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

So we have Yamini Rangan, who's the CEO of HubSpot; and Chuck MacGlashing, who runs Investor Relations and Treasury. So first of all, thank you both for joining us. And it's crazy, but I haven't seen you in about 2.5 years in person, and it's really nice and refreshing to see everybody in person again, and thank you so much for joining us.

Yes. Thanks a lot, Samad, for having me and for having both of us and for being here in person.

It's easy to support great companies. So you guys make it easier for all of us.

And look, I thought we would dive in, Yami. I know that it's a question everybody is asking us, so I'll just get it out of the way and rip the band-aid off. But there's clearly investors that are thinking about all the crosscurrents that are going on right now in the macro environment and where the economy is headed. HubSpot's executed really well, just coming off the first quarter. But just maybe what are you seeing with your end customers today that I think would help the audience maybe think about what's going on with small businesses right now?

I like that you're starting with the ripping the band-aid. So I will say that it's very -- we're in a period where we are watching the headlines. We're watching everything that's happening in the macro on a day-by-day basis, just as they all are. As we mentioned in our earnings, we had a very strong quarter in Q1. We had great results and great execution from HubSpot perspective. At the same time, we saw some pockets where customers were taking a little bit longer in terms of decision-making obviously [indiscernible] are up, and it's been the same. So there's been no change in terms of our commentary, in terms of demand. Having said that, Samad, I will say small, medium businesses [indiscernible] real hard into technology as they came into the pandemic. They needed digital marketing tools, inside sales tools as well as digital services tools. And they leaned in pretty heavily on technology, and we're seeing that continuing. Conversations that we are having with our customers continue to be focused on how they digitize their front office and how they drive productivity, their front office investments. And so that is continuing. The second part of what we're seeing is that a few years ago, and you've been following us for a while now, you know us really well, we made a bet in terms of CRM. And we've transitioned from being a marketing automation software platform. And as we have done that, we've become much more of a platform for small and medium businesses. And so a lot of the conversations are around how we can help across the platform [ deliver ] customer insights as they drive their businesses forward. And so we've become a platform of choice because we're easy to [indiscernible] and that is what we see.

That's helpful. I've covered you long enough that Chuck reminds me, I didn't have long hair or a beard when I started. So it's been that long. . I think the follow-up that we've been asking other companies as we go through conference season and Analyst Days is -- and we saw a little bit of in 2020, HubSpot reacted really well to helping your customers. But what is maybe the operation plan or the strategy if there was to be maybe a little bit of a slowdown? Like what would you do to help your customers from a product standpoint or a solution standpoint?

I think that's a great question. So as we headed into the pandemic, we made a set of decisions that were really focused on solving for our customers. . And you'll remember we changed our packaging and moved a number of down to the free tier. We changed our pricing and made our starter tier much more affordable. And we added powerful features upmarket so that our upmarket customers grow. And so if you look at the first principles of how we approach any crisis, but more importantly, how we build a company that can sustain all crises, is thinking about the customer, really thinking about customer acquisition plays, customer retention plays, pricing that help build that foundation for execution. So that's how we look at it. And again, as we think about what worked during the pandemic, it's fast action, it's listening deep to the customer, acting fairly quickly [Audio Gap] standpoint. And we've got that muscle.

Okay. I promise no more macro questions. We are done with that subject. So switching gears, you've been at the helm of HubSpot now for a year as CEO, first, as interim and now full time for almost a year. And what I wanted to understand is that it's been a great year. You haven't skipped a beat as a company. Growth has accelerated last year. What has surprised you the most as the CEO? And what are maybe your top 1 or 2 priorities now that you've had some time to really settle into the role and see how the company has scaled?

Yes, it has been an eventful year. I will say that it's been a year of tremendous learning, and I've really had fun being at the helm of a fantastic company with great foundations in place. . I'd say, not as much as a surprise, but we are living in an era of change and an era of uncertainty. I think we can all say that like every day, we're looking at what's changed in the market, what's changed in the company, what's changed in the environment. And so I think as you live in an era like this, it becomes really clear what the job of a CEO is. It is to consume all that uncertainty and transmit clarity. And that has been the way I've approached my job, is really to manage through the change and to be very clear in terms of what our focus areas and priorities are for the company but also for you all to understand what we're building in terms of an enduring company. In terms of our priorities, we've talked ad nauseam about the big priorities for the organization. We want to build a world-class CRM that small, medium businesses can build their businesses on. So you'll see all of the investments that we are making from a product and innovation perspective, really line up to that big priority. We've really focused on a bimodal execution, driving a lot of volume in the lower end as we drive up the value for customers in the higher end, and that is a continued priority. We've invested in commerce and payments, and this is one of those bets that we make for the longer term, longer horizon, which is really important. And we want to build a sustainable company with diversity built into the DNA of the organization. So those continue to be my biggest priorities. And as I look at this year, having a strong leadership team that can execute in any environment, is a big priority. So if you really listen to the workings of HubSpot, this year is a lot about focus [ and execution ].

Well, you guys have started out of the gate very strong, and I suspect it will continue. So maybe -- we spent a lot of time on the earnings calls and even with our Q&A just talking about all the other exciting growth drivers that HubSpot has. I think we forget that Marketing Hub has crossed $1 billion scale, right? Not a lot of companies get their stand-alone, and it's one of the few to cross that with just one of your many hubs, and it's still growing rapidly. So I guess, how should we think about maybe the durability of that growth and what those key drivers are to get to that multibillion dollar level?

Yes. We just announced that we crossed that $1 billion mark in milestone in Q1, and it's exciting. It's exciting not just because of that but because we see a really long runway ahead of us. You'll take marketing fundamentally today. It has transformed. Marketeers' jobs have transformed pretty significantly over the last 3 to 5 years, and a CMO's job has really changed over the past few years. If you break it down, Samad, there are channels today that are in marketing that did not even exist a few years ago. So how do you harness new marketing channels to be able to drive growth? And there are tactics that marketeers have been using in terms of search and pay that no longer work. They have highly commoditized right now. And so how do you innovate and drive growth when there are fundamental shifts like that, that are happening from a marketing perspective? And we live in an exceptionally privacy-centric world today that was not the case 3 years and 5 years ago. So marketing is vibrant, innovating and changing at a higher pace than it ever did before, which means we're not sitting still, right? We have poured innovation in our Marketing Hub, as you all know, you've followed it. Last couple of years, our Marketing Hub Enterprise has gotten very powerful features while maintaining [Audio Gap]. And as we look at building a multibillion-dollar business, we focus on multichannel marketing. We focus on advanced automation and focus on driving customer journey analytics that we can deliver much more insights for the marketing organization as they can [Audio Gap]. From a product perspective, we're not sitting [Audio Gap] and we have ideas for the next [Audio Gap] marketing both in our heads that we're [Audio Gap] execute on. And we've been [indiscernible] actually as products. Marketing Hub is the best product in [ 2022 ]. And from a go-to-market perspective, [Audio Gap] offsets and clearly focused on understanding the needs of our customers covering for [Audio Gap] also now in almost every marketing conversation. [Audio Gap].

I would agree with all of that. I think one thing that marketing benefits from today that maybe wasn't the case 5 or 6 years ago, in a point that Yami made earlier, is just that more and more in the small and mid end of the market is becoming a platform level, right? And with the success that we've had with sales, service and CMS and the introduction of Operations Hub and now payments, it's having a platform of choice for these mid-market customers that they can standardize their entire front end on. And then plug and play with the thousands of applications that surround our platform through our ecosystem is just a natural tailwind to overall marketing growth that is, by any stretch of the imagination, tens of billions of dollars of market, of which we have $1 billion today.

I want you to hold on to that microphone, Chuck because I can't not ask you numbers questions. Here they come. So multi-hub adoption has been an important growth driver for ASRPC, so ARPU would probably call it in most places. Can you discuss what the drivers behind ASRPC growth have been and your confidence level that it can continue to grow in the low double digits on a constant currency basis?

Yes, sure thing. It won't be a fireside chat without an ASRPC question. Yes. I mean -- if we take a step back, for having this conversation 3, 4, 5 years ago, the 2 -- kind of 2.5 main drivers behind ASRPC growth were contact your upgrades, it was additional upgrades within marketing from Starter to Pro, Pro to Enterprise and a little bit of cross-selling of sales in hub installed base. You fast forward to today, all of those things are still true. I would say the Starter to Pro upgrade motion is a bigger contributor to ASRPC growth than it was back then. But now, we have -- we're landing larger like-for-like deals within that 200 to 2,000 segment that help out with ASRPC. We're cross-selling anchor hubs, right, so Service Hub into the marketing and sales, installed base that's helping out. We're cross-selling new hubs in CMS Hub and Operations Hub that have quickly ramped up in terms of products for us. And so there are 4, 5, 6 different drivers that contribute to that low double-digit ASRPC growth in constant currency that we've been able to deliver. And it's what gives us confidence for the foreseeable future that we'll be able to continue to grow ASRPC in those, in [Audio Gap].

And only because I know this is your favorite subject about HubSpot and we'll talk...

Ripping off the band-aid for May now .

Anyway, the quarterly cadence of KPIs is a big question, especially as people think about the year in the guidance. But just how should we think about the trade-off between net customer adds and ASRPC? And let's assume a normal steady state kind of macro environment.

A normal steady-state macro.

Something that doesn't exist. I understand.

Listen, like we're pleasantly surprised with the 8,200 that we delivered last quarter in the net customer addition front, although we've been signaling for some time that about 7,000 customer additions is the right way to think about that number. It's because we're driving a lot more balance across the portfolio and sort of the business that we're booking quarter-to-quarter, right, like the business that's coming through our content funnel versus our freemium funnel, the amount of business that we're generating with installed base selling rate relative to where we were for the last couple of years. And net revenue retention rate that's moved up from 100% to over [ 110% ] today. So I think like the growth algorithm for us for -- from a customer addition, ASRPC net revenue retention rate perspective, is going to be in and around 7,000 net customer adds, ASRPC in that low double-digit range on a constant currency basis and NRR above 110. It's not to say that in a given quarter, it can't move around or any one of those numbers couldn't move around. But I think what you've been able to count on from us, historically, is that when one of them moves in a direction that there's a natural offset and that the subscription growth that we deliver at the end of the day is fast, it's outsized, and it's something we're all happy with.

Great. That's helpful. And then, Yami, I want to go back to you. Just when I think about the product strategy, it's clearly worked, right? If I think about just the evolution of HubSpot over time from single product, single solution to platform, both of you have mentioned, I think one of the ones that is done, I'd say, good but maybe hasn't been as strong out of the gate as Service Hub, right? But you guys just recently relaunched it and have added new features to it. And I know that it's a key part of that overall broader platform strategies. Maybe, what customer feedback you've incorporated to level up the product as part of the [ redirection ]?

Yes. I'll actually emphasize the point that you're making, Samad, which is we have had a playbook that has worked, which is we take a hub, really understand customer need in that particular area and we pour core product innovation into it and we relaunch or launch a set of futures that resonate well. You saw us do this with Marketing Hub a couple of years. You saw us do this with Sales Hub [Audio Gap] when we launched custom objects, conversation intelligence, more upmarket-related governance and [ precision ] features. And now we're doing some very, very similar [Audio Gap] hubs. And so for us, it's been a matter of we understand the playbook. We know what our customers [ want ], how do we prioritize our investments from a product perspective that can have outsized impact for our customers. So in Q1, we relaunched Service Hub with a number of features. [ Audio Gap ] We peel back and look at like what has changed in service and what expectations our customers have. Similar to marketing, there is a need for omnichannels [Audio Gap]. It's no longer just about mail or chat. It's about multiple channels [Audio Gap] a very fragmented space. Second thing that we constantly deliver is that support organizations tend to struggle with not having a connection to what was [Audio Gap] in terms [Audio Gap] connection to sales is that's where having a platform like HubSpot lies, certainly, features that we launched, but it's value having marketing context [Audio Gap] context for a agent that actually our [Audio Gap] customer, human. That's what we are trying to deliver on an authentic [Audio Gap] our customer [ deliver ]. So from a product strategy perspective, our strategy for [ Sales Hub ] is to deliver a modern support center with omnichannel support and level of AI embedded into it, so that ticketing routing, those kind of things [Audio Gap]. That's exactly the areas that [Audio Gap]. Overall, it's been just about 2 months since we relaunched [Technical Difficulty] [ park ] tickets. That actually shows that our customers are getting value out of [Audio Gap] launch because [Audio Gap] goes up, that's when we value, see pipeline or [Audio Gap] hub, service and our certain marketing customers in the pipeline. And so we're getting good, positive feedback. I think it goes back to we operate in very large markets with very low penetration, which means when we understand the needs of the customer, when we drive product innovation, then we have the opportunity to build a $1 billion business.

That's helpful. So when I think about one that has come out of the gate hot, it's operations oven. And I'll be honest with you, I understand marketing, I understand sales. I think I do at least. But I think operations is a newer area, where you guys have almost kind of carved that out and productize something that we haven't really seen other software vendors do. So can you help us maybe understand how your Pro and Enterprise customers are using Operations Hub? And what's the value-add of the solution just for somebody who doesn't maybe understand [ resonate ] or touch or feel the product like that before?

I think I completely get the point, which is marketing persona is so well [Audio Gap] everybody knows what their job is, [Audio Gap] else they have a number, they got to get it or they have to deal with a lot of the customers -- customer calls. . So it begs the question on what [Audio Gap] actually delivering. And persona is really a business operation analyst, sometimes also called rev ops analyst. That's what small and medium businesses. It happens to be the case in enterprise as well. So over the last decade, I've had the opportunity to run some of these operations, but the role of operations has really become critical in the front office. So what do they do? Operations team will typically be responsible for bringing the data together across all of the point solutions that they have. Their job is to take the data and automate it, so that more and more things can be driven in an automated manner rather than a manual manner. And their job is to bring insights to the Head of Marketing, to the VP of Sales, to the Head of Customers in terms of how they drive growth. And it's become harder. Their jobs have gotten harder because mid-market company has hundreds of point solutions across what they do in their enterprise stack, and larger companies have even more. And so their jobs have gotten harder over the past few years, which is why we launched Operations Hub last year. And specifically, look at what Operations Hub does, it's really bringing all the data across the small and medium enterprise in HubSpot. It allows our automation, programmable automation is [Technical Difficulty] still key burden [indiscernible] feature for our Pro [indiscernible]. All it does is it takes the data, drives automation, triggers those automations and [Technical Difficulty] of an operation analyst. And then in the Enterprise tier, we have advanced reporting and insights and data sets [Technical Difficulty] there, which allows for an operations analyst to [Audio Gap] publish the data to everyone else. And so this role, this persona and the job that they do for mid-market companies, actually that's the reason why Operations Hub has taken off both our installed base and as part of suite adoption.

I think we have time for maybe two more questions. So one for you, Chuck. Just net expansion, it's remained at elevated levels. How should we think about gross and net expansion just with the different product cycles but also factoring in maybe the demand environment that we're mindful of?

I'll get this one. Yes. I mean -- so we talked about that 110% plus on the Q [Technical Difficulty] call up from the 100% that we've been operating at for the longest time. The ingredients for net revenue retention are actually quite similar to ASRPC. I think the core building block of gross dollar retention moving up from what had been in the low to mid-80s to the high 80s is an important factor in that 110-plus. And then of course, landing larger deals, it's the cross-sell of into the installed base. It's more seats. It's more contacts. They're all pretty equal in terms of their contribution that gives us confidence that, that 110-plus is the right way to think about it.

Great. Yami, I have a very tough curveball question for you. And I know that I didn't send this to you in advance because I couldn't have, actually. . You are in a very tough position as CEO of HubSpot. You live in the Bay Area in the Golden State Warriors and the NBA Finals. And you're the CEO of a company that is based in Boston -- I guess, Cambridge. Who you got? And how many games? And how are you going to manage this? Are you rooting for a tie?

Warriors all the way. I, in fact, bet a bottle of wine with Brian Halligan that Warriors are carrying it through.

All right. Well, there you go, you have it there, folks. Thank you so much for joining us. As always, we appreciate your time and look forward to seeing you at the rest of the conference.

Thank you so much.

Thanks, Samad.