Q3 2020 HubSpot Inc Earnings Call

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Since outlook, including a financial guidance for the fourth fiscal quarter and full year 2020.

Forward looking statements reflect our views, let me as of today and except as required by law, we undertake no obligation to update or revise these forward looking statements. Please.

Please refer to the cautionary language in today's press release, and our form 10-Q, which will be filed with you see see 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 or for a certain non-GAAP financial measures as defined by regulation G.

The gap financial measure most directly comparable to each non-GAAP financial measure used your discussed and a reconciliation of the differences between such measures can be found within our third quarter 2020 earnings press release, and the Investor Relations section of our website.

<unk>, it's my pleasure to turn over the call to have spots C O and chairman Brian Halligan.

Good afternoon. Thank you for joining us today, well none of us could have foreseen the difficult past. This year would take as we entered the final quarter of 20th 20 grape over our customers partners and employees will grow through with us.

Despite this challenging environment hotspot has grown very nicely demand trends have continued to strengthen in the third quarter as more companies digitizer, India and customer experience and build modern flywheels revenue growth was 32% in Q3 and non-GAAP operating margin with seven per cent, we'd have a record total customer growth at 39% year over year.

You're surpassing 95000, while multi product adoption is also continue to grow nicely representing over 45000 customers. These customers have also become more embedded in the hubs bite ecosystem as we reached nearly 2 million cumulative platform integrations.

The year is not over but I believe the growth we've seen in the third quarters. Both a story of digital transformation tailwind combined with excellent execution by our team build and deliver a terrific product for our customers.

A big focus for 2020 at <unk> on building, a CRM platform that couples and increasingly powerful enterprise back in with an intuitive consumer grade from it. This is a rare combination the software industry is unique to us in the CRM industry that rare combination is a result of a few things.

First we handcrafted have spot on a set of internal primary colors reporting content messaging data and automation. These primary colors are combined to create our hub, which all work. The same intuitive wet. This is in contrast, traditional CRM, which will call altogether through acquisition.

Second we have a large multi your investment in user research and design that gives them spot that consumer like feel third our entire company is laser focused on the lighting our customer culturally over the last few years, we moved from a funnel mindset to a flywheel mindset, where our growth rate is heavily influenced by the values.

Our customers are getting from are offering now the really exciting thing that happened. Since we spoke last was the release of sales have enterprise, which leverages. These primary colors add custom object adds proposal at the advanced sales automation and add to counting integrations like next week Quickbooks zero two are.

Sierra This was a huge relief for our customers and partners in particular. The addition of custom object changes the game for a lot of our customers custom objects would be very large investment for it that took over well over a year to develop prior to this release, our customers had to fit their business model into our relative.

Typically rigid object Mel now our customers can fit our object model around their business model. This was a big blocker for us would scale businesses that we've knockdown one customer legal too early sales have enterprise adopter praise the intersection of power needs Me provided I think we have had a.

100% use your adoption and couldn't be happier now it's still early days, but we've had a strong start with sales have enterprise net new we are hitting a record high in October [noise].

They're still allow them uncertainty in the world today, So it's hard to predict the future, but one thing I'm certain of is our approach to building product that the light customers is going to keep paying off.

I want to thank you for your time, so far today, we're proud of the momentum Nissan Q3, and remain optimistic and focused on closing up your strong now I'll hand things over to key to take you through our queue three financial and operating results in more detail.

That's fine.

Let's turn to our third quarter financial results and our guidance for the fourth quarter and full year 2020.

Third quarter revenue Grad, three accelerate at 230% every year in constant currency and 32% as reported Keith.

Q3 subscription revenue grew 32% year over here what services revenue increased 12% year over here I'm in as reported basis domestic revenue of your 24% in Q3, well international revenue grass was 39% here for a year in constant currency and 42% as reported.

International revenue represented 44% of total revenue in Q3 up three points here over here.

Deferred revenue.

As of the end of September was $259 million and 27% increase your ear.

Calculated dealings with $246 million and Keith train up 33% in constant currency and 38% ear for Ya on it as reported asos.

Early in the year, we introduced proactive measures to provide customers and partners that flexibility needed to remain productive and engaged parts of the hub spot ecosystem.

I'll make sure that the analysts day, we saw the vast majority of these covid customer really for class and the first half of the year.

Overall, we continue to see a small number of new requests.

And the retention of our customers at the end of the short term planes remain strong.

We continue to watch these trans carefully, particularly given the recent of tech and global Covid cases.

We also saw continued strengthened demand for new customers during the corner.

We ended two three with over 95000 total customers up 39% year over year.

Net customer additions or nearly 9000 and set another company record driven by brought strength across the bed desk. Although we continued to see notable grass and our starter gross sweet customers.

Average subscription revenue per customer of roughly $9700, but a few points sequentially a down year over year as a result of the strength that we've seen at the low end of the portfolio.

Total revenue retention was greater than 100 per cent in Q3.

Colors.

Of 27% year over year at the midpoint.

Non-GAAP operating income is expected to be between 13 and $15 million.

Non-GAAP diluted net income per share is expected to be between 21 and 23 cents.

This assumes 49 6 million fully diluted shares outstanding.

And for the full year of 2020.

Total revenue is expected to be in the range of $866 million to $868 million of 28% year over year.

Non-GAAP operating income is expected to be in the range of 63, and a half and 65 $5 million.

Non-GAAP diluted net income per share is expected to be between a dollar and 13.

And a dollar and 15 funds.

This assumes 48.7 million fully diluted shares outstanding.

As you adjust your models keep in mind the following.

Ah current spot rates, we expect a two point FX tailwind to queue for reported revenue and now expect neutral FX impact to reported revenue for the full year of 2020.

We have delivered modest operating margin leverage in 2020 as a result of our strong business performance, coupled with some cost savings from our shift to remote work.

At our analyst day.

I reiterated our commitment to investing for the long term and indicated that we expect to increase our R&D spending as a percentage of revenue.

As a result of this increase cut.

Coupled with a return to a more normal level of employee spend over the next year, we do not expect to deliver operating margin leverage in 2021.

We're still early in our planning process. So we will share a more detailed the outlook for profitability. When we report our queue for results.

The investments, we're making in both our product and go to market teams are paying off and will position as well to grow in 2021 and beyond.

And with that I'll have to call back over to Brian for his closing remarks.

I would like to close by thanking my leadership team and all of the hub sputtered out there listening Tonight.

Has been exceptionally challenging year, you all stuffed up during these tough guys with great execution and terrific resilience I feel lucky to be on your team.

Operator, let's open it up with some questions.

And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or <unk>. Please standby, what we compiled Q&A roster.

Your first question comes from Mark Murphy from J P. Morgan. Please go ahead.

Yes, Thank you very much and congrats on a very special performance.

Brian I was thinking back to Inbounded you had commented that this is the year that you started adding legitimate power to the platform and now we're hearing so much discussion of Ah custom objects are you surprised at how quickly the enterprise functionality has resonated in in <unk>.

This kind of environment and do you see more activity at the upper bound of your target market in terms of company size.

Hey, Mark.

Mm good question I read your read your report.

Your report that came out that was great.

I'm not that surprised there's been a lot of hard work. This Ghanaian kind of on the platform level on her on custom objects. Other things, it's been really going on for a long period of time and this was the are we really wanted to strengthen that enterprise two of our product the product will be stolen July 200 to 2000.

Level customers and we knew for customers of that size, a major objection from existing customers, who were graduating and new potential customers was gosh. We've got this evolving business model, but we have to kind of jam our business model into your relatively fixed object.

Into your contact companies deals and sort of rigid the way we structured it and.

And what custom object gives them the ability to do is rap hub spot in our object mall around and evolving a more complicated business model and so this makes us a better fit for example for a university there can be a student object or SaaS company. There can be a subscription object there can be for manufacturing.

Company inventory could be an object. So it just gives you a ton more flexibility if you're scaling company and so I'm not shocked that we're getting good adoption. It's it's a mini loud noise from that Europe customer for us for a number of years and so we undertook the price that project as part of a <unk>.

Last year and it came out great. The nice thing about sales of enterprise done about those custom object is there part and parcel of hops on survey inherit all the great automation and all the other great reporting that I'm kind of bolted in there it's sort of like an apple like feel to them, they're really powerful and really easy to use so I guess I'm not shop.

Okay, Great now Kate I I had a a mathematical question for you when I was trying to run the mass at the analysts J a I think it said marketing hub was over 600 million go in at least 20%.

And sales hub I think over 160 million grow into 60%.

And so yeah. So I I ran the math on that it looks like you're almost booking as much of your new business with Phil's hump now as you are with marketing hub <unk>, it's getting close kind of Ah. This twin engine situation is it fair to start thinking.

Of it that way already you know this soon or is it possible we'd see crossover there in the next couple of years because I was also considering I think Brian set just said that.

October actually I thought he said October not September what was the.

<unk> the highest level you've had for you know sales Hall better prize net new a R. R. So I'm <unk> trying to kind of tie all that together and see what you think yeah yeah.

Yeah, <unk> I think you're gonna see and has seen ebbs and flows across the marketing harm in this day I'll come over time, I think they're both great engines for the company and I think they're both gonna be big growth drivers to come.

Thank you.

Like the pipeline looks good customers are quite happy our value prop is quite strong or products are getting better.

Customers need to move from an outbound model to an inbound model from outside selling inside selling from offline to online our product is a really really really good fit for that type of thing in so I'm feeling good.

And quite positive these days actually.

And Brian I guess, when you think about it as you look to next year, you're clearly going to invest to take advantage of the growth a lot a lot of investors and companies start thinking about comps.

For.

Your next question comes from Samad Samana from Jefferies. Please go ahead.

Good evening, Thanks for taking my question and let me Echo the very strong results were great to see I guess, maybe first question for you.

It was really impressive performance of that net ads is up quite a bit quarter over quarter, but yes, RPC also increased quarter over quarter. So is it fair to assume that the company either had more pro and enterprise signings as a percentage of the mix in Threeq, you or was that a function of of something else.

Yes. Thanks for the question, Yes, we're obviously very happy with the new customer adds for the quarter.

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I would say started Ruth suite was.

Another quarter really strong.

So that was a big driver of the customer count growth in Q3.

One of the things that I like about the quarter was that we also had really strong adds in the professional and enterprise.

Additions and and frankly, both in marketing and sales.

So yes I.

I would caution us not to expect eight or 9008 or 9000, new customers every quarter.

But it was you know it was a great quarter for new customer adds as far as Asps RPC.

And I think coded minded.

Sped up selling the plans on that is that people are they're at home in their prospects are at home and their customers at home and.

And it sort of it was kind of a compelling event this beat people up.

It can cross perfect product go to market <unk> in that middle that 20 to 200, we do extremely well in there I think when you're seeing this year is nice improvement on product markets fit and go to market <unk> <unk> go to market fit.

In the small am the enterprise on the small side, we did that we.

The ones that you've been seeing through this this summer and then into all the way through October but at the same time, we are seeing Covid cases are spiking and you guys. You mentioned in your prepared remarks that is a consideration. So how does your guys' reflect that in your Q4 guide maybe that's a question for Kate.

Thank you.

We've been trying to take a very consistent approach for many years in terms of how we think about guidance you know in.

That's sort of like Hubspot people have all this.

It's just been getting better and better in sort of got a lot better a month ago, the sale sub enterprise the leaf.

Lee borrowed that idea here at Hubspot and one of the bugs in the buying experience for Hubspot, that's been going on for a fairly long period of time, it's caused customers to cringe.

His marketing contacts and you can imagine how this might happen when we first started hubspot.

Accounting system and have all that stuff closed off and close the loop and we came out with <unk> early version of that we felt the bedroom, probably getting really really good adoption.

Keep your eye on that channel, there's more to come on that front customers really liked that area that we're investing in order to invest more.

HM.

Sure next question comes from the line of Orange and Buddy from William Blair.

Hey, guys, Thanks, and all that kind of my congrats on the quarter K. If I can start off I know, we touched on this a little bit last quarter, but.

Is there anything any update that you can give us on this covid cohort.

And just two questions first on retention D C risk for that to check back down after if lockdown start again uhm or have your customer has been able to figure out how to kind of work through the new normal or I guess on the flip side is there more headroom for December to improve as we get further out from the short term.

<unk>.

Okay.

Thanks, Thanks very much.

Ryan when do you think about sort of just the opportunity with the sales.

Enterprise sales hub I would expect that the easier land is to sort of continue to grow with your customers that might have historically grown sort of out of your technology versus going after sort of net new customers, but that might be wrong. So just kind of thinking about when you talk to your sales leaders you isn't about trying to go and rip and replace it.

About expanding with existing customers already with you I guess, how are you thinking about that balance because I imagine the sales cycles are very different with those two conversations.

Yes, there is a few layers to it I think the lowest layer on the case Q.

[noise] retaining those customers longer.

We have customers that outgrow us these reasons our growth things like.

My objective is a big reason why someone would outgrow us in so retaining them as they go from 200 to 2000 is a good one.

Then just winning more deals.

People hesitate to buy Hubspot, if they think they're going to really scale up there where you know its hubspot for scaling company than I think the answer is yes now between what we're doing on the functionality side and what we're doing in the business model side, we cut them object, which is much much more attractive and then maybe the third layer on that team is ramping up.

Replacing.

Our other tools that they use that theyre plugging in anything from zoo to Google AD words, too little startup building stuff on top of spot.

That's helpful. Thanks, and congrats on the quarter.

Thank you.

Your next question comes from the line of code Chiquita from Oppenheimer. Please go ahead.

Hi, great. Thanks for taking my questions congratulations on a really great quarter.

First off I wanted to thank Brian for bringing up that that radio shack attic picture that add in my head right now so that was definitely the Celtics. So thank you for bringing that up.

I wanted to ask you about the sales enterprise version, especially what specifically on the object.

It sounds like it's a real game changer for that version I guess, what good could you talk a little bit about what cousins object means from a customer lens that enable them to maybe replace any existing applications or does it enable the customer to maybe stay within the hubspot ecosystem longer as the business scales before they have to maybe look outside the home.

Spot box for additional features.

The way I would describe it as one should see you or University Koji University of carriage and you're using Hubspot, you're just premise shoehorning. Your student you call your prospective students leaves impact.

You call. Your students that are in here you call them customers and Jim.

Jim This is done unnatural, you're kind of Janney your business model into Hubspot pretty rigid.

I kind of in my head physician Drupal pretty far up market like the White House runs on Drupal and you know it's huge M for Ya enterprises wanted to a ball more where we live in kind of a mid market is more wordpress and you know, we integrate really nice too repressed and somebody who loves work best they can keep it but I do think that.

Sure of having the C. R M and having the C. M. S. Together is going to enable developers and ask people to do.

<unk> over the next couple of years, So I think that's where for competitive advantage is gonna come from.

Got it thanks for taking my questions.

Sure.

Your next question comes from city Panic from Missoula, How please go ahead.

Hey, this is like a burnt orange city upon a growing and congrats on record once again I wanted to die quickly on international and you saw this accelerated in the quarter can you point to anything in particular that is driving success abroad, everything Fortunately expect international to maintain this type of strength, even with the ongoing.

Shut down.

Yeah. Thanks, so much for the question.

It's interesting that you called that out I actually think that performances pretty broad base and so yes, we saw some acceleration of reacceleration in the international grass. We also saw reacceleration in domestic room. So I I think it's a cross hubs across.

[laughter] geography is we saw really strong performance.

Sure next question comes from the line of print Brislin from Piper Sandler. Please go ahead.

Hi, This is a card jeffries on for Brent I was wondering in terms of the traction in the enterprise and professional customers. This quarter, you know on that higher and sort of customer how long were they in the funnel wondering whether these customers were looking at a digital engagement products for even since the early pandemic and they you know they kind of finally converted and cute.

Three or these new customers that are you're engaging with in quarter and converting it into three alone just trying to understand if their customers out there that are kind of enduring the pain of a traditional go to market and then they have to make the change now kind of entering the back half of the year.

Honestly, it's a little bit of both with a lot of people who have been.