare Operations Hub initial pricing to service and sales, it's actually a touch higher today on the professional basis. Wondering why that would be and what sort of work you have to do, Kate, to identify what that proper price point is and how you're delivering value to customers when you come out with a new solution like this?

Yes. I think the -- we did a couple of things at the launch of Operations Hub that I think are interesting from a pricing perspective. The first is that we basically rebranded our suite offering to become the CRM suite, and it includes all of the hubs, right? So we had a Growth Suite. It included our core sales, marketing and customer service. Hub offerings, it did not include CMS. With the introduction of Operations Hub, we created the CRM suite that includes all of those hubs. And I think that is -- you heard us talk about simplicity, particularly at the low end being a real lever and important factor in adoption of the platform by customers. So we thought that was a very important thing for us to do as part of this. And then in terms of sort of pricing of the hubs, I think what you see in our sort of starter, professional and enterprise is that we try to create editions of the product that are -- that line up well to the customer needs at those sort of -- those typical target small, midsized, true mid-market customers. And we look at the value we're delivering and we try to create a price point that we believe warrant the value that we are charging or delivers the value associated with what we are charging.

Yes. And as you're identifying those potential customers, maybe those that are more sales touch heavy, how has the buyer changed for HubSpot with the addition of all these different products? In the past, it would have been a very solid approach to marketing. Obviously, smaller organizations, so maybe they don't have a big marketing department, but what is the persona like of an individual that's buying service, CMS, sales, marketing, operations altogether? Has that changed significantly? Or again, is it more about revenue operations for a lot of your customers than that more siloed approach?

It's a -- that is a very interesting question. I think that what you are seeing is as the -- in some of these larger organizations, as sort of the lines between marketing and sales and customer success and operations, they're all blending in the front office. And what you see is you tend to have a champion in one of those areas, but you have lots of other people who are interested and involved in the decision-making. And over the last period of time, one of those personas that we have seen more and more is the operations persona. And as we've seen them in that buying decision process, we have also got to understand sort of the points of pain and suffering of that person within the organization, which was frankly like the seed that got us into the development process for Operations Hub.

Yes. And how does that translate, I guess, into the metrics that we all like to see? So if we think about the percentage of customers that are using a suite approach over time, how are you internally modeling it, maybe on a 5-year, 10-year basis? Do you foresee that the majority of your customers will be doing something resembling a suite approach over time? Or are there always going to be this cohort of customers that are maybe only wanting to use 1 or 2 solutions from HubSpot, since they don't really have the scale or the demand for some of the other areas?

The truth is that we are seeing, and have been for a long time, a march upward in terms of the percentage of our customers that are leveraging a broader set of tools -- a broad set of HubSpot tools. My gut is that we will continue to expect that, that is going to be the case. But we believe in the value of the platform and our platform, we have a core CRM and a set of tools that all leverage that core CRM. And the shift that we made a few years ago from trying to - we say from all on one or all in one to all on one, we made a deliberate shift to -- we want you to get value from the platform. We don't have to be the only tool that you use, like we are embracing the value of the ecosystem and leveraging our CRM as a core place for you to synthesize data and optimize your customer experience. And so I do think we will continue to see more and more of our customers leveraging multiple, but we feel good about our ability to deliver value to single hub users as well as multi hub users.

Yes. The partner channel has always played a really significant role in customer success. A lot of those have been digital marketing-focused agencies in the past. But how is that partner network and I guess your approach to who you're targeting as a partner, who find you? How has that changed since you've introduced these newer tools, particularly something like operations, which I would think that's a little bit different type of partner than you would see historically in your business?

Yes.

It's a good question, Parker. I actually don't think that it's going to be wildly different. I mean if you take a step back and go way back when 1 million years ago, sure, we were single product, 3 flavors with the partner channel that focused entirely on reselling marketing software and wrapping services around that. Since then, we've introduced sales, service, CMS and now Operations Hub. And despite our move horizontally across the front office stack, we still generate 40% of our revenue from the partner channel, which is the same that it's always been. And there's kind of 2 reasons for why that's happened, I think. The first is that many of our traditional marketing-focused agencies have really transformed from marketing only to this entire front office solution that can provide services across the entire stack, and that's more integrations, it's more complex implementations, more breadth of services. And it really kind of like built up these big businesses. And then the second thing that I think the partner team has done quite well is sort of opening up the front door in many ways to our partner channel for a different type of agency that supports broader use cases across sales, service, CMS and now operations. We gave a stat -- I can't remember if it was on an earnings call, if it was at the Analyst Day last year, that something like 1/3 of the net new agencies that we're adding don't come from sort of that traditional marketing background and are coming from these more emerging areas, which is great. And I think that NPS stat that I gave to you a little earlier about the partner launch event carrying an NPS in the 80s really speaks to the excitement in our partner channel for this hub that in many ways -- I love the way Kate described it, it's kind of like the glue between marketing, sales, service and CMS and allows reps and partners to basically go into these prospective accounts and say -- ask the questions of like, how do you ingest data from your third-party applications into your CRM. Like do you have problems with that? Are they -- like how much manual processes are they involved in it? Do you have issues sort of optimizing and cleansing the data when you do get it in there? And invariably, are you paying this ops person to spend the vast majority of their time on all of those manual tasks? Would you rather have them focused on generating insights and driving business decisions? That's where Operations Hub shines. And the beauty of that situation, I think, for our partners is that the end use cases are going to depend business to business. And so it almost feels like the opportunity there is sort of open-ended with this type of tool relative to maybe some of our other products in the market.

Yes. And Kate, from your own distribution channel perspective, you highlighted some investments you've made at the low end of the market, more product-led growth, automation at the high end, I think sales enablement is a big focus. What are some of those changes in more detail? And how do they compare to the approaches that you've done or that you've had in the past? Obviously, a tremendous amount of success building this company to 100,000-plus customers. So what were some of the changes you all identified? And how long is that going to take to play out?

Yes. I guess I would like Chuck to take us back on the history tour here. When you think about the -- where HubSpot was a number of years ago. We started as a company focused really on the mid-market, so call it, 20 -- company with like 20 to 200 employees. And we nailed that go-to-market motion. Like we know exactly -- we have a machine that is highly tuned and effective at engaging with customers in that sweet spot. But as our product portfolio innovation happened and we've broadened not only sort of the set of hubs but also with the additions of more sophisticated edition in the enterprise and a starter edition that is a bit more basic and an easy tool to get start with, we also needed to innovate the go-to-market. And at the low end, that involved a rethinking of customer acquisition, in a way that made it really easy for customers to try the free -- the product in the form of free tools, purchasing a self-service motion and more recently on board in a product-led way that gets them started with the core capabilities of the tool without interacting with other humans. And we will continue to make investments at that low end in ways that make that process more simple, easier like continue to lower the barrier of entry and make it really a consumer-like way of getting started. Conversely, at the high end, the shift is from -- is toward more of a value-driven selling motion. And that change, it means investment in a lot of -- I keep saying it's like all the really sexy stuff that we're investing in, like technical presales and SOC 2 compliance and legal lawyers to help with the contracting process and training on sort of a value-selling approach. But that change upmarket has allowed us to sort of changed the way that we engage with that 200 to 2,000 type company. and talk to them more about how the solution will serve the needs of their business.

Yes. So sort of wrapping up here shortly, maybe just a couple of quick hitters. The international business has been a tremendous success story, particularly in the first quarter this year. With the fact that you're not able to travel and executives aren't able to go around the globe and see some of those offices firsthand, how has HubSpot been able to navigate this entire situation so successfully? And does that demand that you're seeing, that tremendous growth give you -- or does it create interest in expanding into additional geographies where you may not have traditionally had as much of a footprint?

Yes. Well, I would just say like kudos to our international team. I think they have been executing quite well. We have some great leaders that have been helping to drive that business. I think as an organization, we've been leaning into empathy and support across the globe. And so there's nothing that we are doing internationally that is different from what we are doing anywhere else in the world. I will say that we feel like we have opportunity in all of our markets. When we think about even our most mature markets, our most mature products, we have market share that's still in, call it, the single digits. And so we will continue to let opportunity, unit economics lead the way for us in terms of where we will continue to drive go-to-market investment.

Yes. Just to wrap, here, just thinking about the size of the opportunity that you just touched on there, low penetration right now. I think you've talked about 3 million SMBs, the online presence in the past, 114,000 customers. How significant of a penetration level do you think you can get to over time? And as we think about that cohort of 3 million SMBs, how many are using something in the customer engagement software space today versus those that are still completely in the dark need some solution and could come to HubSpot, via Starter, one of your freemium solutions over time?

Yes. We get that question a lot, and it is a mix. And every time we are surprised that it's 2021, and there's still a lot of companies who are sort of bootstrapping together a solution with Excel and other, I use the term tools kind of loosely, to create their go-to-market. And so I think that there continues to be a lot of greenfield opportunity. There also continues to be a lot of opportunity with companies who have cobbled together point solutions and are really looking for a way to make a real transformation in the way that they go-to-market to their customers.

Yes. Very interesting perspective. Well, since we're wrapping up here, I want to keep everyone on track for their next sessions. Thanks again, Kate and Chuck, for joining us today. This has been tremendous.

Thank you so much.

Yes. Thanks a lot, Parker. We'll see you.

Bye.