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

Okay. Welcome to our next session. Thanks, everyone, for joining us for a fireside chat. We have Kate Bueker, CFO of HubSpot; and Chuck MacGlashing on the IR team joining us today for a little fireside chat. Why don't we just get started here with a sort of a quick introduction, Kate? And just a quick -- and I'm sure most of the people on the call are somewhat familiar with HubSpot, but let's just do sort of the -- a quick business overview here of the company.

Yes, sure thing. So HubSpot is a CRM platform for small and medium businesses. We have a set of tools across the front office, including marketing, sales, customer success, a CMS, so you can build your website as well as an operations hub that allows you to connect all of the data across all of the platform with other applications. And our target customer base is those businesses between 2 and 2,000 employees. The company just celebrated its 15th anniversary, and so we are happy to be here.

Yes. Great overview, and thanks for joining us again, and congrats on the 15 years.

I guess just to start out here, since I've been covering the stock and well before that, I think the organic growth story at HubSpot has really been just a really powerful narrative for the stock, both before you expanded the portfolio into what it is today and when you started out within just the marketing space. So would really love to just kind of unpeel -- you've been growing above 30% for really the last several years here. So if we could just kind of unpeel the growth drivers of the business, both before you started to expand the portfolio and when you first started out, and maybe how those growth drivers have started to evolve.

Yes. I guess maybe I would take us back and just highlight the overall mission of the company. So HubSpot's mission is to help millions of organizations grow better. And in its infancy, what that meant -- and the company was, frankly, founded on this tenet that the Internet was going to change the game for small and medium businesses in a way that allowed them to compete in a more level way against larger companies, in particular, in the marketing space. And they did that through -- or Brian and Dharmesh did this through the concept called inbound marketing, which basically changed the dynamic where traditional marketing was you paid a bunch of money, and you would advertise across a variety of media. Inbound marketing sort of flipped that on its head and allowed sort of small and medium businesses to create content that brought value to potential customers and drew them in. And over time, I think that what we realized is that the trend that you saw on the marketing side was not really a marketing trend. It was really a trend across all of the customer interactions and experience. And so what you have seen over time is that we've tried to deliver this sort of democratizing capability across the entire front office. And so this mission that -- to help millions of organization grows -- to help millions of organizations grow better extends from marketing into sales and service into the CMS. It's the entire customer experience. And we think that the front office and the definition of the front office will continue to evolve over time, and I think that gives us a lot of opportunity.

Yes. No. That's great. I think one of the other powerful narratives just along that same theme is as we look at your business, and you've had some incremental disclosure at your Analyst Days over the last several years, just looking at the pace of multi-hub adoption among your installed base. When it comes down to it, I mean, what are the real drivers there that are giving your customers confidence to lean further into the HubSpot platform? Is it the single code base? I know that you've talked about that quite a bit, just having it all built on one platform. Is it a certain sort of pace of innovation within each of the hubs? I mean, what's really giving your clients confidence to lean back into spending more and more with you?

Yes. I mean, I have -- I'll start and maybe, Chuck, if you have other thoughts here. I think there's a couple of things that are really at play here. I think the -- you sort of alluded, Drew, to the sort of confidence in the product and the platform. I think that is a big part of it. I think we have a really good product that answers our customers' need. I think that it's even more basic than that, though. I think is that our customers are expecting a different kind of experience. The -- our customers are tend to be business-to-business customers. And the B2B buying experience has really lagged the consumer buying experience for a very long time, and we think that the expectations for that are really changing pretty rapidly over the last period of time here. And B2B buyers today expect that your sales team understands what you're interested in based on the content that you viewed or the marketing campaigns that have drawn you in. They expect clean trade-offs across your onboarding process from your sales team. They want self-service as much as they can. They want to be interacting when and how they want to interact. And I think One HubSpot, as a platform, has -- affords our customers the opportunity to create that kind of experience for their end customers. I also think that we've done some things on the pricing and packaging side, in particular, at the low end, to really help drive this in a meaningful way. We introduced our Starter Growth Suite, which has now become the CRM suite at that starter level. It's $50. It's really simple and easy to get started with. It's that sort of experience where we've tried to really drive the friction out of adopting the whole platform that I think is another key driver of the sort of progress toward quality hub adoption.

Okay. The only thing I would add to that, and I think it kind of gets at the point Kate's making around being the sort of holistic platform that gives customers a lot of confidence when they standardize on it and not only take marketing but other hubs and the entire CRM is like the thousands of channel partners that we have that can help customers get up and started and be that extension of their marketing sales service departments and the ecosystem of applications that surrounds HubSpot, right? So traditionally, we were trying to be sort of the all-in-one platform and trying to be everything to everybody. If you'd asked us that question 5, 6, 7 years ago, we early on realized that we couldn't be everything to everybody. And so we opened up our APIs and our documentation and have allowed third-party applications to build on top of our ecosystem. So that if a customer is looking for an application that provides maybe a little bit more power within one of those respective hubs or is looking to lean on an application that they've been using for years already, they have the ability to be able to do that out of the box with HubSpot sort of on day 1.

That's helpful, Chuck. And since you brought it up, just on the partner ecosystem piece, I think just to, I think, give some context to people on that indirect channel that you have, both I think -- you've done a nice job, I think, over the last 2 years talking about how your newer hubs are new front doors for people. But I think to the extent that you're also building relationships within the broader ecosystem within the front office, it gives -- where you have strong relationships, I think gives people another reason to look at a HubSpot. And so on the technology side, I think, is one piece. And then just within your other broader channel partner ecosystem, I think, maybe giving some people a little bit more background on how that's evolved over the last couple of years and how meaningful that is for driving new customers into your business today.

Yes. I mean, we've had a -- I guess, if you turn back the clock, the strong partner ecosystem has been a part of HubSpot for a very long time. But if you turn back the clock, the partners that comprise that ecosystem were largely marketing agencies, and that was a result of the fact that, that was our product at the time. And over time, as our product has become a full -- we've moved from a marketing application into a full suite and ultimately the CRM platform, the nature of those partners has also evolved. And some of those marketing agencies have kind of come along for the journey with us, and both continue to support core marketing efforts but have also become more technical. They have added capabilities around CRM integration. They certainly have some strong website capabilities that help to support the CMS. We've also added new kinds of partners. In particular, we have added integrators who can help our more sophisticated customers get up and running on the CRM over the last couple of years, which has been very positive. I think more recently, we've been making a bunch of investments in our partnership and our partners to help them help us service our partners better, and you will see that from us continue over time. It has always been an important channel for us. It remains an important channel for us. It's about 40% of our revenue. And Chuck and I always joke around that if we turn -- if we had that 5 years ago, what the proportion of revenue would be coming from the channel. I think neither one of us would necessarily have guessed that it would just remain stable, but it really has been an important and stable part of the business for a very long time.

Yes. No. That's definitely impressive. Switching gears a little bit but staying on the theme around just growth. When we look across your portfolio and what's really driving growth today, obviously, new customers has always been a key driver of that for HubSpot. You are, at least from your roots, more of a velocity business. But as you look across more of the actual solutions and the different hubs, I mean, which hubs are, in particular, driving the bulk of the growth today as you look across incremental adoption there?

Yes. Well, I guess I will start by saying thanks for the question. We -- this will allow me a shameless plug for our upcoming Analyst Day at INBOUND on October 12. That is typically the format that we share this kind of hub-level detail. But that said, I think I'll maybe try to give a little bit of framework here in terms of how we think about the maturity of our different hubs and how we think about innovation and growth associated with them. We have, today, 5 hubs. They are at a range of maturity, certainly. And I think you've seen -- what you've seen us do consistently over time is to introduce a hub, make sure it's -- we'll introduce a hub. It will be great, but we'll still have things that we need to work on. And so we will iterate from there and continue to add value to the hub's post initial launch. And so as an example, marketing, which I would call our most mature hub, we continue to innovate in marketing. You saw us at the beginning of 2020 introduced -- relaunched Marketing Hub Enterprise with a bunch of new innovation and functionality at the enterprise side, some core attribution reporting, some permissioning, in particular. And then we will push down functionality into the professional and starter tiers. Likewise, you've seen us do that in the Sales Hub. At INBOUND last year, we introduced or relaunched Sales Hub Enterprise. We added custom objects, which allowed you to customize your CRM to your business. We've introduced Conversation Intelligence. And so -- and then we'll push functionality down. In service and CMS, you'll see similar patterns from us. There is more innovation, certainly, to happen within those hubs. And then also, frankly, it's brand new. We introduced starter and professional only. There is not yet an enterprise hub or an enterprise edition of that ops hub. And so it's really early in terms of innovation there. And I think you kind of expect to see us follow the same pattern, right? Introduce a hub, iterate, push functionality, iterate at the top, push functionality down, and as we see new customer pain points, extend the platform into logical places focused in front-office experience.

I guess -- that's really helpful. Thanks for the kind of colorful response there. If we were going to abstract the level up away from sort of the hub-level view to more of just like other kind of broader growth drivers in the business that you can kind of underwrite durability from, I mean, if we just sort of contemplate category growth, in general, the marketing sort of in the front office more broadly, right, increasing its share of budgets just overall and people continuing to lean into those categories versus maybe market share gains within that pie. How do you kind of think about underwriting confidence when it comes to growth drivers on sort of a macro level there? And which pieces would you sort of point to as things giving you most confident?

I mean, I know you're going to be surprised when I tell you that it's a combination of those things. I think if you turn back the clock on the history of Marketing Hub, the HubSpot approach to marketing in this inbound was really creating a new category and really changing behavior of marketers. And so that -- the growth of Marketing Hub was tied to sort of a change in the market and really the new category creation. The good news is, from our perspective, that the front-office experience and expectations have not stood still. And so across all of our suite, I think our hubs benefit from, say, the continued improvement in expectations for the front-office experience. That's what I think. A lot of our newer hubs also benefit from the fact that there is a 1 plus 1 equals 3 combination in having a core CRM and having a full set of capabilities with a common data platform that is sort of core to the overall strategy, and so I think it is a combination of things.

Got it. The other question that I get actually quite a bit from investors is just around, I think, going back to this idea of HubSpot sort of historically being -- having strong roots in being a velocity business at the end of the day. Like I think throughout 2020, what we saw was you sort of reached a new level of maintaining that new kind of threshold above historical levels of net new customer adds. What were sort of the pieces driving that? I think we're well aware of like the pull forward and refocus around digital channels in the front office, et cetera. But I think the question that I get from people is like how durable is that new level of growth? I mean, does it taper off over time? And I guess what gives you confidence, just from a macro perspective, like when you're contemplating the runway of the opportunity out there, like are there that many organizations where you think you can continue to keep adding customers at that velocity for the next 3 to 5 years?

Yes. Maybe I'll take this one, Kate. I mean, it still feels quite early to us, Drew, and I know that we've been saying that for the last 5, 6 or 7 years. We don't spend a ton of time looking at macroeconomic leading indicators to tease out quarter-to-quarter variability in net customer additions as much as some investors might want us to. But it just doesn't feel like there's a shortage of opportunity out there to land new business, especially when you think about how we've grown, to Kate's point earlier, from being a single app marketing company at the IPO that was largely serving North America and that 20 to 200 segment quite well to a platform today that has 5 hubs across Marketing, Sales, Service, CMS and now Operations Hub, over 0.5 million free users, 120,000 paid users that are growing 40% in over 100 countries globally. Listen, like there are going to be quarters and there are going to be times where the product mix of the business and the addition mix factors into if we're selling a little bit more at the high end or a little bit more in the low end of our product portfolio that could cause net adds to sort of fluctuate around a little bit. But yes, I think, overall, we still feel like there's a big, big opportunity out there in the markets that we serve to bring more and more customers on to the HubSpot platform, deliver a ton of value and help them grow better. So like the TL;DR here is you're going to see some trade-offs from time to time. Like that has been our history between net adds and sort of customer growth and ASRPC. At the end of the day, we're trying to solve for the fastest overall subscription growth rate that we can put up. And overall, it's worked quite well since the IPO.

So I think the other piece that I think is most underappreciated at HubSpot, obviously, there was sort of a shift in dynamic, driving the growth rate last year, where just the -- not only you had tailwinds from the higher velocity of net new customer adds and people allocating more of their attention and budgets to digital channels, et cetera, but like I think underneath all of that has been sort of this underappreciated change in the unit economics of your business over the last few years, right? I mean, historically, I think the knock -- at least the knee-jerk knock when people get up to speed on the business is like wait, aren't they exposed to an SMB customer cohort that's sort of structurally exposed to like just a higher churn rate by nature of those businesses and having lower survival rates, et cetera. Maybe just unpack a little bit for people and contextualize how that unit economics has changed in your business and sort of where you could -- you think that could go moving forward using kind of the metrics that investors used to -- the vernacular that investors use to discuss the retention and things like that?

Yes. It's a good question. The truth is that, and we shared this last year at the Analyst Day, that our unit economics have been trending in a positive direction for a long time, frankly, since the IPO. We've seen kind of a steady increase in the unit economics. I think you are right. Over the last year, we've seen another positive a trend in the underlying unit economics for the business, and maybe you can talk about it in the pieces of LTV and CAC. In terms of the customer acquisition cost, the investments that we've made over the last, I don't know, 4, 5 years, Chuck, on the freemium go-to-market model were a bit of a step change in terms of our ability to drive a lower cost of acquisition for customers. The other thing that's probably less appreciated is that, that self-service motion frees up the inside sales team to focus up more sort of at the higher-value customers and ultimately also help to drive a lower CAC over time. And then on the LTV side, there's -- again, there's a couple of things that I would highlight as particular impacts there. One is that we have seen ASPs move up in our professional and enterprise tiers of the product. And then the other thing, which I think is probably what you were alluding to a little bit, is that retention has a big impact on the unit economics. And as we have talked about over the last 4 quarters, we have seen a step-up in our retention rates, both our gross retention, which we internally call customer dollar retention; and also our net retention, which includes sort of our net upgrades from there. And the combination of both the ASP increases and that retention impact has created a positive movement in our unit economics over the 12 -- the last 12 months. The one thing that I would note is that we are, as a result, confident in making those go-to-market investments to answer the market demand and fuel, for lack of a better description, the future growth of the business.

And then since you brought it up, Kate, I mean, just while we're on the topic here of go-to-market investments, maybe just help us think through the framework that you have at HubSpot. And as you're sort of contemplating the opportunity that you think is ahead of you, durability of growth that you see and your confidence in the business, I mean, how do you kind of come up with the right number, right, of how much more we're going to lean into sales and marketing investments this year and where we're going to go about allocating those investments?

Yes. I mean, it certainly is grounded in our unit economics. But as you've heard me and as you've heard Yamini talk about, one of our core strategies is to lean into the increasing diversity in our prospect and customer base and drive different go-to-market motions based on customer segments, right? And again, if you kind of -- we're turning the clock back a lot in this call. But if you sort of step back a few years, we had a single go-to-market motion for all sizes of customer. And it was really modeled after that sort of 20- to 200-person kind of company, and we applied it both up the stack into that sort of 200 to 2,000 and also down into that like 2 to 20 kind of customer base. And over time, what we have been doing is segmenting our go-to-market so that we have a market motion at the high end that is very focused on a value-based sale. We've been investing in technical sales support. We've been investing in really exciting things like contract lawyers and regulatory certifications that will help fuel that sort of upmarket sales motion. And then we did talk a little bit about this in the context of unit economics. At the low end, we are investing in a product-led motion that is highly self-service and a support function that is more automated. And so you will continue to see us making those investments in our sort of increased segmentation in the go-to-market over sort of the next few years.

Got it. And while we're talking about investments, I think it's helpful to think through how you think about investing in the use cases that you already have. But as you're -- since you've announced Operations Hub as sort of your newest hub and as we're just sort of thinking about the evaluation criteria that you have at HubSpot, looking across the board, different opportunities that you have and then sort of going through and thinking through how to fund those opportunities and go and execute on it, maybe just walk us through sort of how you landed on Operations Hub as the next sort of opportunity for you? And how you're going to go and execute on that opportunity, sort of where you're leaning in?

Yes. I mean, I'll start. Maybe, Chuck, feel free to dive on in. As we think about product innovation, I would say, and I'm assuming this won't be surprising for you to hear from us, the place that we start is always with the customer, right? We listen to our customer, and we want to make sure that what we are making in terms of investment is going to answer a big customer pain point. And so the first thing is really like what customer problem -- is there a big customer problem that we want to solve? Then we, I think, step back and say, "Okay. Like is this really a big problem and a big opportunity?" Not -- a big unsolved opportunity is how I would describe it. Is this a TAM that's really going to expand for HubSpot? Is this a market that -- it doesn't mean that nobody is already trying to solve the problem, but no one's solving it well for our customer base. And we think we can do it in a different way that will provide real differentiation and real value. And then the last thing that we look at is are we positioned from a go-to-market perspective to actually execute against this? Is the buyer the same? Is the motion similar to what we are doing in the other parts of our business? And so, I mean, it's not like -- it's not a strict science here, but I think that the parts that we would focus on are making sure that, one, it's a customer -- a real customer pain point; two, there's a big market; and three, we feel like we can execute against the market opportunity.

Is it fair to say...

Yes.

Oh, sorry, go ahead, Chuck.

No. I shouldn't have say -- like we can probably talk for 10 minutes about Operations Hub and the genesis behind that. But ultimately, if you think about HubSpot as a platform and marketing, sales and service and CMS and CRM underneath it, a big customer ask was like, how do I get data from, not only externally outside of HubSpot within this ecosystem of applications that I'm using as a customer, but like how do I get it into HubSpot? How do I make sense of it, report off of it, get business intelligence and customize that data in a way to make it supremely valuable to the overall business? And so that's, at the most simplistic level, the use case that Operations Hub is solving with starter and operations. And to the point that Kate made earlier, we'll look to sort of build upon those additions and add more power and sophistication over time.

Sure, sure. Is it fair to say -- what I was going to ask earlier. Is it fair to say that like with each incremental hub that you have, I mean, you have sort of learned experiences from each time that you expanded in the past, right? You've sort of seen the movie before and how to enter a new market. I guess you already have the underlying platform sort of technology, so it's not a ton of incremental investment that needs to be had. But is it fair to say that with each new market that you've entered that sort of required less -- it's been less of an undertaking on both of those fronts? And like, I guess, how would you sort of attribute the success that you've had within each of your newer hubs to just having had seen the movie before and having that shared infrastructure?

Well, there are certainly some benefit from having a organic growth shared platform in terms of helping to fuel innovation and our ability to actually execute against some of the new hubs. I don't know -- I know Dharmesh has talked about it in the past. We don't spend a lot of time talking about it, but the engineering team, probably 4 years ago, created what they refer to as the HubSpot framework. And it's a set of core elements that are used across all of our platforms. You can think about things like e-mails or automation or forms, these sort of core building blocks that the teams can reuse within each of our hubs, one, to drive faster innovation; but two, to create an experience across the whole platform that really just is intuitive and very similar. And so that does help drive innovation. And as we've continued to learn from history, we think very much about new -- developing new capabilities, not just as like developing new hubs, but what are the other -- we now have referred to them as primary colors. What are the other core primary colors that we should be investing in, in order to make sure that we're set up to answer customer questions, and we can innovate faster going forward. So there is a balance of investment around the -- what you would see as a new hub and around this sort of core infrastructure that enables innovation over time.

And you might be able to answer this next sort of follow-up question with that framework. But how do you guys think about -- is there a certain point where you say like, "All right. This is too many hubs that we have," just given you're sort of on an early trajectory here with some of your newer hub. There's a long runway of growth in each of those spaces. You could probably do just fine, dedicating all of your time to what you already have in the bag. Like do you reach a point where you're like, all right, let's just sort of focus on executing here on the opportunity versus are you always looking around the corner for the next hub? And what's sort of the -- is there a routine cadence around that? Or how should investors sort of think about that?

You want to take that one, Kate?

Yes. I'll add to the extent that makes sense.

Yes. I mean, it's a good question. I think in many ways, like you're kind of asking about the right number of hubs, and the right number of hubs is 9, Drew. You can just write down -- well, this is going to finally answer the question. Joking aside, look, I think we've really -- we've staked our claim on the front office with this focus on the customer journey, which we've referred to a couple of times in this conversation. As such, like we've added hubs that we see are relevant to that, starting with CMS kind of on one end of the equation and maybe -- so yes, CMS on one side and operations on the other with marketing, sales and service in between. And listen, like there's a constant tension between depth and breadth, which is part of the reason we don't always launch a new hub in a given year, much to some investors' chagrin or maybe like as many hubs or features that people would like because we have a lot of opportunity to go deep in both mature hubs, like marketing, sales and new hubs alike. And so at the end of the day, I'd say the journey for each and every hub we've brought the market has centered around being customer-centric. Marketing Hub, it was really borne out of this vision for marketers to help them grow through content marketing and eventually marketing automation. We expanded from list management to a full CRM, just driven really by how much customers were wishing they had to sell CRM with automation capabilities but a CRM that could kind of unite marketers and salespeople alike. When you think about the original inbound methodology, it was to attract, engage and delight. And it was really kind of that like delight phase that brought a Service Hub. I could go on and on with the rest of the hubs here, but I think really one of the things that makes HubSpot really special has been our ability to kind of consistently balance that breadth and depth in our journey to help scaling companies deliver that incredible customer experience for their customers. And we'll need to continue to go deep and wide to deliver on that mission into the future. So it's a fine line that we have to walk there. I think we've done a reasonable job of it. And every year is going to be a little bit different in terms of if we go deeper within hubs or expanded into newer ones.

Understood. Okay. Kate, do you have anything to add there? I'm just going to wrap up with one last question because we're coming up on time here. But I think it's probably worth just getting your perspective on -- obviously, Brian moved into the Executive Chairman role at the end of -- announced at the end of last quarter, and we've had a lot of experience with him, obviously, over the years and have a good sense for his style and how he thinks about the business. How should investors think about what Yamini brings to the table? And I think just given her sort of differences in background and set of experiences. I mean, any sort of change in how she looked at the business and potential sort of strategy change or anything from your purview that you've noticed? And obviously, Chuck, chime in here as well. But just how we should be thinking about kind of change in style more broadly with her in that leadership position.

Yes. I guess the first thing that I would say is that you should not expect any change in strategy. That's like not the point here. You should expect a continuation of the strategy that we've been sharing for a number of years now. Internally, Yamini has been running the business for most of the year. And so I would say, internally, it feels less dramatic of a change than I think you'd probably feel externally. That said, like I -- Yamini is super complementary to Brian and Dharmesh. Like they share a lot of -- a couple of key attributes. One is she brings this customer-first mindset that has just been inherent in the culture of HubSpot for like all of the years of the company. The other thing that they share is this sort of insatiable appetite for learning, and that has become a core part of the culture and one that's just a natural fit with her. I think she's just a really interesting and unique complement because she brings with her just a different set of experience. So she spent a decade at SAP and Workday and Dropbox, which represent companies that have like the enterprise side, but they also have this high velocity sort of low-end side. And she's seen this play at scale, which is something that is really unique. So I'm honestly personally super excited about it.

Great. Well, with that, I think we should probably wrap up there. Thanks again to both of you for the time and all the insights. It's been a pleasure chatting through things, and we're looking forward to the Analyst Day in October and what else you have to say for us, investment community.

We are, too.

Thanks, Drew.

Thank you, Drew.

Okay. Thanks for your time.