Q3 2021 HubSpot Inc Earnings Call
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Thank you for standing body your call will begin momentarily.
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Good afternoon, My name is Gina and I will be your conference operator today.
At this time I would like to welcome everyone to the hub, but Q3 'twenty One earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again Press Star then one.
Yeah.
Chuck Mclaughlin head of Investor Relations you may begin your call.
Thanks, operator, good afternoon, and welcome to hotspots third quarter 2021 earnings conference call today, we'll be discussing the results announced in the press release that was issued after the market closed.
With me on the call. This afternoon, if you have any wrongdoing, our chief Executive Officer, Dr. Metz Shah, our co founder and CTO and keep <unk>, our Chief Financial Officer.
Before we start I'd like to draw your attention to the Safe Harbor statement included in today's press release.
During this call, we'll make statements related to our business that may be considered forward looking within the meaning of section 27, a of the Securities Exchange Act of 1933 as amended.
And section 21 E of the Securities Exchange Act of 1934 as amended.
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.
The gross the leadership transitions and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2021.
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 SEC. This afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
During the course of todays call well refer to certain non-GAAP financial measures as defined by regulation G.
The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between such measures can be found within our third quarter 2021 earnings press release, and the Investor Relations section of our website.
Now, it's my pleasure to turn over the call to have spots Chief Executive Officer, Yummy Roentgen, Germany.
Thanks, Chuck and greetings everyone. Thank you for joining us today as we review hotspot third quarter 'twenty 'twenty. One results I Hope you were all able to join US a few weeks ago for our annual analyst day at inbound.
A lot of ground as part of those sessions. So today, what I want to do is to focus on the great results in Q3 as well as the strategic pillars guiding us on our path to becoming the number one CRM platform for scaling companies.
Let's kick things off with a look at our Q3 results, we're continuing to see strong performance across the business with revenue growth of 47% in constant currency year over year, and total customers growing 34% year over year to more than 128000.
As we've seen over the past your small and medium businesses continue to embrace our modern CRM to connect with their customers drive insights from customer interactions and transform their businesses for the digital age our strong results speak to the fact that hotspot is providing the right foundation for these <unk>.
<unk> to scale.
At our analyst day, I provided an overview of our long term growth strategy and introduce the four strategic pillars guiding our investments. So today I'd like to share how our recent product announcements at inbound are helping us make meaningful progress towards our long term goals.
Our first strategic pillar is to deliver a world class front office platform by investing in new and existing hubs as well as driving the extensibility of our platform.
We're always looking for ways to address the evolving needs of our customers and expand our addressable market will continue.
Have you explored the development of new hubs invest in anchor hubs like marketing and sales and accelerated innovation around emerging hubs like operation shop.
Earlier this week, we officially launched operations hub enterprise. This is a great example of how we are accelerating innovation in emerging hubs.
As you all know we first launch operations hub starter and professional earlier this year to help customers get all of their data into hotspot and build more advanced automated workflows.
No with operations hub enterprise, our customers are able to report on that data and more connected and consistent ways to generate insights to drive growth.
We also announced important improvements to service hub, including custom surveys and a new customer portal. That's currently in public beta.
We'll continue to invest so that our individual hubs are powerful and easy to use but we also know that much of hotspots magic comes from how our hubs seamlessly work together.
And with more than half of our customers adopting multiple hubs, we know that more and more companies are realizing the unique advantage that comes from managing their entire front office in one platform.
A great example of this multi hub approach in action is triage.
Staffing agency that arranges assignments for traveling nurses across the U S.
After connecting its back office systems to our platform and implementing our marketing sales CMS and operations hub triage has seen increased efficiency and performance across the company.
Their email click through rate double their sales teams capacity grew by 60% and they're now able to quickly mobilized for flu our COVID-19 vaccination.
There is still plenty of runway left when it comes to going broad and deep with our hubs and platform I'm really excited to see where the needs of our customers will take us next.
Our second strategic pillar is to strengthen our segmentation approach across product and go to market.
This is driving product innovation at hotspot in two key ways.
First we're bringing high end features that have traditionally only been available to large enterprises down to our small and mid market customers and second we're bringing a human friendly product and purchasing experience traditionally seen in small and mid market businesses up to large enterprises.
At inbound this year, we focused on the latter half of this strategy announcing new powerful and easy to use features that add tremendous value to our enterprise tier.
In addition to new platform wide governance features like permission sets an audit logging we also launch sand boxes.
Feature that enables customers to test changes to their portal without impacting their primary account.
In marketing hub enterprise, we introduced business units, a new feature that enables customers to manage multiple brands to ensure a more consistent and targeted experience for their audiences.
And new enterprise level forecasting tools and sales hub and service hub help managers keep track of their team's progress towards their goals. All of these enhancements help our larger customers customize their usage of hotspot without adding complexity as they continue to grow.
We're seeing success in our segmentation approach on the high end, we're consistently clothing more large deals and have seen an 81% your over your increased in Q3 large deals.
Our starter edition is also few willing customer acquisition.
That segment has grown from a small percentage of our customer base, a few years ago to more than 50% of our total customers as of Q3.
Now, let's turn to our third pillar investing in commerce and payments.
As I discussed during our analyst day Commerce has traditionally been thought of as an extension of the back office. It was sold to finance leaders and it was about collecting revenue and driving cost efficiencies.
But commerce as a part of CRM is fundamentally different and it's about enabling growth.
Not saving money.
We're excited about the long term opportunity for an integrated payment solution that said, we're still in very early stages of this opportunity and there are years of runway for growth.
For now we're focused on reaching U S based b to b companies, but fewer than 100 employees. So that we can deliver a strong product market fit before expanding internationally.
The product market fit in one geography ensures that we when we go international we're able to capture a significant portion of G. M REIT of any country we enter.
And while it's only been available for about a month, we have seen nice momentum with our open beta as customers tap into the ability to quickly and easily start taking payments.
One early adopter is then pilot and operations consulting business that needed to scale operations, but was being held back by a labor intensive payment system.
Then pilots previous system could only process credit card transactions and required manual work to process payments via a C. H.
With Hep swap payments, then pilot is able to accept ACTH payments with east. The sales team is able to focus more on lead generation activities and therefore have increased leads by 30%.
The early feedback from customers like Zen pilot is evidence that we're on the right path and enabling our beta customers to deliver a consumer grade buying experience.
I'm very excited about what the future holds for hotspot payments in the long term.
Our fourth and final pillar is to continue to scale hub spot.
As you've heard Brian and I must say before we want to build a company that future generations can be proud off as part of that vision, we're investing in hiring and growing diverse talent working on our environmental initiatives and doubling down on protecting our customers' data and scaling our systems to meet their needs.
By investing in these four pillars, we're building a strong foundation that will serve both hotspot and our customers as we chart our next phase of growth.
I'm incredibly excited about our long term opportunity and I'm very confident that we have the right strategy the right investment and the right team in place to help us execute advent.
With that I'll turn it over to Kate to give an overview of our fantastic financial results. Okay.
Thanks Chamonix.
Let's turn to our third quarter financial results and our guidance for the fourth quarter and full year of 2021.
Third quarter revenue grew 47% year over year in constant currency and 49% as reported.
Q3 subscription revenue grew 49% year over year, well services and other revenue increased 39% both on an as reported basis.
The momentum we've seen over the last year and a half continued into the third quarter with broad strength across the business.
We saw continued strength in revenue retention in Q3.
Lending nicely above our new target level of 110% withheld.
With healthy customer dollar retention continuing to be a big driver of our overall strong retention performance.
Net revenue retention also continues to benefit from multiple upgrade drivers, including strong cross sell activity and seat expansions.
Domestic revenue grew 41% year over year in Q3, while international revenue growth was 54% in constant currency and 58% as reported.
Well, our international and domestic revenue growth rates in constant currency remained flat quarter over quarter International.
Revenue as a percentage of total revenue increased three points year over year to 46%.
We added 7100 net customers in the quarter growing our total customer count by 34% year over year to 128000.
Average subscription revenue per customer grew 9% year over year to $10500. As we saw a continued positive mix shift towards our professional and enterprise tiers, along with strong install base selling.
As we've discussed over the last couple of quarters. We expect these trends to continue into Q4 with net customer additions of about 7000 and high single digit year over year growth and a S. R. P C.
Deferred revenue as of the end of September was $376 million or 45% increase year over year.
Calculated billings was $353 million growing 45% year over year in constant currency and 43% as reported.
Billings growth in Q3 was impacted by the strong install base selling mix in the quarter slight.
Slightly lower billing duration and a more difficult comparison as a result of COVID-19 related customer plays in the year ago period.
The remainder of my comments will refer to non-GAAP measures.
Third quarter gross margin was 80% down two points year over year as a result of increased customer usage and the launch of our new EU data Center.
Subscription gross margin was 83% while services gross margin was negative 9%.
Third quarter operating margin was 10% up two points compared to the same period a year ago.
At the end of the third quarter, we had nearly 5500 employees up 38% year over year.
Net income in the third quarter was $26 million or 50 cents per fully diluted share.
Capex include.
Including capitalized software development costs was $16 million or 5% of revenue in Q3.
Free cash flow in the quarter was $38 million or 11% of revenue.
We continue to expect Capex as a percentage of revenue to be about 5% in 2021 and now expect free cash flow to be about $180 million for the full year.
Finally, our cash and marketable securities totaled $1 $3 billion at the end of September.
And with that let's dive into guidance for the fourth quarter and full year of 2021.
For the fourth quarter total revenue is expected to be in the range of $356 million to $358 million up 42% year over year at the midpoint.
Non-GAAP operating income is expected to be between 34 and $36 million.
Non-GAAP diluted net income per share is expected to be between 52 and 54 cents.
This assumes 50.9 million fully diluted shares outstanding.
And for the full year of 2021.
Total revenue is now expected to be in the range of one point to eight seven to one point to eight $9 billion up 46% year over year at the midpoint.
Non-GAAP operating income is now expected to be between 113 at $115 million.
Non-GAAP diluted net income per share is now expected to be between $1.76 and one dollar and 78 cents.
This assumes 57 million fully diluted shares outstanding.
As you adjust your models keep in mind the following.
At current spot rates, we expect FX to be a slight headwind to as reported revenue in Q4.
And still expect a three point tailwind for the full year.
And with that I'll hand things back over to yamani for her closing remarks.
Thanks, a lot Kate before we wrap up I want to extend a huge thank you to our customers partners and employees for your support over the last quarter. It was such a joy to connect with you all during inbound and I have felt so welcomed and energized as I transition into the CEO role.
As you heard me talk about it inbound we're now in the age of the customer customers want and expect a frictionless connected consumer like buying experience at every step of their journey.
Fortunately, we've been building for this new era at hub spot are uniquely suited to meet the moment as evidenced in this quarter's strong financial result.
Our most recent product announcements are designed to help companies create customer relationship magic and our four strategic pillars will enable us to continue to deliver on our mission of helping millions of companies drove better in the future.
With that operator, please open up the call for some questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the mind of Alex Zukin with Wolfe Research Mr. Zukin. Your line is open.
Hey, guys. Thanks, so much and congratulations on a great quarter, yeah, how many maybe the first one for you, particularly on the demand environment can you talk about what you saw in the quarter did you see any seasonality summer holiday.
Weakness internationally and then obviously in the news we're hearing.
See headlines of supply chain issues, you hear the reports of the advertising companies.
Having a little bit of consternation are you seeing any impact from that at all and any commentary on kind of the pipeline for for either new customer growth or existing customer expansion into Q4.
Hey, Alex Thanks, a lot for the question. We are seeing the same headlines and that you mentioned in terms of supply chain challenges macro environment, but I'll say that there's not a set of factors that have outsized exposure to gear. It apart.
In terms of the demand environment and the demand patterns, it's really solid and by.
If I step back and look at why we feel very good about the demand environment. It's two things.
One of the World has changed since the start of the pandemic customers have looked for digital solution.
And the buyer expectations have changed pretty significantly where they need a consumer like buying experiences they want to be able to connect to their customers digitally and they want to be able to grow and accelerate growth in this environment.
And two we have the perfect solution for that hotspot has a very unique value proposition. We have crafted the solution and we provide consumer like user experience with enterprise grade features and that is resonating really well in terms of the market. So.
I feel very good about the demand environment and what we're seeing in the pipeline and this reflects both across our North America business as well as international business, So feeling pretty good.
Got it and then.
Super helpful indicate for you I mean, I think look what one of the questions I know I'm Gonna get tomorrow is for the last I don't know call. It six quarters or so billings has been ahead of revenue growth in the quarter, even on an adjusted basis from a constant currency perspective. This quarter. You mentioned there were some headwinds on.
The billings that is important to take into account. So maybe can you just walk through them, particularly on the deferred side.
What youre seeing and why it's not necessarily.
<unk> yeah.
I mean, it's usually not indicative, but in this case, specifically why it wouldn't be indicative of.
That's kind of the way to think about future revenue growth because I think your guidance suggests a.
Again also very strong growth for Q4 subscription revenue.
Yes sure thing.
I would just start by saying that we actually feel really good about delivering constant currency billings growth in the mid forty's, especially when you look at the sort of a tougher comparison that we have here in Q3 relative to Q2, it's basically 12 or so.
More difficult that's what I did mention a few things that were headwinds to constant currency billings in the quarter. There was a little bit of a headwind from duration and you may recall in my prepared remarks that I noted that this was a very strong install base selling quarter that also has a little bit of a headwind.
As it relates to billing.
Around deferred revenue FX on deferred is very tricky and you may recall in particularly the euro.
Weakened against the dollar pretty dramatically over the course of Q3 and so the impact.
On deferred revenue from FX was much more acute.
There was about a four point headwind to deferred revenue on a constant currency basis versus an as reported basis.
Got it that's super helpful. Thank you guys Congrats again.
Yeah.
Okay.
Operator.
Your line is open Mr. Morgan.
Hey, Mark Mark are you there.
Yes, yes, I'm here, sorry, I never heard my name called so I don't know if I was disconnected for a moment.
But that's okay.
Mr. Mr market. There is yes, I'm flattered floater to be called Mr. Morgan.
So harmony at the at the Analyst Day, you had you had mentioned the touchless sale and I think the fact that most b to B companies haven't started on it yet I'm wondering how is that vision of the touchless sale are resonating with your customers.
Who are in this open beta of hub spot payments and and and what is their feedback to you so far.
Yeah, Great Great question, Mark So you know at the Analyst day, what I said.
Was that in terms of B to B. There are two ways that companies typically sell one of the touchless sale and then the other is the rep assistant sale now in terms of Tuxtla sale.
These companies haven't just gotten started in terms of online processing of services and software and our hypothesis is that we can really help them and enable new revenue stream for our company now in the prepared remarks I mentioned, an example offer.
That's hubs of of sales and marketing or is it more across the board or even more kind of down market.
Yeah. Thanks for the question I think.
The good news is that.
TPI as a customer editions answer can be kind of came in exactly where we told you that they were going to.
We did see that nice pickup and anarchy C really isn't that high single digit range N again that positive momentum and S. R. P. C is is a mix driven calculation the customer mixes moving toward that pro and enterprise and we've.
<unk> again, I'll hug the strong installed they selling commentary for two three and both of those things are like key drivers of a S. R V C. Russell.
Excellent. Thank you very much and congrats on a great result.
Your next question comes from the line of <unk> with Jeffries. Your line is open.
Hi, good evening and Echo the congrats I'm, just a a great quarter. It is the the cops get tougher. So maybe first yamani for you I have a follow up on the payment side. You know can you talk about the front office CRM approach helps fight is taking the payments and the advantages that have spot has over other more entrenched back office centric competitor.
That are more closely tied to accounting systems.
Alright. Thank you so much that's that's really like my favorite question about payment because the way we think about payment.
Commerce is part of C. R. M is fundamentally different it is about enabling revenue growth for our customers and it's very very different from commerce as part of back office, where traditionally it is about talking to the finance leader and focusing on collecting.
Revenues and cost efficiency and over the past few quarters as we have gone back to our customers and ask them. How we can enable grilled it became really clear that we needed to embed commerce in payments as part of C. R. M and there are three ways in which we can drive the growth.
First one is what I just talk about with Martha question, which is enabling new revenue streams. So if you think about touchless. This is not wear b to be companies have traditionally focused and so we want to enable new revenue streams and provide opportunities for growth there and the second area for grilled is really.
Helping with the Rep assisted last mile failed. So what I mean by that is hot spot. Historically, we have focused on very persistent sale, but the last mile which is quote to cash has been the hardest not to crack and we want to focus on that one it <unk> simplify it.
So that the reps can not focus on growth initiative on demand generation activities and so we do that right. We're gonna actually enable growth of our customers and then the third thing, which I'm Super excited about is commerce bring context to every customer interaction. If you can imagine having a commerce odd.
Object deeply embedded within C. R. M. You know have more information when you run marketing campaigns, you can run marketing campaigns on abandoned cart you have much more information in terms of sales interactions with if you know what are the invoice them you have much better service interactions because it's prioritized by the purchase history. So.
So calmer deeply embedded in C. R. M is just really valuable in terms of enabling growth and so I think we're taking a very different approach and enabling both of our customers. So I'm excited about the longer term opportunity here.
Very helpful. And then maybe a follow up for for a K 47 per cent corrupt on constant currency stay in the same quarter over quarter to submit a tougher accomplished was impressive and yeah. I think one of the things related to that is that the stat around and 81% increase in large deals in the third quarter, you know I haven't really heard that.
Talk about large deals more just you know, which <unk> is being adopted so I'm curious if you could maybe you can help us understand how we should think about large deals and and how you're defining it and then maybe just how should we think about that going forward from a contribution standpoint.
Yeah, I I think I talked a little bit about that at analysts day. When we tried to highlight strategic pillar around segmentation internally, we look at what we call a large field as anything that is greater than three K a M. R. R and we've seen.
That the volume of those guilds increased 81% year over year.
Okay. Okay, great. Thanks, again for taking my questions.
Six months.
Your next question comes from the line of Ken Long with Guggenheim Securities. Your line is open.
Great. Thank thank you for taking taking my question.
First question I, just wanted to get a sense for yeah. I think earlier. It was mentioned some of the advertising appears out there running into kind of the occasional issues with the idea Fay how do you see that potentially impacting hub spots business does that push customers more towards an inbound strategy would love to see if you guys are running at any tailwind head.
[noise] winds on that front.
Thanks for the for the question Kenzo, just can you step back you know the.
The reason, we get into trouble, sometimes at our personal lives get sent the dog houses when we when we forget things like an anniversary of your birth date. The reason, we get put into the dog house and a privacy centric world is when we remember and know too much and that's I think what's caused some of the reasons developers here now having said that helps us jettison from the beginning as you noted has.
Been around this idea of inbound marketing, which is a very kind of consumer friendly privacy forward uhm approach and we've kind of stuck to that for all 50 of our years. So as developers have happened in the industry Uhm, but are kind of moving privacy forward uhm, they've been neutral to positive to have spots and some of the recent developments I don't think are any different specifically some of the.
<unk> tracking stuff that's happened recently the company's most impact are the ones that if you're running a massive advertiser network, where you're running a massive mobile application for which tracking a super important you're going to feel the <unk>.
Impact of some of these recent recent changes how far does it fall into either of those categories. So we don't really expect any meaningful impact on our business at all as a result of something interesting development that are happening.
Got it got it really thought I'd really appreciate that Dr. Mesh and then K just just thinking about the shape of the quarter I think in the past you guys had mentioned that I think in July help spotters were given Ah give it a break also potentially saw higher than typical PTO any sense of kind of how the kind of the linearity played out from from July through Sept.
<unk> to the extent that you could comment on October November kind of how how about demand life.
Lifecycle look.
Yeah, I mean, I think I'll stick.
Q3, uhm, but you're exactly right and have a great memory, we made a decision to give the organization a break at the very beginning of the quarter and we had a global be compressed for all of our employees and that obviously creates a bit of.
Slow start to the quarter, we feel great about where we've landed for the fourth quarter, but we definitely saw momentum and the second couple of months as a result of that.
I would say well deserved break on behalf of our employees.
Got it perfect. Thank thank you so much.
Your next question comes from the line stand Slutsky with Morgan Stanley. Your line is open.
Perfect Uhm. Thank you so much guys wanted to touch on on the payments business, a little bit I'm sure you're getting a lot of questions from investors on that one how are you thinking as far as like disclosing the traction that you see with them in that business, yeah as it starts to ramp.
What are the milestones that we should be looking for and you'll be looking for as far as you can really just broadening out the the initial set of customers that are involved in the in the beta program.
Sam Thanks for the question I'm Gonna maybe addressed it from broad strategic perspective, and then I'll have can't address that in terms of how will be tracking. It you know as you heard us talk about it the analysts day. This is a long term opportunity that they're very very.
Excited about and specifically we have targeted approach the target market that they're going after U S companies with 100 employees or less that R. B to be mostly focused on services and software and the reason we are focused on that market at first it.
Laos us to build a delightful product experienced the customers can love and even if within that market recede as a pretty large market tens of billions in G. M. B with them that segment and we wanted to start with that market and we're gonna make sure that in terms of both the pain.
<unk> features at the Commerce features we're focused delivering and driving market adoption and I think the longer term there is a significant opportunity for us to grow both upmarket domestically as well as international and I'll pass it do Kate So she can address your question on how we will track and.
Sure <unk>.
Yeah, Thanks, how many.
Just take a step back and look at the specific customer segment that y'all need outlining the U S is customers with 100 or less employees and that sort of <unk> software and services faith. You already said, we think that the tens of billions of dollars of G. M. B, a market for us and that would translate into something.
That looks more like hundreds of millions of potential payment volume for us over the next couple of years.
And you know I I covered at the analyst day, how about going to earn a transaction fee. This payment volume and the amount of that transaction be it's gonna depend on the payment method, it's gonna depend on the transaction side, and we will recognize that C. As <unk>.
Avenue to hub spot.
There'll be you know an associated cost with that transaction, most notably for credit card transaction that yeah that interchange fee and so the gross margin for the payment business is going to be a much different and lower gross margin than what we're used on the software side that said.
The scale of expense and growing the business is also going to be very different than the four software business and we feel really good about the overall margin for hot spot overtime with respect to the pavement Uhm, we will likely uhm in the near term record any revenue under that what we call serve.
Mrs and other revenue stream and as we ramp up over time, we will have to evaluate uhm. When it is the appropriate time to break that revenue out.
Got it got it and then can you just wanted to go back to billing for a quick second I mean, I I think you you did a great job of outlining the the effects uhm material effects headwind to billings at the end of the quarter versus the F X tailwind we actually.
So on revenue, but just on the on the duration component of Billings you know if you were to kind of just put together the the the the overall kind of headwinds that you sign a quarter to billings between effects and duration, which one was the was the more material one and what kind of a maybe give us a little bit of a magnitude.
Of what the buildings duration headwind may have been as well.
Yeah. So the ethics <unk> ethics has been to billing overall was network, 2% headwinds alright, and that's a combination as you as you are indicating of a tailwind to revenue with a more extreme headwind to the deferred revenue component of billing them in turn.
<unk> the relative impact of duration verse is.
Versus F X I think it's a combination of duration and the fact that that we have a higher mix. It installed base spelling that sort of make up the other part of the difference between constant currency revenue in constant currency billing.
Got it got it alright. Thank you so much guys congratulations like a quarter.
Your next question comes from the line of bread sales with Bank of America Securities. Your line is open.
Oh, great. Thanks, guys for taking my question, congratulations and a nice quarter, maybe I'll ask another question on the a S. P. A question another way.
With the kind of growth you're sitting there that nobody retention has been accelerating now for several quarters, our customers landing with multiple hubs more so than in the past I think historically, we think a pup spot where customer I'll start with marketing or sales or see them. As those are great entry points and then you'll see the cross sell a year or two later now that you're kind of a.
Really got marketed as more enterprise editions are you seeing customers commit to multi hubs kind of judicial land deal more more so what does that mean for kind of future expansion opportunity potentially.
Brad Thanks for the question I say that we see three things that happen across our customer base. The first is what you said, which is more multi hop and you can see that reflected in the numbers that kid shared at the analyst day, and so we definitely see the.
Multi have customers Lan, where things don't you know really good front doors with marketing sales tub, Egypt Bill clubs have gotten really good over the past 12 to 18 months and so they are very good front doors and so we see that land and expand motion and then as you know we.
Launched the CRM suite at the starter level as well as the go level and those are also really put front door and so across the board. We are seeing all three motion now I will say in terms of multi hob uhm, when our customers adopt multi calm but that.
I'll do that they get because it's a seamless user Nazi because it's a single data model because there is a single view of the customer is just much higher uhm B C. When customers adopt sales plus marketing Cobb may get much more needs than when they just had marketing help ourselves up alone.
The same powerful combination with marketing pub, and yeah, Matt Palm our sales have been service top and so I think what you're seeing is that there are great front door into adoption. There is also a growing trend to work multi hub as well Ah sweet adoption.
The combination of all three are kind of what you see as a result in terms of a S. R. C C growth.
Great to hear thank you so I'm gonna be so much of that and then one on the surface tub if I may.
You know, there's there's kind of a view that service customer services more of an upmarket type solution small business don't necessarily run a separate support desk and a lot of it could be done within sales as you guys. One do you agree with that view and then two as you guys are moving into this kind of upmarket business more enterprise focus could we expect perhaps an acceleration.
We've already seen good strong results out of service talk with potential even greater attach there. Thank you.
Yeah. So it's in terms of service of adoption or interest on the Lauren We don't think it's relegated just to larger enterprises, we think an increasing number of customers want to provide online support even if it's not a call center it might be over email over a chat. So that is definitely a need in terms of service of the park is doing really well in the <unk>.
<unk>, we're kind of progressing as similar to what you saw with uhm sales have over the last several years, which there are some key features.
That's because we're looking forward and sales of print since cause some object was one of them and once we start knock it is dominos over we see the adoption rate grew up and then you see that how becoming on ramp in front door cause. That's my platform. We seem to think something similar will happen with service up we just recently launched at the recent inbound.
The picture of a customer portal, where customers can log in and see their tickets and interact with their data with their account.
That was one of those big dominoes in our minds that the customers have been kind of asking for repeatedly and it puts us further down the path, where we need to be so we think 2022 is gonna be an exciting year for service of the market opportunities massive across our sector of the one to 2000 employee customers and your you sort of know what the customer needs are and we're just looking to execute.
Great to hear thank you very much.
Your next question comes from the line of Brian Peterson with Raymond James Your line is open.
Hi, Thanks for taking my question I I just wanted to follow up you want me to your answer to Brad's question, It and I'd be curious.
To what extent customers are really kind of understanding of what this new frontier is gonna look like particular engagement models and I say that because or are they still at the point or I guess are they at the point now where they were willing to kind of by not even just one or two but three or four hubs at once right or or are they seeing that digitally across.
All hubs or all channels or is it do they have the vision or are they still gonna have to kind of pick one at a time, just giving maybe they're limited ability to execute I'm curious what you're hearing from customers in regards to this new frontier in terms of digital engagement.
That's a good question, Brian I think it's across the board the level of maturity within our customer base are quite different. So you have some customers that are pretty early and then you know they realized in the past couple of years, you know that they need to be.
Digital first digital ready and they are kind of putting their toe and starting with one hop and then expanding and then there are customers like the use case example that I gave in the prepared remarks off triage, where they realize that they need complete digital front office platform that is all in.
One in order for them to be able to accelerate their girl given all of what they're seeing and so it really depends on the maturity of the customers and you know the one thing that I would say is that our approach has been resonating really well with customers we've taken a very very different.
Approach to building hand, crafting or solutions and it's unique uhm. So customers don't have to cobble together, a bunch of different applications within their tech back. They can start with one R. Multi hub Oracle all N D.
V crafted way in which we approach building product and therefore, the value that our customers see in our whole suite is really fascinating within the market.
Great No. That's that's good to hear <unk>, maybe a quick fall for Kate you're one of the Bush take away for me the endlessly and what state was the net revenue retention above 110, I I believe you indicated that would kind of be the new normal going forward I think I have that right, but you know I'm curious how can we frame that in terms of the average revenue per customer trend I know, it's not the same <unk>.
Overall, but what should we think about that may be lagging the 110 figure by a couple of points I'm. Just curious if there's any read through for me at all or that we should be looking at in terms of the the revenue per customer groups. Thank you.
Yeah no. Thanks for the question I think that you are right analysts say me shared a new target.
Level for net revenue retention at or above 110% and what we talked about with a couple of different drivers. The first of the drivers is really strong customer dollar attention. That's what we call. It internally may refer to it as gross retention and what we said is about half of the impact on total net revenue.
Tension was associated with improvements on customer dollar attention.
The other piece of that is that our upgrades are improving and we have a diverse set of upgrade driver that are helping to increase net revenue retention that sort of second half no drivers will also helped drive a S. R. P C growth alright, so it's not the.
<unk> you know that retention is driving it's the same core adoption of a greater portion of the platform that is driving both of that revenue religion and higher F. R. P C.
Great. Thank you.
Your next question comes from the line of Michael Church with Keybanc capital markets. Your line is open.
Hey, guys. Thank you very much some so two questions. So many for you and it was very excited about payments could can you talk about Ah you're fishing longer term ecommerce more broadly and then I will go on for too.
Yeah, I I think like yes, we are excited about payments that were equally excited about the core business I will say that in terms of the longer term payments opportunity. It would be really step back. There is just a lot that we can do.
To help our customers thrilled and the way we are going to focus on definitely set. This in a couple of different ways is that first off for my payments perspective, we're gonna just embedded in almost every way embedded payments, which as the name you know suggestive embedding it informed N web pages in meeting request.
And really that will help us drive adoption. So from a roadmap you will see drive payments adoption and the second part of what I'm excited about in the roadmap is uhm building that Palmer's contacts into C. R M and vice versa, that's where we see significant value.
That they can deliver to our customers by making sure that the commerce you know contact sit there and every interaction with its marketing or sales of service and both of those are going to open up a huge opportunity for us, but also it's going to enable growth for our customers. So that's how we think about the roadmap at.
Longer term opportunity in terms of payment, but I'll also point that uhm as we've talked about the core business is really strong and the core business is going really well and we're continuing to invest in terms of all of our strategic pillars and focused on driving a world class the iron platform. So it's kind of bad.
<unk> across new opportunities at the corvette.
And then can you you said good for 22 not to expect a meaningful improvement in margins can you just talking about what some of the the puts and takes over there and how they may or may not be shifting in terms of what what's ahead wondering what to tell into margin sound that balance is a mixture.
Yeah, I guess you know the way that I was just about it.
Is and and we tried to talk a bit about this the analysts say was how we balance growth and profitability Uhm and overall if you just started at the highest level think about it what we.
I've been trying to do and what we continue to try to do is focus on building really durable longterm growth for the company and we will clearly look for ways on a regular basis to expand margins and we leverage our long term financial framework to try to to do.
What we don't want to do is.
Mmm is forego really high conviction really high return opportunities to drive.
To drive future growth.
That we can deliver very specific leverage targets from one year to the next and so you would hit you heard us talking about the analyst that you hear you I'm gonna need to talk about it now we feel really good about the opportunity in front of us and we want to make sure that we continue to it and burst into that opportunity and so that areas, where you're gonna see us in Boston too.
22 are gonna be the same areas, where you've been seeing us the best over the last couple of years in particular, we want to make sure that we are needing into our R&D organization to drive innovation. Because you think that's the engine for strong and durable grout gross so I don't have specific Clinton.
Six in 2022, what I would tell you is we're going to continue to invest in the places where we have been seeing strong our ally and we can believe that we can continue to see strong Roy and that's primarily and innovation on the product.
Thanks, Thanks Joni.
Your next question comes from the line of Michael turn with Wells Fargo. Your line is open.
Hi, This is Michael Bergeron for Michael term congrats on a great quarter I have a quick question I'm a follow up for dark rash.
<unk> environment in this environment, we're seeing right now it appears to be a pretty strong or difficult hiring environment and with hope for being such a focus on culture and.
Retention can you kind of walk through what you're seeing them a hard environment any trouble getting people on board any better or worse retention within your employee base.
Thanks for your question so it's.
We're really pleased with the kind of.
Long term investments we've made in culture, an employer brand that has really paid off now and these are tough times, we haven't seen a direct impact of the so-called kind of great resignation, but we know that there's some connectivity going out there and then the world at large, but we continue to have a very strong employer grand he leaned didn't even prepandemic into this notion of Ah.
Hybrid remote workforce, uhm, which you're even better at now so personally I feel we're coming from a position of strength, even more so than we were before I think the value of our culture the value of the flexibility we haven't been our Workforces. Appreciate it you know we've long said that we think a culture of the second product that we build and that product include.
Our main product is actually doing very well so thanks for the question.
Your next question comes from the line of Parker Lane with Stifel. Your line is open.
Yeah, Hi, Thanks for taking my question at being able to see you mentioned about 60 per cent of the business is coming direct versus the remainder coming from a solution partners wondering if you could break down with the composition of the it looks like in the enterprise customer care, particularly were thought I'd go to market investments you've made there over the past year.
Yeah Parker. Thanks, a lot for that question brought he's thinking that's right I think but if you kind of break it down between our segment partner is focused much more on upmarket for all the obvious reason more custom more integration more CRM implementation.
More customization and so if that wait a little bit higher towards the upmarket segment and you know look at our strategy has been very very clear in terms of working with our solution partner ecosystem. If you historically look at the solution partner ecosystem, it's about 4000 strong.
They were marketing agencies, but we've done a lot of investments to diversified that solution Parker ecosystem, and they're very pleased with the level of expertise and helping our upmarket customers one of the the competitive mode for us they do a fantastic job of understanding are cussed.
<unk> as well as our products and when partners get engaged we see hi customer dollar of attention as well as revenue attention and we understand that we have an event right. After inbound four partners, where we talked about the our strategy and doubling down in our strategy of selling and servicing with them and we're.
I'm, making pretty hefty investments in enabling partners matching partners with customers and building expertise within the solution Parker base and so we're excited to see that ecosystem five.
Your next question comes from the line of Richy Julia with RBC markets. Your line is open.
Hey, guys. Thanks, so much for for taking my question just one for my that I wanted to drill back onto some of the art market penetration Yamani IV got 81 per cent increase in large deals year over year in Q3, really really impressive and great to see that <unk>, maybe can you help us understand with with this off market penetration.
Gration, how you're kind of balancing the investments that you're making their with wanting to keep that same E. Commerce type approach himself service approach that is work for Ya, historically, and and and maybe Directionally can you give us a sense for you know with these larger customers what sort of impact that tends to have on your <unk> dollar attention.
Thank you so much.
Hershey. Thanks for that question I think it really goes back to our strategic pillar, which is strengthening our segmentation approach the both of the analyst as well as prepared remarks, we talk about the investments we are making to make sure that every one of ours.
Segments are optimized we have broadly please segments you heard us speak about this want to 20 segment, where we are investing in <unk> growth. The 20th 200 segment, which is our traditional sweet spot from both a product and go to market perspective, and the upmarket segment, which is the 200.
<unk> 2000 segment, where we are we're making a lot of investment and add we've mentioned before we're being very thoughtful and della bread in making product as well as go to market investment Uhm are clear view that both of these need to be incomplete lockstep.
In terms of execution. So uhm the success of your thing with an upmarket is one because of the product. We have worked on the product extensively and we've talked about wanting to maintain and can do Margrave look and feel while investing and powerful features and that is beginning to work and in terms of go to market.
We have invested in sales enablement partner enablement as well as bad marketing effort and so the result off our segmentation strategy is what gets reflected both in terms of customer dollar of attention as well as avenue of attention and this is kind of what Kate mentioned earlier in her comments about revenue attention.
Your next question comes from the line of Ryan MC Donald with Needham and company. Your line is open.
Hi, Thanks for taking my question, how many in the last I guess two questions you've talked about sort of the upmarket motion hearing and I want to focus in on the partner channel and how 'bout driving up market deals and you know you <unk> you announced the the launch of operations hub, it's only been a whole two days since it's officially launch, but just curious since you know.
It's been an inbound what sort of feedback you've gotten from the partner channel on that offering and and how do you think that can continue to maybe unlock the higher end or or the upper market segment of your business overtime.
Yeah. Thank you so much Ryan for the question, yes, the operation Tub Enterprise with just launched you know this week and as you all know we launched operation sub starter as well as pro earlier this year in April and you know that's actually an example.
One of the hub, where we cold launched it with partners you know our parts of our community has been just incredibly involved in terms of the beta program. They were incredibly involved in terms of identifying early use cases, and we pulled launched operation sub in fact that launch.
<unk> event was probably the highest N P. F partner event that we have had all year and the feedback from partner you know in terms of operation <unk> has been very very now promising as well as positive now the broader point in terms of how we are enabling go to market.
With partners upmarket you know as we optimize our product investments actually let's go to market investment we've been working hand in hand with partners in driving expertise within the partner ecosystem to enable them to take more complex implementations and that's beginning to work and.
I am very pleased with how are directing athletes department teams have been working collaboratively. This here.
Your next question comes from the line of origin Bhatia was William Blair. Your line is open.
Yes. Thank you for taking my question Uhm, Okay, maybe maybe one for you it seems like a lot of a trend. So we've <unk>, we've been talking about with a severe expansion, including no multi have adoption up so sweet adoption, but those are those don't necessarily seem like temp.
Temporary <unk>. So when we look out maybe beyond Q4 should we think of the model as having structurally shifted where a see growth can remain in that mid high single digit range not just in queue for but in 2022 and beyond as well.
Yeah. Thanks for the question I think what we have shared orange isn't as bad we feel like the trends that we are in queue too and in Q3 are gonna continue into queue for.
The longer term.
These are not metrics that we manage the business again and you know you heard y'all need to talk about the segmentation strategy, where we intend to innovate both at that upmarket, but also add you know velocity with the velocity segment that is is more lower N and as we innovate at one end or another you're gonna continue to see <unk>.
Men and both of those Katie I. So I think it's fair to say that in the short term, but over the longer term, we're gonna continue to see a little bit more volatility.
Your next question comes from the line of <unk> with Evercore. Your line is open.
[noise] hi, yeah. Thanks, very much I was wondering if you could just talk about whether any of the trends that you're seeing in the upper part of your business Upper upper Mark market part of your business are are different if you'd looked at the U S versus maybe internationally I'm just kind of curious if our pick of service cloud content management are are are those products that take.
It up internationally at the same rate in the U S or is it similar to what we've seen in other sauce companies, where you international tends to follow the route Sir I know y'all are much more balance. So it's just curious on that thanks.
Yeah, we've been very very balanced in terms of both international thrilled as well as North America growth and as you hardest talk about international is about 46% off our revenue and consistently growing really well in terms of adoption trends, it's quite similar in in a law.
<unk> you know the international market. They are still a bit earlier in terms of digital transformation and adoption of additional product, but you know overall quite example operations have has done really well, there and going multi <unk> with C. M S and marketing has done quite.
Well, there and so the trends are pretty consistent across both of the market.
Your next one question comes from the line of <unk> <unk> with Mizuho. Your line is open.
Hey, guys. This is actually my time in on six behalf. One quick one I'm curious about the magnitude of customer engagement that came after the inbound carpet. So if you could compare that to your <unk> to be super helpful.
That's a good question you know overall inbound the the product announcements very very favorable positive feedback from customers Uhm, we had really good engagement bold <unk> at in terms of you know the breakouts as well.
The spotlight sessions and and the M. P. S for some of the sessions were better than even last year. So overall inbound landed really well the engagement of our customers have been really good and the feedback in terms of the announcements their operation pop enterprise sandbox business.
Units. The feedback are lot of those features that'd be announced at inbound has been very very positive. It's still early days. It's just been a couple of weeks since inbound and so we'll likely see more momentum in queue for based on the announcements at inbound.
Your next question comes from the line of rubber D. Let's choose your line is open.
Hey, guys. This is actually Joe mirrors on for Terry Tilman talked a lot about the product announcements. So I think on the call, but I'm just wondering for a very high level.
All of the three major announcements that you guys made whichever customers made the most noise about in the last three weeks since the the ouster.
That's that's a good question I think you know I broadly categorized you know a product announcements in three areas. The first one is operations hub enterprise that'd be just launching November really positive feedback we've seen very good.
<unk> not just for the enterprise product, but also for the pro as well the starter releases already had this year. So we're seeing consistent good feedback there I think the second class is just a lot of the upmarket related you know big powerhouse features that'd be launched right. So you heard us talk about.
Business unit, which again, it's another domino feature within marketing help enterprise you heard us talk about sand boxes, and forecasting which is pretty big in terms of sale. So lot of our customers that have been looking or will need. This in the future are excited about that category.
Features and then payments you know payments as early days, but a lot of our customers are engaged in conversations in terms of how they can be a new revenue streams and as well as you know enable consumer like buying experiences and so those three I would say probably the big categories of infections.
Customers.
There are no further questions at this time you how many running I turn the call back over to you.
Thank you so much it was great seeing a lot of you of inbound B U L and do great work and too far we'll see you in the new year.
This concludes today's conference call you may now disconnect.
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