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

[Audio Gap] are now well aware, my name is Alex Zukin. I run the enterprise software practice here at Wolfe Research. I am super excited to be joined by yet another founder, Dharmesh Shah. Dharmesh is one of the co-founders of HubSpot; and Chuck MacGlashing out of IR as well as a number of other functions I think you do, Chuck. So thank you first for joining. It is a pleasure hosting you.

My pleasure. Thanks for having me.

Yes. Thanks for having us, Alex.

And as with all of the other ones I've hosted today, I recommend highly investors ask questions. Please feel free to use the Q&A function in the Zoom or if you're shy, you can e-mail me directly. Again, these are meant to be interactive. They're short, sweet, quick bursts.

So Dharmesh, let's start with a very -- the short, short version of HubSpot as a company, as a value proposition today and over the next couple of years. How should investors think about it?

The HubSpot story is very simple. We want to be the #1 CRM platform for scaling companies for people that are coming in the SMB space. The CRM category has been around for a while, but it's constantly changing. And we think we're in a portion of the market that's been historically underserved. So we're excited.

The first few questions I want to throw at you are very much setup questions. I've been asking them to everybody partially because it makes it a lot easier to write these notes. But the second question is, let's talk about the demand environment. How is the demand environment right now? How does that compare to, I don't know, a quarter ago, 2 quarters ago? And how should we think -- how are you thinking about it through the rest of this year?

Maybe I'll start off with that one, Dharmesh. Earn my paycheck here. Yes. I mean listen, like we're -- go check us into giving a big quarter update here in -- on September 8. But listen, like the demand environment in the first half of the year was strong, and I don't think that much changed in the way in terms of the demand trends that, quite frankly, we began to see at this point in time or even earlier in the early summer of 2020. I think the good news is that it's been quite diverse in terms of the trends that we're seeing. So it's more mature hubs. It's new hubs. It's the partner channel. It's the direct side of the business. It's domestic. It's international. All of it has sort of accelerated, post pandemic, new business versus installed base. And as I kind of think about not so much the last couple of months, but maybe the last year to 18 months, I think it kind of comes down to 3 things, right? Like it's product innovation. And I think that investors and you are starting to see the fruits of some of the significant investments that we've made into the product over the last couple of years. And that is much like improving existing hubs as it is launching new ones and investing heavily into the ecosystem that surrounds HubSpot and leveraging our framework for the way that we build product. It's a big TAM, right? We've successfully transitioned from what was a marketing-only app company 5 years ago to a full-fledged CRM platform that we feel like is a great fit for not just the 120,000-something paying customers that we serve today, but millions of scaling businesses around the globe. So massive, massive opportunity there. And then there's been this move from digital-second and digital-third to a digital-first mindset within the SMB and mid-market, like there has on the enterprise side. And I don't think there's any going back on that. We've clearly seen customers modernizing their CRM from websites to marketing sales and service so that they can deliver a fully connected customer experience for their customers, right? And it just doesn't feel like that's going to change anytime soon. And so I think like quite frankly, Alex, it's this trend that began in the early summer months of last year that just kind of plowed through the back half of the year and into the first half of 2021. And as evidenced by our guidance coming out of Q2, it's a trend that, on the whole, we expect to continue into the back half of the year.

Perfect. Dharmesh, if -- as -- I've been asking this specific question to founders. If there is one metric that you focus on and you see in the business that if an investor could see, they would be most excited about, what would that be?

Net Promoter Score, just the overall happiness of customers with the product and overall HubSpot experience.

Great. That's quick and direct. And now -- so I was eavesdropping, obviously, on 1 or 2 of your meetings, and you said something that was very interesting, which is that customers increasingly want to buy from platform companies. And it's not that they want to buy the entire platform per se. It's that they want to understand that they're going to go on a journey, and they may not be ready to take the whole journey today, but they want to buy from someone where that could be in the cards. Can you walk through what the significance of that is in the business today? When did that start? And how should we think about that going forward?

Yes. I mean there's parallels to this from back in the '80s and '90s. I've been around for a while when Microsoft launched the Microsoft Office suite. And what happened over time, there were individual productivity application vendors that -- for word processing and spreadsheets and things like that. But over time, the kind of market moved towards buying suites versus individual applications. And that -- the suite was judged in its entirety versus other suites. And the reason customers do that and the reason it's happening now with platforms is that over the long term, it's just a much more efficient way to do it. It's a much more efficient way to run the business. That says, okay, if you know you're going to need part X and part Y, having it from 3 different vendors, and this is particularly true in SMB, is just not the best way to go about it. It just increases the overall complexity in running and growing your org. And so our experience and our sense is both that companies coming into this with this kind of digital transformation kind of mindset. And it's like, okay, we're not quite ready to replace our service product yet, but we really need to do something in marketing and sales or the other way around. And some -- an increasing percentage of them, at least in our experience, actually go out and buy multiple applications, buy the suite or buy the platform from the get-go. That number has been trending upwards. But even the ones that don't, over time, I think, have that in the back of their heads. They don't usually pick up spot just for the 1 thing. We do the individual application hubs really well. We're probably like top 3, each of the categories we play in. But it's a platform story. And I think it's a platform world.

And like the beauty, Alex, is it's shown up in the numbers that we've talked about quarter in and quarter out really over the last 5 to 6 years, right? Like sort of backup, we were marketing on the app with sort of 3 flavors 5 to 6 years ago, virtually no customers on multiproduct today. We have a high 50s percent of our installed base that are taking 2 or more products. If you go back 5 years ago, it was -- we largely led with marketing. That was kind of the front door into HubSpot. Today, and these are rough approximations and it can sort of change quarter-to-quarter, but basically like 1/3 of our new customers will find us through marketing. 1/3 will find us through sales only. And then 1/3 will find us purchasing 2 or more products together upfront. And so multiple front doors in the HubSpot that I think plays into that theme that Dharmesh was kind of pulling on there.

Awesome. Dharmesh, I want to hit you with a harder question now. So I was on the earnings call, was waiting with bated breath, see how well you did. And definitely, I was like, oh my god, Brian is no longer the CEO? Now post that, Chuck assured me that this is not going to be like those other CEO transitions where Executive Chairman kind of goes up, gets promoted effectively out of the organization. That -- and again, eavesdropping, it sounds like Brian is actually back in the building, and he's now almost reengaging. So walk us through -- because you're also unusual in that you're a founder that's still actively engaged in -- as everybody can see, very actively engaged in the business as it's gone through multiple evolutions of scale, multiple evolutions of culture and all probably in a positive direction. So walk us through why we should not be worried about Brian assuming a different role, why it could actually be even better for the business. And again, this is -- we all have Yamini, but founder-led business transitions are always fraught with risk.

Yes, it's a great question. So when we started the company on kind of time equals 0, Brian and I had the conversation around who was going to be CEO, and it's like -- I didn't want to be CEO because I don't think I would be good, it wasn't good for the company, and Brian did. Now fast forward 15 years, it's like, okay, well -- the exact share role is a better fit for Brian. It's like -- it's hard to imagine HubSpot without Brian as CEO. But the truth be told, I love my co-founder and I think his kind of contribution to HubSpot has been immeasurable, but the part that he's out of the most value over the 15 years has been around product strategy and vision and understanding the market. And this is one of the passion that founders often bring to companies. That's not going to change. So yes, his official first day "back in the office" was yesterday. So he's in back-to-back meetings. We're exchanging late -- well, we've been exchanging late e-mails the whole way through. But he's in the -- I mean he is in the business. It's the Brian we always know, but I actually think he's more dangerous now, more impactful now, because he can focus on things he cares about most and he's not in -- doing one-on-one reviews and doing staff meetings and things like that. He's kind of focused on a higher order of things. So both as a co-founder and as a shareholder myself, I think this is going to, net-net, be better for the business. It's like kind of looking past the next -- last 6 months, we can transition Yamini here a little bit, is -- I didn't have to imagine what life with Brian -- without Brian as CEO would be like because we've already experienced it. Yamini has kind of been in that seat, running the company day to day. And she is -- I know I have a bias here, but I have a vested interest in the outcome as well. She is literally perfect for the job, because she is -- if you draw a Venn diagram for Yamini, she's got this kind of deep customer passion, which Brian and I both share. That's the kind of genesis of the company. That's a core part of our culture. Super smart, like just really -- just high wattage as we say at HubSpot. And she's seen scale. She's got this operational excellence. And I might dare to say, she might be better out of many of the things that a CEO would need to do than Brian was. I think it's going to be a net positive for the company. That'll -- yes. I'm very bullish.

Awesome. Let's talk -- I want to go back to a non-mid-quarter update question for Chuck about what we've learned about the demand environment in terms of now being a few quarters in the midst of the kind of this -- not post pandemic, but a COVID-adjusted reality. What -- if you look at the vectors you've seen, because it's kind of all gone your way, right? Like new customers got better. Retention got better. Expansion got better. Deals got bigger. If we think about which of those is likely to be the most durable or sustainable, obviously, we hope they are all very durable and sustainable, but if we think about where -- which ones are -- you can now -- you're starting to see the compounding impact of what's happening in the business, which one of those vectors is going to be the most durable in your mind?

Well, I think to deliver on the sort of the updated guidance that we've provided that starts with the -- for Alex, it's all going to continue to be durable. But quite frankly, like it starts with the demand environment, right, and the macroeconomic outlook remaining relatively positive. I think we've got -- we've got the products. We have the go-to-market. We've got the customer service organization. We've got the right team after the -- any demand that we see in front of us. And I think you're going to see a pretty healthy mix of customer growth as evidenced by the net customer additions that we've been putting up here more recently. We've talked about ASRPC likely in that sort of high single-digit range for a number of different factors. We've seen gross retention and net revenue retention move up quite nicely. And I think we've got confidence in seeing at or around the levels that we've been putting up. And so it doesn't feel like any -- going to change in a big way from a KPI perspective that I think will surprise investors one way or the other. Sorry, my kids are home from school, as you can probably hear.

All good. All good. And maybe then -- I'll pose this question a slightly adjusted fashion to Dharmesh. Dharmesh, as you think about the pandemic's impact on HubSpot, we -- I cover Zoom, we cover DocuSign. And some companies had this massive acceleration of demand. Some companies had a pull forward. Some companies have a permanent step-up where COVID was the best commercial for their business. They could expand now to the rest of the world over time. How do you classify the impact of the pandemic on HubSpot in terms of the structural dynamics inside of the business that now -- again, now as you are at least peering over the other side of the wall, what's durable? What's temporal? Like what happened to the business?

Yes, if you kind of plot companies on the spectrum in terms of the level of impact -- positive impact, I'll say, that COVID has had, kind of the remote working companies, anyone attached to that, it's like, okay, well, in that world, these products are much more useful, much more likely to get bought. We're much further down the spectrum. It's not that we don't benefit from a remote work environment, but the kind of fundamentals of HubSpot and the product offering are not about remote work, they're about digitizing business, which has been important prepandemic and will likely continue to be important postpandemic, however things kind of shake out. So -- and in terms of how we classify the kind of headwinds and tailwinds from COVID and whether -- the one-word answer to that is carefully, right? It's like we don't really know. Personally, my belief is that if you could wave a magic wand and see what happened in the company, like if we just extract COVID out, let's say, it just never happened, we already had plays in play, and we were optimistic about where the company was headed in a prepandemic world. And my sense is those plays worked. And yes, we might have gotten some lift and some tailwinds. We certainly have. But I don't think it's just that, right? It's unknowable in terms of what percentage of it was a tailwind from COVID versus just founder charisma. But -- no, I'm kidding. It's -- we're very kind of confident that we're solving a problem that continues to be something of relevance for customers. And it may have compressed purchase cycles, may have increased urgency kind of temporarily. That's the lift we might have experienced. But it's still there. People still have recognized the need that more and more of the businesses should be digital. That's what their customers expect. So...

Award for the first joke of the day inserted into an answer goes to Dharmesh. Let me ask this question, Dharmesh. What product -- you're a product guy, right? That's kind of your thing as both an expert and a founder. If you think about -- what product are you most excited about inside of the company right now that you don't think is fully appreciated or fully recognized by the external investor population?

It's a product we don't actually sell and it's the HubSpot platform. As a software guy, so within HubSpot, we've been in business for 15 years, and I've been in software for 30 years, and the name of the game is long-term leverage of the software you already write. Can you get reuse out of those software components? So over the course of 15 years, we've built the HubSpot framework in what we call our primary colors. So we have things for automation and a component for reporting and a component for data management and access control. And so what happens is as we add new hubs, as we go from marketing to sales to service to other things, what we're really doing is saying a large portion of those application hubs, we can kind of build as a result of taking existing software that's already been tested, that we've already kind of paid for and crafted, and reassemble that to solve a new set of use cases for a new set of people within a company. And that's one of the heuristics we use in terms of how do we kind of move forward in terms of think about product innovation. One of the core things we look at is what degree of leverage will we have going into this new category introducing this potentially new hub. And it's less about how [ cloud ] is that category. It's more about how much leverage can we get going in. So the HubSpot platform/framework is the thing I'm most excited about because that's the kind of unspoken hero under the covers of the HubSpot product itself.

Perfect. Let me ask a -- so the other thing that I've heard you -- I've asked this question many times in sneaky ways to Chuck in terms of what's the next hub, what's the next area, what's the next market. And one of the things that I think -- one of the ways you've answered some questions today is like, look, we're going to continue to solve for amplifying the B2B buying experience, the considered purchase, helping customers help their customers making more informed, data-driven decisions in a digitizing landscape in the world. One of the areas that seems to be experiencing a major renaissance at the moment is the sales category, like sales intelligence, sales effectiveness between the Outreachs and the Saleslofts and the Gongs and the ZoomInfos of the world. How important is -- and you kind of launched into that category even before CRM to some extent because you wanted to improve the life of a salesperson, right, really empathize with that buyer that you hadn't fully, I would say, hit on in the past. And you did that with Sales Hub even a few years ago at this point. Am I -- I guess am I barking up the right tree and seeing -- and kind of putting the pieces together?

Yes, it's the right tree. It's an important tree. The way to think about it, when we moved from marketing to sales and sales automation or sales enablement, whatever you want to call that stack of technologies, we saw a repeat of the movie that we have seen in marketing. So part of HubSpot's contribution when we were in the marketing software space is saying, "Oh, there's lots of point products for marketing." But it's really hard for like an SMB to kind of put all these things together, right? Like if you could, if you were a Fortune 1000 company, obviously, pick best-of-breed across 18 different categories and you'd be fine. We're seeing the same thing play out in sales, right? There's lots of great products and great categories that have been growing. And HubSpot, the way we consider it is to say, "Okay, well, we're all about democratization." But says, "Okay, what do we know has worked but has been relegated to only being available to big enterprises? Can we -- because of our scale and because of our existing platform, can we bring that to the masses, right?" So about a year ago, we launched our Conversational Intelligence product, which is one of the important kind of pieces in that sales tech stack. And -- not because they weren't existing products, which we're partnered with and they're great products, but the price point in the market that they're after does not serve the millions of customers that we think would also benefit from that kind of technology and we think actually grows the pie for that category overall [indiscernible]. Lots of people will be happy with the Conversational Intelligence product that HubSpot provides. It kind of gets them in the game and makes them aware of what's possible and what's available. And then some percentage of them will say, "Oh, I actually need a really, really high-powered version of that individual feature." So we try to pull it all together and make it all make sense and make it accessible to SMB, which historically is not possible with those kind of enterprise apps set based on the way they've grown.

Your answer to that question was so complete, I lost my next question. I guess where are we in that journey of putting everything together, right? So when you think about that sales tech stack and kind of how -- actually, I remember my question. So forget everything I just asked. You were also really good at thinking about the future, thinking about -- I would say, Brian is really good about making the future -- commercializing that vision, but you're really good about just understanding early where things are going, whether it's Conversational Intelligence or bots or AI or blogging. How do you -- what is the next really exciting trend you are seeing that you think is going to be disruptive, that might not be next year or next quarter, but you think we're going to be talking about a lot in the next few years?

It's a great question. So this one -- so we've been -- we -- the industry at large has been kind of waiting for a long time for the next big kind of paradigm shift or a platform shift, right? So if you look in our category in CRM, you had Siebel launched in '93 with kind of CRM 1.0, right? And it was about getting this kind of a centralized system of records, all of your customer data could be in one place. Awesome. Then Salesforce had the brilliant observation to say, "Hey, all the computers are connected by this thing called the Internet, and we can use it as a way to better deliver software over the cloud." And they invented the kind of cloud CRM category, right, which made a complete sense. That was awesome. What's happening now -- so we had kind of the prior generation of the web. So generation 1 of the web was information spreading. It's like, "Oh, we've got this information. We're going to put them on web servers and make the world be able to access them." Generation 2 of the web was about interaction. We can build web applications now. So you can interact with something. It's not just static information. You actually have interaction going back and forth. We're right at the beginning of what some are starting to call like Web 3 or the third generation of the web. And it's actually about economics and identity on the web. So right now, what happens is that I visit any number of websites and I buy some -- from some people whatever. But each individual website has their own little kind of piece of me in terms of my data. What I think we'll be moving towards is that every individual will control their own kind of data and the value of their identity on the web. So if I visit -- let's say, it's like I'm going to go to asana.com, it's like, I'm a potential buyer. I should be able to bring with me my purchase history result. By the way, I've been a long-time HubSpot customer, and I bought this and this and this, and that should give me access to discounts and things like that. So -- and I might be able to say, "Hey, you know what, in order for me to take a meeting or take a call, here's what my price is based on my market rate or whatever." Instead -- and so it will be about -- decentralization will be about removing the middleman, just like the web has always been about and saying, "Let individuals control their own data. Let them interact with the business they want to buy from and share the information they want." That's where I think it's headed. It's going to take 5, 10 years for that to transpire, but it just -- it makes too much sense for it not to happen. And we're already seeing the beginnings of it now.

What's interesting about your answer, which again, unprompted, we actually just wrote a white paper on CDP. And while you were answering that question, the Q&A field popped up with a question about CDP. So I feel like the universe is trying to tell us something about that category. I'll ask the question now because it's ultra-relevant. By the way, I completely agree with you, and I do think that the notion of data as a currency and a fluidity and a construct is going to be paramount, in some cases, with respect to the way it's monetized and interact with. So the question, elegantly stated, is, is Operations Hub fundamentally different from CDP? Is Operations Hub basically filling a CDP role within the platform? And can you give us a sense of how big Operations Hub could be relative to, say, CRM or Sales Hub?

Okay. So let's talk about CDP just generally. I mean the definitions vary, but obviously, the acronym stands for a customer data platform. And what it really represents is that can you have a unified data store to put all of your customer data, including their interactions with the company, all in one central store and then make that data available to the people and applications that need it. That's what a CDP is. In that regard, HubSpot, even without Operations Hub, is actually a CDP. It meets the definition for most people. What Operations Hub does really is turbo boost some of our kind of data capabilities within HubSpot to say, "Oh, you want to bring -- you want to do data synchronization with these 16 different applications. We'll help you move that data in a reliable way and synchronize it. And so you can use HubSpot as your core kind of data backbone." Unless you do automation to say, "I've got my data all in 1 place, and I want to automate these particular parts of my business." Unless you do that. So it's not a CDP per se, it's a turbo booster for our existing -- what I think was our CDP. In terms of how big could it be, there's kind of 2 parts to the Ops Hub strategy. Like it sells to a different persona than the ones we've kind of historically sold to in terms of VP of Marketing and things like that. This is for operations people, still front-office operations people, marketing ops, revenue ops, that kind of thing. But the real value is not just the revenue that it drives, which we think the product will do well. But it's also because it kind of raises the tide for the entire platform. What will happen as a result of customers buying Operations Hub is that over the long [indiscernible] of time, they'll buy more seats. They'll be deeply -- more deeply embedded or will be more deeply embedded into their business. So I think it increases retention. So lots of goodness comes out of it to the platform overall. Oh and by the way, it's also a great standalone hub that we can kind of drive ARPC up with. But yes, a two-sided story on that one.

Who -- when you think -- when you look around the landscape, there was a question in terms of the competition. But when you think about the -- not the survivors, but the thrivers in this industry, given the vision you just laid out, who are going to be the sustainable thrivers in this business, HubSpot excluded, obviously, as we would assume that they would be -- you would be one?

I think it will be -- well, I'll say like the usual suspects, right? And I'll put 2 criteria on it. The survivors will be the ones that are either a platform or investing meaningfully towards becoming a platform, right? If you're going to be a -- kind of a point product player and you can build multibillion-dollar businesses being a point -- but if you're going to be kind of the next big $100-plus billion behemoth, I think you need to be a platform in order to really thrive in this market. The second thing is that -- and this is completely biased opinion, but doesn't necessarily make it wrong, is that I think, especially in the SMB space, which I think is very, very vibrant right now, there's lots of value to be created, is that you have to have kind of solved from the customer backwards. It cannot be it's like, okay, well, we want to check these boxes in our product portfolio, and we're going to do these acquisitions in order to kind of fill that out. It has to be more of an Apple-esque approach that says, "Okay, here's the problem. There are millions of people, tens of millions of people. This is what Apple thought, right?" When the iPod came out, it was not a feature comparison, it's like, oh, we're more gigabytes per dollar and you can put more [indiscernible]. Like no, it was a -- this has to be easy in order for the -- for consumers to be able to benefit. And so I think the next generation kind of thrivers will be the ones that recognize how important ease of use is. And it's not just because of the time to join is faster, it's because the world is just impatient. Like people don't have the tolerance for kind of [indiscernible] applications. And in some cases, in SMB, they don't have the budget, right? And if you're a Fortune 1000, you have an army of people with like pitchforks and process diagrams that can run around and make everything work. HubSpot and others -- I guess I'll take HubSpot out of the equation. Those -- we are the ones that recognize that and can simplify it and can offer ease of use that's unmatched in SMB. That's my self-serving answer, but true.

Okay. Dharmesh, is there anything I haven't asked you that you want to make sure you leave investors whether you want to touch on? And by the way, Chuck, same thing, feel free to jump in here as well. Anything that you want to make sure comes across that we haven't touched on?

One thing I'll say is that HubSpot is -- everyone asks and we've been asked this question for -- in varying ways for all 15 years. It's like, okay, so what's the path to the enterprise? And how are you going to scale up? And like I know you're serving the 1,000 to 2,000 employee market now, but surely, you have plans to grow. And the answer is like even the kind of enterprise-oriented investments we've been making are to optimize for the 200- to 2,000-employee segment that we're already in. So we are very, very happy with SMB. The physics in the SMB market are different. But we figured like we've kind of mastered or at least optimized around those and we've made the model work. As a result of which, we get to kind of enjoy this kind of blue ocean of opportunity with very disproportionately low competition given the size of the TAM. It's because it's so hard to make a business work in SMB. And we figured out the mechanics for that working. So we are very, very committed to that. We're not getting lured into this kind of reverse gravity that happens in software sometimes where every company winds up being pulled into the enterprise because the numbers, at least in the short run, look better. So we've been disciplined about avoiding that pull into the Fortune 1000.

And the only thing I would add is just a shameless plug before our inbound event and Analyst Day on October 12. So hope to see you all there. But I think that's probably as good a place as any to leave the conversation. Appreciate it, Alex.

Thank you guys so much for joining. Thank you, everybody, for participating. And see you again in a few minutes.

Sounds good. Thanks, Alex.

Thanks, everybody. Thanks, Dharmesh.