Q3 2022 HubSpot Inc Earnings Call
[music].
Good afternoon, and thank you for standing by.
Looking to the hub school, Keith late 2022 earnings call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
At this time, if you wish to ask a question. Please press Star then one on your telephone keypad.
Today's conference is being recorded.
This time I'd like to hand, the conference over to Chuck Mcguffin head of Investor Relations. Sir. Please go ahead Chuck.
Thanks, operator, good afternoon, and welcome to hotspots third quarter 2022 earnings Conference call.
They will be discussing the results announced in our press release that was issued after the market close.
With me on the call. This afternoon to see how many rocket our Chief Executive Officer, <unk> Shah, our co founder and CTO and Kate Bueker, Our Chief Financial Officer.
Before we start I'd like to draw your attention to the Safe Harbor statements 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, 8%. The Securities Exchange Act of 1933 as amended.
And section 21 E of the Securities Exchange Act 234, as a method 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 FX movement.
And business outlook, including our financial guidance for the fourth fiscal quarter and full year 2022 and 2023.
Forward looking statements reflect our views only as of today and as 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 affected him 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 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 2022 earnings press release, and the Investor Relations section of our website.
Now, it's my pleasure to turn over the call to hotspots, Chief Executive Officer, Johnny Rockets Nobody.
Thank you so much and welcome to everyone joining us on the call today.
Q3 was another solid quarter for hub spot with revenue growing 38% year over year in constant currency.
We added over 8000, net new customers in the quarter growing our customer base to nearly 160000 globally.
Representing 24% growth year over year.
These strong results reflect our focus on innovation and execution.
Our connected platform is clearly driving value for customers, especially as they look to increase efficiency, while lowering the total cost of ownership during this period of uncertainty hub.
<unk> continues to be a mission critical platform for our customers as they depend on us to stay connected with their customers.
On the last call I spoke about the launch of CMS free and moving marketing automation down into our startup here. This place combined with our focus go to market initiatives drove strong customer adoption and multi have momentum in the quarter.
Before I get into some of the trends we're seeing in the business more broadly I want to reflect on our recent milestone for hotspot, which was our annual inbound event in September .
This year as you know we hosted inbound in person in Boston as well as online and had tens of thousands of attendees from all over the world join us.
It was truly a week to remember with incredible speakers and fantastic opportunities to connect with our customers partners and community I know many of you attended as well. So thank you again for joining us.
I loved and Bob feeling more energized than ever about <unk> future.
Through my conversations with customers and partners it becomes even more clear that we are well positioned to drive long term durable growth.
And there are three key reasons for this.
First we have a unique opportunity to help our customers with solving the crisis of disconnection.
I spoke at inbound about the crisis, our customers are facing as a result of disconnected systems disconnected customers and disconnection from their peers.
To solve this crisis, our customers need to be able to seamlessly connect our data connect with their customers and with each other all in one place.
That's exactly what we've been building a top spot with our connected customer platform.
We can already see the value customers are getting from being able to connect their entire front office.
For example, take growth lab financial our financial services company.
Our growth was limited by disconnected tools and our legacy CRM platform.
Without a central platform their teams spent hours manually tracking prospects and didn't have the insights they need to optimize their growth.
The consolidated onto the hotspot CRM platform.
Marketing hub sales hub and service hub.
Brook Lab now uses automation to boost conversions and shorten deal cycles, and Leverages CRM data to get insights on revenue attribution. So they can make more data driven decisions.
Since implementing hub spot growth lab financial doubled their revenue and saved a significant amount of time eliminating manual tasks.
This is just one great example of how scaling companies can grow better with hotspots connected CRM.
The second reason Whereabout position is that our market opportunity is large expanding and underserved we operate in massive underserved market that are forecasted to grow to over $70 billion by 2027.
Within this market, we have multiple levers to drive durable long term growth.
Our land and expand motion is working with majority of our customers triangle III product before purchasing and our pathways for expansion have diversified with the breadth and depth we have added in our product.
We're also launching into new product categories like payments and commerce.
We'll continue to open up new avenues for future growth at hotspot.
Even in the weeks since inbound we have a number of new exciting features in private beta including payment schedules and made of invoicing.
We're encouraged by the long term opportunity to help b to b companies transform their buying processes and so easily online.
Finally, our product innovation is cranking.
<unk> announced over 80, new product enhancements at inbound to meet our customers' evolving needs and help them optimize for connection.
Two product highlights, where our new campaigns to dot or tool and customer journey analytics, both our practice to give businesses a more unified view of their customers experience and bring data together for deeper insights.
We're thrilled to see the positive feedback from the beta so far.
As we look ahead, we are focused on maintaining the pace of innovation. So we can drive even more value for customers and emerge stronger as the connected platform of choice for the mid market.
I'm energized by the opportunity we have to solve the crisis of disconnection for our customers serve Mega markets and continue to drive the pace of product innovation in order to set ourselves apart.
Next I want to talk about the demand environment, we see today and reiterate our playbook for managing through it.
Last quarter I talked about the demand trends, we were seeing in the business through the end of July including a lengthening of deal cycle and more decision makers involved in deals.
Since then the macro environment has become incrementally more challenging we.
We see two clear trends in this environment based on our customer and prospect conversations.
On one hand deals are taking longer to close there are more decision makers involved more approval layers and budgets are tighter we.
We continue to see this across the geographies and segments we serve.
On the other hand hotspot is emerging as a platform of choice to help customers get through these uncertain times.
Our customers need more needs better conversion and better customer experience, but they need to do it all with less.
Our value proposition of easy to buy easy to use and easy to build resonate even more now as customers are looking to consolidate their tech stacks.
Despite the softer macro environment I'm confident in hotspots playbook for resilient growth through the cycle.
Our playbook is based on three core principles that served us well during the pandemic and again through the macro volatility this year we.
We talked about these principles last quarter, but there was repeating.
The first is solve for the customer even during uncertain times. One thing we're certain of is that solving for the customer is good business.
What that means right now that we're helping customers understand the value of consolidating onto a connected platform and the impact it can have on their total cost of ownership.
We're also providing even more functionality at a lower at me.
We moved high value features like marketing automation down to starter and helping early stage businesses get online with free CRM and CMS.
These plays are resonating with our customers and you can see it in our results.
Second we will continue to invest in innovation to emerge stronger.
We're being more prudent with our hiring as well as discretionary spend but remain committed to investing in innovation. In fact, we're so thrilled to see that our product investments resulted in hotspot being recognized as a leader in the magic quadrant for B to B marketing automation platforms.
By Gartner this past quarter.
Moving forward, we will continue to invest in innovation and functionality to help scaling companies optimize for customer connection.
Lastly, we execute with focus.
For us it is all about controlling the controllable we're focused on driving expansion through cross sell and upsell motion and the percentage of our are from customers with three plus hubs grew nicely within this quarter.
We're executing on our bimodal strategy with strength in both net customer additions at the lower end and momentum among larger customers driving double digit a S RPC growth.
And we are continuing to balance growth and profitability through more measured hiring and tighter control of discretionary spend.
Heading into the end of the your I feel energized we have a clear opportunity ahead to drive value for our customers. Our teams are focused on execution and we have the right playbook in place to drive growth in this uncertain environment with that I'll hand, it over to Kim.
Thanks, Germany, let's turn to our Q3 2022 financial results.
Third quarter revenue grew 38% year over year in constant currency and 31% on an as reported basis.
Q3 subscription revenue grew 32% year over year, while services and other revenue decreased 13% on an as reported basis.
Domestic revenue grew 33% year over year in Q3, while international revenue growth was 44% in constant currency and 29% as reported.
International revenue represented 46% of total revenue in Q3.
We added over 8000, net new customers in the quarter, bringing our total customer count to nearly 160000 up 24% year over year.
Big driver of the strength this quarter with customers adopting the starter CRM suite as hubs that continues to emerge as a platform of choice in times of certainty and uncertainty.
Average subscription revenue per customer grew 12% year over year in constant currency and 7% on an as reported basis to $11200.
The primary driver of this strength continues to be professional and enterprise customers adopting multiple products.
Despite the more challenging macro environment, we maintained a healthy gross retention rate in the high 80 as customers look to have such a platform to drive increased efficiency net.
Net revenue retention was 109% in Q3 down quarter over quarter as a result of slower net upgrades, particularly in the marketing contact and seat expansion motion.
Deferred revenue as of the end of September was $474 million or 26% increase year over year.
Billings were $444 million in Q3, growing 34% year over year in constant currency and 26% as reported.
The remainder of my comments will refer to non-GAAP measures.
Third quarter gross margin was 82% up two points year over year.
Subscription gross margin was 85% in Q3, while services and other gross margin was negative 49%.
Third quarter operating margin was 9%, including a one point margin headwind from the impact of foreign exchange.
Net income in the third quarter was $35 million or <unk> 69 per fully diluted share.
At the end of the third quarter, we had over 7400 employees up 35% year over year and down six points sequentially.
We expect our hiring to moderate further in Q4 and to exit the year with head count growth in the mid to high twenties.
As we discussed last quarter hiring for the remainder of the year will be focused in R&D and revenue generating sales head count.
Capex, including capitalized software development cost was $25 million or 6% of revenue in Q3, and free cash flow in the quarter was $36 million or 8% of revenue.
Finally, our cash and marketable securities totaled $1 $4 billion at the end of September .
And with that let's review our guidance for the fourth quarter and full year of 2022.
Germany, you've described in her remarks, the macro environment has become incrementally more difficult through October .
Taking customers longer to make decisions, causing deal cycles to elongate there are more people involved in the approval process and budgets have tightened.
Our guidance assumes the fees weaker macroeconomic conditions persist through the remainder of the year.
For the fourth quarter.
Total as reported revenue is expected to be in the range of $444 million to $446 million up 20% year over year at the midpoint.
We expect foreign exchange to be a nine point headwind to as reported revenue growth in the fourth quarter, representing an incremental $4 million headwind relative to our previous forecast.
non-GAAP operating income is expected to be between 47 and $49 million, we expect foreign exchange to be a two point headwind to operating profit margin in the fourth quarter.
non-GAAP diluted net income per share is expected to be between 82 and 84 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 $1 705 to $1 $707 billion up 31% year over year at the midpoint.
We expect foreign exchange to be a six point headwind to as reported revenue growth for the full year of 2022.
non-GAAP operating income is now expected to be between 152 and $154 million we.
We expect foreign exchange to be a one point headwind to as reported operating profit margin for the full year of 2022.
non-GAAP diluted net income per share is now expected to be between $2 48 and $2 55.
This assumes 51.1 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 5%.
Now expect free cash flow to be about $195 million for the full year of 2022.
<unk> of the incremental headwind from the strengthening of the U S dollar relative to our prior forecast.
Well, it's too early to provide formal guidance for 2023, given the material moves in foreign exchange rates. This year, we thought it would be helpful to quantify the impact of foreign exchange on 2023 revenue.
At current spot rates, we expect a four point or 70 million dollar headwind to as reported revenue growth for the full year of 2023.
And with that I will hand things back over to yamani for her closing remarks.
Thank you so much Kate I want to close by emphasizing the tough spot is operating from a position of strength.
We've built a robust connected customer platform that is meeting the evolving needs of our customers.
We have a strong balance sheet and an incredible team and company culture that allows us to attract and retain top talent.
Trilled for hub spot to be ranked number one in employee happiness among top rated large companies by comparable <unk> just last month.
Our culture and people continue to be a competitive advantage for hotspot.
Looking ahead, we will continue to adapt to the realities of the environment without losing sight of our mission to become the number one CRM platform for scanning companies.
Thank you so much to our customers our partners, our employees and shareholders with that operator, let's open up the call for questions.
Okay.
Thank you.
If he would like to ask a question at this time. Please press Star then one.
Thank you Pat.
Please could I ask you to limit yourself to one question and one follow up to allow all investors speak on Stateline.
Yeah.
Okay.
The first question we have comes from.
Brian Peterson.
Raymond James Your line is now a combined.
Oh, Thanks for taking my question and congrats on a really strong quarter.
Taking a step back here.
A number of companies that the macro got incrementally worse over the course of the quarter. It sounds like that was the case for hotspot as well would appreciate any color maybe on what changed.
And how youre thinking about the macro impacting fourth quarter guidance.
Yeah.
Yep, Thanks, a lot Bryan for the question.
Yes, we're seeing many of the same trends in our customer base that we saw in Q2. It was just a bit more intensified in Q3, we saw the longer deal cycles that we talked about in Q2, we saw more decision makers getting involved in deals and more approvals needed a tipping.
If you would talk to the Vps of marketing sales for approval now we're talking to the CFO Ceos and sometimes even the board product evaluations are taking longer as buyers are generally much more risk averse and the budgets are tight now.
Well look I think we're seeing a lot.
A lot of things that go very much in line with what you've heard from other companies. This quarter. The overall environment is just incrementally more challenging than it was in Q2.
Now, having said that Brian we continue to win and our value proposition resonates really well in this environment customers want a clearer value piece and they want a clear business case for driving efficiency. So we're working with our champion we're working with our point of contact with customers to be able to articulate the business days.
And then other able to present to the C suite and board our customers want.
Abuse and ease of implementation because the combination of those two lead to time to value and that's what matters. In this environment now both of those ease of use and ease of implementation the boats historically been core differentiators for hotspot.
And continues to be a differentiator now and it's really important in this environment and then finally I'd say that customers are looking to standardize on our platform, they're looking to eliminate point solutions. They are looking to reduce their budgets and they're looking to us.
To be able to bring more data and have a single platform were now no longer a nice to have solution. We're just becoming a must have mission critical solution for our customers. So all of those are resonating within our customer base and you can see that within all resolved now.
Now look looking forward I'm going to have a crystal ball, but we expect these conditions to persist in Q4, and possibly even into 2023.
We're navigating through all of these choppy waters from a position of strength and will remain exceptionally focused on executing the playbook that I just walked through.
Great I appreciate the color maybe to follow up are you talked with the value of the platform, where there are certain products kind of on top of marketing that you saw particular strength in the quarter, what did that sells all of our service hub.
Stan maybe where they cross sell was really successful this quarter. Thanks guys.
Yeah, Brian I think you know the combination of marketing and sales is becoming exceptionally more important right now when I talk to customers. They.
We are expecting much more from their marketing and sales organization, they're expecting more leads better lead quality better conversion better disability into the pipeline and they want all of this format right and.
That means we're definitely seeing the value of having a connected marketing and sales hub solution.
That's that's what is really key within our customer base and so when we talk about multi club most of our multi clubs have sales hub and marketing hub involved and we're helping our customers kind of navigate through this environment as well.
Okay.
Yeah.
Thank you.
The next question, we have from the phone lines comes from.
Mark Murphy with J P. Morgan Chase your line is highly tomorrow.
Yes. Thank you very much I'll add my congrats on the execution in a tough environment.
So I wanted to ask you as you're building out these more sophisticated enterprise features.
Which started with custom objects can you share perhaps how some of the upper thresholds are changing.
For hub spot, if we think about kind of the upper bands for M. R R or even just the seat counts.
Four four sales hub as you gravitate into the enterprise and mostly what I'm wondering is do those continue to increase.
Even despite.
The macro that you're encountering.
Yeah, Mark Thanks, a lot for your question look from a segmentation strategy. We're very much focused on the two to 2000 segment. So for us the upper bounds of the segment continued to be too.
202, a 2000 person employee company. The only thing is were winning our fair share within that market and as you rightly pointed out over the past couple of years, we have invested going upmarket with features like custom objects at inbound we.
Now more than 80, new enhancements and features across the entire platform and a number of these enhancements and features are really driving a better UI customization better data management advanced permission ing granular ability for.
Admins to control the environment. So a lot of the features have enabled us to win our fair share going up market and in this environment.
One of the things that we see is customers as I just talked about care about better disability, but they also care about that our time to value and cost effective solution. So going back to really the fundamental value proposition all clubs block, where it easy to use but we have very powerful.
And that makes us exceptionally competitive in that market. So we're remaining true to the segmentation and winning our fair share of that market.
I understand thank you how many and just as a quick follow up I was wondering if you or Katie could could you just clarify them.
Yeah, because the I think we're trying to maybe understand somewhere in the results, where we would see.
Some of the signs of incremental strained, but just based on what you saw.
Are you trying to convey that the month of September and October you did in fact feel a bit tougher save in July and August in terms of the friction in the selling cycles, because I think that's generally what we're what we're hearing elsewhere.
Yes, it should be very clear.
What we saw in Q3 was just an incrementally more challenging environment than what we saw in Q2, and specifically budgets are tight and every approval is being carefully considered and because of that the approval processes are longer customers.
Our spending a little bit more time, you know getting a value case, Delaware to their C level for approval and sometimes even going to the board. So we're continuing to see that pressure.
We're also seeing the need for a crystal clear plan to deliver value, which means more time to understand implementation plan user adoption plans more time to understand the training plants and all of this means that there's just a lot more rigor more demos and war conversation so.
We definitely are seeing incrementally more challenging environment from a macro perspective, having said that like we talked about we've put in some place from.
Being focused on the customer and those plays.
Continue to work at the bottom end, which is where you see the strength in net adds and with our multi hub.
The proposition is resonating.
And so we'll continue to work through this choppy environment.
Excellent. Thank you very much.
Yeah.
Thank you.
Now half.
Santos terminal from Jefferies. Please go ahead, when you're ready.
Hi, great. Thank you and I'll, just add zecca, great work and focus by the whole organization. So it's all of the apps Butters great job.
Maybe just first one for you I know you've talked about the macro getting incrementally worse longer cycles more approval, but what you didn't mention is the change in the top of the funnel or maybe inbound interests. So just could you shed. Some light on are you seeing any changes in terms of the customers that are reaching out or coming in through the <unk>.
Of the funnel and just interest levels, maybe is that even uptick because you had inbound in this quarter, just maybe help us understand what you're seeing at the top of the funnel versus just in terms of deal closings or the cycles.
So mark Thanks, a lot and I will double down and emphasize I think congratulations to the entire company both in the product and flywheel and the entire company or executing in a very tough macro environment look on the demand side. If you if you come to that a year ago.
It was primarily all inbound so it was a lot of people racing has them coming to us are mostly quantified them. So it was fairly quick to take that kind of a quantified and convert it into a customer win what we are beginning to see is that that level of inbound has.
Change and right now, it's a combination of that and our customer success team, our sales organization going to customers and going to prospects and having conversations about hub spot. So it's a combination of people raising their hands and coming to us and that's part of it has slowed down a little.
So it's off going back to our install base and having conversations on how we can add more value. So certainly from a demand perspective, we see a pretty big shift from last year and somewhat of a shift from the first half of the you're having said that what I would say, it's like there's just a higher bar to action with.
In the pipeline, there's there's more conversation more approvals and more demos that are needed to get to action and so the way I would characterize it as demand has slowed a we've compensated by going out and proactively having conversations to the customer base and it takes much longer.
For us to close.
And we continue to be very very focused on executing in this environment.
Very helpful. And then maybe if I just ask a quick follow up.
I wanted to make sure I think you said up four point FX headwind, where things stand today for 2023 revenue was that one did I hear that correctly and two is that the level that you had assumed when you gave the flat margin guidance at the analyst day or should we should we rethink that as well.
Yeah. Thanks for asking I do think it's a really important point for us to communicate.
Foreign exchange has been one of those things that has moved pretty dramatically throughout 2022, but frankly like even within the back half of Q3.
And so you are right.
Given the current foreign exchange rates, we would have a four point headwind to 2023 revenue growth and that's about a $70 million.
Not at all headwind.
If foreign exchange did get harder in the last couple of months and you heard US talk about our Q4 guidance is having an incremental $4 million of headwind relative to the last time, we guided you should assume that 2023 hot sauce similar trends to that.
Okay.
Great. Thank you said that your mother as far as we did.
Or is the 8% margins.
We talked about at the analyst day, it did incorporate a wear resistance.
Okay.
Okay perfect. Thank you for clarifying have a good day.
Thank you so much.
Uh huh.
Awesome, that's yeah, that's really helpful.
Now do you feel the headwind you're already on.
That's perfect. Thank you for taking my questions.
I'll add my congrats on the quarter Gummy Understandably, you know as more buyers and more approval levels get involved in the process. It creates a tougher selling environment, but you did mentioned that you're getting you know.
A little bit more exposure are higher in the organization to the C suite to the board what does this do for hotspot and and you know your ability to pay yourself as a more strategic partner to make a broader platform sales. So maybe buyers that you didn't have access to as much than in prior years and how equipped to do you think the sales.
Team is to make that pitch.
Two to those higher level buyers at this point.
Okay.
Yeah really good question certainly more C E O CFO speech he knows that we have dealt with in the past and it is you know why are the conversations take longer they are really good conversations and the way I'd characterize it.
Is that when we talk to our C suite within our customer organizations. There are few things that matter to them first is time to value. They really care about how quickly theyre going to get to value and how their teams are going to see the impact and so part of it is all having a clearer articulation.
Nation of value as well as cost savings to the C suite. The second is really talking about the value of our consolidated platform.
They're over the past couple of years a lot of these companies I've ended up buying disconnected point solutions and that's costing them and so when we have conversations with Ceos and Cfos, we talk about how we can help them with eliminating some of these point solutions and consolidating and seeing the value.
A consolidated platform and that's certainly resonate now on the second part of your question. This has meant that we've doubled down on enablement.
For our sales team for our customer success teams as well as the partner organization, we have rolled out D. C O playbooks as well as value playbook. So that they can bring these conversations earlier in the sales process. They can proactively talk about how we can help them get through time to value.
Well as cost savings and that's part of the enablement is something that they're doubling down and we're doubling down in terms of execution as well so I absolutely see all of those within the pipeline.
Okay perfect.
Helpful. And then the other part you know your your new customer adds actually picked up and you know this is something that we're not seeing I think with your peers, where new customers have seen greater headwinds I'm curious as you look at the new customer cohort that's coming in are you seeing more replacement opportunities even in that starter.
CRM suite, where customers are wanting to rip out existing solutions versus more of more of a greenfield opportunity that you may have seen in the past.
Yeah.
Yeah. Thanks for the question maybe I'll Die then you are right. The net adds for the quarter came in a little better than we had even expected and where we saw the strength was really at that starter tier of particularly in the starter CRM suite.
These are not customers that typically are ripping and replacing these are customers, where you don't have the spot is the first tool.
They are largely using and Theres a couple of things that we think really contributed to the strength of this quarter you already talked a little bit about them, but you may remember, we took a bunch of actions last quarter that were really customer first and nature.
That leaned into the value proposition at the starter tier.
One is that we added automation to marketing hub starter.
Launched via that's free at inbound and we continue to experiment on pricing and packaging in that starter tier and it's really the combination of these three actions that we believe drove the increase in net customer additions quarter over quarter.
It's not something we solve for it as an output and our goal is really to drive those both long term and short term growth in the business.
But you know this quarter. The plays that worked really drove customer additions and really focused customer additions at the low end.
The one thing that I was just want to add about that is there's two pieces of the K P. I equation. One is the net customer additions. The other is a S. R. P C and so when you see really strong quarters like this one in terms of net customer adds, particularly starter what youre going to see on the other side is a little.
Alas strength and the S. RPC growth and you know as a result, what I would encourage you to see and like Q4 is that a S. RPC will likely be more like 10%.
In constant currency.
And what they have just done that starter tier is that obviously, it's nice to have the revenue from those 8000, new customer ads, but the other way. It helps its not part of our bimodal strategy, which is as we get more and more customers. It kind of helps their brand and word of mouth, which has been a strong driver of growth for ups thought historically the second pieces.
That you know, we're looking to build a CRM platform, that's a de facto standard.
B and the more customers we have the more attractive the platform is procured party applications to build on for solutions partners to partner up with our customers. So it's just a it's a net positive all around but that starter tier. So it's been a really strong driver for us.
Thank you.
The next question comes from Wuxi familiar from RBC. Please go ahead pushing your line is now open.
Wonderful. Thanks, so much for taking my questions nice to see continued execution in spite of the macro.
Wanted to go back to the commentary about the opportunity to consolidate point solutions I think that makes a lot of sense. Just in theory I was wondering if you could point to any examples of that sort of behavior that you've already seen and if there are particular areas within the martech stack or within C. L.
Graham that you're already seeing that sort of interest from existing customers and then I've got a quick follow up.
Yeah Richie.
Elimination of point solutions is a place where our customers look to them as their budgets get you know super constraint right and and again example in the prepared remarks of one of the one of our customers kind of consolidating there are.
Many more like that that we were having conversation you know rehab ERP software solution organization in North America. So we're using multiple tools for marketing as well as their sales efforts and all of that was extremely manual siloed and so they are looked to us and over a period of time we had.
People conversations and initially started with marketing hub, and then extended through marketing and sales and eliminating six tools as people are looking to help them consolidate their go to market stock and so.
That led to not only just improved marketing efforts, but also reducing their overall spend so a number of customers now I'm not saying that these are easy I'm not saying that these are you know quick because that's not happening within this environment, but when we start with either a marketing ourselves we do have the opportunity.
Do engage with our customers strategically and talk about their entire stack and how we can help them.
Solved at their stack.
Yeah.
Yeah.
Thank you.
We now have Alex Zukin with Wolfe Research. Please go ahead when you're ready.
Hey, guys. So just maybe two numbers questions for me I guess I want to understand given the commentary on the incremental.
Macro demand environment.
I will send that retention this quarter.
He remained in the high eighties net revenue retention fell to one O nine and that was a result of really lower that upgrade motions from that gross retention. We've talked about this we talked about on the last earnings call. We talked again about it at analyst day that we thought we would see.
The pressure on that net revenue retention in the near term really as a result of the macro environment factors sort of the difficulty that we're seeing there and so I would expect that you would see Q for net revenue retention continue to be pressure for like all the same reasons that we are seeing.
In Q3.
I think the good news and and all of that is that we have seen the customer dollar attention really desk hot in the high eighties.
[noise] into Q3 and again it into October like our customers are staying with him spot. They are doing things to optimize like cleaning up contacts and eliminating on new seats. There you know upgrading seats that potentially a lower rate, but we think that it.
Puts us in a nice position as we start to see the economy turned to really lean into that growth with the recovery over the long term, we still feel good about 110, plus but to your question in queue for we think it will contain net revenue protection will continue to be furniture.
And then you know on your margin question, you know as it relates to the 2000 twenty-three margin that we talked about the analyst egg.
If I just take a step back I think the about 2023 is having a few things that are really driving the margin profile for the year. The first is you know we hired pretty aggressively in 2021, we hired pretty aggressively into the first half of 2022.
And we you know want to you know realize the productivity efficiency from these hires but when you think about 2023, you're gonna see a full year of the cost associated with that hiring.
The second thing that I would say is we have actually pulled back pretty significantly and taken a number of of steps to reduce hiring in the back half of this year and reduce overall discretionary spending and things like T N E and facilities and we're gonna continue to do that.
That as we move into 2023.
And then finally, we talked to a little bit about foreign exchange and the impact on 2023, there is real ethics headwind to operating margin. It's about a point in this year 2022, it's an incremental point in 2023, and so you know if I just sort of step back.
And think about all of those things you know, we're doing a bunch of or taking a bunch of actions to be really prudent in our spending and we're gonna continue to do that into 20 twenty-three, but we you know we will retain investment in certain areas like Orange D and revenue generating head count to preserve grew.
Both both in the near term and long term. So all of that said you know, we said 8% were committed to delivering a percent and we will share very specific guidance with you when we announce our queue for results.
Thank you.
A reminder.
So you can ask <unk> to limit yourself to one question meaningful it.
You'll have the next question from <unk> of Goldman Sachs. Please go ahead, when you're ready.
Good afternoon. Thank you one clarification on the early at the mom comment is the rate of change. So we're getting worse in a pool cue or the table at the new low at the mob double I'm Gonna put my question I wanted to ask about the early or come in <unk>.
<unk> hotspot catalyzed motion what are the implications customer acquisition costs <unk> instructional in nature and I'm looking Thomas ton as well is the cheapest pub spot <unk> have to acquire one dollar and the installed base alright.
The new customer <unk>, a couple of things on that but I appreciate the call. Thank you.
<unk>. Thank you multiple questions there.
[laughter] Oh sounds right.
Answer those and I'm sure they can jump in there as well.
Thank you all the <unk>.
You know, we did see and incrementally more challenging environment from a demand perspective in Q3 Danvy saw in queue for <unk> you know, it's a new level. It's not you know getting worse. It is an incrementally more challenging demand environment <unk>.
And all of the things that you talked about more conversation more time to get approval more demos all of that adds to that incrementally challenging environment and when I talked about you know nastier almost everything that we did was just inbound where we had <unk>.
Customers coming in raising their hands coming to us wanting digital transformation right now that is not the kind of pale than that you can do it from all of the macro commentary in a block and even you know other appears within the industry. It's a combination of you know some of the inbound demand the digital trend is continuing.
But it is kind of metered by the cyclical macro <unk>. So partly our team have to go engage with our customers and identify opportunities for them to save cough or consolidate on a platform will continue on the digital journey and yeah. I I think it's you know cyclical and <unk>.
Nature I think it's based on what is currently happening from macro environment perspective, and you know the overall structural need for digital in the belief that our customers have in digital transformation has not changed great do you want to add.
Add anything on the latter part of this cat question, Yeah, why don't I why did I do that I think about what you know what I at least tried to communicate during the analysts say is that we have a number of different motions to acquire new customers and we are continuing to.
To make investments in all of those motions that we think are over a long time longterm gonna drive real leverage on the sales and marketing site. So we talked about a number of them at the analyst day, we're investing in data and systems that are really designed to improve <unk>.
Fish and see that helps a lot of this all that emotion that yamani is talking about you know, we're continuing to invest in our product, but freemium motion we've been doing that for your for a number of years and we still think there's a lot of runaway there and we're investing in linear growth opportunities like commerce right and so on.
All of those are long term that's for us that will <unk> will take time to impact the piano that will ultimately drive nice leverage and our go to market.
And the more near term we do have a number of plays that are focused on driving increased productivity in the sales organization again, you want me to talk to them about a number of these but we have invested pretty aggressively and sales enablement or arming both the sales teams and also our customer success teams with T C.
C O playbooks that really helps them engage customers in a relevant way at the moment, we're leaning into the partner channel. That's always been a successful channel and it's even more important when we see sort of upmarket more complicated multi product deals and we're we're really looking at our own.
Uhm marketing organization to drive efficiencies in top of bundled demand investment. So all of those things we believe can translate into higher sales productivity even in this more difficult environment.
[noise]. Thank you.
The next question comes from the nine O T C.
For Morgan Stanley . Please go ahead, when you're ready Keith.
Excellent. Thank you guys and thank you for taking the question really nice quarter in a environment that everyone on our side of the fence, we're definitely quite worried about giving the macro trends that we're seeing in particular were most worried has been Europe and so I was wondering one.
If you're trying to get your guys perspective on trend in Europe versus the U S. I know you guys talk about Europe , a little bit last quarter, I bet incremental weaknesses as it spread into the U S. More so could you repeat them numbers were for your international growth was was strongest quarter on across the currency basis, and then too.
When when you were talking about these macro impact.
It sounds a lot like it's customers coming in the door, but a new customer count what was good at my misunderstanding that it'd be like you won't you shouldn't feel cycles is that upheld as well as bringing new customers in the door like where did that really weird. It. Thank you.
Yeah, Let me answer the first one and then maybe get can answer the second part. So international revenue grew 44 per cent in constant currency in Q3, that's you know pretty good in the macro environment like this as we mentioned before you've been starting in two one and certainly in Q2.
The transport longer deals cycle started in India, but however, what we are seeing now is the macro environment is just broadbase. We're now seeing the trend that started kind of across all segments and all G. O. So I'm really not a notable difference in <unk> vs North America.
For now.
Yeah.
Could you you you cut out a little bit and I think you were asking whether or not <unk> deal cycles were seen across both new customers and existing customers. The answer is we redecorating elongated deal cycle everywhere and so there isn't anything that I wouldn't necessarily call out other than.
Then what yamani has already talked about which is the bar to action is just higher across the board.
[noise] got it when when when we see your your new customer account actually like improving nicely in this quarter. Despite those belonging to deal cycles is it a difference in kind of like the starter edition and sort of the the experimentation we're doing there.
Uhm enabled better new customer additions at at the low end, but the the higher end stuff is where you saw the longer deal cycle.
I mean, you are exactly right the the investment and experiments were doing at the low end with our freemium motion and product like growth are the key drivers for our quarter over quarter uptick in new customer edition.
[noise]. Thank you now have a question from <unk>. This bank of America Merrill Lynch.
Oh, great. Thank you I wanted to ask a question around service. So you know, it's a big category and one where you've made a big step forward with the the new release earlier. This year. Just curious you know is there a different sales audience here versus you know sales and marketing you know versus support, particularly as you go up <unk>.
Market or is it is it the platform sale here, where if you're already in sales and marketing you've got that warm lead just curious to get your thoughts on just the adoption curve for service hub versus sales and marketing.
You're out of the market. Thank you.
Yeah. Thanks for the question so I mean as he noted and.
Last quarter, we kind of get a relaunch of service hub pro with a bunch of really pivotal features including escalate the mobile help desk, an inbound Collins and that's what that's really going to kind of open the door for kind of more sophisticated sort.
Seems to be able to implement service club and to get to your question what what's happening now the service. Obviously, you know we could I ask ourselves and of course lunch or more people buying service hub are they adopting the feature set more readily are very happy with the product.
It's all those questions is yes, we're overall kind of happy with our service habits headed but right now we're still seeing a lot of interest in kind of multi <unk> deals a lot of cross sell between marketing and sales and going to what you already spoke up earlier people just want visibility into the entirety of marketing sales pipeline going all the way to the customer service and success. So Uhm service up right now.
How is a kind of strong participant in that multihull across the opportunity over the midterm, we think it will become increasingly.
Large opportunity for being a you've kind of front door, where people come in as a result of service, helping them, we sell marketing and sales of you know to those customer, but right now very strong number come across all motion and multi up deals, though but we're kind of pleased with the progress.
Thank you.
We now have my <unk>. Please go ahead when you're ready.
Either because obviously, we have to talk about I mean, I just want to take a step back and.
Metrics that we tend to focus on just based off of those closure.
Customers with a yes or a P C number.
New added in for two per cent constant currency.
That number to Q3 I'm not sure we've seen those metrics work.
Balance.
This quarter of what we're generally used to seek so I can appreciate the commentary around the starter I think that's useful but you just talk more about the interplay I know you don't necessarily manage the business.
These two inputs, but the reasons that they're both coming through so well, particularly give us a tough micro backdrop I think it's just useful for a photo.
Yeah. Thank you Michael I mean.
In truth, the trend that we're seeing this quarter and the K P. I S. R. A continuation of some of the trends that we've been seeing for awhile, particularly in his R. P T.
R.
Strength and install they're selling is very much aligned with the platform value that you are hearing from yamani at that professional and enterprise and that is what is enabling us to continue to grow S. R. P C. Even with the large our customer.
<unk> at the low end.
Thank you.
You know have Kimberly from Oklahoma.
Please go ahead when you're ready.
[noise] can when can be there for me lately.
We have had the name is created when you're doing something wrong with another question.
We now have the next question from.
Pakistan seafood.
C N N.
Yeah, I think that's really the question I'm wondering if you could comment on the general health of the partner Channel you know a lot of your agency partners or small business with themselves. So I'm wondering if they're seeing any added pressure here and just overall what is the performance of the agency part of the channel looked like relative to your own direct sales efforts and in about demand.
Yeah Parker a really good question I think look the no one's immune to the mackerel had been sent to your overall C. So I think you know <unk> partners will also see it now having said that we have about 6000 partners within our or.
They're all ecosystem and contemplate about 40% off our revenue over the last couple of years, we have invested pretty heavily in the partners in terms of enabling the partners in terms of helping them kind of really transformed from being a marketing agency to a full fledged CRM implement or and being a.
To take <unk>.
Market customers and drive <unk> up market customers and I'd say that is working really well partner contribution to total <unk> M. R. R. Both what they're sourcing as well as what they are closed selling with hot spot is doing well. It was you know pretty high and to do and it continued to be pretty high.
I N Q3, and that's a sign that partners are very engaged and there are moving on the journey with US as we you know really provide a platform for scaling companies. So we're we're happy with how our partners are executing they're executing in a tough environment.
<unk>, so huge thanks, and shout out to them.
Thank you.
We now have Sarah kidney from Macquarie. Please go ahead, when you're ready.
Great. Thank you so much for squeeze me and I really appreciate it maybe I'm gonna ask a little bit more of an esoteric question. When you were in your in your meetings and you're speaking with a C C.
It would be curious to know what you're seeing about their desire to move marketing away from some of the the really predominant social platforms. It seem to be stumbling a little bit right now perhaps for strength is moving to tech talk and and how that's helping drive more conversations around in.
Marketing.
Hey, Sarah Thanks, Thanks for that I'm gonna need to get started and then you know <unk> feel free to jump in here as well.
The conversations right now are all around driving efficiency driving time to value and getting <unk>, you know that can impact the outcomes in the near term right and asked if you think about that Omnichannel marketing is really important when I have conversations with Cmo's Mmm C E o's within cus.
<unk>, they clearly understand that it cannot be just one channel and so a lot of fitness Omnichannel marketing and this is why would be announced and launched at inbound which are <unk> really hard on customer journey analytics and campaign, you know to Dido functionality both of those really meet the needs of where the marketing Oregon.
<unk> is expected to step up and <unk> right now and that's the kind of conversations that you're having in general a lot of marketing spend is around driving direct impact with revenue in pipeline in the short term and away from things like <unk>.
It's been our <unk> our brand spam that is what you're hearing based on talking to customers.
[noise] experience, we have the data to be able to drop against like about just how many people visit the website or how many <unk>.
<unk> or <unk>, you add like who were those customers and what was the revenue associated with that we can do kind of full circuit recording which is really hard to do when you've got to kind of be siloed products and that's one of those appeal to grab spot platform.
Thank you.
We have a final question from city Pentagon from machine. Please go ahead when you're ready.
Thank you. Thanks for squeezing me and not to this question is asked if I look to for guidance that gets really can you <unk> when I look at historical guide for for cues.
He usually like four per cent sequence hill versus flag. This year. So I'm wondering is this mostly effects or you have some kind of incremental conservatism back into the guidance considering the macro environment.
Yeah, why don't I I'll take that I think you know if your paying attention on the call. We are definitely spend a lotta time talking about the challenging environment in which we're operating and that is certainly reflected in the queue for guidance. In addition, you know you highlight effects that is also an increase.
Mental headwind for us into Q4, we called out $4 million of incremental headwind as a result of foreign exchange movements and so it's really both of those things that are contributing to our queue for guidance, we are assuming that the environment.
Stays about how it is operating today and and I was always we want to make sure that we can we're confident in our ability to deliver even if it gets just a little bit worse from here.
Thank you.
Now that to hand at that T. Yemeni for any sign of Vermont.
Well I wanted to do a big call out to her spotters globally. They are just so focused and executing so thanks to my.
My heartfelt thanks to all of the employees and also thanks to customers partners and investors.
What what are you talking to your next year.
Thank you for doing this stuff complete today's crew.
Have a lovely day and you may now disconnect two nine.
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