Q2 2020 HubSpot Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Hubspot Q2, 2020 earnings Conference call. At this time, all participants will listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone please be advised that today's call.
Conference is being recorded if you requiring further assistance. Please press star zero I would like to how the conference over to your speaker today, Chuck Macglashing head of Investor Relations. Thank you. Please go ahead.
Thanks, operator, good afternoon, and welcome to Hubspot second quarter 2020 earnings Conference call.
Today, we'll be discussing the results announced in the press release issued after market closed.
With me on the call. This afternoon as Brian Hogan, our Chief Executive Officer, and Chairman and keep Euchre, our Chief Financial Officer.
Before we start I'd like to try your attention that the safe Harbor statement included in today's press release.
This call will make statements related to our business that maybe considered forward looking within the meaning of section 27 day of the Securities Exchange Act 1933 as amended.
Section 21 of the Securities Exchange Act, if that came 34 summit.
All statements other than statements of historical fact are forward looking statements, including those regarding management's expectations of future financial and operational performance operational expenditures expected growth.
This outlook, including our financial guidance for the third fiscal quarter and full year 2020.
Forward looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise these forward looking statements.
Please refer to the cautionary language in today's press release, and our form 10-Q, which will be filed with the FCC. This afternoon for discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
During the course of today's call were for certain non-GAAP financial measures as defined by regulation G.
The GAAP financial measure most directly comparable to each non-GAAP financial measure you just are discussed in a reconciliation of the differences between such measures can be found within our second quarter 2020 earnings press release.
At Investor Relations section of our website.
Now, it's my pleasure to turn over the call to Hubspot, CEO and chairman, Brian Hogan. Thanks, Chuck Good afternoon folks. Thank you for joining us today Roshe run through a lot in the last few months collectively were still weathering the storm, but I'm happy to share progress Hubspots made over the last quarter.
Constant currency revenue growth was 26% in Q2 and non-GAAP operating margin was 9%.
Total customers grew 34% year over year surpassed the 86000, while multi product adoption continues to grow nicely representing over 38000 customers. We were fortunate back in Q1, there has to wind in our separate strong start to the year. Nevertheless beyond plot of the global pandemic was felt throughout our company into.
Customer base.
Much of our spring was focused on helping our customers and partners respond to be economic downturn. The day I'm thankful to say that the disruptive headwinds we paid early in Q2 heavy it might have even began to ship.
In our favor helped along by some nice execution into important plays we ran.
You've had a strong product here so far that's raised the power of our enterprise tier while also adding new products through the mix.
Beginning Q1 with the introduction of an entirely updated version of marketing of enterprise.
This relaunch came it kind of advanced features including revenue attribution reporting.
Hi, powered AB testing and account based marketing marketers can now start with that in early stage and grow with us into a large scale up now that we've released this product marketing hub enterprises really resonating nicely for us as a more.
If you do we introduced a new product line CMS. So this is the completely reimagine version of our previous CMS add on with advanced features making up a pro and enterprise tier.
We have found strong product market fit in the mid market between simple, but limited website products in overly complex content management system CMS hub give companies the benefit of advanced features like dynamic content adaptive testing in 24 by seven security monitoring with all in all that heavy maintenance and design needs.
It comes with legacy content management.
Companies in organizations like class pads World Wildlife Fund and Randstad have now bill sites on the news CMS.
Normalization of our CMS through the addition of the peers led to a really nice re acceleration and growth in that product line you see their traditional enterprise that playbook is the cobbled together a chronic through acquisition.
This approach has led to a pretty rough enterprise front end for lot of products married to a pretty solid enterprise Bakken.
Spots to skew that traditional approach, we chosen instead to hand crafted our product in house.
Underneath some spot there's only one view of that customer in a consistent user experience across that from it.
Weve marry a consumer like front end with new enterprise power. This is giving us a real advantage in the marketplace I think our patient approach and our flight obsession with Apple is starting to really payout.
Now.
We haven't just they're working on their price tier help more businesses make the transition from offline to online after the crisis that we reduced the first your price of our started gross suite by more than 50% increase email sending call limit. Additionally, we really greater editing controls over AD campaigns across Google.
It's both in linked in marketing Hubspot starter.
All of this resulted in a 400% plus increase in our starter installed these growth as free users upgraded many new businesses move fully online for the first time.
We coupled this onramps the hubspot with the surgeon educational content, we see a record engagement and Hubspot Academy as a result is back in Q2, we saw nearly 150% increase year over year, the academy sign ups and similarly strong growth as a number of people getting certified announced spot really great stuff I'm incredibly proud.
The way the entire team the team to deliver on or product roadmap in pivoted to help our customers amid rapidly changing times companies in nearly every every industry hasn't moved their teams or go to market strategies in the entire customer experience online what might have been a gradual digital transformation for some businesses.
It's now been dramatically accelerated by the impact of the pandemic, we've become the platform to support that transformation in the mid market.
I'm encouraged by the traction we saw in the second quarter and we see evidence of a continuation of that performance in the early part of Q3, but this short term demand environment is still quite fluid. So we're watching very closely now I will hand things over to key to take you through our Q2 financial and operating results in more detail.
Thanks, Brian, Let's turn to our second quarter financial results and our guidance for the third quarter and full year 2020.
Second quarter revenue grew 26% year over year in constant currency and 25% as reported Q2 subscription revenue grew 26% year over year, well services revenue declined 3% year over year on an as reported basis.
Domestic revenue grew 20% in Q2, well international revenue growth was 36% year over year in constant currency and 32% as reported in.
International revenue represented 42% of total revenue in Q2 up two points year over year.
Deferred revenue as of the end of June was $241 million, a 22% increase year over year calculated billings was $202 million up 21% year over year, both on an as reported basis and in constant currency.
Hubspot ended the second quarter with over 86000, total customers, which was up 34% year over year.
Net customer additions exceeded 7800 and set a company record.
Driven by strong demand across our entire product portfolio, but particularly in our starter gross suite.
Average subscription revenue per customer of nearly $9500 was down both sequentially and year over year as a result of the strength we've seen at the low end of the portfolio combined with elevated levels of customer downgrades.
As we highlighted last quarter, we took some proactive measures in late March to help alleviate the impact of cobot 19 for our customers and partners.
He is included offering flexible payment terms and customer friendly downgrade alternatives to our most impacted customers and prepaying some partner commissions.
As a result, we expected retention rates to try and lower in Q2 due to the weaker economic environment as well as the impact from our customer friendly programs.
Well, we did in fact see pressure on our retention rates in Q2.
We maintained a net revenue retention rate of 90 per sat with the majority of the decline continuing to come from customer downgrades.
It's still quite early but we have seen encouraging performance from the first cohort of customers coming off the short term discount and moving back to more normal pricing.
I want to stress, but the near term economic environment is still uncertain, but we're cautiously optimistic that the plays you put in place helped our customers and partners adapt in these difficult times.
The remainder of my comments will refer to non-GAAP measures.
Second quarter gross margin was 82% flat year over year subscription gross margin was 86% well services gross margin was negative 8%.
Second quarter operating margin was 9% up slightly compared to the same period last year.
Well, we plan to maintain disciplined approach to investment through the remainder of 2020, we expect our planned returned to work initiatives and continued investment in R&D to largely offset these expense savings.
At the end of the second quarter, we had 3769 employees up 29% year over year.
We expect total head count growth to moderate in the second half of the year as we start to compare against our strong hiring quarter from 2019.
Net income in the second quarter was $17 million.34 per diluted share.
Capex, including capitalized software development costs was $14 million or 7% of revenue in the quarter.
We continue to expect Capex as a percentage of revenue to be about 7% in 2020.
Free cash flow into second quarter was $800000 driven by strong business performance and better than expected customer cash inflows.
As a result, we're increasing our expectations for full year 2020 free cash flow to approximately $40 million Hubspot ended the quarter with $1.2 billion of cash and marketable securities at the beginning of June we successfully executed a 460 million dollar convertible bond issuance.
With a concurrent repurchase of roughly 70% of our existing convertible bonds due in 2022.
As we look to the future we remain confident that our strong balance sheet will provide us with the financial flexibility to invest for the long term.
And with that let's dive into guidance for the third quarter and full year of 2020.
For the third quarter total revenue is expected to be in the range of $210 million to $211 million up 21% year over year at the midpoint.
Non-GAAP operating income is expected to be between seven and a half an eight and a half million dollars.
This range includes one point headwind to operating margins from our inbound event in September.
Non-GAAP diluted net income per share is expected to be between 11 and 13 cents. This assumes 48.8 million fully diluted shares outstanding.
For the full year of 2020.
Total revenue is now expected to be in the range of $828 million to $832 million up 23% year over year.
Non-GAAP operating income is now expected to be in the range of $52 million to $54 million.
Non-GAAP diluted net income per share is now expected to be between 90 to 96 cents.
This assumes 48.5 million fully diluted shares outstanding.
Our guidance reflects a view of the business that we're comfortable with today given the current economic environment.
And also factors and heightened future uncertainty caused by the pandemic.
As you adjust your models keep in mind the following.
As a result of the recent weakening of the U.S. dollar we've seen a meaningful reduction and the headwinds related to foreign currency for the remainder of the year.
Current spot rates, we now expect a one point FX tailwind to Q3 reported revenue in a neutral FX impact to reported revenue for the full year 2020.
In Q2, we elected to begin tax affecting our non-GAAP net income, which we believe better aligns with the FCC guidance.
Our updated non-GAAP EPS guidance for Q3, and the full year 2020 includes the impact of this change.
Importantly, this change does not impact our historical reported GAAP financials.
Please refer to the table included in our press release for the historical impact to prior period non-GAAP earnings.
In Q2.
Excluded the accounting impact of our convertible debt repurchase from our non-GAAP net income and free cash flow.
Please refer to the non-GAAP net income and free cash flow reconciliation tables included in our press release for more information.
And with that.
I hand, the call over to Brian for his closing remarks.
Throughout 2020 has thus far been one of his versus the society, we faced in public health crisis, and economic crisis and increases the conscience.
When the dust settles role will be change, we're trying to lean into the future ourselves and helping our customers and partners are with us on the conscious side of that equation enough spot, we've been working to advance diversity inclusion and belong in our culture representations.
We have a long way to go through its become one of our top strategic priorities. It's also become important for me personally to learn evolve is the gallery against racially adjusted to the ways that I Kid.
My hope is that what started as this story leavers to be this year will become one of resilience in resilience lives on diversity. Thank you for your time I look forward to see many of you again order first ever virtual.
As part of inbound pointing on September 22nd we've recently it was Davis your more ways than one as you all there.
Okay, operator, let's open it up to some questions.
And at this time I would like to remind everyone in order to ask a question you will need to crest star one on your telephone to withdraw your question press the pound or hash key.
Please standby, what we've compiled acuity roster.
Your first question comes from stands Latzky from Morgan Stanley.
Perfect.
Thanks, so much guys and.
I hope, everybody, saying, well AWG and congratulations on a very strong quarter.
Maybe the thing that really stood out to me was the strength of the starter package.
You guys reported in the quarter I understand the contributions to the overall customer growth in the quarter.
As you look across and maybe try to slice and dice that the strength there of any similarities within the customers that are adopting the starter package in the current environment and then I have a quick follow up.
Hey, Dan Thanks for question and help your well.
That's something we're actually was relatively closely.
Let that.
We've been.
I wish they pleasantly surprise, we've got stars suite adoption, we just to refresh everyone's default memory, we lowered the price of the starters, we'd get marketing sales and service product altogether.
66%, so $60 a month now for the first 12 months.
And we did that rate when it started at work.
There isn't really nice adoption of it and you can see that with lots of new less birds weve customers and Thats 70, <unk> hundred net new customers number. So we're really happy with it and we're watching those cohorts super carefully.
We're looking at the quality of those cohorts like what is the buys in makeup of the company buying it what is the retention rate calculus calculation on those.
Cohort, what's the upgrade rate and so far so good.
They look pretty good theres similar sized companies that were buying for we'd be for other retention rates look pretty good. So we're going to keep that that first year. If the dollar for now and see if we can use as a growth lever going forward, we're pretty happy with it.
Perfect and then maybe just one more.
The the geographic growth you are slow to 20% international very strong 36%.
Constant currency.
When you look across the various geographies is a fair to say the U.S. seems to be the most impacted with all of the downgrades and international to be seems to be.
Hang in better.
You kind of qualitative commentary as far as you know where are you seeing the pockets of opportunity as well as strength in the various geographies thats. It from me. Thank you.
Okay.
I guess at a high level the international business is going really well and I think that because we've made some big investments over the last five years and return to get a return on those investments like big investments offices.
In Europe large office in Dublin, now we have Paris.
Berlin, We've got offices in Japan in Singapore, and Sydney and needs and one in Latin America now, but those are big investments, we've invested heavily in translating not just our product and as a reminder, but the whole customer experience different languages getting nice return on that I.
I think another reason international is doing so while it's just the unit economics are really good growing fast.
Got to acquire customer relative to total lifetime value those thoughts are hiring a little faster there.
I guess in terms of North America.
Jamie bullish about I mean, it's huge market, we've got great product market fit.
Tons and tons of happy customers. Good word of mouth, the sales organization North America's mature.
Think we're set up well for steady strong growth North America for several years to come here I feel good about it.
And then I'd just add to Brian's comment if you look like overall revenue growth decelerated from Q on Q2, and if you look at new Afton International what you saw in sort of the more mature.
More developed market is very similar level of deceleration across those markets.
Where we saw a bit of an outsized impact was really on some of the more emerging markets.
Got it thank you so much.
Your next question comes from Christopher borrowing from Goldman Sachs.
Hi, Thanks, very much for taking my questions I wanted to ask about CMS hub I think you talked about a bit in the prepared remarks, but.
Particular, where you're seeing success, there that helping to onboard symptom brand new customers is are you seeing some early.
Success, there with cross selling to the existing base just curious any other color you could share about that product. Thank you.
Thank you for the question I guess did so one or both.
I am very I'm very excited about that new hub.
It's a funny industry and of the industry down the bottom of the industry's guys like really strong SaaS players like.
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Does the company called Squarespace. This private is doing really well down there and they're south product, but most of the market is buying kind of opened stores client server technology.
And it's funny that way and so we feel like the big opportunity to build a true staff product and all those benefits that product.
We have a great advantage in this market because we've built that CMS from scratch when we built our CRM from scratch and that's one plus one calls.
And when you combine those through product together with the same user interface and you're just able to create a great experience for your customers to use them together so.
I feel really good about it we're getting lots of new account through it and we're getting some up sell through it we launched we couldn't Washington or worst time, we launched in April but.
But despite having favorable timing on launching it doesn't really really well and I think thats going to be a big up for its kind of like sales of it.
Okay, Great and maybe just one quick follow up on billings.
Very solid number there I mean, it little bit slower than.
Then the revenue growth indicate I think you called out some churn, which you had.
Spoke to last quarter. So could you just give us a sense of magnitude.
They are just in terms of what you saw on its I imagine it was.
In line or even better than your expectations given given the performs in the quarter.
Yes, sure thing, so typically carry and probably a little bit better than what we had.
Hoped for most of that frankly is driven by solid performance on the new business side.
But what are the things that.
We talked about last quarter.
Also expected that we would see.
Decrease in billing terms.
During.
A period of economic.
Turbulence and we saw a little bit better performance on that regard in Q2.
We continue to expects to see in our customer base.
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Duration compression.
Overtime and that will cause billing growth should be a little bit shy of the revenue growth at constant currency.
Perfect. Thanks, so much.
Your next question comes from Argentina from William Blair.
Hi, guys. Thanks for taking my question.
Right and we've talked about the partner the partner channel on the agency workload.
Based on the commissions just curious if you've seen kind of any change in how the partner channel contributions from holding up over the past 90 days.
How much.
What was strength is with those partners. After you had worked with on Q.
Okay.
The business going.
Sure just to refresh everyone's memory on the call.
When.
When things first started hitting in kind of mid March one of several baby rain.
Was to advance the month of commission through our partners and I think that went over really well I think that work for us on work for them they were able to kind of stabilize their business I.
I think it prevented lay off that a lot of it so I'm feeling very good about that call.
And I think our partner you generally weathering the storm quite well.
If I look at the numbers through Q2, and even through July they look pretty solid and stable I don't see any big red flag to be weathering I think some are getting a lot better than others. Some are feeling more at when some more tailwinds, but generally feeling pretty good about that partner channel right now.
Perfect. Thank you and then arc energy just from a from a percentage of revenue perspective, it ticked up a little bit in the quarter I think is 40% to 43% revenue.
Perfect. Thanks.
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Okay quick follow up for you you did raise your full year kind of revenue guidance pretty meaningfully above and beyond would be on them in the quarter, maybe just talk about what you're seeing in the back half of the year that gives you a bit more confidence and having a few quarters will play out.
I guess just start by saying that we approached guidance with the same sort on foundational framework that we've always suburbs guidance.
No our model.
Quite predictable, particularly as it relates to sort of short term.
Much like we did last quarter.
Well you sort of recognized.
There is more forward looking uncertainty and we ran a bit of a broader set of scenarios.
To look at the second half of the year and try to understand sort of upside and downside.
Outcomes and frankly, we feel really confident about the numbers are putting forward.
Great. That's helpful. Thank you very much and congrats on a core.
Your next question comes from Ryan Macdonald from Needham and company.
Hi, Thanks for taking my questions asked first off Brian.
As we kind of gone through the impact of the pandemic here you sound any sort of pockets or verticals, where you were surprised that maybe demand can you saw increased demand that you didn't see sort of pre cobot at all.
Okay.
Not really.
The thing about this kind of interesting is.
You know theres been some industry, there's just been been.
Brutal on a couple of industry. We just didnt have a lot of concentration of some of those industries like that restaurant quality can travel those are pretty small for us we've got a heavy concentration and b to b.
The other side of that is.
People call it SMB software, where more and that App like.
More than two thirds of our revenue comes from companies that are that are over 25 employees. So we're we're a little bit like net suite is the back office as part of the front office. So we were definitely impacted we built the wrong.
Strong headwinds demand was soft like marshmallow in Q2, but feel a lot better about things easier in July.
Excellent and then just a quick follow up you mentioned last quarter that multi product customers youre seeing a bit better retention there than with single product can you just talked about how that trended during second quarter, and if you're seeing either improvements or maybe some deterioration there at all thank you.
Sure.
Multi product customers do tend to retain better than single product customers and we continue to see that quarter that has not changed.
Your next question comes from Brian Peterson from Raymond James.
Hi, everyone hope of Rowan's, well and congrats on every quarter. So Brian just as we think about the pace of product innovation. We can kind of look back at main sale. Obviously, you had CMS up come out this year I'm curious, how we should think about the hubs being added to the platform over time, what that could should look like.
Well, we're certainly I've done with hubs I can tell you that I guess for big step back and think about spot.
And kind of what's going on inside of Hubspot is a year ago. When we were on this call.
We talked a bunch about seeking a separate to back. So we can report step outs fair.
We were super patient about that and.
That's paying off for us now.
You can kind of be it without the January February we get off to Dillard, starting the year, we will announce that CMS.
Marketing on enterprise product did really well.
And we're starting to get a real return on the other thing around patients for us.
We've got a different approach building our company in our product like if you look across enterprise software as a CRM industry lots of companies in enterprise.
CRM, they're more like private equity company would giant salesforce is attached to them than they are like true software companies they call their solutions together with them and eight coming in crack it from scratching how.
And I think over the very long haul that will set us up quite well to compete in the mid market.
I think there'll be a lot of value for that and I think it's the new way of building one of the CRM companies.
And that all in one approach is really going to pay off the way we describe it internally they change the way. We described we call our primary colors, so underneath spot.
You've got data you've got automation.
Got reporting you've got met beginning to get these different kind of shared services underneath that and then themselves.
Our product managers and our developers in or designers theres sort of grading. These beautiful applications that are really easy used in the front end increasingly this year with marketing how better price a better bride veight there they deliver a real powerful punt on top of it so feeling really good about their product board there'll be more hubs become down the road.
I don't feel like Weve reached the edges of our vision for products, we can build to help companies build great experiences in the front office here.
Understood a quick color, Brian I mean, maybe as a follow up I just wanted to double click on linear already a bit it sounds like things got better in June and July is that from a new customer logo perspective or is that also kind of profit retention perspective, as well any color you could add on that thanks guys.
Yes, it's sort of sales three cities January and February Wow incredible.
March through May Marshmallow Soc.
And then June and July it's always you got back on track a little bit in.
And the question of an appetite both what's going on how much of this is based on spot in your comments.
Okay and.
And I I kind of give credit to read things for the bounce back.
One is like for a long time, you've been espousing a vision on meet move from offline marketing online marketing outside built insight built to build a flywheel opus.
Great digitized front office.
Yes use digital transformations that to rethink your front office approach in the stuff, we bought was going to happen in the market for because they don't really big years really happened over the last over six months now it's really set up so our vision for in a massive time. The plays we ran works.
We talked about this starter play that worked really well, but they were the whole you read the places that we ran to help our customers and partners weather the storm and I think the team executed them really well ever welcome season, while I do this and then the product than just talked about we took to step back last year. So we could big ports that for this year and I think we're getting a return on that we had.
Two new product offerings, this year with marking up better pricing the CMS of launching our net promoter scores are guy a high we broke a bunch of records with our on net promoter scores from our customers. So.
Yeah, I think it's Ben we don't know what will happen in the future I mean, this has been a terrible tragedy for so many people in so many companies then.
We don't know what will happen the economy or to our demand curve in the future. So obviously with that but the things did get better ingredients alive works.
Good to hear thanks, Brian.
Your next question comes from Samad Samana from Jefferies.
Hi, good afternoon, and thanks for taking my question and I'll Echo the congrats on on the strong performance.
Brian I wanted to ask just because I think historically hubs is done really well in b to B focused.
Smbs and I'm curious if maybe into just kind of renewed pivot from offline to online. If there has been any differences in the type of small SMB that you're getting whether there is more b to C. And there are just whether they're smaller or larger as you think about that offline to online cohort in particular, and then and then I have one follow up.
Not really we've got some on the Ginormous number of company between you know five employees in 2000 lets say was huge mark.
We have a very very small presenting does that not market on spot and so we're a little bit focus.
Turning to our netting to build out.
Pillar solution for that target market before kind of getting distracted with totally new value prop. So were you got our heads down we think through the huge market. We think are value prop is really strong we're really differentiate relative to competition. So kind of you got to write downs breaking away money.
Gotcha, and then I know that kind of trends question has been asked but maybe in a slightly different van if you think about countries that are maybe further along the reopening path.
As you've seen those countries reopen have you seen a change in.
Whether there are downgrades, they're going to.
Upgrading again or in terms of new deal activity.
We're just trying to see if thats, a leading indicator for what we might see in some countries like for you at that are earlier in the reopening cycle.
It's a good question like Australia open up a little earlier and that that started getting a little better a little faster, but really across the developed market.
They all kind of move in tandem front, obviously, where they slowed a bit we're in more of those emerging markets like India.
India Latin America places like that in those markets are ones that.
You don't have that you'd presence in any way, we're pretty focused on the bigger markets.
And we haven't rushed into those emerging markets. So we haven't been super impacted the thing. We don't know is what will happen in the United States, but we'll have to Europe and what the path, but this thing has given them do so it's hard to predict the future, but I would say.
You know feeling feeling cautiously optimistic relative to the last call. We obviously both last quarter.
Well, that's great here, and we're certainly happy habit to that as well. So thanks, again and I'll hop out you.
Your next question comes from Alex Zukin from RBC.
Hey, guys. This is going rider on for Alex Thanks for taking my question and congrats on great quarter.
Brian I guess just to start clearly this is a very disruptive time for some of your customers and thats, causing headwinds in some cases and tailwinds in other cases.
You clearly been practice and working with them to ensure that anxiety from all the spot and.
Been effective in reducing churn and offering promotions on the starter. So I guess just threw out all these different conversations you're having with customers and steps that you've taken to work with them could you speak with maybe some of the learnings and takeaway is that you've had as you think about your strategy coming out as coated.
Anything new or different that you might take from an operational perspective.
These conversations you've had customers. Thanks.
I think is really just moving the future forward at some of those up we've been espousing from pages that inbound in both than.
Blogger goals for 14 years.
That.
It's just a better way to go to market matches, the lead people actually want to stop and buying gauge.
And we don't have platform for that and I think it sort of matching the time.
But no no no like huge thing I think than we ran a number of wave that being the land. When this all the guarded and they've been pretty well and I think we're we're pretty good.
No we haven't done a big pivot so we talked about at about two or three weeks into this I was going to be pretty bad what do we need to change your product roadmap Nancy and were like you know what you actually built the product is well suited for this stuff, but let's let's keep our heads in pregnant.
Your next question comes from Walter Pritchard from Citi.
Hi, Thanks question on the customer hasn't how you're thinking about those upselling as time goes on especially relative to the customers you've added in the past given the dynamics of the lower end product and then and then had another question on.
On the expanding the product line.
Yes, so that we have a lot more of the starters meet customers coming you Walter a lot more that's done really well and we're watching the size of those cohort were watching.
The upgrades and we're watching the cancellation.
And so watch all very very carefully watching by cohort. The size is about the theme as previous cohorts on on that product line, which feels good to us that are what we didnt attract a bunch of mom and pop and.
The cancellations look real good the upgrades aren't quite as good as previous cohort, but theres still pretty solid from that started to pro. So early signs are really good that we made a change. There you are the demand curve looked a little bit differently than we thought we made a change do it and.
Yeah at least for now we're going to stick with it.
And then any any changes how you're thinking about the additions the product line via M&A any any more confidence you haven't your ability to to do that to accelerate the roadmap or you feel like you have enough on your your play at this point that that doesn't make a lot of sense.
I think we weren't we look at deals and.
We're just picky.
Thank you for a few reasons one.
Part of the reason we went in the marketplace. We built this thing like glow in house gorgeous front end consumer like front end just these therapies single deal in the customer on the back end not a bunch of different.
Cokie systems integrated together.
Our net promoter score word of mouth going way out.
Product organization.
Really took a couple step back is really frankly right now we feel like we have the bit ability at scale built great new product that customers love and so our confidence is high there more higher now than it's ever been.
You know well be sensitive on valuation as Stuart certainly that we'd be super sensitive on anything that.
Messes with that core competitive advantage, our front end and.
So we're just going to be very careful about M&A, we do them, we're going to theyre going to be good deal and they're going to be thoughtfully, Donna and thoughtfully integrated but were unlikely to break or core value prop pursing very short term.
Great. Thanks, Brian.
Your next question comes from Terry Tillman from Trust Securities.
Yes, Thanks for taking my question and congrats from me as well.
One thing I've always liked about Hubspot is just the testing and learning you guys touched a lot of things out you learn and you reiterate and you talked a lot about like running place what I'm curious with Pms hub is what are some of the early feedback and learnings you're getting because where I'm going with this it seems like the west getting rebuilt website clunky website was not going to work anymore.
And so do you see opportunities here with CMS hub to actually be kind of the tip of the spear the west to go after new business as a way for folks to.
Engage with Hubspot or am I thinking about but the wrong way in its really more about going into the sticky installed base. That's the first question.
I think our sales organization will will gravitate towards the lowest hanging fruit and that likely within our installed base than some of the part organization, but I think over the over time with that'll be a that'll be a front door, we bring lots and lots of customers. It is not by the way I think you're right I think the idea of a web site and I can give you have a way.
You don't want to whether you want to build the customer experience and that customer experience should be light into modern and it should be the light oil and you mean in new type of CMS pull that off and you need to treat it like those them and that CMS has had been married CRM and a lump us money with three.
I feel really good about product.
Product organization delivered and I'd be the business for it.
Got it and just to follow up relate to.
Looking at kind of the durability of your marketing up business, what I'm curious about what the marketing hub enterprise product you've got the AB testing you've got the revenue contribution and they BM like does any of those features really resonating more than others in terms of either helping with that business or replacing legacy marketing automation platforms. Thank you.
[music].
All of them are attribution reporting Ben for us.
Can you be testing has been very solid and account based marketing has been huge for us.
And they were very thoughtfully done there were there weren't bolting on through an acquisition. They were built with our primary colors student we executed inside the user base and that products mezzanine really really well and we're getting off to new customers, but we're getting a lot of.
They bought a lot of rip and replace the more legacy marketing automation venue.
The other thing I would say about how spot marketing up it's not just marking automation like I think a marking automation is.
As the way people would describe almost that old school middle of the funnel, where you've got the lead you scored the lead you segment. The lead you do automation off that lead on spas marketing support those all that stuff in a really elegant way you.
It does search engine optimization can be your advertising through it you can do your social media grew it you can marry or the web site.
Driven Lane ages in your blog.
As much much more than your garden variety.
Garden variety marketing automation platform, but still alone proud of the team the marketing gain it really innovative new cranked on it in the nice thing about that marketing industry at the big industry as a lot of money being that industry. The lot of value being delivered there's a lot more innovation coming up for us there.
Thanks look.
Your next question comes from Ken Wong from Guggenheim Partners.
Great.
First question for for Brian.
The roughly net customer adds significant uptick in the pays for what you saw.
Q1.
Can you help us understand how much of that might have that it just but then initial surge to meet immediate demand grows the.
Sustainable run rate that we should be thinking about from a customer adds perspective.
Mike Ditka pick them yeah. Thank you. So yes, you are obviously very happy with 7800 ads on I think we're also very happy that.
Particularly in that garner growth pace.
Pretty consistent month over month, we think it sort of.
I mean, a bit of a new normal for aspects or excited about.
The other thing that was.
A positive from our perspective is that why not just in that sort of Gardner grossly where we thought some strength.
Your customer adds are pretty strong across the board and then I think that you know as Brian highlighted has a lot about the value that our product.
It's delivering.
[music].
One thing that I would point out yeah, we obviously saw the MSRP drop quarter over quarter.
Not surprisingly we talked about the fact that was likely going to indicate on the last earnings call and I think that you are you're seeing that for a couple of reasons one is.
That really significant traction that we're seeing at the low end up portfolio is going to have sort of a natural.
Nick impact there and the other thing is.
That we have seen elevated downgrades throughout Q2 as a result of some of plays that we're running around the co Ed.
Thanks.
Got it limited a quick follow up.
As far as the net retention you mentioned I think 90% last quarter, you guys were talking about how things potentially trend lower from the low ninetys, but likely should be troughing in Q2.
We view that 90% as trough going forward.
Yeah, I would say you know what we sort of.
Lead you down.
Sort of the path.
Trend here starting in January and February at that 100, plus which is.
Strong performance for US and then in March that retention drop to the low nineties.
Good hanging in there at 90% in Q2.
Just a bit better than.
We had expected.
Okay.
Instead, who knows what the future brings but I am cautiously optimistic that we've seen the bottom here, we did see retention strength and on thin out throughout Q2.
Great. Thanks, a lot.
Your next question comes from DJ Heinz from Canaccord.
Hey, guys. This is look on for DJ.
So I wanted to dig a bit in them more on your CMS hub, and specifically whether or not the current environment.
Actually enhanced interest in that offering as.
Traditionally brick and mortar businesses look to be stop there their online presence so any commentary there on the tracks and you're seeing specifically.
In that context of accelerating E commerce adoption. Thanks.
I don't think Thats, a huge factored by honestly most of our customers are viewed to be a lot of b to b companies, arguing customers.
Nice integration to Shopify, and you have a bunch cubs.
But I think the CMS on product and get better and a lot more people are buying it might be whether we're in co overtime not but we've done I think we've got to bump on that.
Your next question comes from Peter Levine from Evercore.
Actually I think it's hurting the term.
I Hope you can hear me.
Just I guess to start Brian can you just talk a little bit about the adoption of the starter pack.
Right delineation between Europe, and you asked I mean, just based on your customer growth in Europe. It seem that that's taken off perhaps faster in the U.S., but I was just kind of curious if theres any differential and how you're seeing that adoption from a geographic perspective.
No.
Ben pretty steady across European on a ratios are pretty similar it seems like it and landed Atlanta.
Blended in the similar way across all geographies, maybe a little softer in developing markets, but really solid across the the developed markets.
Okay, and then just came on the customer downgrade comment sounds like.
You feel like you're kind of getting through maybe the bulk of those conversations at this point time I want to put words in your mouth on that front, but does it feel like you the amount of customers that are coming to that to talk about that is slowing and and that obviously helps in terms of visibility and obviously in our are going forward I want to make sure I'm I'm clear on that point, because that's what sounds like but again I want.
Or is there enough.
Yeah, I think you're right as it relates to that we put in place the number.
Is that the end of March designed to really help our customers whether a short term impact here and I think as Brian highlighted we they works largely how we wanted them to.
The volume of our class has continued to fall and as I said in my prepared remarks.
Cohorts are starting to kind of come out the other side and frankly, it's really early in that process. We have a long way to go by the early signs there.
Your next question comes from Jennifer Lowe from you yes.
Great. Thank you actually because maybe just to finish up on that side.
When you talk about customers coming out the other side does that mean that that they're starting to move back up to where they were previously or they're getting current on payments terms, what exactly does that look like when they come out the other side.
It's frankly, all the above Jennifer I think there's a variety of plays that we put in place short term guest counts as one example, many of the short term guest counts are 90 days in bank those customers would be starting to come up.
And we have seen.
Many of them progressing on a path toward more normal discount level.
Another play that we.
Ran was around more flexible payment terms.
And that would mean that our customers are coming up.
And how does have a payment due and yes.
We're also pleased with the performance.
Yeah.
Great.
One more for me.
If I look at the customer base and particularly at the enterprise are the more enterprise how did your base.
And just curious as companies have to move faster or maybe they once at solution is simpler.
Given that things are changing so fast and just curious if that created any differences in the conversations that you have or the win rates that you have when you're in a competitive situation, where maybe buyer need.
Look a little different because the world looks a little different or what they are prioritizing it a little different probably there would be interesting.
Good question Jennifer.
Lower kind of where like if I think though the legacy providers. They are hard to buy are set up our views arc home.
We're trying to Yang where the rest of the market Dan and we're trying to make it easy devices is set up easy to use an easy level.
And I think it's just resonating well and.
I think that marketing of enterprise the lease we didnt in January work and I think that CMS enterprise. The we Didnt April is working.
We've always been really easy to use that we've invested massive amounts of user research and design is really paying off.
And then we've added a bunch of power and and that's kind of the Magic Britain. Just don't you that combination number consumer front end really easy to use with that power on the Bakken and this year, we've added a bunch and you're likely more to come.
Your next question comes from Siti Panigrahi from Mizuho.
Thanks for taking my question just want to double click on the comment on his focus is down 5% we've talked about.
Makes sense of new customer thinking okay.
Cybersource promotion what percent of existing Douglas customer also well took out we're going to something.
Now $50 promotion and then.
All that promotion was supposed to prices go up 75 dollar in August so as I've said it to September how should we think about the south basi for the rest of.
Yes.
Yeah, why don't I will start.
And Brian if you want to any thank you.
The first thing that I would say is that the vast majority.
Customers that are adopting the starter growth suite, our new top spot.
So that's what's really driving the growth of that product.
Yes.
As Brian said, we are bit frankly surprised that this pricing change resonated as much as it did with the market and we've seen really strong adoption here.
We talked a lot about.
You know what to do about the pricing and we are obviously looking very closely at the performance of the cohort and for now we're going to keep it.
You know, we will continue to look closely but.
For at least that for the near term here, it's going to remain at $50.
Your next question comes from Michael turn from Wells Fargo.
Hey, there. Thanks, good afternoon, maybe stepping outside of the financials for a moment.
Thoughts known for its company culture, Glasgow scores are consistently off the chart just wondering how the pivot to remote work has been for the team given that close security Bill and maybe any observations you have around maintaining that culture with new hires likely coming on remotely as well.
It just feels cycle here as well.
That does the that's great question. So im thrilled at first it obviously, we have began on or employees out of our all of our offices in in your home set up.
That was challenging, but you're going pretty well I give a lot of credits to our people ops team into our facilities being dollar off you did a great job with that.
I think part of the reason I went pretty well what you were leaning towards Romo remote was or third biggest office wins. Both it hit we were we're trying to make that are more attractive option for new employees and brings us more oil oil than we and we were on top of that I do think our culture is very strong the real advantage for us.
I think one or one of the thing that we also saw I mean, it's been certainly interesting in challenging the month.
Between the health crisis going on the economic great sort of better pricing, obviously, well with all that stuff going on the black buys matter was meeting aren't in there we feel like our employees really care about diversity inclusion as guidance too and we would like to make progress. There. So we've been rolling out initiatives internally to that you talk about that in the short term.
We try to move the needle on that so our culture is still very much of the forefront we feel like we still do products. We built a product that attracts rig customers retain them and we built a product that fact, great employees remains them, we just call that product culture.
Your next question comes from Brent Bracelin from Piper Sandler.
Great. Thanks for taking the question, maybe I'll start with Kate and end with with Brian Kate.
About the new cohort of customers coming online this year.
The mix of billing terms between term multi versus annual are you seeing that shift a little bit more towards monthly just given the current environment any color there would be helpful relative to the nucor's versus the traditional cohort you're seeing.
Sure.
So.
The significant additions that we're seeing at that starter tier will have monthly billing terms.
And so that is probably the most notable shift.
With respect to customers, who are coming on to our professional and enterprise products as I noted in my billings comments, we had thought that we would be.
Pretty significant.
Reduction in the billing terms that has sort of hung in there a little bit better than what we had thought.
Okay. That's helpful color.
And then Brian I don't know, if you're able to answer this or not but I'll ask it anyway, I think a lot of the questions that have been asked and answered it really focusing around this idea of how much of the momentum you're seeing in June and July is tied to the promotional activity versus this idea, there's something more durable half.
Putting in the industry around the shift to kinda online the shift to digital even remote work, where perhaps you need to have a more modern kind of marketing sales approach in the mid market. So.
You think about those two drivers of what you're seeing in June how much of how much should we wait just around company specific promotions driving the momentum here versus a but couldn't be more durable trend.
I think it's more durable I don't think that promotion I think the promotions worked and.
I think they work there well design work, but.
Yeah, we've been talking about digital transformation for 14 years.
Hi, good movement from offline marketing online from outbound marketing been memory remote.
Bounce from.
Funnel, the why wheels, and you've been screaming for mills in.
You know our vision of the future for our customers that we thought we'd pig virus six more years like this is Bob Barton see around it and I think digital transformation is a massive way that's been going off for a long time. It just picked up a little seen here and our products are well suited our vision well suited our services organization, serving allow and got.
Maybe around that.
Income spot well positioned for nights on here feel good.
Encouraging to hear thank you.
Your next question comes from Parker Lane from Stifel.
It's actually Parker on for Tom Roderick sorry, Thanks for taking my question just wondered if you could talk little bit more about the pricing acquisition for late last year and how that business is tracking from an integration standpoint, it could go to market standpoint.
Just.
The other details together.
I think going great that team is doing terrific.
We're working on some often stuff.
And the business itself at the smaller business relative to Hubspot, but it's grown faster than we thought.
It's going really well I think whats interesting about I think their capability, what they are like super focused on and they're really like.
Got it somebody's got one application and they want to sink there were gaining.
Together with another application they eat sleep drink live that problem. It is a sticky hard problem. It actually was not a problem we were particularly good at it wasn't one of our primary colors and so the perfect type of acquisition for Us, where we kind of added that primary output.
So stay tuned for that.
Capabilities going to show up in other places than going to power some new capabilities down the road and I'm really feeling good about that.
Your next question comes from Koji Ikea from Oppenheimer.
Hey, guys. Thanks for taking my question is great quarter. Congratulations I just wanted to ask the question. Another question on net revenue retention trends and just thinking about the future a little bit fast forwarding into the future thinking about how the discounts today as those kind of normalize out and the renewals that.
Sorry, the annual discount that you have as those come up to renewal is the right way to think about.
Net revenue retention will those anniversarying of those discounts that normalization of the discounts act as a tailwind for net revenue retention trends, maybe boosted backed up to over 100% in the future.
Yeah, Hi.
Turn back the clock and talk about retention in a way that we were doing before the onset of co that I think that what you would remember is that we would say that we believe we can have net revenue retention at 100 plus.
Over the long term and I think we fundamentally believe that is true.
You are highlighting a.
[noise] trend that is real.
We we obviously saw some shark headwind due to the downgrade activity in Q2.
The customers come off on short term guest count.
And move toward more normal discount and they tailwinds to retention that will show up over the next few quarters. So from a near term perspective that should help.
And that was our last question at this time I will turn the call back over to Brian Halligan CEO for closing remarks.
Thanks, everybody for joining today I hope you stay well and we'll see you at inbound.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.