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

Okay. Good morning, everyone. Welcome. I'm Mark Murphy, software analyst with JPMorgan. And it is an honor and a privilege to be here with Kate Bueker, who, as you all know, is the CFO of HubSpot; as well as Dharmesh Shah, who is the Co-Founder and CTO. Well, first off, welcome to the conference, and thank you for taking the time.

Thank you.

Thanks for having us.

Maybe you could just spend -- maybe you could just give us the 30-second version to introduce yourselves and HubSpot for the benefit of anyone who's not aware out there.

Sure. I'm Dharmesh, the Co-Founder and CTO of HubSpot. HubSpot is a SaaS platform. It's a CRM platform, primarily focused on small- and medium-sized businesses. The company is about to approach its 17th-year anniversary, and I'm having a better time than I've ever had at HubSpot right now.

I'm Kate Bueker, I'm the CFO, and I am approaching my 5-year anniversary in June, and I am also having a great time.

Those are big words because you always have a pretty wonderful time as long as I've known you. Okay, let's talk about the resiliency of HubSpot for just a moment. It's been a tough period of spending on front-office software because it had accelerated so much during the pandemic, right? We've had several quarters now where we've been in a tougher environment, it's been a different environment. But HubSpot has shown this resiliency. When we look at it in Q1, the growth rate was 30% constant currency, and that's on -- it's on about a $2 billion top line scale. When we look at it in contrast, we're forecasting these growth rates that range from about 5% to 15%. We've applied -- that applies to Salesforce, ZoomInfo, Qualtrics, Twilio, et cetera. To what do you attribute this superior resiliency for HubSpot? And do you see an environment here that is translating into faster market share gains?

Yes, maybe I'll start here. Welcome to add in. I would highlight maybe 3 things that I think contribute to the resiliency of HubSpot. I think the first is, I talked about the fact that I am approaching my 5-year anniversary. HubSpot is a very different company today than it was 5 years ago when I joined. We have been on this journey from a single application for marketing automation company to a platform company, a CRM platform company that provide -- that serves the whole front office. And that means a different level of necessity for our end customers. Today, 60% of our customers use 2 or more hubs and 45% of our customers are on 3 or more hubs. It means they're running their whole front office on HubSpot. The second thing that I would attribute to is a little bit of the current environment. We are in a world where total cost of ownership is front and center and decision-making. And for small- and medium-sized businesses, there are more and more making platform choices, consolidating a disparate set of applications onto a single platform that can help them drive efficiency, and HubSpot is really well positioned in that order. And then the last thing is really around time to value. In this environment, people are also looking to derisk the decisions that they're making. And so they're looking for investments that pay off quickly. And HubSpot has, frankly, by virtue of the fact that we've grown organically and we've made some very smart choices around how we build product, is one that is very easy to get started with, easy to use, and that makes a difference in this environment.

So a broader platform versus 5 years ago, TCO matters more and then the time to value being reprioritized, yes. Okay.

That's exactly right.

So you talked in a little comment on this on being an organic platform. And I want to go right into that. Dharmesh, you've had this messaging that we love. You call it crafted, not cobbled. And there's this quote, the dream is to have a single cohesive, uncomplicated CRM crafted by people who care. So this is something that I really value, that type of architectural cohesion. We've heard you for many years talk about having an Apple-like type of a design ethos built into the product. Can you help explain to us how does HubSpot benefit? How do your customers benefit from having this kind of contrarian approach, where, for the most part, you've really actually been avoiding M&A?

Yes. So to start off with, we don't really avoid M&A. We're actually committed to this kind of cohesive platform. And sometimes those 2 things can be at odds. So the right M&A, I think, would make sense for us. Sort of back to the kind of importance of being a platform, having built everything kind of organically in-house within HubSpot. Let's talk first about the benefit to customers. As a result of it being one cohesive platform, one database, one set of user interfaces, it makes it much easier for the customer. And for us, in the market that we're in, that's really not optional. That's high on the list of what customers want is ease of use and simplicity kind of reduce the complexity compared to alternatives in the marketplace. The other one is a little bit more subtle. The value of a platform to HubSpot outside of benefiting our customers is that it makes it simple and easy for our customers, but it makes it simple and easy for HubSpot to innovate as a result of having one unified platform as we have new shifts happening in the marketplace in terms of, "Oh, there's this new thing called generative AI that everyone is all excited about." I think we're in a better position to leverage those shifts and innovate faster, iterate faster than we would be if we had a portfolio of products accrued via acquisition over some long period of years, right? That's just harder to get everything coordinated and put things in motion. So it's one of the things that has me excited. And you'll really know these things. I've been in software for 30 years. At the time you're making these long-term decisions to be a platform, but I have experienced that it's like, okay, it's just a matter of time. You don't know exactly how those benefits will show up at the time you're making those decisions. Some are obvious, some are less obvious, but we're kind of reaping the rewards of some of the kind of harder work the product team has done over the years.

Okay. And we'll -- you brought up generative AI. I didn't have to do it, but I want to make sure we're going to come back to that because that's going to be topic number one. But before we do that, Kate, I wanted to also sort of acknowledge, I think you had some wisdom in terms of not issuing the multiyear targets and growth rates when spending was very robust a couple of years ago. I keep saying companies that did that, they're really regretting it now, and they're having to dial that back. So we don't know exactly what the longer-range plan is for the business. What -- I think what we can see is we can see just a tremendously huge top of funnel, we can see that happening at the free and starter tiers and then you've got all this multiproduct and you have what's happening, what's resonating with the enterprise tiers. How do you think about the longer range, the -- maybe more from a qualitative standpoint or just what you aspire to, even if we're looking way out, something like a 5- to 10-year horizon?

Yes, it's a good question. We've obviously made a choice to focus on the small- and medium-sized businesses. And we did that because it's really a massive market. And we're a $2 billion company operating in a market that is, in a couple of years, projected to be $70 billion. So we have -- we continue to have single-digit market share across all of our markets. We believe that each of our marketing sales and customer service sort of our core hubs can -- in there each be multibillion-dollar hubs. And we think that, that SMB market is largely or relatively underserved versus other parts of the market, and we feel really good about our ability to answer the needs of those millions of businesses.

Okay. So the -- so I do recall, Brian Halligan actually said this at the Analyst Day last fall that you're super ambitious to build a giant, giant company. You're up to 180,000 customers today. If you're successful 5 to 10 years from now, how many customers do you think you would have?

I mean our -- I come back to the foundational mission of HubSpot, which is to help millions of organizations grow better. Like we chose millions purposefully. We believe that we should be a company that can serve millions of customers.

Okay. So we've noticed -- I was thinking back a year ago at this very conference. You had begun to mention that some deal cycles started to extend in Europe. And I would say you spotted it sooner than most companies. HubSpot has a tendency to be, I think, a little more attentive to conditions or kind of better able to monitor it and the willingness to kind of comment on it. When you think back to them a year ago, what was it that allowed you to pick up on the change that was happening in the macro? And if I were to ask you just directionally, do you think the macro and business confidence are kind of -- directionally, which way do you think they're going here in the month of May?

Yes. Well, I guess I'll start by saying thank you. This is the second comment that you've made, which is complimenting me in front of my boss, so I appreciate that payback.

I've been returning the favor.

If I think about HubSpot noticing the trends earlier, I don't -- I mean, it's not clear that we noticed the trends earlier than anyone, but I do think there's a couple of things that we do in how we approach the business and the sort of understanding of the business that maybe helped us get there at least with our external comments sooner. One is the company is a very data-oriented company. We look at -- consistently look at a large number of metrics internally on a weekly basis, on a monthly basis, to try to give us insights into what is happening in the business, what are the sort of potential outcomes that we could see sort of in the next set of quarters. And the other is that one of our core cultural values is transparency. And that's an approach that we certainly take internally, but it's one that we take externally. And so it's really that combination that I think put us earlier than many companies and sort of having the conversation around the challenges that were emerging over the last 12 or so months. That said, like I'm not going to provide any new update on the sort of external environment. We had earnings just a few weeks ago. What we said on that call and consistently in our callbacks is, we continue to operate in a really challenging macro environment. It is pretty consistent with what we have seen since the back half of last year, but it hasn't gotten materially worse. It also has not gotten materially better.

When you think about what has happened with tech spending in this cycle, it has been unusual, right, in my experience because basically, tech spending has had a recession without seeing an economic recession, at least not yet, knock on wood. Do you think that it could mean that spending on tech, spending on software has, to some extent, been kind of purged or been optimized such that when we get into the next recession that it wouldn't feel maybe quite as bad at this juncture as it otherwise would?

I think it's a really interesting question. We certainly feel like we've been operating in a recession for a number of quarters, even if it's not technically being characterized as a larger recession. What that translates into from a customer perspective or customer motion is 2 things. The first is that just our customers have a higher bar for decisions, purchase decisions. And that is taking many forms, but we've talked about things like more and more decision-makers getting involved in purchase decisions, decisions taking longer, we are losing to inaction, not losing to competition. The second thing that we're seeing is that customers are very focused on optimizing their existing spend. So for us, that takes the form of customers cleaning up unused seats, maybe trimming down contacts that they haven't been marketing to. Some of the new functionality that we have in the enterprise versions of our product with some of the permissioning and governance allow our customers who maybe have been managing their business through multiple portals to do some consolidation of their spend. And then we're seeing customers expand their sort of usage spend at lower rates than we have historically. That said, we are -- we continue to see our gross retention really nicely in the high -- like hang in there in the high 80s, which we think speaks volumes of the value of the platform. And we feel good about our ability to continue to deliver net revenue retention at sort of 100% plus.

Okay, which is a pretty remarkable feat, and I want to come back to that discussion on the retention in a couple of moments as well. But so Dharmesh, let's get to the big topic here around generative AI. I have been telling investors that I thought what HubSpot did with ChatSpot.ai is really the single best example, like this is what a SaaS application software company should do to understand the trend and actually go do something about it and code it up and have a demo in a very compelling, very well-done demo. Working live right there on the screen inside of HubSpot, the -- so I believe it's in public alpha. You had reached 40,000 users very quickly, also pretty remarkable. And I have been told that you personally did -- really did the heavy lifting on ChatSpot. I told like this kind of starting last fall, you sort of had this obsession with it and really took control. Can you tell us just the story? What was going through your mind, and how did they come together so quickly?

Yes. I'll start with again by reiterating that the heavy lifting actually happened years ago as we start building out the platform, that's what made it possible to build something like ChatSpot. Now I've had a personal kind of passion around AI for a long time now and have done variations of what is now ChatSpot as early as 5 years ago. I was going through some old e-mails. And so Brian and I had a chat with Sam Altman, who's the Founder, CEO of OpenAI. This was June of 2020, talking about GPT. And our question to him is, where do you think this is headed, right? This is 3 years ago, which is in a [ tourney ], it's like dog years when it comes to generative AI. And his statement was that we're making progress. It's going to continue that way, and then there's going to be an inflection point. I don't know when that's going to happen, but it's going to happen because they saw the writing on the wall. Obviously, they were building it. And so I've been following the kind of progression of generative AI for a long time. And then it kind of really hit me as it did, I think, other folks, just kind of raw potential of something like GPT-3, which was we caught the imagination. So I'll tell you a quick story. Look, so I have built something for myself just to kind of tinker with it, and I'm up till 2:00 in the morning every night coding on it. And we had -- I had 50 users, kind of friends and family and internal HubSpotters, and our goal was it's like we'll launch this because I'm a big believer in iteration, and we'll get it to 500 users, like someday within the first month or so. Two days after launch, it was 10,000 people who had signed up for ChatSpot. And 2 months later now, we have 45,000-plus users. And this is a testament, it's less about kind of ChatSpot, but how much the potential of generative AI has kind of captured the imagination. We have all been exposed to it in varying forms through things like ChatGPT, and I think it's going to be transformative both for HubSpot and the software industry at large.

So -- and that's a great story. And it's amazing you were talking to Sam Altman 3 years ago. How do you think generative AI is going to change the experience of using HubSpot? Do you think it's going to be more of an amplifier on in terms of -- because you have a lot of people that are trying to crank out marketing copy. They're trying to crank out blog content. Is this actually going to be more of a tool where you would be able to go in and generate the kind of internally generating reports and analysis using plain English? Because I think I saw elements of both in that demo.

Yes. And those are both great use cases, but both discrete use cases. The reason -- part of the reason I'm so excited about generative AI is for us, not just a discrete set of features we can add to our existing applications, we will certainly do that, but how we can kind of weave it into the platform and make it what we call one of our primary colors, part of the HubSpot framework. And just kind of walk you through this just in terms of the experience of HubSpot, and let's take it from kind of -- I'll make it short. I talk really fast anyway, so it's like watching YouTube on 1.5x, right? And so let's say, one of our customers, they have a website up there, they're posting blog articles on. Those articles will be assisted by generative AI within HubSpot. A customer shows up at the website, signs up and says, like, I'm interested 2 days later, they get an e-mail from that company. And it's like, "Oh, by the way, we understand you're in higher education than you're interested in this. Here's a really good blog post that you should also consider." And the beauty of it, that blog post was written for that individual person. It was not published 6 months ago, 2 months ago. It was published 5 minutes ago once we had the context for that user. Okay, great. Now the user is like, yes, I'm buying internally within HubSpot, people are using the product. And they're like, "Oh, I want -- I'm the head of sales, and I want to generate a report, and walk into a meeting for that shows us the last quarter's revenue broken down by industry in geo. And I want to see the top 5 industries, so just I can kind of talk to the team." Back 6 months ago, that would have been 30, 35 clicks. And now it's just a you express the thing that you have in your head. And I think this is the biggest shift in software is that you kind of state what you want and the software figures out how to get that answer or that report, that workflow, that automation, that whatever for you. And I think that's going to be a radical shift in people's expectations of how software should work. Now that...

And you're stating it in plain English, like a mere mortal...