Q1 2022 HubSpot Inc Earnings Call

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Hello, and welcome to hub spot Q1, 2022 earnings call. My name is Elliot and I'll be coordinating your cold stacked.

If you would like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.

I would now like to hand over to our host Chuck Mcglashan head of Investor Relations. Please go ahead.

Thanks, operator, good afternoon, and welcome to <unk> first quarter 2022 earnings Conference call.

Today, we'll be discussing the results announced in the press release that was issued after the market closed with.

With me on the call. This afternoon is yummy Roentgen, our Chief Executive Officer, Dr. Michelle <unk>, our co founder and CTO and Keith <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 of the Securities Exchange Act of 1933 as amended.

In section 21 E of the Securities Exchange Act 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 and operational expenditures.

Expected growth and business outlook, including our financial guidance for the second fiscal quarter and full year 2022.

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 today's call will 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 first quarter 2022 earnings press release, and the Investor Relations section of our website.

Now, it's my pleasure to turn over the call. It the hotspots Chief Executive Officer Yamani rocket harmony.

Thank you talk and welcome everyone. Thank you for joining US today as we review hub spot first quarter 2020 to resolve.

Just start off I first want to acknowledge the devastating situation in Ukraine, we are deeply saddened by the Russian invasion.

Hearts go out to the people of Ukraine, with this war and ongoing pandemic in volatile markets.

We are that we continue to live in a time of great uncertainty.

2022 is a year of focus and consistency at hub spot for that exact reason.

With that backdrop now, let's talk new hotspot first quarter results.

Hotspots saw strong performance across the business with revenue growing 44% in constant currency year over year in the first quarter and total customers growing 26% year over year to more than 143000 customers globally.

These results prove that top spot continues to be mission critical for our customers.

The pandemic accelerated digital transformation and fundamentally transformed the way companies.

And so.

Our customers are faced with hybrid work decentralized team and disconnected systems, creating a significant growth challenge.

As a result, they're realizing it's even more important to have a single unified view of the customer in order to grow.

That's why our customers continue to choose sub spot.

We provide a connected easy to use platform that enables growth.

In 2022, we're continuing to focus on helping our customers grow and executing on our clear growth strategy.

We've previously shared the four strategic priorities guiding our path to becoming the number one CRM platform for scaling companies.

Now I want to walk you through the meaningful progress we made over the past quarter in each of those areas.

Our first strategic priority is to deliver a world class front office platform by investing in our anchor hubs and innovating with new emerging hubs.

We have recently crossed two important milestones on this front.

First off I'm thrilled to report that marketing hub surpassed $1 billion in annual recurring revenue in the first quarter. We have built a world class marketing automation platform, that's powerful and easy to use.

And over the past couple of years, we've made significant investments to better serve all of our customer segments.

We have enhanced the onboarding and user experience and introduced simple automation functionality to free and starter tiers.

Serve the higher end of the market, we rolled out the business units and advanced reporting capabilities that drive deeper insights.

These investments have enabled marketing hub to achieve significant scale of $1 billion in Anr and now we have the opportunity to replicate the success across all of our anchor hubs.

Hub spot operate in markets with very large Tam and when we build world class products that solve for our customers like marketing hub, we see scale I'm incredibly excited about this milestone and the opportunity ahead for hotspot.

The second milestone is that we recently relaunched service hub with expanded features and functionality.

In today's hybrid world customers expect the service experience that human and exceptional we built service up to enable small medium businesses to Denver that kind of exceptional service.

Our service hub strategy is three fold build a modern support center, Denver, Omnichannel support and drive AI powered automation and insights.

As part of the relaunch in March we introduced service level agreements.

Mobile Helpdesk and support workspace to fuel a modern support center.

Our omnichannel support we added customer portals live chat Facebook messenger and email functionality and to provide our customers with Richard automation and insights. We added feedback surveys and ticket automation I'm also pleased to share that inbound calling is now generally.

Bannable to service and sales hub customers as of this week.

We believe this will empower customers to provide an even more authentic service in real time.

I'm excited by the early feedback we are hearing from our customers about the new features and the value that theyre seeing some service hub.

Once a customer is take a trusted name in metal working manufacturing since 18 87.

Their legacy customer service system was holding them back from providing a level of service that match the quality of their product.

They started with marketing carbon sales hub, they saw a ton of value from hotspot and expanded the service hub as a result.

Dave now uses shared inboxes to gain visibility into customer interactions throughout the journey and Leverages automation to streamline all of the manual task all of which increases their productivity with service hub data improve their customer satisfaction score by 13 points up too.

87%.

This illustrates how our connected platform makes it possible to remove friction and Denver, an incredible customer experience.

Now, let's talk about our second strategic priority, which is to strengthen our segmentation approach across both product and go to market.

Our approach here is twofold, we want to drive volume at the lower end of the market with products that are easy to buy and easy to use and we want to fuel value on the higher end with robust features for customers with sophisticated needs.

In Q1, we made a few key investments here on.

On the lower end, we introduced simple automation for free and started tiers as I mentioned earlier. In addition to that we are running experiments like pricing page optimization and self guided demos.

These investments are resulting in strong adoption of our starter suite.

Within our upmarket segment, both our direct sales team and partner channel are focused on driving multi hub sales and the investments we are making are beginning to pay off.

We're seeing multi hub adoption grow with 24% of our professional and enterprise customers now using three or more hubs.

Looking ahead, we'll continue to focus on making hub spot an easy choice for scaling businesses.

Driving multi hub adoption upmarket.

Our third strategic priority is to invest in payments and commerce.

As more businesses become digital first having a native payments solution is critical for F&B used to go on.

On our last call I shared that payment had just become generally available in the U S or b to b customers.

I'm pleased to share that we've already expanded this offering with the addition of recurring atheist functionality and payments dashboard and object, which are currently in beta.

Payments object as a top requested feature because it really enables customers to see commerce data in all of their CRM interactions delivering an even more unified view of their customer journey with.

We're continuing to hear positive feedback from customers confirming the opportunity we see to empower businesses with a commerce enabled CRM.

That said, we're early in our payments journey and our focus remains on building the features and functionality our customers need to help them Bill moving.

Moving on our fourth and final strategic priority is to build a sustainable company.

An important part of that journey is hiring and developing diverse talent.

In the last quarter, we released our annual diversity report and I want to celebrate how far we've come as a company today.

Today, 47% of hotspot employees globally identify as women are non binary up seven points over the past five years.

In the U S, 35% of employees identify as buybacks up 20 points from 2017.

Additionally, we have four women on our executive leadership team and particularly proud of that and 70% of our board identifies as a woman a person of color I'm incredibly proud of how far we've come and we will continue to work towards building a company that reflects the diversity of our custom.

<unk>.

With that I'll turn it over to Kate to give an overview of our financial results for the quarter Kate take it away. Thanks, Germany.

Let's turn to our first quarter 2022 financial results.

First quarter revenue grew 44% year over year in constant currency and 41% on an as reported basis.

Q1 subscription revenue grew 42% year over year, while services and other revenue decreased 4% on an as reported basis.

Domestic revenue grew 37% year over year in Q1, while international revenue growth was 53% in constant currency and 44% as reported.

International revenue as a percentage of total revenue increased by one point year over year to 46% in Q1.

We added 8200 net new customers in the quarter, bringing our total customer count to over 143000 up 26% year over year.

Average subscription revenue per customer grew 12% year over year to just over $11000 driven primarily by continued multi hub adoption and strength in our enterprise tier.

Deferred revenue as of the end of March was $463 million or 36% increase year over year.

Calculated billings were $423 million in Q1, growing 41% year over year in constant currency and 39% as reported.

Consistent with trends, we've seen in prior quarters constant currency revenue growth exceeded constant currency billings growth in Q1, primarily as a result of the strong install base selling mix in the quarter and a lower overall billing duration.

The remainder of my comments will refer to non-GAAP measures.

First quarter gross margin was 82% up one point year over year.

Subscription gross margin was 85% in Q1, well services and other gross margin was negative 19%.

First quarter operating margin was 9% up two points compared to last year.

Net income in the first quarter was $28 million or <unk> 54 cents per fully diluted share.

At the end of the first quarter, we had 6400 employees up 41% year over year.

Capex, including capitalized software development cost was $20 million or 5% of revenue in Q1, and free cash flow in the quarter was $63 million or 16% of revenue.

Finally, our cash and marketable securities totaled $1 4 billion at the end of March.

Before I turn to our outlook I wanted to highlight the impact of foreign currency translation on our as reported financial results.

The U S dollar strengthened sharply throughout Q1 and into May.

This is created a meaningful incremental headwind to our 2022 as reported revenue and non-GAAP operating profit relative to the guidance. We provided on our February earnings call.

At current spot rates.

We now expect FX to negatively impact full year revenue growth by five points up from our prior expectations of a three point headwind.

And to create a headwind to non-GAAP operating profit margin of approximately half a percentage point.

And with that let's dive into guidance for the second quarter and full year of 2022.

For the second quarter.

Total as reported revenue is expected to be in the range of $409 million to $410 million up 32% year over year at the midpoint.

We expect FX to be a six point headwind to as reported revenue growth in the second quarter.

non-GAAP operating income is expected to be between 27 and $28 million.

non-GAAP diluted net income per share is expected to be between 42 and 44 cents.

This assumes 51 2 million fully diluted shares outstanding.

And for the full year of 2022.

Total as reported revenue is now expected to be in the range of one seven to two to $1 $7 billion to $8 billion up 33% year over year at the midpoint.

As I mentioned, we now expect FX to be a five point headwind to as reported revenue growth for the full year of 2022, representing an incremental $30 million headwind to 2022 as reported revenue from our prior forecast.

non-GAAP operating income is now expected to be between 152 and $154 million.

This includes approximately $10 million or a half percent margin impact from the incremental FX headwind.

non-GAAP diluted net income per share is now expected to be between $2 40 and $2.42.

This assumes $51 5 million fully diluted shares outstanding.

As you adjust your models keep in mind the following.

We continue to expect Capex as a percentage of revenue to be roughly 6% and now anticipate free cash flow to be about $230 million for the full year of 2022, including a headwind of about $10 million from the strengthening of the U S dollar relative to our prior estimate.

And with that I'll hand things back over to yamani for her closing remarks.

Thank you so much Kate I want to close out by sharing two exciting developments on hotspot leadership team and board.

First we recently welcomed Rob Julio as hotspots, new Chief customer Officer, Rob.

Rob is a customer centric multidisciplinary leader, who has seen tremendous scale from his time at Adobe and occupied.

His expertise across marketing sales and operations will meaningfully help a pub spot scale. Our go to market strategy through this next phase of growth.

We're also thrilled that Claire Hughes Johnson, former CEO of stripe joined our board this past quarter.

We have so much to learn from her expertise scaling businesses, especially in the payment space.

I'm confident we have the right team to execute on our vision of helping millions of organizations grow and I'm really excited about the impact both Rob and Claire will have on our business.

Looking ahead, our plan is to stay focused and execute on our four strategic priorities in 2022 to continue driving value for our customers partners employees and shareholders.

With that operator, please open up the call for some questions.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.

Have you changed your mind, Please press star followed by two.

When preparing to ask you a question. Please ensure your phone is on mute locally.

And we ask you please limit yourself to one question and one follow up thank you.

Our first question today comes from Mark Murphy from Jpmorgan. Your line is open. Please go ahead.

Yes. Thank you very much so a kid and you how many I wanted to ask you you're clearly absorbing just a tremendous amount of FX impact.

We can see that youre actually raising guidance in constant currency.

But I think one of the questions is what is your sense of the overall health of inputs.

Just in terms of business confidence and pipeline build for instance is there any hesitancy in Europe or.

Interest rate pressures for your SMB customers or do you think that that picture is actually fairly steady.

Yeah.

Hey, Mark Thanks, a lot for your question look like everyone else, we are paying attention to all of the macro trends. We are watching interest rates were watching inflation are watching in demand trends more broadly in terms of the impact Mark.

We found some pockets up delays in purchasing decisions among customers.

Mostly in Europe , now, having said that while the macroeconomic environment could change it has not been a material headwind to the growth of our business and more fundamentally we're seeing a big secular change where customers are adopting the software to drive productivity and growth.

As you know our customers need them to technology during the pandemic to stay very very connected to their end customers and what I'm seeing now is that they're continuing to lean into technology.

<unk> operated this hybrid world and drive productivity.

And I think more specifically, we made a CRM bet a few years ago.

And that bet is working our product innovation is in high gear. As you just heard me talk about the innovation that would be.

With the features we launched relaunched this quarter, we're seeing customers consolidate spot because we are quick to implement.

Usually to us and we are easy to adopt and our value proposition is resonating with our customer base.

Thank you and just to clarify that anywhere there was a little pocket of.

Purchasing delays in Europe are you signaling are you, saying that that was kind of counteract it elsewhere in the world because the customer adds were a bigger number than we've seen in a while and I think we're just sort of wondering how are the customer as possible.

Given there was kind of a more volatile environment. It just slower new business formation.

Maybe mark I'll jump in and talk specifically to the customer as you know we were obviously happy to see the net new customer additions sort of pop back up above 8000 for the quarter. The growth, we're seeing quarter over quarter is really being driven at that starter tier and we are we saw within the quarter.

<unk> a positive uptick in gross additions at the starter level.

Thank you.

Yeah.

Yeah.

Our next question comes from Gabriela Borges from Goldman Sachs. Your line is open.

Hi, good afternoon, Thanks for taking my question.

How many maybe I'll follow up on the comments on service hub since the release and the upgrade curious what the feedback has been and if you're starting to see the pipeline change or your conversion rate or win rate go up based on some of the broadest set of features and functionality.

Yes.

Hey, Gabriele thanks for that question.

I'm very excited about the service hub relaunch and a long list of new features that'd be launched I think it's going to be game changing for service hub, but more importantly, it's going to be game changing for the entire CRM platform because the combination of marketing sales and service hub becomes even more powerful.

So I'd say that you know our focus when we relaunched service hub is just simple we want our F&B to be able to Delaware just exceptional service and what you saw deliberated. This quarter is a three pronged product strategy, which is to build a modern support center Delaware.

Omnichannel support and provide AI powered automation and insights like ticket predictions and smart routing and conversation intelligence.

So overall, we launched a ton of features that are going to be pretty big needle movers for F. N b the reactions have been very very positive.

See it in both kind of demand trends for service hub as well as feature usage in fact, our ticketing usage has gone up since the relaunch and that shows that customers are getting a lot of value from the features that we released and.

If I step back I see you know three big opportunities are.

That begin to accelerate with this relaunch first I think we actually made all of this cross sell opportunity within the installed base. So I can see marketing hub customers sales some customers will see value from our platform lean into service hub second as Ive mentioned multi club adoption is a pretty big lever for us.

And service hub relaunch that bolster our ability to sell three plus hub deal and then a longer term. This is an important milestone for service hub to become emergent front door. So overall very excited about this relaunch, but also hearing very good feedback from our partner community.

All of our customers.

Our next question comes from so much Yamana from Jefferies. Please go ahead.

Hi, good afternoon, and congrats on the strong results maybe first one for you you Amani, it's great to hear that marketing hub crossed the $1 billion Mark for IRR now one of the largest yet still fastest growing marketing businesses and software can this be a durable growth driver going forward and what investments are needed.

Can be made to get there.

Hey, some odd yeah. Thanks, a lot for the question, we're pretty excited about that are important milestone.

First off I'd say like marketing operates in a mega market. This is a market with a very large tam and still low single digit penetration. So I feel like there's plenty of opportunity and runway for us to grow and we see significant growth with marketing hub, but theres also a runway for us to.

Build a multibillion dollar business here and as I talk to customers. It is clear that marketing needs have not remain static and therefore, our marketing innovation is not remaining static almost every company is now looking for ways to drive more effectiveness in marketing looking to support.

More channels, it's becoming much more omni channel and marketing more campaign disability and more cohesion with the rest of the go to market, including sales and service and so we're not sitting still on the product from our focus is to drive that type of Omnichannel marketing, which our customers need drive more advance.

The automation of a lot more reporting we're doing all of this while maintaining the ease of use and in fact this is something that you know.

I was very excited about marketing hub recently earned the number one spot in the truck radios 10, most enough products in 2022, that's just a great Testament to the powerful yet easy to use platform that we're building and marketing and then on the go to market side.

Marketing hub is in almost every marketing automation conversation within all segments, it's become a great front door, but more importantly, becoming a de facto standard within you know the customer segments that we're focused on so we definitely feel very positive and there's plenty of runway left for marketing to grow. There's also a great playbook for the other.

Anchor hubs to follow them.

So happy about the results.

Great and maybe a follow up for you, it's really impressive to see the increase in the constant currency guide.

And I'm curious, maybe how did net retention.

Trend Q1and maybe what you've seen early so far through may for net retention.

Yeah, It's an interesting question Simona.

Has over time become kind of a natural shape to the retention curve within a quarter, where you tend to have more of the install base up for renewal in the third month and so what happens. There is you have a bit of a lower gross retention in the third month in a bit more up sell opportunity so a bit of a higher.

Sure.

Net revenue retention as you finished the quarter and that is very much what we saw.

In Q1.

Great I appreciate the additional color. Thanks.

Our next question comes from Brad Sills from Bank of America. Your line is open.

Oh, great. Thanks, so much guys for taking my question and congratulations on a real nice quarter here.

To ask about the upmarket business, we keep hearing about real strength. There. It's obviously in the results you can see the accelerating ASP growth constant currency now for several quarters in a row.

So tremendous traction there I wanted to ask what is the environment like out there what does the landscape look like are these what is there an underserved segment here a lot of white space, our customers running a hodgepodge of different tools, maybe just a little bit of color on what's driving the success, there and where our customers coming from.

Brad Thanks, a lot for that question and I think you're hitting on the right area. So if you Peel back the onion and look at upmarket.

There's a huge challenge for mid market companies to stitch together very disparate systems that don't work well. They don't have the time. They don't have the budget. They don't have the technical team sitting around and that's a fundamental challenge. They also have a challenge of being able to get clear visibility across.

Their entire journey from marketing from sales from service and they need that to be able to grow in you know in any environment and so I think fundamentally what is happening is that hub spot to solving both of those challenges and it's becoming a clear and.

And no easy platform choice, our customers love. The fact that we provide a cohesive experience across all our front office and sometimes they'll say look we can't figure out there one how about the other one begins with very very seamless and we've invested in the platform we have more than thousand integrations that have made us.

Easy platform choice for those upmarket customers when.

When they even choose to integrate with others and so I think overall, you're seeing that are the other part I would say is look we have planted seeds, along I'd call ourselves seed planters and be planted seeds, along and over the last 18 months our product portfolio.

<unk> has gone broad and deep and that means we have the sophistication you know all the powerful features to be able to support upmarket customers at the same time, we have the breadth of the portfolio and so the combination of those two lead to higher and higher.

Upmarket adoption and also lower graduation rates.

That's great to hear thanks, Jeremy and then one more if I may just on the on the volume business. This is the strongest quarter of net adds we've seen in several quarters.

You mentioned the starter edition strong this quarter was there something behind that.

Was this.

Kind of a one time thing or is something else going on in the demand side. Thanks, so much.

Yeah. Thanks, Brad for the question I think you know what we had what we have seen nicely is a bit.

Over time last year, we saw a bit of a shift in new customer additions out a starter and more into professional and enterprise AR as we lap those big new customer cohorts. During 2020 that we're primarily focused on that starter tier.

That really began in March.

Of 2020, and so this is like the first quarter, where we have not a clean comp, but something that's on the road toward that.

But as I've mentioned when Mark asked the question. This is very much a factor of a gross additions ticking up versus anything else.

Thanks, so much Keith.

Yeah.

Our next question comes from Brian Peterson from Raymond James. Please go ahead.

Thank you and I'll Echo my congrats on the strong net add number so the server momentum has really been impressive I'm curious with the relaunch service hub, how big of a front door could that be relative to some of your other products on the schedules here and I'd also be curious you know with the new starter momentum is that.

More of a single product adoption or multi help adoption as they're going through the front door, how do we think about that.

Yeah.

Yeah. Great question Great question. So you know if we if I talk about the priority that we mentioned, which is we almost have like a bimodal strategy and the way I describe it is that we have a volume motion at the lower end of our tiers and we have a value motion at the high end of the tiers. So.

Cross product and pricing packaging and go to market, we really focus on those two broad motions at hotspot. So what you're seeing here is a starter motion, which is a full suite motion.

From a product perspective, we have done a lot to make it exceptionally valuable you saw me talk about automation down. There. We are also doing much more in terms of pricing page optimization. So there's a lot that goes into the lower end and therefore, it translates into high volume.

All starter suite adoption.

Sure.

Empire suite now I'm talking about or your question about the upmarket where our motion is very different there. It is much more about a value play where customers might actually start with one hub and then go on a multi journey multi hub journey with us and suddenly you know service hub Pro <unk>.

Helps with the with all of that I think overall, our product innovation that has been just on a strong cadence over the last couple of years across every one of the stairs help us execute that type of a bimodal strategy.

Our next question comes from Michael <unk> from Keybanc. Please go ahead.

Hey, Thanks, very much guys. Two names want one first continue on this on the starter motion started package.

Yes.

How do we think this year about whether or not we'll see that similar impact on ASR P. C.

Headwind that we saw last time around and what eventually ended up being higher churn and how do you make sure that you get.

When we see those dynamics.

Thanks for the question actually you know one of the things that I liked a lot about the kpis. This quarter was the balance across the uptick in net additions and the increase in E. S. RPC that we saw within the quarter.

Yeah, I think about that balance as being something that is reflective of this bimodal strategy that you harmony is laying out.

Historically, what I have said is that we're comfortable in and around call. It 7000, plus a quarterly net ads and that this year. We are focused on a S. RPC growth that's in the low double digits and I I continue to remain comfortable at those levels.

Our next question comes from Michael <unk> from Wells Fargo Securities. Please go ahead.

Hey, there. Thanks, good afternoon, nice job and the team are executing especially given the current environment.

Certainly appreciate the commentary and quantification on the FX side was hoping you could maybe just help us think through exposure or are diversified across industry as well I think some investors still think of hotspot is tied to helping businesses digitize that are more modern we've we've picked up a fairly broad based customers across even some of the more traditional industries as you've expanded.

Your products that maybe you can just help us frame from your perspective, the diversification of hub spot and your ability to just overall withstand some of the macro shocks we're seeing.

From an overall demand perspective, thank you.

Yeah, I I very much appreciate the question we did a lot as you can imagine of a deep dive into our customer base and the industries associated with the customer base as we navigated the early days of the pandemic and despite digging very hard but what we found was.

Was the most popular of all of the categories of our customers as it relates to industries. I think we have we are a b to B company that is broadly diverse across industries.

If I were to call out anything I would say software and services tend to be the.

The sweet spot for us.

Our next question comes from Parker Lane from Stifel. Please go ahead.

Yes, hi, thanks for taking the question I Wonder if we can get update on the operations hub I know you've launched them up to your versions of that in the last year, what kind of success, you're seeing on that front with your internal sales teams as well as the partner channel. Thank you.

Hey, Parker yeah. Thanks, a lot for the question on <unk>. It continues to perform really nicely.

Much of our original expectations. When we launched last year, we're seeing strong customer adoption across all the tiers of op sob and we saw the same level of attach in March as we saw in December which was great.

And specifically, we see a higher volume of customers coming through the start up here as part of that suite motion that I was just talking about so that's certainly been the case that the theme and the majority of the E. R. R.

Going through the pro and enterprise tiers, which is also going to see now operation for US is it's very different from other home, unlike marketing and sales and service, which we've really thought about the front door. We think op hub is a supercharger.

Kris as the value of all of the other hubs that I call. It the sauce that makes the whole meal come together. It just makes it tastes really nice that's what op hub is and we think it's what you know.

Gaining a lot of traction with customers that from our partners and we're not done innovating on the go to market side, we're continuing to invest in terms of sales enablement resources and training to get our reps and partners more familiar with use cases, creating a library of case studies and so on and on the <unk>.

Product side, we recently launched a bunch of more features in the enterprise tier.

Schedule triggers custom called action more data quality things that really improve on the power within that enterprise tier and so overall.

Early but we're very pleased and we're hearing from both customers that the partners that this is really helping with the adoption of the full suite.

Yeah.

Our next question comes from Alex Zukin from Wolfe Research. Please go ahead.

Yeah.

Hey, guys. Thanks, taking my question I wanted to key in.

One more time, maybe Kate on on net retention, specifically what was the net retention for the quarter I think previously you've said above 110% in given the macro picture.

For the year are you still expecting that to be sustainable over the course of the year and then I've got a quick follow up.

Yeah sure thing you are right.

Net revenue retention target that we shared.

Let's say last fall was 110, plus and we were again trending nicely above 110 in Q1 with very much. The same drivers of that retention strength, a strong fundamental growth retention and then really the upgrade drivers being seeded.

Expansion Cross sell in addition upgrades and we do remain comfortable at that 110 plus for 2022.

Our next question comes from Keith Bachman from BMO. Please go ahead.

Hi, Thank you and nice segue from <unk> question I wanted to ask.

Question on.

The investor pervasive psychology is that marketing budgets and Henry hub spot.

Revenue will get negatively impacted during the course of the.

In an economic downturn, particularly one that might have longer duration and are to get kind of what your response is that particularly in light of if you look at what happened during Covid. It was a very short lived.

Challenge and a hotspot in fact accelerated meaningfully in the September and December quarters. After the onslaught of Covid because many of these.

We're prepared for the whole kind of work from home model and whatnot and so there was tremendous build up capacity, but what do you see is different or similar.

If we face a more prolonged economic challenge, whether it be Europe or otherwise what's different today than what happened during COVID-19 and just to sneak one quick one caters to sub out the ads were great this quarter.

It sounds like you expect them to go back to kind of seven but I just wanted to see if you could clarify that and that's it for me. Thanks.

Yeah. Thanks, a lot Keith I'll, maybe start with a broader macro question and then Kate can take a specific one.

Look we're we're not economists and we certainly do not have a better crystal ball than any of you are but where we're watching we're watching the trends across all of this and look at there is a really massive a recession no one is immune to that.

That becomes very very clear the the thing I would say there is a big structural change when we see customers that are adopting front office software before it was just we need to be able to talk to our customers and we need a digital channels to be able to do that across marketing sales and service now.

It is.

We operate in a hybrid environment, and we need to continue to drive productivity and growth.

And as I talk to customers you know two things stand out for me this year, which is that digital transformation in the front office is not over even though we saw it accelerate over the last couple of years and maybe the tailwind we're like really gushing, it's not over and customers that I talked to our store.

Struggling with basics, you know spreadsheets, Google Spreadsheets point solutions disconnected team. They don't have the insights that they need to be able to drive growth and so driving and continuing to put in technology that can provide that type of disability is going to be import.

In you know almost every environment and then the second thing I you know I said this earlier we made some.

Really smart strategic that's a long time ago, which was around the CRM platform and are having a platform that is just world class.

It's really you know paying off right now because people want easy to implement solutions. They want quick time to implement and if you think about it.

We're able to implement in like a matter of weeks not months and were pretty cost effective and so we become more of a platform choice in this environment.

<unk> payments is going great you know.

We have a clear vision in terms of payments, which is we Wanna help b to b customer sell online and we want.

To improve that last mile of the Rep assisted sale and we've been very focused on introducing new functionality as well as improving the experience of customers all the way from when a customer discovers a payment link with them a product to starting an application.

Two completing the transaction and then maybe you know recurring transactions and so as you heard we launched a recurring Acs, which is a really big ask them. This will position us to capture a lot more gross payment volume and we're definitely seeing good pickup in usage and Oh.

Early feedback from customers have been very very encouraging the same thing with the payments dashboard that we just launched it brings a ton of payment context into CRM and in prior calls I've talked a lot about our vision for having a commerce enables CRM and having the payments object and bringing that object into.

CRM.

Marketing campaigns into sales campaigns and to support calls is going to be really valuable and that hypothesis has been validated our customers are saying that is exactly what they want and so overall, we're very happy with the feedback from our customers and traction that they're getting and look I'll make a broad.

Or point I think we think of ourselves as seed planters, we always glad to see that can grow into these giant big trees and Bryan plant. It's nice to see you know a few years back and therefore, we're getting a nice benefit in terms of the growth that we're seeing right now and we've done this multiple times.

With sales hub and service hub, and you think of payments and commerce in the same vein. We're planting the seeds. We are nurturing it and we're getting really good feedback we're continuing to maintain our pace of innovation and this is something that's going to provide us a lot of shade as they go forward.

Our next question comes from Keith Weiss from Morgan Stanley . Your line is open.

Hi, This is elizabeth quarter on for Keith Weiss I, just wanted to ask a little bit on the average subscription revenue per customer sort of a bit of an acceleration in growth. So if you could just unpack what were some of the drivers of that especially given that some of the new customer adds anymore and that the starter suite. Thank you.

Yeah. Thanks, so much for the question I think I would call. It two main drivers of the S. R. P. C growth. One is just the continuation of multi hub adoption that we're seeing across our customer base.

And the second is the traction that we're seeing at the enterprise tier those two things are really the primary catalyst for that growth in a S. R. P C.

Yeah.

Okay.

Our next question comes from Arjun Bhatia from William Blair. Please go ahead.

Perfect. Thank you.

Do you have any I wanted to maybe go back to Europe . I think you had said earlier that there was some small pockets of a door.

And in Europe in terms of purchasing decisions I'd be curious if you ever granular more granular insight into whether that's eastern Europe , where you're seeing that.

Yeah spread into western Europe , driven by the impact of the war there.

To follow on to that does that.

Does that impact your international investment decision at all this year I could see our international growth to outpace domestic growth, but just curious how you're thinking about given.

The geopolitical uncertainty there.

Yeah. Thanks for the question I first off I will say that you know my heart goes out to Ukraine, and the millions of people that are impacted by the Russian invasion, and Oh, specifically, there we have been supporting our hotspot community and providing relief through.

Organizations that are doing some really important work on the ground in terms of direct impact we don't have employees, but we have some contractors in that region and we passed all sales into Russia in.

In terms of scoping, we have less than 200 customers and about you know 0.5% off a R. R combined across Russia, Ukraine, and Belarus, So very small direct impact from that region and then your question more broadly on.

In Europe , our Q1 was a very good quarter for US as you saw from the result International grew 53% your over year on a constant currency basis, and what I mentioned was that we saw a few delays in purchasing decisions.

You know, mostly took one or two additional conversations but once again.

It is not material in terms of growth at this point and I would reiterate all of the things there you know.

If if all of this worsens then it's we can't really control any of that but we are controlling the controllable rehab our focused efforts in terms of the priorities I laid out the priorities. We are investing in terms of the priorities and they all have looked at this as long term bets. We don't look at it is quarterly that's where the investments.

If we make an international or how do we can continue to grow that region and grow our presence in the region for the longer haul.

Our next question comes from Kirk My phone from Evercore. Please go ahead.

Yes, thanks very much for taking the question Jeremy I was wondering if you could just talk about the market opportunity if you're if there's anything you're seeing that's different in say the U S versus Europe or international markets in terms of bundling.

Europe would seem to be actually an area, where there's potentially more greenfield where customers haven't made as many decisions across as many hubs or it's just kind of curious if there's any real difference in how sort of the bundle strategy plays out internationally versus the U S. Thanks.

Oh, that's a that's a good question I would say that more.

More broadly we think about it as the volume play and the value play that I talked about you know when do you think about our segmentation strategy.

In the lower end of our market everything that we do is to remove friction from the product from the customer experience from the go to market perspective, and upmarket everything that we do is driving value for our customers.

And it's it's.

Similar set of strategies in place that we drive up market in North America as we do in Europe now to your point, we do think that the European market is you know a little bit you know behind in terms of digital transformation. So there are more greenfield opportunities more.

Or opportunities, where there may be currently using spreadsheets are they are half a point solution and theyre looking to drive that and we we are suddenly see back within the market, but overall our approach to the value side of our sales play.

Is build fantastic products continue to solve for our customers biggest problem and enable our partner channel as well as direct channel to have great conversations that drive multi hub growth.

Okay.

Our next question comes from Brent <unk> from Piper Sandler.

Okay.

Maybe.

Donna Darvish.

Oh go ahead add your comment.

You always glad to comment on the upmarket in terms of international one thing we've also seen recently.

I'll kick in part of our platform usage in our integration partners are specifically with our local app developers in these regional market. So we've been kind of focused on increasing the number of integrations overall, which were up over 1000, that's been growing very nicely, but specifically for kind of local application partners that are in region, we see 80% year over year growth in terms of the number of those integration.

But I think that's really helping us as far as a part of that adoption.

<unk>. Your line is open. Please go ahead.

Yeah.

Thank you. This is Clarke Jeffries on for Brent I wanted to ask about the hiring environment, what youre seeing right now in terms of acquiring talent and then additionally, maybe about the appetite to pursue tuck in acquisitions to accelerate innovation in acre hubs or potentially new hubs.

I appreciate that you wouldn't want to impact the user experience by bolting on quarterly integrate features but how are you weighing M&A as an opportunity to kind of accelerate that innovation versus the number of internal initiatives you have running right now.

Yeah. Thanks, a lot maybe I'll start with the hiring question and then take the broader question on M&A and how we view that.

I'd tell you look to the type of markets are is the is definitely competitive we see that but it's not necessarily a new phenomenon as you saw.

In Q1, we hired 41% more than we ended the head count of 6400, so we've been able to hire some incredible talent even in a very very competitive markets that we have and I would really point to the strong culture that'd be half.

[noise] of listening learning and evolving that is a real big part of our culture and we think of culture is as important as product and so we pay a lot of attention to the net promoter score on the product side and we pay a lot of attention to the employee net promoter score on the culture side and that.

It means that when you know we hear things, we certainly listened to it and then we go back and we're able to kind of make sure that the culture is evolving as we continue to scale and so our commitment to our people I'm you know, it's really really key in this environment.

It's really helped us higher retained top talent and we'll continue to do that its not a one and done in terms of the broader question on M&A I think you said it right for us.

We've taken a very very different perhaps to crafting a CRM solution and in times like this sometimes when you know almost any time. It is a real value proposition that resonates within our segment of customers our customers don't want to spend a ton of time kind of money kind of resources.

Some of it to be able to cobble things together and so our crafted experience and platform has resonated and continues to resonate. So when you think about M&A, well certainly look at it and but we want to maintain and enhance the customer experience and when we do look at M&A it'll be more.

Sure from the perspective of accelerating one of our primary colors, which is within our hotspot framework or maybe adding a new primary color and so well continue to look at it but the crafted experience is something that would be really deeply care about and believe in.

Our next question comes from Ryan Macwilliams from Barclays. Your line is open.

Thanks for taking the question. So we noticed the price increase on the professional tier of service hub recently and this may have been a part of the service hub relaunch, but as we enter possibly a more inflationary environment now is there an opportunity here to take advantage of price and some of your other products.

Yeah, a great question a good you know top of mind question in terms of pricing and you're absolutely right. We are.

It did change the service of pricing from 400 for months to 500 per month based on all of the features and functionality that we just relaunched and I'd say look I think our we're going to stay consistent with our pricing and packaging philosophy and.

Our pricing philosophy is that we add value to customers and when we know we have added value and when our customers have received a tremendous amount of value. Then we look at pricing changes. So that's exactly what we did with the service how price increase that you just mentioned.

The other part of our overall packaging strategy is that we'll continue to pour innovation, we want to build just exceptionally powerful features on the enterprise tier and we want to keep bringing down those features a high end features into starter and professional edition so that our customers can get the value from all of them.

The innovation that we're doing and that's our consistent pricing and packaging strategy will remain focused to that strategy and when we deliver value to customers is then we will make changes to pricing.

Yeah.

Our next question comes from Terry Tillman from <unk> Securities. Please go ahead.

Okay.

Hey, good afternoon. This is Conor Bachelor all on for Terry. Thanks for taking my question I just wanted to ask one around the partner ecosystem. So as you continue to push up market and see enterprise customers adopting our mobile strategy.

All kinds of synergies that youre seeing with stronger communication between the partner ecosystem in your direct sales team and maybe what kind of impact for customers experiencing from a strengthened coastal emotion. Thank you.

Yeah. Thanks, a lot for the question the partner ecosystem who've contributed about 40% of our overall RR and that continues to be the case, so very strong synergies there and I have we have really transformed from being a market.

Adding automation company to a CRM platform and as we have transformed from really being a small business company to a mid market company, which as you know both of these are pretty big transformations, we've really enrolled our partner ecosystem in that transformation and we've enabled them to you now.

Hum along with Us and we've made a ton of investment. So overall our strategy that we have clearly communicated to the partner ecosystem as we want to scale selling and servicing with that partner ecosystem and I think it's going really well I talked to partners a lot.

And I know some of you do as well and what I hear from them is that the.

The CRM platform scaling is going well our customers definitely clearly see the need for our platform and our partners are able to help when our partners get engaged with customers customer dollar retention improve revenue retention improves in the multi hub adoption improves and so it's a win for our customer.

It's been four partners and therefore, it's been four hub spot so I'm pretty excited about how the partner ecosystem is coming along with us.

Just a quick note yummy is around.

The platform itself, we have three different dimensions of valuing the portfolio allows our partners to create why don't we talk about a lot of logistics op integration partners that create value not just for the.

The company developing those applications, but also our solutions part, there's all kind of make those integrations come to life. The second emotional value is around creating assets that work within the upstart platform. So we have CMS hub templates now so.

What does that also create a template for a particular industry that once you see a mess up therefore, driving down that kind of time to enjoy make and the third one is around customizing the platform, which we've been continually making more and more investments and to make the platform more accessible and this creates another wave of opportunity. The other dimension of value that our solutions partners can kind of bring to our customers all of them.

I really think value there. So all three of those things are exciting we hear from partners. All the time, but talks about platform is kind of unlocking more and more value for them over time.

Our final question comes from Tyler My goodness from UBS. Your line is open.

Yeah, hi, thank so much effort for squeezing my question in so Keith earlier, you spoke about comfort with a S. R. P. C growth remaining in the low double digits. So could you maybe just talk about what's giving you comfort with the durability at this metric just given some of the earlier comments you made with starter being strong in net add this.

Last quarter and just as the comps for this metric got tougher as we go throughout the year and maybe it's like a second.

A second part to this question.

Just I would imagine you know the mix of starter versus some of the premium tiers has a role there. So curious how you're thinking about that mix evolving throughout the year.

Yeah. Thanks for the question I would say you know you've heard us talk a lot about the strength of the install base selling motion that we've seen over the last three or four quarters.

Dominic you talked a lot about the innovation that we've been pouring into the product at the high end and introducing new hubs that creates a lot of opportunity for our sales team to go into our customer base and find opportunity to deliver more value to them that is a natural tailwind to a S. R. A T.

C and provides a nice balance to any incremental uptick in that starter tier.

We have no further questions I'll now hand back to examine the Rangana CEO for closing remarks.

Well I want to finish off by thanking all of our customers for our partners employees as well as the investors. Thank you. So much for your support really appreciate it our board appreciates it and we'll look forward to talking to you again next quarter.

Today's call is now completed I'd like to thank you for your participation you may now disconnect your lines.

Okay.

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Yeah.

Okay.

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[noise] okay.