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

Glad to be welcoming HubSpot to the conference. We're very fortunate to have CEO, Yamini Rangan on with us. Kate Bueker is not here, but we have Chuck MacGlashing here from Investor Relations. Thank you both for joining. I was joking with Yamini. This is not the first time we've had Rangan on stage at the conference. Delighted to have you here and look forward to many more.

Thank you so much for having me here, Brad.

Absolutely. And please say hi to [ Kate ].

Yes, he wished the conference well. So he was all thinking about the conference this morning.

Absolutely. Thanks so much for joining, again, looking forward to the conversation. So why don't we just start, Yamini, you've been with the company now for 2 years. You came in as Chief Customer Officer. A year later, you were -- you stepped into the role, took the reins as CEO of the company. What was that experience like? And now that it's been a year behind you in perspective, what are some of the perspectives you could share with us in terms of what surprised you coming into the role, what was the experience over the course of the year? And I'm sure it was exciting a company's dynamic as HubSpot that you're taking over as CEO to run. Just curious to get your perspectives on that whole experience.

Yes, absolutely. Definitely, a roller coaster, it has been in the last -- I think I've been here now for 2.5 years. And I would say a lot has happened externally in the environment and the customers that we serve, but also internally within the company. And look, I joined the company because I thought that there is such a great opportunity for us to serve small and mid-market customers that are going through a digital acceleration. Now a little did I know that it was going to just get accelerated as we entered the pandemic. I joined couple of months before the pandemic. And so part of what has been great as well as the pricing is the level of change that has happen within the market. We've been talking about digital transformation within small and medium businesses for almost a decade. And what we saw in the last 2 years is that almost every company needed to go from just thinking about being digital-ready to going digital-first. And we had the platform products, the team, the vision and the leadership. And so we just were able to meet the needs of that moment. And then personally, it's certainly been eventful over the last couple of years. And what I've recognized is the level of change that is happening both externally as well as within the company. And with the level of change, you need clarity. And so part of my focus has been bringing clarity to our strategic priorities. We want to be the #1, CRM platform for scaling companies. And so we've really focused the whole organization on a set of priorities and communicating to them the importance of the areas that we are investing for our customers. So roller coaster ride, but clarity is really the most important theme out of all of that.

Absolutely. That's great. And we think about digital transformation kind of as a broader term, it's a real trend. What are you hearing from your SMB customers with regard to digital transformation in the front office? We heard from Bill.com earlier today. They're seeing a tremendous modernization of the back office; this integrated suite for back office systems. You guys are in the forefront of the front office. What are you hearing from small businesses with regard to their initiatives for digital transformation in the front office?

I mean it's gotten accelerated, but it's nowhere close to getting done. We saw over the last 2 years, marketing sales, service organizations that needed to get connected with their customers, that's one part of the journey. But more importantly, if you take marketing, there's so much that has actually changed in the types of channels that marketeers need to think about. There's so much that has changed in terms of support in providing omnichannel support. And so -- at the time of digital transformation, there's also significant expansion of the channels that's happening within small and medium businesses. More importantly, what is maybe slightly different about the segment that we serve is that our customers don't have a very large IT base. We don't have a lot of developers that are sitting, and there is a need for very quick implementation and time to value of any technology and certainly front office technology that they think about. And so given those 2 factors, we find a lot of the conversations with our customers really accelerating towards having a platform for a modern front office. That's really the biggest thing that I'd say.

Absolutely. And in the public markets, when we think of front office digital transformation, we think of Salesforce in the Enterprise and what they've done, building an integrated stack across the 3 pillars of CRM, sales, support, marketing and then everything else around it. How is their strategy the same or different from yours and in your vision for a company that has been built to address the needs of the mid-market? What are the similarities to what Salesforce is doing in the Enterprise versus HubSpot in the SMB?

Yes. I think that's a great question, Brad. So I started in CRM a couple of decades ago at [indiscernible]. And since that time, there has been a playbook for CRM, which is get started with one area, maybe that's SFA and then expand to other areas through acquisitions. Expand into marketing, expand into service, expand into operations, other areas through a series of acquisitions. Now we think that's a fair enough label for companies to grow. But if you look at the choice that HubSpot made very early on, which is focusing on small and mid-market businesses. And going back to the point I made before, those companies don't have very large consulting streams or large technical teams, which means that cobbling together a whole series of acquisitions and then providing something for them does not work. What works is a streamlined, cohesive all-in-one platform that is quick to implement that is easy to adopt and easy to buy. So the playbook that we've taken for CRM for scaling companies is really to craft the solutions, to craft the CRM platform where between marketing, sales and service, it's a level of cohesion and a level of insights about customers that is easy for our customers to get. And that is what resonates within the market. And I'd say that mid-market, we really focus on this mid-market because we look at where we have the best product fit as well as the go-to-market fit and the approach that we have taken truly resonates within that segment.

Absolutely.

One thing I would add to, Brad, is that it's not enough just to have the platform at one segment, right? We often hear from our customers, too, many B2B customers is that the 15- and 20- and 25-person companies have aspirations to become 100- and 500- and 1000-person companies. And so they want the ability to scale with the platform over time, which is something that HubSpot can deliver on relative to a number of the other point solutions that exist down market and support them in a way that we support ourselves, right? Like HubSpot runs on top of HubSpot, we're a 6,000-plus person company here growing headcount quite fast with sophisticated [ needs ], and that's a critical piece of the equation.

Absolutely. Absolutely. Thank you for that, Chuck. You mentioned platform. And then when I think of HubSpot, I think of a platform, it's rare that we see companies that actually fit into that category. When I also think of HubSpot, I think of the strength of the company is developer-centric with all the products you put out -- I've seen the evolution of the company over the last several years. It's been exciting to see the expansion in these other categories. What is it about this platform and the organization that you have at HubSpot that enables that rapid deployment of all these categories? I mean you're going from one category to another. And then within each category, you're adding all these new features. So perhaps you could elaborate a little bit on what is it about the HubSpot platform and the organization that you have in place that is able to deliver on that type of expansion.

Yes. I like the way you framed it. I think if you looked at HubSpot maybe 5 or 7 years ago, we were a marketing automation company that served the need within a Pro and Starter tiers, and we have transformed to a CRM platform where we offer best-in-class products across marketing, sales, service, CMS as well as operations. And over the period, we've kind of gone broad in terms of the product portfolio, but we've also gone deep in terms of the level of features, functionality and sophistication across the Enterprise tier, the Pro tier as well as the Starter tier. Now fundamental to all of this is how we build products. Our application hubs in each of the hubs that I mentioned sit underneath a framework. We call it the HubSpot framework. And think of it of the framework as building blocks or Legos. So we talked about how CRM companies can grow through acquisitions or by crafting. The way we have crafted it is through our platform, which is the framework, which are like Lego blocks. So you can think about Lego blocks being in common shapes and standards, but then you can build very quickly if you want to build a bridge versus skyscraper or another building, it's easier to build. That's the same way we build our platform. So a clear example of that is automation. Automation is one of the core things within our platform or the framework that we talked about. Now that automation helps with marketing, and it certainly drives a level of sophistication within marketing automation. But we've taken that same primary color within our platform and enabled sales automation of Workflows. We have enabled service automation of Workflows. So the power really from the HubSpot platform comes from having these Lego blocks, which we call as primary colors and then driving features in either a new product or a new tier of a product. This is how we launched Operations Hub last year. We launched it in April, and we've seen significant traction. That's because we're able to take the foundational framework and then drive features and functionality across. Another part of the platform story is really the level of integrations and what we've been able to do with the ecosystem, which drives the level of extensibility. You've seen us talk about this, we have nearly 1,000 different applications and integrations within our platform and ecosystem. And that drives a lot of value for our customers because our customers want not only to adopt an easy platform, but they also want to be able to have an ecosystem that's driving and being able to consolidate across their data sources. And so we've been able to do both with our platform investments.

Absolutely. That's exciting. Thank you, Yamini. And when I think of HubSpot's other strength, I think, of the channel, and you alluded to this earlier, which is these are small businesses that don't have that expertise to run the marketing budget and they need that expertise. I think it'd be helpful if you could provide a little bit of color on who you work with to help SMBs with that in the channel.

Yes. I think you're right to point out the strength within our partner channel. So if you think about the go-to-market, we have a direct sales team, and that team obviously goes and talks to our customers and discovers for their needs and serves them well. And at the same time, we have a partner ecosystem that's really thriving. There are close to 5,000, 5,000-plus partners within the ecosystem. And they are going through a similar transformation as we have gone from a marketing automation company to a CRM platform. Our partner ecosystem has also gone through a transformation from marketing agencies to CRM implementers and implementers of technology solutions across the front office. And so they've been really significant in helping us scale both from a selling as well as a servicing motion. What we find is that partners who understand the value of our entire platform and are able to discover for all of the pain points that a small-medium business has, they're able to onboard our customers well. So we see that in engagement early on. We see them continuing to drive value for our customers, which means the customer dollar retention characteristics as well as revenue retention characteristics for partner touch customers is much higher, and they are able to continue to provide that feedback into our direct sales and product organizations so we can drive improvement throughout the system. And so -- we've invested pretty heavily within the partner ecosystem, and we're seeing them continue to evolve and grow, and that's a big part of our overall go-to-market expansion as well.

I would add 2 other things that they help us do that I think are really important for our customers. One is they help us to verticalize, right? Like many of the partners will specialize and certain end segments that are obviously important to the customers that are joining, and they also help us to go into markets where we may not have a direct presence, right, like emerging markets where we don't have infrastructure, we don't have feet on the street to sell and support those customers. And we've seen, as we've evolved from a North American-centric company based out of Cambridge into 8 international locations and near 50% of our business international, that our partner channel has helped to sort of lead that charge into those markets and allow us to deliver really strong unit economics, right, where we may not have the infrastructure in place out of the gate.

Makes a lot of sense. Thanks, Chuck. That's great. And last earnings call, impressive results, you raised the outlook on a constant currency basis for the full year, 36.5% from 35.5%. What gives you the confidence to raise that? Where are you seeing the incremental strength in the business?

Do you want to take that?

Yes, sure. From a few places. I mean, first and foremost, HubSpot has been executing at a pretty good clip for a few years now. And at the end of the day, we had a strong first quarter. We had the benefit of seeing the way that the business acted in both April and into early May. We're mindful of the fact that the economic picture could change. But I don't -- the one thing that I don't think changes is the strength of our CRM platform, our competitive position in the market, our go-to-market motion and the execution around that. And so I think that's kind of the shorter version of it. The reality is we also have a guidance framework that's been around for 7 or 8 years now. I think it served investors well in terms of the variables that it considers and always leaves open the possibility for changes to variables in a given year. And so I think the combination of having that first quarter under our belt, having some visibility into the second quarter, feeling strong about our position in the market, the opportunity ahead and putting forth, I think, a prudent set of financial guidance that incorporates the ability for some variables to change is the way that we got there.

Sure. Absolutely. Great. Thank you for that. And Yamini, when you think about the addressable market here, it's massive. There's 5 million U.S. SMBs. Is that the right number we should be thinking about? What is it going to take to consolidate that kind of market opportunity? I mean you have 100 -- roughly 190,000 customers today. So a fraction of that...

[ 140,000 ].

Sorry, 150,000. So again, a fraction of that, the TAM here is multiples of that. How do you achieve the kind of scale in order to kind of get to multiples of that, just given the size, the sheer size of the U.S. SMB market that you're addressing?

Yes. And I think the numbers that you're talking about is U.S., Brad. I think we operate in multiple countries as well. And so the TAM is massive. And if you look at our overall strategic priorities, look, we want to build world-class products in marketing, sales, service and commerce. And each one of those are mega markets with fairly low single-digit penetration, which means that we are early stages in terms of what the opportunity is, both in U.S. as well as in international markets. And so the way we approach it is we make sure we understand the needs of these customers and the maturity that these customers are in. If you take that SMB number that you talked about in U.S. and also apply to the rest of the world, there's 1/3 of our customers that are very, very early in terms of their maturity or using digital tools. They're still in the world of Google spreadsheets, Excel spreadsheets and point solutions. There's a third, which I'd say are they attempted to go the digital route, but they are still using homegrown solutions and unconsolidated point solutions across the board. And then there's a third that have tried legacy products and are in the process of getting value or they're looking for more value from some of the legacy investments they've made. And so we look at where the maturity is across our installed base, and we want to be a leading CRM platform across each of these markets. And so the strategic priorities and the investments that we have driven this year and where we are focused on as a company, really tied to really driving that market opportunity. So one, we want to build a world-class product. You saw us in Q1 announced Service Hub, and we relaunched Service Hub as well as we crossed the $1 billion ARR mark in terms of marketing. Both of those really drive to our strategy of building world-class products that can be adopted by our customer base. Second is we want to double down in terms of our go-to-market both at the low end of our segment through a product-led motion and at the upper end of the segment through a much more value driving rep-driven motion. And this is what we just talked about in terms of our go-to-market investments. Third, we believe that its -- B2B is still really nascent in terms of commerce. And we think there is a really big opportunity in terms of commerce. And so we are investing both in our product as well as our overall platform to drive that commerce. And finally, we want to build a sustainable organization that's focused on environment but also diversity, and we want to be an enduring company for the next generation. So there's -- all of our investments are aligned to those 4 strategic priorities that drive our growth strategy for the next decade.

That's exciting. Thank you, Yamini. And maybe we could shift gears to the core business marketing that the company got started. We saw a nice acceleration in the business through the pandemic and in our model to sustain this kind of high 30s level. You reported high 30s ARR growth at the last Analyst Day. That's up from 20% in the prior year. So we've seen a nice acceleration in the core business. What has driven that? I think many thought perhaps that wasn't sustainable, and yet we've seen this acceleration. So what's going on there?

Yes. I mean marketing is vibrant right now. I can't tell you like there's -- there used to be a time where there were a set of strategies that marketeers would use, a lot is changing and shifting within the marketing space. First off, there are new channels today, Brad, that did not exist 3 years ago, 5 years ago. So a marketeer within a small-medium business is thinking about new channels that they can leverage in order to reach their end customers. The second is what has been tried and tested in terms of SEO approaches in terms of organic search, they are getting so commoditized right now that, again, marketeers and CMOs are thinking about how they get through that digital clutter and noise and really get their message to their end customers. So a lot of innovation that needs to happen there. And then finally, marketeers more than ever or being forced to be accountable to their sales counterparts and service counterparts for quality of what they're spending and generating as [ needs and ] pipeline. So I think the marketing space has become really vibrant, and there's just a lot that is happening within marketing. So we're not sitting still. From a product perspective, we understand the changing needs of small-medium businesses, and we've invested a lot more in multichannel marketing. We've invested a lot more in customer journey analytics, being able to attribute campaigns across the customer journey is something that small-medium businesses need. So we're investing there. And then the constant need for automation as well as reporting. And so our marketing strategy has been all of that. And the level and pace of innovation that we have driven within marketing product continues to kind of improve based on all of the platform investments that we just started the conversation with. And so there's a lot that's happening there. In fact, TrustRadius, I love this, like TrustRadius puts out products that people love the most, and we've been rated pretty highly on that, and it goes to say that we've created a product that people really love to use and adopt that is powerful and easy at the same time. So from a go-to-market perspective, what we find within marketing and what has accelerated is really -- we are in almost every conversation within the small-medium business. If they're looking at marketing solution, a front office platform, then we're in most of those conversations, and that's been nice to see over the past couple of years. Still feels very, very early. There's just a lot more that's happened within the marketing space that we are excited about driving.

That's great. That's exciting.

One of the other things I'd add too is that what we often hear, and I know you picked this up in talking to some of our partners is, our customers no longer fully understand where marketing begins and ends and sales begins and ends and service begins and ends. They're buying HubSpot, right, which is a wildly different motion than 5 to 6 years ago when we were a single app marketing with 3 flavors, and you bought us for marketing automation. And it's showing up in the numbers, right? Like 1/3 of our gross customers do come through marketing only, 1/3 come through sales only. But now 1/3 are coming through that multi-hub channel where they're just buying HubSpot. They're not buying marketing or sales or service or CMS or Operations Hub. They're buying HubSpot, and that's the system that they log into in the morning as a business to grow their business, and it's the system they log out of at the end of the day, which I think, back to one of your earlier questions about the differences and the similarities between us and other platforms that are up in the Enterprise is something that we're moving much more closely to today than we ever were years ago.

That makes a lot of sense. And that's a great segue to my next question, which is Sales Hub, another tremendous success. I think at the last Analyst Day, 70% ARR growth, up from 60%, another acceleration. And you talked about the marketing and sales connectivity there as a key component to the value proposition. What's going on in that business? This was your second entry after Marketing Hub going into Sales Hub. What are you hearing in the sales department, do small businesses have a sales department? I guess the broader question is just what's been driving that kind of acceleration?

Yes. I'll say that there's been a fundamental shift, which is that our customers used to come in for marketing and then expand into sales. And over the last couple of years, they've come in as much for sales as they're coming in for marketing or more likely they come in for marketing and sales because it's the platform value proposition that Chuck was talking about. And so that's been exciting to see. Two big things that are driving what we are seeing in terms of Sales Hub acceleration. First is the product and pace of innovation within Sales Hub. 2 years ago, we launched something, and we introduced it inbound, something called custom objects. Now it seems like it's another feature. But what was fundamentally different about that is it provided the level of customizability for a small-medium business to quickly and easily model their whole business model. It gave power to them while still maintaining the ease of use. And since then, we've kept up the pace of innovation through Conversation Intelligence, through better Forecasting, through more automation, through Sandboxes. The list goes on. We have kept that level of innovation to serve the needs of our small-medium businesses really high. The second big change is that one of the most fundamentally difficult problems in the front office for small-medium business is rep adoption. It is literally the hardest thing to get. You can launch a whole bunch of tools, you can launch a bunch of like SaaS products, but to get the level of adoption from a frontline sales rep or a frontline support person is exceptionally difficult. And we have taken that particular problem, and we've made it our focus to get the rep experience within a small-medium business high. And a lot of times, when we talk to customers, they'll say, well, we were able to double and even triple the level of a sales rep adopting your tool over the point solution that we had or homegrown solution or a legacy solution that we had. And so those 2 factors in addition to the fact that our customers need to be in touch with their customers and therefore, needed to get through inside sales have been a powerful combination.

Absolutely. That's exciting. Great. And when I hear you say things like custom objects, Operations Hub, I don't think small business. I think these are the needs of more sophisticated mid-market firms. So my question is, and we heard this from the channel is that the company is moving up market, seeing larger deals going into more of that mid-market. Is there a limit? Are you being pulled up market? What's your view as to kind of where HubSpot is going within that kind of segmentation of SMB, mid-market?

Yes. I would say it's an intentional strategy. We're not organically getting pulled -- I think it's an intentional strategy to win a fair share of that 1 to 2,000 segment and the market that we are in. Again, the part of this is that a couple of years ago, we made some product investments, both in terms of marketing and sales. And those really made us a great fit for a mid-market company, a 1,000-person company, where they needed to get digitized. They didn't have years or months. They wanted solutions that were quick to implement and easy to adopt and easy to drive and we met the needs of the customers within that segment. What we have done in addition to driving the pace of innovation from a product perspective is we've made a number of go-to-market investments. We've made investments within our direct channel to bring the right profiles of sales reps and get them the right enablement. So they can now deal with multiple decision makers, which is not the same in dealing with a 10 or a 20-person company. So we've leaned into enablement of our direct sales team. At the same time, we have leaned into the product and the partner channel that we just talked about. And so the combination of having a product that meets the need of our customers and making go-to-market investments have really accelerated our wins upmarket. Look, HubSpot runs on HubSpot, and we're a 6,500-person company. So I don't think it's a product limitation. But in any market that we choose, we want to make sure that customers are adopting, getting value, and we are serving them as -- with a great customer experience. And so we'll be measured intentional in terms of where we focus our efforts.

That's great.

The other thing too is like, I wouldn't count like just because Operations Hub sounds more enterprisee or [ hear ] acronyms like CDP or sort of advanced features and functionality. Many of these small-medium businesses need these things, right? Like that is part of our secret sauce is democratizing these technologies for [ mere mortal ] businesses that want all of their data in one spot. And these Operations Hub as an example, sure, they may not need custom code actions and all of the advanced reporting that you get with our Enterprise SKU. But the bidirectional sync of data with our Starter version so that they can sync up all of their applications within their ecosystem and get that into the central repository that is their CRM so that they can report off of that is a hugely powerful feature that helps these businesses grow in scale.

Absolutely. That's a great point, Chuck. Thank you for that. Why don't we open up to the audience if there are any questions from the audience? If you do want to ask a question, please raise your hand. We'll get a mic over to you. Otherwise, I can keep going. Okay. One up here, please.

So there's a lot of reasons that these businesses probably need your services, right? So they're looking at their IT, their staffing issues, cost issues. How do you distill down that ROI to a customer when they're coming to you in either sales or marketing, right? What are the key considerations? Is it automation? Is it data? Is it a tangible cost save identification? Like what are those key points, selling points that the customer is looking for and that ultimately you can share with them to drive this uptake?

Yes, I think that's a fantastic question. I would say that -- if you want to distill down the problem for -- the problem statement for most small and medium businesses, it comes to a crisis of disconnection, disconnected systems, disconnected data, disconnected teams. And -- exactly, exactly. It has made this crisis even worse, and they are, therefore, challenged in terms of driving growth, and they are challenged in terms of driving productivity. And so for us, the conversations with our customers is understanding their landscape and understanding what is blocking their growth and what is blocking the level of productivity that they want to drive across their front office. And going back to what is the conversation with marketing and sales, how do you drive growth? Well, let's look at your top-of-the-funnel strategies that then drive value to your sales organization. What are you responsible for? And how well are you doing it from a top of the funnel as well as driving the right pipeline? And the most important KPIs, really or key performance indicators for marketing organization is top of the funnel converting into a sales qualified lead. We drive that conversation. We drive a lot of the automation and the data and insights that we provide drive that for a marketing organization. For sales organization, that have ended up hiring a lot of people over the last couple of years and are looking to drive productivity, how is your sales rep best using their time? And what is that sales rep time being optimized through? That's the lens through which we have the conversations. And both of those lead to clear benefits in terms of driving growth and revenue for our customers as well as driving efficiencies and cost optimizations as they look at us as a platform. So both driving the revenue as well as the cost, and that's the ROI case that we typically have with small and medium businesses. It's a great question.

Marketing [indiscernible] bottom line...

If the budgets get constrained for both marketing as well as the sales, how does the value proposition change and how are you looking at that. And I think that's a great question for -- I talked to a lot of customers. And this quarter, last quarter, the conversations have been much more about looking at their budgets, understanding what drives clear ROI, and we happen to be a platform that drives the type of clear ROI within the budget. So that's number one, and that's kind of like the foundation. As they look at their budgets for marketing or sales, then the question of how are you going to optimize it? They still need to grow. They still need to drive productivity in terms of the investments that they're making, and you need the visibility that a tool like -- on a platform like HubSpot provides to drive growth as well as the productivity. And so those are the conversations that we're having with our customers right now. I, again, would say that we think that digital acceleration is like behind us, it's actually just accelerated, it's nowhere near complete. And so conversations continue to be how do you get the best out of your investments in marketing budget. What campaigns matter the most? Which channels matter the most? That's the level of visibility that we provide. Similarly, what drives productivity for your sales organization? What are the Workflows, automations that can get more in terms of their time? And because we help with all of that, we have robust conversations with our customers.

Great to hear. Thank you for the question. Well, unfortunately, we're out of time. Yamini, Chuck, thank you so much for being here. It has been a pleasure. I learned a lot. And thanks, all, everyone, for joining us.

Thank you so much for having me.

Thank you.

Absolutely.