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

Yes. I mean I think the good news in coming into this period is that we've been hiring quite well. We have a fantastic brand from a recruiting perspective. And through the first half of the year, we grew head count 41% up against some pretty difficult comps. And so I think in that regard we have the people in seat to execute against our growth plans here in the sort of the short to medium term. When I think about like the major subcategories of spend across the P&L: Product and engineering, we're going to continue to invest aggressively there and put outsized bets into that because I think, as it turns out, like we're pretty good at building product. We're not an overly acquisitive team and we see a big opportunity in front of us, right? So I think product and [ eng ] continues to grow at a strong pace from here on out. We hired aggressively on quota-carrying rep head count through the first half of the year. We'll grow that again into Q3. Q4 doesn't tend to be a big quarter just because the reps that you'd be looking to hire are presumably having pretty good years, don't tend to leave in the fourth quarter; and so probably modulate a little bit there in the fourth quarter. And then listen. Like G&A is always an area where we're trying to grow it less quickly than overall revenue, albeit Ryan and I are going to push for IR to grow a little bit faster this year. We'll see how that works out, but yes. I mean there are things that you can do with facilities-related expense. We're obviously always looking at ways to optimize our commercial real estate footprint. We're being even heavier handed from a T&E perspective and just trying to make sure that we protect our margins here in the high single digits and are putting our investments into the areas that are going to help us grow in the short, medium, long term, yes.

Yes. So we've talked a little bit about like value of platform in this environment, and maybe that's a segue to talk about kind of how we got to where we are. I mean the product innovation, right? I mean this started as a marketing business. And you added sales and service and CMS and RevOps. And now we have payments. Like we're -- it's just dramatically kind of expanded out from this -- what was a marketing hub. Was that always the vision, do you think, for Brian and Dharmesh and team? Or is it just kind of evolve organically?

Yes, that's a great question. I wish Brian or Dharmesh were here to sort of wax poetic about kind of the trials and tribulations of how we got here. I would say, as I sort of think about that question, [ maybe there were like ] kind of like 2 big aha moments for Brian and Dharmesh, when we sort of look back on the last 15 years at HubSpot. The first one was, of course, that like there was this whole new way of marketing, right, inbound marketing; and creating content; and bringing people to you, as opposed to spamming them upfront with these old, traditional marketing techniques. That was kind of the first, I don't know, 6 to 7 years of the company and the first couple hundred million dollars in ARR that got us started. I would say, in the 2013, '14 time frame as we were gearing up for the IPO, the venture capital backers were kind of pushing the team on figuring out like what that next growth lever was going to be. The traditional playbook at the time was basically just to really go hard into small and medium business, exhaust all the opportunity there. You probably over-hire with enterprise sales reps. You -- the cost-of-acquisition model breaks as you head up market, compete up there and then like pray for a graceful exit at some point. As Brian and Dharmesh kind of evaluated the landscape, it -- I think like the big second aha was that there just was not a front-office platform that was doing a particularly good job of serving these small and medium businesses. Many businesses kind of had 2 options. Like you either buy a bunch of point solutions together. You cobble them together and glue them together, kind of hope that they work for you. Or you stretch, right? You buy some enterprise platform. You pay up for it. It's big. It's heavy. It requires a big implementation. It requires internal IT support to manage, and it doesn't work for you and your business. And so really like, the last, I don't know, 8 years, 9 years or so, we've been on this journey from marketing and adding sales and, to your point, service and CMS and operations and more recently payments in early 2022 to provide this full CRM platform that is organically built and crafted for this [ 2 to 2,000 ] employee segment that we're trying to serve.

Yes. So if we think about kind of the scope of the efforts, right, I think, at the last Analyst Day -- and these numbers probably don't hold up anymore, but Marketing Hub was like 3x the size of Sales Hub. And Sales Hub was growing quite a bit faster. I think, at the time, it was 70% growth in sales and 30% in marketing. So we think about how this evolves. Like does it feel like sales has the potential to eclipse marketing over time? Like what does this business look like in the years ahead?

You'll probably get a different answer from the two of us, but I'd be surprised to hear Ryan's answer on this one.

Yes. DJ, that's a super popular question. We get that all the time, including I think 3 times this morning, but...

Yes.

We have the benefit of operating in 3 mega markets when you think about marketing, sales and service, each kind of multibillion-dollar markets on their own, so we feel really good about the opportunity across the portfolio, but let me talk about marketing and sales quickly. Marketing, it's our flagship hub. It's the biggest; still growing really, really nicely. And what's interesting about it is it continues to evolve, so our customers aren't standing still. The list of things that they want us to do in that product is more than we can actually do, so it's really about prioritizing what we're going to do that's going to have the most impact. And we're not standing still. Right now we're investing in omnichannel marketing and driving more advanced automation into the product and better reporting, so we feel really good about the outlook for marketing, multibillion-dollar market. We feel like it's a best-in-class solution within the SMB market with a lot of runway left. On the sales side, earlier on in its life cycle. We feel great about the momentum there. We've poured a ton of innovation into that product over the last 18 months and we're starting to see it pay off. It's really become a legitimate front door to HubSpot, so it's involved in most of our multi-hub deals. It's growing faster than Marketing Hub, as you pointed out. We think that probably continues given where it is in its life cycle. So if I step back: We feel really good about marketing and really good about sales. I think it's going to be interesting to see which one ultimately ends up being bigger. My money is on sales in the very long term, but it's going to be a long time before we know the answer to that one.

Yes, so maybe we can talk about that kind of multiproduct adoption. I think you've disclosed like 60% of your customers are using 2 or more modules. How do you see that scaling over time? And like what are the levers to net revenue expansion? And should we think about additional hubs, price tier, moving up price tiers into different functionality layers? Like what do you think multiproduct penetration looks like longer term?

It's a good question. I don't think we know. It's been on such a consistent trajectory upward into the right, I think, for all the right reasons, but it doesn't feel like we're hitting some natural ceiling, so I think the answer there is it's higher. I think we see -- we'll ultimately end up seeing more multi-hub adoption on lower-price SKUs, [ right ]? Just as people are getting started, they take that full CRM suite and, as Dharmesh likes to talk about, kind of like the best deal in town at $50. And then as you move more into professional and enterprise, I suspect that the penetration levels on full CRM suite are probably lower, as companies will just look to take one point solution and solutions from others.

Yes, yes. Someone asked me the other day how the business breaks out, SMB, mid-market, enterprise. And I guess you have your own definition of enterprise. Maybe that's worth visiting as well, but -- and then how each of those kind of contribute to growth. Can you frame that?

Yes, I can size it for you a little bit based on what we've said historically. So what we've said is that about 1/3 of ARR comes from companies with less than 25 employees, and the balance 2/3 from companies with greater than 25 employees. Another way you could look at it is based on our tiers. So our starter tier products account for less than 10% of ARR. Professional tier is more than 50%, and then the balance is our enterprise tier. It's kind of a proxy for customer size. And what I'd say is that we're seeing nice growth kind of across all 3 of those segments, and the way you see it is in some of the metrics that Chuck talked about earlier. So at the low end, we look at net adds. We added 7,100 net new customers in Q2. That's about 2x what we were adding pre pandemic. At the higher end, we look at ASRPC that grew 14% in constant currency in the second quarter. We think that continues to grow nicely. What we said was 10% in constant currency here in the back half. And in the middle part of the portfolio, we look at cross-sell. And we've had some nice trends there over time. We've talked about how 60% of the customers now are on multi hub, so we have a really nice, balanced growth algorithm across customer segments. And we think that's going to continue.

Yes. You guys announced a pricing change on Marketing Hub Enterprise. I think it goes into effect on September 1. Just big picture, like generally philosophy around pricing, I think it's a little bit different than a lot of enterprise software companies. And then second, just help us frame how this price increase could factor into growth over the next 12, 18 months.

Yes. I like how you worded that question around the philosophy because I think it is we've taken a different approach to pricing and packaging, I think, relative to many other software companies out there. We don't have -- it's not like we take 2% to 3% per year or build in inflation escalators into our contracts. It's just not the way that small and medium businesses are used to seeing bills go up. And so the approach that we've taken historically is pouring innovation into the higher end of the portfolio through enterprise and then sort of titrating features and functionality down into the professional and starter layers over time. And then when we know that the features and functionality that we've added are resonating, they're value add, they're driving growth for customers; and when we look at the competitive landscape and recognize that there's an opportunity to close the gap from a pricing perspective, you'll see us tactically take pricing within a hub or within an addition of a hub. You've seen us do it in marketing, sales, service, CMS, really across the board. In terms of Marketing Hub Enterprise and that price increase. We announced it. It will go effective September 1 for new customers and then any Marketing Hub Enterprise customer that comes up for renewal after September 1. And so I think it's going to take a year or 2 for it to roll through the installed base. We have customers that are on multiyear contracts and so not all of them will come up for renewal in 2023, but it's a 12.5% price increase on a $1 billion-plus ARR installed base that represents, I don't know, 35% to 40% of our marketing ARR. And so it will be a -- it will be one of the growth drivers for the business over the next couple of years, so...

Yes, yes, yes. That's helpful context. We talked a little bit about kind of investment strategy in a slower-growth environment, but I want to ask on more specifically maybe around like operating leverage. You guys have been putting up really nice growth while kind of delivering expanding margins. Like how do you think about balance of growth and profits going forward?

Yes. I mean [ we want to be able to do both ], I think, is the answer. And I think the good news is we've been able to do that, right, since the IPO, all right? Wildly unprofitable and quite profitable on a relative basis given our growth rate today. I come back to, quite frankly, like the short-term answer that I gave, which is continuing to invest quite aggressively in product and engineering. From a go-to-market perspective, it's about putting our bets into the areas that have the best unit economics. As it turns out, when you do that, like it's a good thing for overall profitability over time; and then of course, looking for leverage in G&A. We have a financial framework that is part of the IR deck that we published. I would encourage people to take a look at that. We outlined sort of growth bands and how to think about leverage over the longer term. Any year can be a little bit different given what's going on, but I think that, that framework has served us well. It's been a nice guidepost for investors to be able to think about that trade-off...

Yes. It's essentially, if growth is slower, you get a little bit more, and vice versa, yes, yes, yes.

Yes, exactly.

All right, I see our time dwindling. We're taking down maybe one final question, just open ended, I've been asking every one of my companies that's presented. Like what do you think is something that investors still underappreciate about the HubSpot story?

It's a good question. I don't know. I mean I think I see a number of investors out there in the crowd. And I think you guys give us a lot of credit. You stuck with us through the good times and in some difficult times, and so it's hard to imagine getting much more credit than we do. I would say I think it can sometimes be a little bit easy to get cut up in -- caught up in the minutiae of like week-to-week trends and month-to-month trends and quarter-to-quarter KPIs. Ryan and I spent a bunch of time on the buy side and we did it ourselves. And maybe we lose sight of just how truly mission critical we've become for many of these 150,000 small and medium businesses that we serve today; and how much they entrust HubSpot, all right, like the enduring trust that they put in HubSpot to help them not only market, sell but service their customers and ultimately grow better. And so I guess I'd leave you with that.

Yes, yes. I think it's a good answer.

Thank you.

Chuck, Ryan, thank you, guys, for doing this. Thanks for all your help on the stock, and we look forward to keeping tabs on progress.

Thanks. Thanks for having us. All right.

Thanks, DJ.