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

Good morning and welcome, everyone. I'm Parker Lane, application software analyst here at Stifel. And with me today is the HubSpot team. We've got Kate Bueker, CFO; and Ryan Burkart from the IR team. Thank you both for being here.

Thank you.

Really appreciate it. Well, Kate, I think the biggest topic coming out of 1Q was the macro. We saw that across a lot of different software companies. Can you give me a good circle back to exactly what you guys saw out there and how that manifested itself in your guide for the year.

Yes, sure. Look, I would just say that it has been a challenging environment for the last 2 years. With December maybe being a bit of an anomaly, what we saw in Q1 was like a very choppy environment. The -- there was -- budgets were tight, high bar to action. Deals were continuing to take a long time. We saw multiple decision-makers. We saw a desire for lots of demos and even trials before decision-making. And so that was frankly consistent with what we've been seeing throughout 2023. The -- it turns out that sort of December poke of Sunshine was a little bit of the anomaly. And now we are seeing a return to sort of a more challenging environment, very consistent with 2023, and we expect that, that is going to be the environment that we operate in throughout 2024. That said, I think what we know how to operate in that environment. As I started, we've been doing that for the last 2 years. We have a great TCO story to tell, and we're trying to communicate that very well. We have a strong value proposition for customers in our platform play. We're seeing customers increasingly consolidate software spend on to HubSpot as their platform of choice. And so we are focused on from continuing to operate in that -- assuming that environment and controlling the things that we can control, which is really delivering a real strong product -- strong product innovation and executing well from a go-to-market perspective.

And Kate, when we look back to that 4Q of '23, which is sort of an anomaly in hindsight, why do you think that was the case? Is it the business becoming more upmarket and enterprise and those people tend to buy at that time of the year. And should we expect any sort of increased seasonality in this business where perhaps 4Q ends up being a little bit better this year?

Yes. Another good one. Look, I do think that it's hard to really get very specific on the drivers there. I do think that when you take a step back now after a couple of months, it probably is a little bit more budget flush than we had thought. We tend to have a seasonality that is stronger in Q4 and a little less so in the first quarter, like that -- even adjusting for that, Q4 was a little bit better. We saw January and February, a little bit weak. We didn't see the typical step-up that we would anticipate in March. And all that kind of indicates that December really was the anomaly. I think the good news for us is that what we continue to see is really strong gross retention, so our customer dollar retention continues to be in that high [ $80s ] range. We are now -- have seen a few quarters of like stable downgrades. In Q1, it really is that upgrade rate that was the challenge for us. Customers are not expanding their spend. We are not alone there. But we think as the economy improves that, that will also improve for us.

And as we chart through the rest of this year, you're embarking on a new pricing and packaging strategy, no seat minimum, pricing increases, view only seats. So different than you've had in the past. I guess the question would be why is now the right time to implement that in light of what's going on in the macro. And can you talk about the early cohorts there and what those have looked like?

Yes. So I'm not surprised to get a pricing model question. We've been talking a lot about this. The -- maybe I will take a step back and talk about what it is we did and why we did it and what we expected to see and what we actually are seeing. So this is a pricing model change that we have been working on for 2-plus years. The foundational reason that we wanted to make this pricing change was really to align the value that we are delivering to customers with like what they are paying for. And we made a pricing change at the beginning of March. There were a few components of this. The first is that we lowered the price of our starter tier and made it super simple with the idea that, that would allow us to attract -- lower the barrier to get started with HubSpot eliminate the friction in getting started with HubSpot. The second thing that we did was we eliminated seat minimums, as you said. And that really removed the friction for upgrading from our starter into our professional tier. And then we added a core seat, which allowed us to monetize our smart CRM, which is a place that we have been investing and innovating in for a number of years, right? And so as a customer, you can now get started with HubSpot in a very simple way and buy exactly what you want. So it's good for customers, and then you can buy more when you need it and grow over time. So the value is much more aligned with like the pricing model. And it's good for HubSpot because what we're seeing is healthier cohorts. And then over time, what we will see is stronger downgrade and upgrade rates over time. And so what we piloted this in Australia and New Zealand for about a year to make sure that we really understood both the -- sort of how it resonated with customers and partners and also how to operationally manage under the new pricing mechanics. And what we saw and what we expected to see here was that initial ASPs are going to be lower but that deal velocity was higher. And so the overall initial ARR was largely neutral. And then from there, what we saw was healthier upgrade rates over time as customers sort of grew their businesses and bought more of HubSpot. What surprised us in the rollout of the global launch of the pricing model in March was that more customers who are already in process actually finished and closed under the new pricing model. And so what we saw was the ASPs dropped, but we didn't in the first month see the increased deal velocity that we saw when we rolled this out in the pilot. And so there's a period of short-term kind of dislocation that we are seeing. And April and May, the trends are better in terms of the velocity sort of catching up to what we had thought. The good news is that we did -- are watching these cohorts, obviously, very closely and the expansion rates that we expected to see are actually playing out very much the same as what we saw in the pilot. And so we remain convicted that this is a really good pricing change for us and for our customers. It's just going to take a bit more time for it to settle in.

And Kate, you just touched on the NRR dynamics, ASRPC is another metric that people care about, and I think we kind of can table that. How about net adds? What sort of predictability do you think you have compared to your old pricing model going forward. Do you have enough data to even know wouldn't that ads could trend to be?

Are you asking me, what Q2 net ads are? No, I'm just kidding. I would say -- and you've heard us say this like time and time again, ASRPC and net customer additions are output metrics for us, not input metrics for us. We're not solving for a net customer addition number. What we are trying to solve for is a sort of NRR and ARR maximizing strategy over time. And what we have found is that the product, the freemium model, so the free and starter tiers of our product have a really compelling value proposition. And if you can make them super easy for customers to get started with, you will drive significant customer acquisition. And this seats model change just double down on the value proposition that we have seen over time.

Okay. Last quarter, you talked about Sales Hub being more of an entry door into the platform. Clearly, you've done a really good job of expanding beyond the marketing use case. Just talk about what the share of customers that come in via Sales Hub versus Marketing Hub versus full platform looks like? And is it a different type of buyer? Like what compels them to take one of those kind of...

Yes, do you want to try that.

Yes, I can jump in here, Parker. Sales Hub has absolutely become a front door into HubSpot right alongside Marketing Hub and multi-hub. So if you look at new business coming on to the platform, it's split pretty evenly about 1/3, 1/3, 1/3 between Marketing Hub, Sales Hub and Multi-Hub which is a mix we feel great about, certainly relative to where we were a few years ago when it was predominantly marketing hub as a front door. So if you kind of step back and think about how we got here from a sales hub perspective, we poured a ton of innovation into this hub over the past of the last 3 years, really with a focus on that enterprise tier and upmarket customers. So at INBOUND, we launched sales prospecting workspace and advanced sequences. And those are 2 features that are getting a ton of traction today because it really allows folks to kind of align marketing and sales and drive growth, very important in this environment. And then, of course, we're layering in AI throughout the entirety of Sales Hub things like the ability to generate sales e-mails with content assistants, summarizing sales calls, summarizing e-mail threads, even the ability to forecast pipeline close rates and kind of predict the performance of the business, all with AI. So I think we feel really good about the momentum we have in Sales Hub and feel confident about that continuing here.

I think the other thing just to add to Ryan, is that our reps are using HubSpot every day. And so the level of comfort that they have in selling Sales Hub is really high. And so you're seeing that show up in numbers.

Got it. Sticking on product for a second. You recently relaunched the Service Hub offering. CMS Hub became Content Hub. Can you just talk about what is new as part of the relaunches of each of these platforms. And can they become entry doors at some point? Or is it going to be those core offerings we just talked about?

Yes. I'll start. You can jump in. So we are super excited about the level of innovation that we're seeing out of our product and engineering organization. And what -- the feedback that we heard from our customers was like it was hard to keep up with inbound being sort of the one point of the year where we would take a step back and really like sort of announce a big set of product innovation. And so we started this new cadence this year, which we have a spring spotlight, which happened at the end of April, and then we will have another set of exciting announcements happening in the fall at INBOUND. And the spring spotlight included a bunch of new product announcements, but you happen to pick my 2 favorites, which are the relaunch of our Service Hub and then the launch of a new hub, which we call Content Hub, which really is a real transition of what we had been calling CMS. And so maybe I'll talk to you a little bit about where we are in each of these. We do have a view that we have 3, what we call core hubs, marketing, sales and service. And we think that all of those 3 hubs can be multiple billion-dollar businesses. They are -- and can be front doors for us over time. We are obviously at different stages of that. You heard Ryan talk about the Sales Hub journey to become a real front door. We are not yet there at Service Hub. But the spotlight launch, relaunch of Service Hub was a really big step forward for us. We have been innovating in Service Hub for a number of years. And I would say up until the last 12 months or so, we are really focused on driving innovation in that Service Hub Pro. This relaunch includes a couple of really key upmarket features, including sophisticated SLAs and more sophisticated routing that were big asks for upmarket customers. We also launched as part of the Service Hub space dedicated to customer success. So in larger organizations, you will have a support function that partners well with a customer success function, whose job is really to drive customer retention. And so creating this workspace for customer success to really like get the visibility and drive their work activities with a big milestone. And then finally, Service Hub has been a place where we have seen a lot of AI innovation. So we have a dozen or so features in Service Hub that are being well used by our customers. We have a GPT-based chatbot to help deflect INBOUND support calls, call summarization, real-time prompts to help support reps, handle tickets in a more sophisticated and appropriate way. And so all of that was a real sort of meaningful step forward in the overall features and functionality in Service Hub. And then I will shift into -- I'll shift into Content Hub, which was another really big announcement at the spring spotlight. And I shared -- like I have shared historically at Content Hub, internally, we talk about Content Hub as AI Hub, we kind of call it, we joke around because it really is a hub that is foundationally based on a set of AI features and functionality that are being very widely adopted by marketing professionals. So content marketing is the root of HubSpot and is our DNA. And it is a way that we feel that is a very effective way of driving leads what CMS Hub was, was a way to manage your website content. What Content Hub is a way to manage all of your content, right? The website is not the answer for the only place people want to find information. The number of channels has dramatically increased. The media associated with the content you're producing has dramatically increased. And Content Hub is the single place that marketers can manage all of that content. And there are 2 AI features within Content Hub that are particularly notable. One, we call content remix and what it does is it lets a marketer create a single piece of content just call it a blog post, for example, and use the AI functionality to translate that piece of content to appropriate content for all of your marketing channels, whether it be social posts or something that is a video post or podcast, the content remix feature will help you do that translation. And then there's another feature, which is called Brand Voice that will make sure that your content is expressed in a way that's consistent with the way your brand shows up overall. And so those are like 2 highlights for me from the Spring Spotlight. The adoption of Content Hub has been -- the reaction to Content Hub has been very strongly positive. The attach rate we're seeing for our Marketing Hub and Content Hub since launch has been the highest that we've seen and in new hub launch.

Yes. So it's funny you say that Content Hub is essentially AI hub because I think a lot of people are trying to figure out across all software. If you're delivering this added value, more automation, how are you and your pricing teams going to capture the value that you're providing a client if they don't need to hire outside resources or hire new people to do those tasks.

Yes. Maybe I'll just take a step back. I think we're taking a bit of a different strategy than what you're hearing in terms of AI monetization from lots of other people. When we -- when HubSpot started, the idea was that the internet was a big change and it was an opportunity for small and medium-sized businesses to benefit in an outsized way relative to enterprises from the what the Internet delivered as a technology. And HubSpot wanted to play that role of enabling SMBs to benefit in an outsized way from the Internet. We feel similarly around AI, right? Our approach is really to democratize AI for SMBs in a way that gives them the outsized impact of AI to drive their business. And we are doing that really by embedding AI across the platform in as many places as we can. We have AI features and functionality in our free tools, and our starter and in our professional and enterprise. About 2/3 of the features and functionality are in the Pro and Enterprise tiers. And so there's a bit of an indirect monetization of AI that happens there. But we are focused very much on driving usage, the breadth of usage as well as the depth of usage of the AI features and functionality. About half of our Enterprise customers today are using AI features and functionality 25% of our Pro, there's room to grow there. And then importantly, there is room to drive repeat adoption of the features and functionality. And then over time, as we get these real value use cases. Some of them will be more sophisticated and there's an opportunity to monetize those on an individual basis, but we're not there yet.

Interesting. Okay. I want to make sure I get any questions that we have in the audience before I continue. Any takers? Got one over there.

Yes, curious to ask about how you're thinking about -- in the service space, the contact centers, any displacements. Any way to think about [indiscernible]?

Yes, I would say not now. What we are -- Service Hub is one of our earlier hubs, and so we have much less of an installed base to worry about. I think what we would see in Sales is a little bit different than what we would see in Service. What we see in sales is as you continue to add value, you're making your sales reps more effective. They're driving more productivity, you'd want to hire more of them. In Service, there's a balance between really driving better customer support and driving efficiency. What we have seen so far is our customers and our internal use case is that we can deflect easy tickets, and we can focus on solving the hard problems for our customers and drive customer sat up. I think over time, as we add more value, there will be the opportunity to manage through pricing, but we aren't at a point where we feel like we need to address that.

Charge ahead. Clearbit, the acquisition you guys made in the early winter, I believe it was maybe late fall.

Yes.

You haven't done a lot of M&A in the past. And we heard in the last call about the financial applications, right? The impact that it had on growth and bookings, et cetera. We haven't heard as much on product roadmap there what your intentions are with that core assets that they bring to the table. So can you just talk a little bit about that, what sort of opportunity you saw in acquiring that business?

I can take that one, Parker. Many of you know [indiscernible] in IR, he's my boss. So I get to hear a lot about this. It's early days for a Clearbit, but it's going well. I think if you step back, the vision in the acquisition was. Let's take Clearbit's really robust company and intent data, combine it with powerful AI that can drive insights and actions based on that data and then embed it within the HubSpot platform to help our customers connect with their customers and ultimately grow. We've gotten great feedback from partners and customers on that vision. They really like the idea of combining Clearbit's data to really power the HubSpot Smart CRM. So the feedback has been great. Today, the motion is getting Clearbit data into the hands of HubSpot customers. And that's happening through a cross-sell motion. We started that kind of late Q1 time frame. So it's early, but going well. I think the next step is really integrating the technology and the data right into the platform natively. So we're doing that now. We're making good progress. I think we'll have kind of more to share on that over time so stay tuned.

Got it. And Ryan, maybe sticking on the subject to Clearbit for a second. There's some more pure play or stand-alone vendors in that -- I guess, you call go-to-market intelligence space. If I'm one of them, should I be fearful of what you guys are doing and embedding this data directly into the platform?

Look, here's what I would tell you. We have seen in AI, we have seen in many places that when you can embed something in the workflow, you're going to drive greater adoption. And so we think that the combination of the data and intelligence and intent right in your CRM, where you're actually working is very valuable to customers. And so I think that is an advantage.

Got it. Okay. There was a lot of changes to the partner ecosystem last year the way you compensate partners and I don't think there's been a significant number of them that have left the ecosystem necessarily, but there was some that were little upset, some that have leaned in a little bit more to HubSpot. Can you just talk about where we are in the evolution of the partner organization ecosystem?

So partners are an absolutely crucial part of our go-to-market motion. They influence about 40% of our ARR. That's been consistent over time. They're particularly important upmarket. And really, what we've been doing is trying to kind of double down on the partner channel to continue to enable their success. One thing we did about a year ago is make some changes to the commission structure. What we wanted to do there was really align incentives more with value creation. And it's gone really well. It's been 12 months now. What we're seeing are partners really kind of leaning into engagement with customers. Customers are happy and happy customers ultimately stay with us longer as they scale. Another thing that we did as part of that change is incentivize what we call co-selling motion. This is where we bring partners into deals that were sourced on the direct side, kind of late in the deal process. It's where we need partners to help get that deal over the finish line, really need their expertise. Typically, these are larger, more complex deals with that market customers. That motion is going really, really well. I think we're up -- co-selling is up 65% year-over-year in Q1. So we feel good about that. So stepping back, I think we feel good about the evolution of the partner channel. The changes that we made a year ago have gone well, and our focus is really on continuing to enable the partner community to kind of come along in this transition that we're on to a unified customer platform.

Got it. Okay. Kate, need to double back to the macro because that's what people care about. One thing we didn't touch on, I don't believe at the start of this was just the -- the difference in the U.S., North America versus some of the international markets you play in. Can you talk a little bit about if there's any material difference in the sales cycles, what's coming through the top of the funnel, et cetera, across the key areas you plan?

Yes. I -- my inspiring opening statement would be, it's hard everywhere. It is a difficult selling environment everywhere. What we are seeing is that in developed markets, customers are behaving largely similarly. So there's nothing significant. On the margin, I would say EMEA is a little bit weaker than North America. And I would say that the SMBs, the sort of S of SMB is a little weaker than our mid-market and corporate.

Okay. Maybe margins. That's something that you guys made substantial progress on, and we have the guidance for this year. Maybe you could talk about the future and what some of the key drivers are to get you in a better margin position.

Yes. So at last year's Analyst Day, we shared -- we reiterated our long-term margin framework for a 20% to 25% non-GAAP operating profit. And we also included an interim -- tangible interim goal of 18% to 20% in 2026. We still feel great about the trajectory to get there. There -- the philosophy of how we get there is very consistent with what we have been talking about for a couple of years, which is we want to continue to invest in an outsized way in product and engineering so that we can continue to drive innovation, that's going to fuel top line growth over the long term. And in order to do that, we need to drive leverage in our go to market. So when you look at the go-to-market, when you look at the leverage framework, we have the largest gap between where we are today and where we want [Technical Difficulty] marketing line item, and so we're going to continue to drive leverage there in order to both achieve the profitability increases that we will want it and also continue to invest in innovation.

Understood. All right. Well, I think we're bumping up against time. So it's probably good to stop there. Please join me in thanking Kate and Ryan from the HubSpot team.