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

All right. Thanks for joining, everyone, today. I'm Parker Lane, software analyst here at Stifel. And joining me is HubSpot CFO, Kate Bueker.

Hello.

And Chuck MacGlashing, VP of Treasury and IR. Thanks for joining.

Thanks for having us, Parker.

Okay. Really appreciate it. Let's just kick things off. Everyone kind of knows HubSpot. You've been around for a while, but everyone is worried about the macro environment right now. Remind us what you said in your earnings call last month, what you're seeing from inflation, labor pressures, war in Ukraine. I think there was some hesitancy for some customers maybe in Europe, but give us the lay of land for HubSpot right now and what you're seeing for the rest of the year?

Yes. I am surprised that we get this as an opening question. It is definitely on the minds of many. You will remember, we announced earnings at the beginning of May, and we were very purposeful in trying to share as much as we could around the current environment at the time of earnings. And what we did say on the call was that we had seen some pockets of deals taking a little bit longer, in particular, in EMEA. I would actually call out maybe 2 geographies within EMEA, Nordics, in particular, and DACH. And what we said was, things are just taking a little longer, right? So an extra call, an extra conversation to see the deals close.

Yes.

Yes. I think what you've seen -- I mean, we were -- so we were at the beginning of May. I think we were probably relatively early in making that statement. I think what you've heard from others as the earnings season has progressed is similar messaging. And we, like all, are looking very intently and paying a lot of attention to what's happening.

And how are those trends comparing with the existing customer base versus net new customers? I mean, you have existing customers that have been with you for a long time. You're pretty critical to their workflows. How is there -- is there any differentiation between the way that they're thinking about their investments?

I mean, as we talked about it, I don't know if that's a little...

You're very powerful there, Chuck.

Yes. I might want to turn down the volume a little bit on that one. As we talked about it through the earnings call, which was, of course, in early May, the thing that we talked about was that gross retention rates had held up well year-to-date. And we felt good about that given the value that we're delivering with the platform. We, of course, showed a net customer addition number that was a little bit above 8,000 customers, which is quite healthy. And overall, to Kate's point, I mean, I think we're paying attention, close attention to the environment. May and June matter for Q2. And of course, there's a lot that can go for us and against us in the back half of the year depending on what happens with inflation and interest rates and the war in Ukraine and everything kind of in between.

Yes. So HubSpot has been around a long time, but this is fundamentally a different company than it was during 2008, 2009. You've invested a lot in areas outside of marketing. How do you think the company performs in a recessionary environment? I mean, it's, again, a very different customer base even than what you had back then.

Yes. I mean, I think you're making a really good point, Parker. The company is very different. I would just start by acknowledging like if we see a recession, we are not immune, right? I don't think anyone is immune. Everyone will slow down. We will slow down like others will. That said, we are in a very different place. Like if you turn the clock back 5 years, we were a marketing automation company, right? Today, we are a CRM platform company, and 60% of our customers are using more than one product. People are running their business on HubSpot, right? And I think that is even more important in an economic downturn, like staying connected with your customers is foundational. And so I think we will not be immune, but there are reasons to be optimistic. I think our platform provides a great opportunity to consolidate on to HubSpot. I think if you think about the value we deliver, the ease of use we deliver, it's -- there are some opportunities there as customers are making decisions on their -- about how to optimize their own businesses. And I think HubSpot provides a great opportunity as a solution.

And we've always heard these larger players, whether it's Salesforce or Adobe, talk about the platform approach for the enterprise market. Why is HubSpot really the first company to sort of replicate that for the SMB space? And how much receptiveness do you see in that market? Is it very healthy for the full platform? Or is it still a point solution type line of thinking for these customers?

Yes, it is interesting. I think that the mid-market, and Chuck, please dive on in here. The mid-market is foundationally different than the enterprise market in terms of the sophistication of the customers and then the solution that you provide. That said, the problem is foundationally the same, right? When you hear enterprise software companies talk about the platform, it's with a goal of providing a consistent customer view, consistent customer data set, a way to make the sort of experience that their customers see, like seamless, right? And we -- our aim is the same. And our customers want to be able to provide that same experience for their customers. I think the difference in the mid-market is that our customers don't have big teams of IT professionals that can kind of stitch everything together. And so we've taken an approach that is an organic approach to developing a CRM platform with ease of use like at the forefront of what we're trying to deliver. And you can get up and running and get value on HubSpot in weeks, right? It's not a month-long implementation process that involves a big IT department or a bunch of consultants. Like you can get value and adopt and use our platform relatively easily.

Yes. I think that's like a crucial point or crucial 2 points, which is it's not to say that like small and medium businesses out there ever wanted to cobble together a bunch of point solutions to build out their front office and scale up and grow. It's just that there wasn't a natural platform to be able to do it. We've invested and focused quite heavily on building that out from marketing to sales and sales to service and, I think, CMS and operations hub and more recently, payments. And then, of course, have invested quite heavily into the ecosystem that surrounds HubSpot, so that customers can plug and play. That has created this platform that allows mid-market businesses to standardize on it and grow over time. That didn't exist 5 and 6 years ago. And so I think it's that kind of focus -- focused investment on that 2,000 segment and really trying to be that mid-market platform for these customers that has been an important piece of the equation.

Yes, makes sense. I mean, ease of use, time to value, very important to this core market. How important is it just on the cost savings side though? I mean, you offer the full CRM suite at somewhat of a discount to buying these individual solutions. How often do you hear that cited as a reason that customers would choose to go with the full suite?

I mean, I would say it is a reason, but it is ultimately our ability to help our customers grow their businesses that are -- that's going to drive the decision-making. I think what you have seen from us is a pricing and packaging strategy that is like make things super simple and a complete no-brainer at the starter tier. We introduced the Starter Growth Suite at $50. It includes everything. And it is easy to buy, easy to get started on the acute problem you're trying to solve. And then it makes it really simple to grow over time on HubSpot, whereas at the professional and enterprise, we are focused on delivering value. You see us innovate continually at the top end and push value down. But ultimately, it is that sort of, -- do we serve the needs of our customers, that is the decision-making factor.

I think more and more, too, it's less about the price of the software than it is the total cost of ownership and the surround sound that you have to wrap around some of these legacy platforms. And they not only get them up and going, but to maintain them, right, that a 25- or 50- or 75-person company simply can't afford. And if we are heading into an environment where budgets are going to be pressured and it's going to come down to having to make a trade-off between adding an engineer or adding a frontline sales rep or somebody else internally, the manager IT instance, I suspect that, that continues to move more in our favor.

Yes. Can you remind us what the numbers are on multiproduct today? And then when you look at the full CRM suite, I mean, how do you expect that to trend from a penetration standpoint? It makes a lot of sense in the starter market to go all in at that price point. But when you look at Pro and you look at Enterprise where the ticket is a little bit higher, do you think you get the majority of the base in the full CRM suite eventually? Or is that something that's far downfield?

Yes. Look, I would say today, we have 60% of our installed base that is using 2 or more HubSpot products. We have, as we shared on the earnings call, 25% of professional enterprise that are on 3 or more. So there is a lot of opportunity to continue to expand the use of a broader set of products within that Professional and Enterprise tier. Look, I think that there's a lot of opportunity for each of our hubs to become big businesses over time. They're in big, fast-growing markets. That said, there's a lot of magic in some of the combinations, and we're starting to see that more and more. When you look at marketing and CMS, there is just -- there is a natural synergy across those 2 to drive higher organic traffic. And we're seeing that in our sort of CMS plus marketing customers relative to CMS alone, right? When there's some natural synergy across marketing and sales, and we're starting to like get the data and be able to see that. You get higher growth of deal creation and closed -- won deals in customers who have marketing and sales relative to just having sales. And so I think increasingly, what you're going to see is customers realize the benefit of sort of the breadth of products and how they work together.

I mean, my personal hope is that it's a long ways away, right? Like we have 140,000 paying customers, a decent percent around 2 or more products. But I think we're a good fit platform for many millions of businesses out there. And so the personal -- my personal hope is that we're adding lots and lots of single product customers where it works for them and cross-selling them new products when they're ready and that we're adding multiproduct customers upfront where it makes sense.

Going back to this point of single product customers. Again, 5 years ago, you're mostly a marketing automation company. What do those initial lands or hook points look like today? Are you starting to see more and more sales-only, service-only, maybe even something like operations or CMS?

Yes. I mean, 5 years ago, it was, 90% marketing only, maybe 10% sales, where sales is more of a cross-sell into the existing installed base. Today, it's, 1/3 marketing only, 1/3 sales only and then 1/3 folks buying 2 or more products upfront. So we've diversified with, I would say, 3 primary front doors into HubSpot.

And that's in the Professional and Enterprise.

Yes, that's right,. I think we've invested quite heavily into Service Hub. I think it's going to take some time, but that's obviously a very large market. I think that product, particularly the Professional layer, is quite good. And I think over time, the hope is that we can continue to sort of evolve on that product and open up -- the services market is a front door into HubSpot in the same way we did for sales, although it did take for -- some time for that to play out.

Yes. I would just say the biggest change that I've seen over the last, I don't know, I'm going to go with 24 months, but I'm just making up a number, is that CRM is really like a foundational part of the initial conversations, whereas historically, it was very much a marketing-first motion. Now you hear our prospects really talking about adopting the CRM platform and the importance of CRM in their decision-making.

Going back to your point on Service Hub. It's one of the newer solutions on the platform. You recently relaunched that. What went into the relaunch? What new features did you bring to market? What's the reception been from customers so far?

And maybe I'll start and dive on that because I will say that the Service Hub relaunch has had a lot in it. And so I'm sure I'll miss something here, but the relaunch of Service Hub had many just like foundational pieces in it that really move the needle. Like prior to the relaunch, I think we were a good solution for small companies, for companies who really didn't have a service solution or running it out of Excel or something else. And I think this is really a set of features and functionality that make us a legit service opportunity for customers, not in the like 1,000-person companies yet, but in the hundreds of people companies. And there are a few things. We launched 3 core features as part of the relaunch. One was SLAs. The second was mobile inbox, and the third was inbound calling. And just prior, we had announced a customer portal. It went to beta at inbound. But those 4 things really are like a foundation for a real like service desk capability. And the reaction, quite frankly, has been really strong. I think a lot of you get some feedback from our partners. We pay a lot of attention to what they're saying to us as well. And all of the feedback from partners and customers has been very positive.

Great. I want to pause real quick and see if there's any questions here in the audience before continuing. We've got one here in the front. Go ahead. Do we need a microphone?

[indiscernible] Okay. So if we go back to the beginning of the pandemic, it was -- the bad news was there was a lot of lessons to be learned about customer retention and what happened to churn rates and recession, and then that reversed itself really, really quickly. But you hadn't really think through how to run the business in a slowdown. So if I just think about the 2 kind of key levers of the business, one being marketing spend for any customer addition versus -- and retention; the other being ASRPC and pushed for product to the installed base. What's more important to you as you go through, what happens? How you want to run the business if the world does slowdown here?

I mean, I'll start, dive on it after. The -- I would sort of take us back to first principles maybe in how we are thinking about decision-making at the very onset of the pandemic. And things -- ultimately, the pandemic was a mechanism for a reacceleration in our business, but we did not know that, right? No one knew what was going to happen. And the initial, like March, like life stopped. And we sat back and said like what are we going to do for our customers, our partners and our employees. And those like key sort of customer-first, partner-first, employee-first mental model is just like a foundational part of our culture. And that's how we made decisions. And so we did a bunch of things to make it really easy for our customers to stay with HubSpot, get started with HubSpot. We -- the -- I would say notable among those were we armed our frontline team with a bucket of money that they could use to make short-term deep discounts for our customers to stay on HubSpot. We created the Starter Growth Suite at $50 as a mechanism for our customers to stay. I mean, this is like half the price of your -- or maybe 1/4 of the price of your cell phone bill like stick with HubSpot. And we're delivering a ton of value in that Starter Growth Suite. For our partners, we prepaid 6 months of commission so that they didn't have to worry about liquidity in this initial, like real moment of uncertainty. And that was a very, I think, well-received action on our behalf. And then with our employees, the main goal there was very much around providing some stability, right? And we very much tried to do that. I think the actions would be different, right? I don't think that anyone feels like if we do go into a recession, it's going to look like in terms of the speed of decline in recovery, the COVID turn. But I think the foundational approach to making sure that we're doing the right things for our customers, making sure that they can stick with us for the long term is going to be the same.

Yes. And I think like in terms of that trade-off between new versus installed base or net new customers versus ASRPC, it's going to be grounded in the unit economics that we're seeing, right? We're going to go after as much new opportunity as we can but make sure that it's profitable growth. And from an ASRPC perspective, there are going to be tailwinds to multi-hub deals we're adding and larger ASP deals that we're adding and the cross-sell of newer hubs in the existing installed base. But then there'll be headwinds like seat downgrades and customers cleaning up their marketing contacts to save a little bit on their bill. And so I think there'll be a healthy amount of pressure on both sides. But we, of course, will remain committed to growing as fast as we can through that with the lens of trying to do it profitably and in a way that is going to continue to throw off cash and support our growth for not just a year or 2 or through whatever the amount of quarters that the recession is, but over the next 3- to 5-plus years.

And just maybe one quick follow-up on it because, Kate, it's a great reminder that the economic turmoil from that recession, from the COVID-related recession was a real accelerator for your business. When you look back on that, do you really think that, that was just this wake-up moment of digital transformation? Or do you look back and say, "Well, everyone had to do something, and there's a lot of infusion from the Fed, and therefore, there's a little bit more capital to go around," and maybe it pulled some things forward? Now that you've had some time to sort of reflect on that moment, was that a pull-forward? Or was that the digital transformation moment that's going to last for 5 years?

Look, I think there was an acute need. And I think it sped up decision-making and the transformation for a lot of companies across a lot of things. But I think what we saw over time was that you may have made a quick shift. And then as you recognize or we all recognize, life is not going to just go back to the way it was, there was a move to like how do we finish the swing on this in a way that sets us up for a really, like, effective, stable digital-first front office, right? And I don't think that's over.

The other thing I'd add to, [ Tom ], is that we obviously had the benefit of knowing what the plan was coming into 2020. There wasn't this pandemic in December of 2019, January of 2020. We knew Marketing Hub Enterprise was going to be refreshed, knew that, that was going to be a big deal. We saw CMS Hub on the road map, and that, that would be coming out in April. And so we thought coming into '20 that it was going to be a really good year. Of course, the pandemic changed some stuff in the March, April, May time frame. I could actually argue that there maybe wasn't so much a pull forward as there was a push out of the first half and into the second half of 2020 that exacerbated some of that reacceleration that we saw. And I think you can trace back now with the benefit of a couple of years' worth of data some of the reacceleration that we saw to the product investments and things like main sale that we were making in that sort of '19 and 2020 time frame that has allowed us to open up a lot of opportunity, both at the lower end of our market with our starter SKUs but also with the way that we sell our products in the 200 to 2,000 segment. So I wouldn't have you walking away thinking that we were in that sort of top decile of companies that saw this massive reacceleration because everybody was buying first and asking questions later and have come to the other side of that. I think we're probably more towards the middle in terms of the beneficiary group.

Great. Any more questions? Got one in the back there.

Can you just maybe help us a little bit with kind of backlog and a little explanation on the VAR? And what's the pricing like if that's what about, I think, about 40% of sales right now through a third channel. Is that right? Can you give some color around that for me, please?

Sorry. Could you repeat the first part of that question?

Yes. I'm just trying to figure out the makeup of the sales mix right now and how much of the business because it's kind of growing through third party, I think the VAR, can you just give us some color on that and how that's working? Are they integrating that into a solution? And is pricing different? And is it booked differently than you do on a typical deal?

Yes. You want to start and then...

Yes, maybe I'll start. You can add some color. So you're right, it's 40% of our overall revenue. It's actually moved up a little bit relative to 5 years ago, which a little bit surprising to me personally given that the vast majority of our partners started out with us on the marketing side of the equation. There were marketing agencies, website redesign firms. And I think there was this open question with our move horizontally with the platform and into sales and service and CMS and operations and now payments on whether or not that channel would keep up with us, right, keep up with the direct side. They have, right? A lot of them have made the move from marketing into sales and sell multiproduct. We see a pretty significant percentage of our partners that are actually able to sell the entire CRM suite and service our customers in that way. And quite frankly, I think it's an important part of the secret sauce that is HubSpot and what separates us from a lot of our mid-market competition, having these partner agencies that resell our software, but wrap retainers around these customers and serve as extensions of their entire front office to help them scale and grow is just a crucial part of the growth algorithm for HubSpot and quite frankly, for our customers.

In terms of your margins [indiscernible] you're getting more sales from the [indiscernible] the overall margin?

Look, I would maybe answer it this way. Like we -- the unit economics across direct and partner channel are relatively similar. I think there is a bit more cost on the partner side, but the retention rates tend to be a bit better there as well. I think what I would add to Chuck's comments are, in the last -- as we've moved up markets the last 12 to 18 months and had a little bit more success at that enterprise, we've really doubled down on the partner channel in a couple of ways. One is really around education, where things like Operations Hub are super fits for that partner channel. If they have like the deep understanding and knowledge of how to do programmable automation, for example, or create these real data sets that our customer -- joint customers can use in reporting and insights. And then the other place that we've really spent time over the last 12 to 18 months is around alignment, right? I think what you would have heard a couple of years ago from our partners is like love -- I love HubSpot, but sometimes there's this conflict where the direct and partners are kind of running into each other, and there wasn't the right set of aligned incentives for them to really partner up and execute together. And we've -- I don't think we're perfect, but we've really fixed that to some meaningful extent over the last 12 to 18 months.

Any more? Great, about 1.5 minutes here. So I just want to get...

Like blinked.

Yes, exactly. I just wanted to touch on payments really quickly. That was a big topic at inbound last year. Very measured approach to distribution on that. You're trying to sort of tinker with it, figure out where you can get some initial wins and some success. What does that look like today? How has the progress been on that so far? And remind us when you expect the contribution from that solution to be meaningful?

Yes. Great. I'm happy to talk a little bit about payments. So just like level set, of course, the public service announcement is going to be like 2022 as a year of learning and iteration for payments. I will say that every time I have a conversation with people. That said, like we are very pleased with the trajectory of the payments business. We came into payments with 2 core sort of theories or hypotheses. One of them was that B2B customers or B2B companies like don't today largely sell online, and they actually want to, and that has proven to be true. The other one is that there's value in combining payments information and CRM to enable other actions. And both of those things have been like reinforced in the feedback that we've gotten from our customers and the sort of pace that we are seeing in payments.

Perfect. Well, I think we're out of time here. So please join me in thanking Kate and Chuck from HubSpot.

Thank you.