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

Good morning, everyone. My name is Brian Peterson. I'm the application software analyst here at Raymond James. Very happy to have HubSpot with us today. For those in the audience, feel free to raise your hand, ask questions, let's make this interactive. But Kate, Chuck, thanks so much for taking time. It's great to you, guys.

Thank you, nice to see you.

Thanks for having us, Brian.

So maybe just start on 2022 demand. I know that's kind of a very topical question. I'm sure you guys are used to getting it by now. But I'd love to understand maybe how the demand trends have progressed through the course of the year and maybe what you've seen so far in the third quarter and fourth quarter?

Yes, sure. Why don't I start, you can certainly jump on in. Not surprised we're starting here. I think every meeting that we have had all quarter starts with demand. And I think if I just kind of step back and think about how we've seen or how we've approached the conversation around the external environment throughout 2022, we've tried very much to be transparent and stay ahead of the trends that we're seeing in the market. And you saw us start the conversation around the softening demand environment in the first quarter on our earnings call, where we highlighted, in Europe, in particular, we saw some softening of demand. We saw some deals start to stretch out, particularly in Doc and the Nordics. And then as we entered Q2 and we went through the Q2 earnings cycle, what we shared was that, that trend actually became more broad. So we not only saw lengthening deal cycles in EMEA, we also saw that happening in North America as well. And then as we entered Q3, I think what you heard from both me and Yamini going in and around the earnings call was that trend continued. It got a little bit worse. We tend to see at the end of the quarter a bit of an uptick, right. Like a little bit of a seasonality within the quarter. We didn't really see that in September. September was pressured and we saw that continue into October and what we are really seeing there was a high, I would call it like a higher bar to action with our customers and prospects and that manifested itself in a lots of people getting involved in deals. You heard Yamini talked about the fact that, God forbid, the CFO is getting involved with the deals. Sometime even the Board was getting involved in CRM decision, which is something that we had not ever seen historically. And things as a result were taking longer. We're having more meetings, people were looking for real clear path to our life. So we've continued to see, if I just kink of take a step back and summarize that, the year has been a challenge and it has gotten progressively more challenging throughout 2022.

Is there anything that you would maybe -- if we were -- unpacking that a little bit, is there anything that you've noticed maybe by product or by customer segment that you would unpack by that? I know you mentioned the deal cycles, but I want to understand Enterprise, starter, some of the products, anything you can say there?

I mean there's a lot there. I think in general, we have seen things are broadly more difficult, right? I think that where you -- where we are seeing success is in places where you can really show a clear path to value in a short time frame. And I think that if you think about HubSpot and the competitive advantages that we've had for a very long time, it's around easy to implement, easy to use. And as a result, I think a general advantage from an adoption and a total cost of ownership. And that does resonate in the environment in which we're working across all of the segments.

Got it. And so such an -- we're in person now. It's great to be back at INBOUND. It's always interesting to me, if you think about kind of the new products and what you've been able to do mostly organically, we've seen payments, we've seen Ops Hub. Just -- I'd love to understand how you guys are thinking about kind of the long-term product cadence. And is there a new hub every so often? Or where should we see in terms of the existing hubs, maybe some perspective on that? .

New hub every...

Yes, Right. No, not that. Maybe I'll take this, and you can add some color. I think you're going to see more of the same, quite frankly, Brian. We've added new hubs over the years. In some cases, we've improved existing hubs. So you're right, like Operations Hub payment, CMS Hub over the last few years. You've seen us improve Marketing Hub Enterprise, Sales Hub Enterprise, Service Hub. And then you've also seen, I think, a pretty steady cadence of pouring features and functionality into the upper end of our product tiers and then cycling features and functionality down into Pro and into Starter. You saw us make a, I think, a pretty important decision with automation and dropping that into the Starter addition of our products, which drove net customer additions for us a bit in the quarter, which I hear that some of you guys care about from a KPI perspective. And so, yes, at the end of the day, I think it's -- we're not done here. There's still a lot of ideas that are up in our minds, in our collective minds, in terms of new stuff that we can add and ways to improve the existing portfolio. And then just making sure that we're continuing to add value into the product portfolio to sort of drive value for our customers.

So maybe hitting on that KPI. So in terms of the net new logos, that has been pretty strong this year. Is that mostly Starter, non-Starter? What would you attribute that success to in terms of looking at kind of the net new adds? .

And maybe I'll start, and then please feel free to add any color. As we thought about new customer additions over the last few quarters, I think what we had signaled and what we had expected was something that was in that kind of 6,000 to 7,000 range. We came in, in Q3 at an 8,000-plus kind of number, which was great. The upside to our expectations was very much in that Starter tier of the portfolio. And we've done a couple of things, Chuck alluded to one of them, over the last couple of quarters to be really customer first in mindset as we started to see some of the economic challenges. And that was, one, dropping marketing automation down into our Starter tier. Two, was continuing to experiment on pricing and packaging in that Starter tier to make it really super simple to get started. And three was the launch of the CMS Free. And it was really that combination of the 3 of those things that drove the outperformance in customer additions in Q3.

And -- okay. So a lot of drivers of the customers. How do we think about retention? I know there's been some discussion on NRR and maybe that's moved a little bit, but I'd love to understand how you guys are thinking about NRR in the current macro, anything that you guys can share on gross retention and any thoughts on that?

Yes. Maybe again, I will -- the retention is a topic that I -- is very near and dear to me. We've been a bit on a journey on retention over the last few years. If you turn the clock back 3 years, we would have been talking about net revenue retention, call it in the high 90s, then we moved net revenue retention up to comfortably 100 plus. Over the recent couple of years, we have seen another step-up in our net revenue retention to -- we called a range of 110 plus. You saw us report 115% in net revenue retention in 2021. And there are a couple of things that drove those increases over time. The first thing was a step-up in our gross retention. So as our customers adopted -- more and more of our customers have adopted multiple products, we saw gross retention increase from, call it the low 80s to the mid-80s, now to what I would refer to as like the high 80s. And the good news over the last period of time here is that gross retention has really held steady in the high 80s. What we did signal was that we felt like we would see some pressure on net revenue retention. And that has happened. We went from that 115% in 2021, back down to kind of 110%. And then in Q3, we reported 109% in net revenue retention. And what is happening in this current environment that's creating that pressure on the net upgrades from gross to net revenue retention is a couple of things. One is people are, call it, cleaning up the stuff they already purchased, right? People are making sure that they're going into their contact databases and deleting contacts that they're not using, for example. They are making sure that they're using all the seats, and they are cleaning up unused seat capacity. And then people are -- so those are on the downgrade side. We're seeing a bit of pressure there. And then on the upgrade side, what we're seeing is as hiring is slowing, people are needing to add less seats, for example. So the seat upgrade motion is slowing. The upgrade from Starter to Pro and Pro to Enterprise is slowing a little bit. And that's -- those points of pressure, which we signaled -- expected and signaled to you we saw in Q3, and we are continuing to see in Q4.

So I wanted to hit on Sales Hub. So when I talk to some of your agency partners, I continue to hear about really encouraging momentum. We've got an update out of INBOUND at the Analyst Day. Maybe talk about win rates and what's driving the success for Sales Hub?

Yes. I mean, I think it's been a multiyear journey rate of investment in product, investment in go-to-market and, quite frankly, having the right product at the right time in this sort of environment that has driven some of the recent momentum. So approaching $500 million in ARR, still growing quite fast. You've seen a refresh of Sales Hub Pro and Enterprise over the last couple of years. You've seen pretty specific and I think needle-moving investments into CRM customization and upmarket features that are moving the needle within that 200 to 2,000 segment of Sales Hub. You've seen purposeful investments on the go-to-market side, right, like arming our reps and our partners with the right playbooks and, to Kate's point earlier, being able to sort of drive conversations around ROI and prove out total cost of ownership relative to some of the legacy platforms in the market. And then I think in this sort of environment where deals are making it on to the desks of CFOs for sign off. You need to be able to make the case that a platform is going to be easy to integrate, right? It's going to be easy to adopt for your sales reps. And that there is not only like a total cost of ownership that's commensurate with whatever you're coming off, but a total cost of ownership that is going to be cheaper, right, from a financial perspective. And so I think Sales Hub in many ways is kind of meeting the moment, both in the product and the environment, and has a very good product market fit in the sort of environment where budgets are under a lot of pressure.

And how would that -- sorry, Kate, go on.

Yes. No, I -- I mean Chuck's got it. The other thing that I would just add is a lot of the innovation that we're seeing in the Enterprise segment of -- and again, we use Enterprise loosely, segment of Sales Hub is actually happening at the platform level. And so there are benefits we are seeing today in Sales Hub through the introduction of custom objects, the ability to customize the CRM, the introduction of permissioning, the -- and governance properties, the introduction of sandboxes. Like all of these, what I would call, like administrative foundational things are happening at the platform level, so they are benefiting Sales Hub, but they will also benefit marketing and service.

So I do want to ask on service, right, because I feel like a lot of -- maybe what you said on Sales subject might hold true for Service as well, just thinking about a platform. I know it's earlier days there, but how do we think about the trajectory of Service Hub? And what have you seen so far from that product this year?

Yes. I mean we are admittedly much less mature in Service Hub than we are in Sales Hub, right? The Sales Hub innovation had started, and I would data back to like 2014, right, we've been investing in that product for a number of years now. Service Hub, the approach we will take on Service Hub is very similar to the approach that we took in sort of iterating and improving Service Hub the same way as we did with Sales Hub, we're just further behind. That's why we've made a pretty meaningful relaunch of the Service Hub product in the spring time. And there are a bunch of features and functionality that was just like foundational, right? SLAs, INBOUND calling to name a couple of them. You may have seen -- was it last week or the week after...

2 weeks ago.

2 weeks ago, we announced the WhatsApp integration, was live in Marketing and Service Hub. So we have made very significant strides forward and functionality for Service Hub. That said, it's very much focused still at that Pro level, right? Whereas we are talking a lot about innovation at the Sales Hub enterprise level, we're still talking about innovation at the Pro tier for Service Hub. And we really feel -- and we feel good about our ability to deliver like a full-service modern help desk to experience for companies that are, call it up to 200, 250 in terms of employees, and that's the target for our Pro tier.

Right. Okay. So on payments, I'm kind of going through to the front. We got a lot of questions on payments. Just given the scale of your platform, like I think it's natural to think about it as a big long-term opportunity. But as investors, how do we look at that? And what have you guys seen so far from the Payments front?

Yes. I mean, again, we're probably going to follow a very similar approach to innovation on Payments that you've seen us do on Sales, and then you've seen us do on Service. It is -- investors should very much think about Payments as a long-term opportunity for HubSpot. And we are much earlier on in that journey than we certainly are for Service Hub, and certainly for any of the other hubs. We launched that product into GA just at the beginning of this year. And there's, I would call it, like 3 core value propositions in Payments. One is just creating the opportunity for small business-to-business customers to sell online. Second is really simplify what I would call like the baseline quote-to-cash process for a lot of B2B companies that is super manual and disjointed and time-intensive and, frankly, broken. And then the third is bringing commerce data into the CRM and making it actionable and real time, which is super hard and I think our biggest area of differentiation over the long term. And so that, we're going to continue to iterate. We are still focused on very -- on smaller companies, call it, less than 100 employees. We're still in the U.S. We have a lot of learning and iteration to do just with that sort of target over the next year or so. But you will continue to see us like learn and iterate on Payments.

And so maybe -- you have a lot of different products, but taking a step back into the value of the platform and what you guys can offer. One of the things investors have debated is just, will there be a consolidation of IT vendors in this market? Is that something that you guys have seen or maybe a Marketing Hub customer kind of migrates on for other products? How do you think about that dynamic in this macro?

Yes. I mean, we have seen it, but we've been seeing it for a while, right, with the move towards -- from marketing app towards marketing and sales and then adding service, now payments and commerce and operations, right? Like there has been this consistent march within the small and mid end of the market to consolidate, right? I wouldn't say that we're necessarily seeing some step-function change given the overall environment. Although a lot of the conversations are pivoting towards total cost of ownership and showing ROI and a lot of business leaders reevaluating their tech footprints to see where they're spending money and where they can pull back and consolidate on a platform like HubSpot that will provide you with 80% to 90% of what many of these point solutions give you out of the box within the core subscription, it can be a super valuable, compelling offering. And so yes, we've been seeing it. We continue to see it. I think it's probably more of a low to mid-end phenomenon too. Where at the low end, people tend to buy the entire suite. In the mid-end, it's going to be multiproduct. And then upmarket, it's going to be sort of best-of-breed, where sales and marketing would probably lead the charge there.

Got it. And maybe just on margins. You made some comments at the Analyst Day on margins for next year. Just I'd love to think through some of the puts and takes on what's influencing the margins and how you're thinking about that balance on growth versus profitability.

Yes, I guess maybe I'll take -- do you want to take that one? Okay, I'll take that one. I think at the Analyst Day, what we wanted to do is really land, call it, like a bedrock case for margins for 2023, which was flat year-over-year, and so we're absolutely committed to delivering that. That said, like what -- we are paying a ton of attention to margin and we are really focused on making sure that we're optimizing our expense structure given the environment. And we're doing a bunch of -- we've already done a number of things in the back half of this year. We pulled back very significantly on hiring in the back half of the year. You saw us exit Q2 at a headcount growth of 41%. You saw that step down in Q3. You're going to see it step down again pretty significantly in Q4. And we are continuing to hire in very specific places. We're hiring in R&D, aligned with the sort of core strategy that Yamini articulated. We think that's important to continue to invest in our product and engineering teams. They are really good at building product. We feel good about the ROI that we're getting, and we want to make sure that we are going to be in a position to continue to drive sustained growth over time. We're hiring in sales and BDR headcount, but at a much reduced pace versus what we have hired in the past. And frankly, outside of that, we're not hiring much. We are also and have been looking very hard at all of our discretionary expenses. You've seen us pull back pretty significantly again on the T&E side. We are really focused on optimizing our facilities footprint, and we're going to continue to do all of that through 2023.

So we have a few minutes. If there's any questions from the audience? That's a quiet group. So maybe on Marketing Hub, I know there were some enterprise price increases that came up this year. I'd be curious to get the feedback that you've heard from customers in terms of this functionality coming with that, right? But would love to -- any thoughts on how that's been received by the customer base.

It was a big change for us. It was probably the first time that we have put to our installed base of customers a meaningful increase in price. And frankly, I think it went as well as we could have hoped. Our pricing philosophy, if you just sort of take a step back, has always been to add value as a first order before you extract value through any sort of pricing change. And if you think about the Marketing Hub and the Marketing Hub Enterprise in particular, we had been delivering innovation into that enterprise tier of Marketing Hub for 4 years without taking a price to increase. And so we felt really good about the story that we could tell to our customers and prospects around sort of the value price exchange that they were getting. And I don't think anyone loves to get a price increase. But so far, the feedback has actually been pretty good.

Great. I think we'll stop it there. Thanks, Chuck, Kate. Thank you so much.

Thank you.

Thanks, Brian.