Q4 2022 HubSpot Inc Earnings Call
Yeah.
Good afternoon, and thank you for attending today's hubs by Q4 and fiscal year 2022 earnings Conference call. My name is Danielle and I will be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad.
It is now my pleasure to hand, the conference over to our host Chuck Mcglashan head of Investor Relations Chuck the floor is yours.
Thanks, operator, good afternoon, and welcome to hotspots fourth quarter and fiscal year 2022 earnings Conference call.
Today, we'll be discussing the results announced in the press release that was issued after the market closed with me on the call. This afternoon is yummy Rangan, our Chief Executive Officer, Dr. <unk> Shah.
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, a of the Securities Exchange Act of 1933 as amended.
And section 21 E of the Securities Exchange Act of 1934 as amended.
All statements other than statements of historical fact are forward looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures.
Expected impact of the restructuring expected gross FX movement and business outlook, including our financial guidance for the first fiscal quarter and full year 2023.
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-K, which will be filed with the SEC. This afternoon for a discussion of the risks and uncertainties that could cause results to differ materially from expectations.
During the course of today's call, we'll 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 fourth quarter and fiscal year T cells from 'twenty two 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 me wrong in Germany.
Thank you Chuck and welcome to everyone joining us on the call.
Today I want to focus on our Q4 results reflect on 2022 and share our strategy for driving profitable growth going forward.
Before we get started I went up knowledge the restructuring announcement, we just made two weeks ago, where we decided to part ways with approximately 500 clubs theaters.
This was the most difficult decision and have spots history and not one we took lightly but one we believe isn't the best interests of the company over the long term.
I'll talk further about the rationale and the impact in a few minutes.
Now onto our results.
Q4 revenue grew 35% year over year in constant currency and full year 2022 revenue grew 39% in constant currency.
Our operating profit margin was 14% in Q4 and 10% for the full year.
Total customers grew 24% to over 167000 globally.
Our bimodal strategy is clearly working.
We saw strong net customer ads of 8400 in Q4, driven by a strong quarter of free CRM sign ups CMS Humphrey, which continues to open up our distribution channels.
And the starter suite, which is delivering more value through better automation.
At the same time, we also have momentum upmarket, where we are delivering clear value for larger customers in.
In fact large deals where the fastest growing area of our business in Q4.
These results demonstrate the top spots connected easy to use powerful platform is mission critical for our customers.
In terms of the demand environment I talked in November about what we're seeing with customers, including longer deal cycles more decision makers and increased budget scrutiny.
While these trends and macro pressures persisted throughout Q4, they did not get materially worse.
We continue to navigate this environment by demonstrating the value hub spot can deliver.
And we're increasingly becoming the platform of choice.
We saw more multi club deals with the mix shifting even more to three and five hub deals.
I'm pleased with how we continue to solve for the customer with product innovation, while executing against our strategic priorities throughout 2022.
Now, reflecting on 2020 do it truly was a rollercoaster of a year.
Much like our peers, we experienced a perfect storm of uncertain macro tighter customer budgets and longer decision making cycles.
As I talked to our customers a few ships are increasingly clear.
F N B's are doubling down on digital their businesses are now built on digital compared to pre pandemic, they're not turning back.
But instead of operating in a buy first understand value later mode, they're now understand value deeply by cautiously mode.
Hotspot has always resonated with customers, because we deliver easy to buy easy to use and easy to manage solution now.
Now in this environment, we're focused on helping our customers drive innovation and efficiency with a quick time to value with customers, taking under eight weeks on average to activate and see value.
Throughout 2022, we had two key areas of focus.
Maintaining our fast pace of product innovation.
While driving consistent results.
On the product side innovation was just cranking.
We relaunched service hub added CNS hub free and launched hundreds of new enhancements to meet our customers' evolving needs.
Three areas I want to highlight.
We drove more omnichannel execution with launches like our Whatsapp integration more intelligence and insights with customer journey analytics and campaigns to Lotto and more connected commerce with payments objects recurring ECH and payment schedules.
It was a record year of innovation capped off by being rated by <unk> as the number one global software company in 2023, and the number one product in both marketing and sales.
Just awesome recognition and a strong testament to the progress we are making on driving innovation.
Also I'm happy to announce that we are promoting Andy Petri to lead our product organization as EVP of product and user experience.
And he has had an incredible influence on our product over the past 13 years at hub spot.
He is one of the very early product leaders, who drove the CRM platform vision was.
It was the brains behind operations hub and its exceptionally customer centric.
Andy will be filling the role formerly held by step cut parts and made a personal decision to step down as chief product officer at the end of 2022.
I want to thank step for her contributions to hotspot and dish are the very best.
In terms of go to market execution as customer behavior shifted in 2022 we adopted.
We lean more heavily into total cost of ownership and got even better at communicating the tremendous value of hub spot.
We did more teams selling and Delaware clear messaging to the multiple buyers and persona that are now part of the buying process in.
In short, we stepped up to the challenge executed well and helped our customers navigate choppy waters.
Now, let's shift gears to 2023.
Our continued focus is on driving profitable growth, maintaining agility and executing efficiently.
I'm confident in our ability to not only navigate uncertain times, but also to emerge stronger.
Or are some of the decisions we've made to help drive long term profitable growth.
First in January we announced plans to reduce our workforce by 7% and consolidate our facilities.
We made this decision to thoughtfully aligned our people and resources to strategic business needs were.
We're also optimizing our real estate portfolio to better align with the needs of our hybrid workforce.
These changes will help us drive profitable growth and enable us to invest more in innovation that solves for our customers long into the future.
We're also taking steps to drive more efficiency over the long term.
Specifically, we're looking at multiple areas within sales and marketing.
The direct sales side, we're investing in systems and automation to improve rep productivity internally.
We're continuing our journey on product led growth both to scale. The low end of our business with starter and to drive demand for pro and enterprise in a more efficient manner.
On the partner side, we're making important changes to our commission structure to align partner incentives with customer value.
We're leaning into better reward partners, who source demand call sell alongside us and engaged deeply with our customers.
These are multiyear initiatives and will lead to a more efficient direct product led and partner sales motions that set us up for profitable growth and margin expansion.
I want to wrap up by sharing our strategic objectives for 2023.
While the environment may be uncertain, we operated massive market and are confidently pursuing our goal of becoming the number one CRM platform for scaling companies.
Our first objective is to become the F&B market share leader in marketing sales and service.
We're laser focused on these three mega markets and will enable more upmarket customers to adopt hotspot with easier customization, greater extensibility and better governance capabilities.
We will help our customers drive revenue through improved customer journeys and greater rapid effectiveness.
We will lean into omni channel by expanding channels to serve the changing needs of our customers.
Our next objective is to continue on our journey to transform beat to be commerce.
We launched hub spot payments, a little over a year ago and early customer interest has been strong despite the macro environment.
This year as we continue to ramp we will be focused on driving greater awareness of our e-commerce capabilities and increased customer adoption, while adding key functionality like native invoices flexible billing and flexible payment processing that our customers need.
Third we will double down on our bimodal strategy.
Our strategy of focusing on volume of customer adds at the low end, while expanding the value of customers at the upper end is working.
Relaunched CMS re introduced self guided demo moved automation down to our starter edition and optimize sign ups.
These initiatives drove resolve and we added over 30000 net new customers last year, but the majority landing on the starter CRM suite and expanding beyond.
We will continue to find creative ways to make it even easier for customers to get started with hub spot and get value out of our platform quickly.
Our final objective is to build a high performing sustainable and equitable company.
We are focused on foundational investments that can help us scale better.
That includes better coaching and development for top talent better performance culture, better systems and better hybrid connection.
We know when we invest in our employees growth, we will drive better outcomes for our customers and for hotspot.
We have a clear opportunity ahead to drive value for our customers and we have the right strategy in place to drive profitable growth.
With that I'll hand, it over to our CFO , Kate Bueker to take you through our financial and operating results.
Thanks Tommy.
Turn to our Q4 and full year 2022 financial results.
Fourth quarter revenue grew 35% year over year in constant currency and 27% on an as reported basis.
Q4 subscription revenue grew 28% year over year, while services and other revenue increased 8% on an as reported basis.
Full year 2022 revenue grew 39% year over year in constant currency and 33% as reported.
Full year subscription revenue grew 34% year over year, well services and other revenue decreased 5% again, both on an as reported basis.
Domestic revenue grew 31% year over year in Q4, while international revenue growth was 38% in constant currency and 23% as reported.
International revenue represented 45% of total revenue in Q4.
We added over 8400, net new customers in the quarter, bringing our total customer count to 167000 up 24% year over year.
Starter CRM suite continued to fuel our strong net adds again in Q4.
Average subscription revenue per customer grew 9% year over year in constant currency and 3% on an as reported basis to $11200.
The primary driver of this strength continues to be the adoption of multiple hubs by professional and enterprise customers.
We maintained a healthy gross retention rate in the high Eighty's in Q4.
Customers continue to view, our baas platform as mission critical.
Net revenue retention was 107% in Q4 down two points sequentially driven by continued customer optimization of hub spot spend.
As I've mentioned the last few quarters, we continue to expect net revenue retention to remain pressured as a result of the challenging macro environment.
Deferred revenue as of the end of December was $546 million or 25% increase year over year.
Billings were $542 million in Q4, growing 29% year over year in constant currency and 26% as reported.
The remainder of my comments will refer to non-GAAP measures, except my comments relating to restructuring charges.
Q4, gross margin was 84% up two points year over year subscription.
Gross margin was 86% in Q4, well services and other gross margin was negative 14%.
Full year gross margin was 83% again up two points year over year.
Subscription gross margin was 85% while services and other gross margin was negative 29%.
Q4, operating margin was 14% and full year operating margin was 10% both up compared to 2021.
Q4 operating margin benefited from the impact of slower hiring and reduced discretionary spending that we implemented in the second half of 2022.
Net income in Q4 was $57 million or $1.11 per fully diluted share.
At the end of the fourth quarter, we had approximately 7400 employees up 26% year over year and up slightly sequentially.
This does not include our recent workforce reduction of approximately 500 employees.
Capex, including capitalized software development costs was $19 million or 4% of revenue in Q4, and $82 million or 5% of revenue for the full year.
Free cash flow in the quarter was $71 million or 15% of revenue and $191 million or 11% of revenue for the full year.
Finally.
Our cash and marketable securities totaled $1 $5 billion at the end of December .
Now before I dive into guidance I wanted to provide a bit more context regarding our recent restructuring.
Germany indicated this wasn't a decision we made lightly but it is one that we believe will better align our people with our strategic needs and help position hub spot.
More efficient and agile company.
Our head count reductions allow us to continue to invest against a number of strategic business needs, including product innovation and systems and automation to scale better in a hybrid world.
We're also taking steps to optimize our real estate portfolio to better serve our hybrid employee base by consolidating leases, including our Davenport headquarters building in Cambridge.
As we outlined in the 8-K filing a few weeks ago, we expect to incur charges in a range of $72 million to $105 million in connection with the restructuring.
We expect the majority of employee severance costs to be incurred in the first quarter well the lease consolidation costs are expected to be incurred throughout 2023.
These charges and related cash expenditures will be excluded from our non-GAAP operating profit operating cash flow and free cash flow results.
And with that.
Let's review our guidance for the first quarter and full year of 2023.
As we've discussed the macro environment remains challenging the.
The customer behavior. We're seeing today is very similar to Q4 tighter budget deals taking longer to close and more people involved in the approval process.
Our guidance assumed that these weaker macroeconomic conditions persist throughout 2023.
For the first quarter.
Total as reported revenue is expected to be in the range of $473 million to $475 million up 20% year over year at the midpoint.
We expect foreign exchange to be a four point headwind to as reported revenue growth in the first quarter.
non-GAAP operating profit is expected to be between 45 and $47 million.
We expect foreign exchange to be a one point headwind to operating profit margin in the first corner.
non-GAAP diluted net income per share is expected to be between 82 and 84 cents.
This assumes $51 5 million fully diluted shares outstanding.
And for the full year of 2023.
Total as reported revenue is expected to be in the range of two five to two point or $6 billion up 19% year over year at the midpoint or 20% in constant currency, including a foreign exchange headwind of one point for the full year.
non-GAAP operating profit is expected to be between 248 and $252 million.
We now expect foreign exchange to be a slight headwind to as reported operating profit margin for the full year of 2023.
non-GAAP diluted net income per share is expected to be between $4.24 and $4.32. This assumes $52 2 million fully diluted shares outstanding.
As you adjust your models keep in mind the following.
Most of the operating margin increase we expect from our restructuring will be realized in Q2 through Q4 of 2023 and is included in our guidance.
We expect non-GAAP operating profit margin to be between nine and 10% in the first and second quarters low double digits in the third quarter and high teens in the fourth quarter.
We expect capex as a percentage of revenue to be roughly 5% and free cash flow to be about $225 million for the full year of 2023 were seasonally stronger free cash flow in Q1 and Q4.
And with that I will hand things back over to yamani for her closing remarks.
Thank you so much Kate.
As I look ahead, we have a clear long term vision to become the number one CRM platform for scaling companies and a focused strategy in 2023 to make progress on that vision.
Our customers continue to depend on hotspot and we are more motivated than ever to help them grow.
We also have a clear strategy to drive profitable growth long term and thoughtful changes, we're making to build a more efficient company.
All of this makes me confident in hotspots future.
I want to thank our employees for their adaptability and continued focus on solving for our customers.
I want to thank our customers our partners and our shareholders for your support with that operator, let's open up the call for questions.
Certainly if he would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two <unk>.
Again to ask a question please press star one.
A reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
And behalf of the management team, we would ask that you would limit yourself to one question.
We will pause here briefly is the question rostra compiles.
The first question comes from the line of Samad Samana of Jefferies. Please proceed.
Hi, good evening, Thanks for taking my question.
Yes, how many congrats on what was an impressive 2022.
Particularly tough circumstances. The initial FY 'twenty guidance is also very healthy considering the macro environment.
What.
Sorry.
We didn't catch the first part of that yeah. We missed the first part of that could you maybe start over first.
Yeah, sorry, yeah, sorry, even saying that it was an impressive 2022 under tough circumstances and the initial 23 guidance is also very healthy considering the macro environment. How should we think about what's considered in the guidance when we compare it to your comments in the recent shareholder letter the letter to employees about potentially tougher times ahead.
And it doesn't factor in the impact from the areas that will be deemphasizing following the layoffs.
Hey, Thanks, a lot for your question. So maybe this is Dominic maybe I'll start with the strategic rationale for the lay off and then give a little bit of color in terms of demand and then Kate can answer the question on guidance.
In terms of the lay out this was the most difficult decision, we have to make and complex history and something that we did not take lightly and it.
If we step back this is not simply a short term cost cutting decision. This was a strategic realignment of our people and investments. So we can drive long term profitable growth.
And there are two reasons why we got to this decision. The first is that we had areas within the business, where head count had grown faster than revenue areas like recruiting and services and even when we consider our 2023 growth.
We had that excess capacity. So we wanted to ensure that our people and our resources are clearly aligned to the growth in 2023 and our strategy in 2023, the second rationale.
Is that we want to invest thoughtfully in key areas of the business to drive profitable growth over the next decade, we want to invest in product innovation. So we can drive customer awesome and emerge stronger from the cycle, we want to invest internally in our own systems and automation wherever we find there a mango.
Processes. So we can be even more efficient and innovative as a company. So those were the two reasons why we got to this difficult decision now you mentioned the employee letter and the comment that we had made in terms of the demand environment.
The demand environment in Q4 remain very consistent with what we shared in Q3, we saw bill cycles lengthening. We saw more decision makers involved we saw more scrutiny of deals and budget before approvals Q4 did not get better, but it did not get materially worse and so.
What we have assumed is that the demand environment remained challenging going into 2023.
Yeah.
Yeah, and some odd I will just follow up with you on these comments around how we thought about guidance the baseline assumption in our 2023 guidance is consistent with young niece description of the environment, which is it stays difficult, but it remains very consistent with what we saw throughout Q3.
It doesn't get materially better and it doesn't get materially worse now that said as you know we always try to set guidance that contemplates a variety of outcomes and we did the same thing this time and so we feel good about our guidance with that set of base case assumptions, but we also feel good about that.
Guidance, even if the external environment gets a little bit worse from here.
Thank you. The next question comes from the line of Mark Murphy of JP Morgan.
Please proceed.
Yes, Thank you very much and I'll Echo my congrats on the the ability to navigate this environment out there.
I am wondering if perhaps in any pockets you might've noticed any change in the buyer behavior in the last three or four months.
Basically since we started to see some of the cooler CPI inflation data I'm, just curious if that development might be sporadically loosening up some conversations.
I know you're saying the environment was just as tough overall in Q4, but do you think anything could be changing on the margin as we.
We head into the spring and summer or do you think that that will take more time.
Yeah, Mark this is yao many thanks, a lot for your question and look I think.
Overall, the demand environment has remained consistent it's not gotten better and it's not gotten materially worse.
As we look at our pipeline now our pipeline tend to be just current quarter next quarter. There are a couple of things that you're seeing at the margin right short cycle deal ones that are typically created in month end close in months and they tend to be in the lower end of our segments are continuing to maintain.
Velocity, so we see reasonable velocity there longer cycle deals that typically tends to be upmarket are taking just a little longer to pool and again. This is because of more decision makers involved.
More kind of some caution in terms of looking at the budget and so that's the maybe minor change or shift that I would say in terms of the types of deals now if I look at pipeline and I've been talking to customers a lot more in Q3, Q4 and going into Q1 or few kinds of characteristics of what we see within the pipeline.
<unk> customers care, a lot about time to value. The number one question that I get we get is how quickly can we migrate what is the value and how quickly am I going to get there and how the slot is resonating because we can deliver value in a matter of weeks not months. The second thing that we are seeing is P.
People care about driving productivity and a tight alignment between marketing and sales. This is the year, where driving clear productivity across marketing and sales and get a much better visibility on the customer's matter and so we begin to see that in the pipeline and then finally eliminating.
Point solutions, and driving down cost a lot of conversations on platform consolidation and with a view towards cost savings. That's what we are seeing it's a high bar for action amongst customers and been hi, Barbara, Maine, but I'm really pleased with how the team is focused and executing in this.
Environment.
Okay.
Okay.
Thank you next question comes from the line of Brent bracelet.
Piper Sandler. Please proceed.
Thank you and good afternoon I wanted to follow up on the large customer cohort. This sounds like it's the fastest growing part of the business, we've seen an appetite to consolidate vendors, which really spiked up in RCM survey ahead of the year enterprises seem to be more than willing to consolidate vendors more than.
Have you seen a change relative to the size of the large customers wanted to consolidate onto a hotspot I ask because it does feel like youre getting pulled into the enterprise. So can you just refresh us on your ambition to move up market versus staying in the core mid market Swim Lane.
Yeah. Thanks, a lot for the question look we remain very focused our segmentation and the segment that we care about deeply is two to 2000 employee that's the segmentation that they care about within that.
The 200 to 2000 segment is what we consider upmarket customers and as I mentioned, we certainly saw momentum and a lot more larger deals in Q4 and they are continuing to see that now I think if you step back and think about these larger customers.
We are expecting a lot more out of their marketing and sales spend this year. They want Morley they want better visibility of pipeline they want better rep effectiveness and as you think about this hub spot Delaware is that we are Ah connected marketing sales and <unk>.
On top of solution and our hubs are clearly delivering value, which is why we see that the second thing that you mentioned Ah is also around platform consolidation one of the key priorities. This year is to look at the sales tax and the Martech stack and look at ways of eliminating point solutions to draw.
<unk> cost savings and in all of those you know consideration hub spot is becoming the platform of choice now that certainly because of the product momentum. We've had it's because our go to market has adopted with our partners to be able to drive value for these upmarket customers and really proud of the work that.
The entire organization is doing in terms of where we are in the market.
Yeah.
Thank you. The next question comes from the line of Terry Tillman of Truest. Please proceed.
Yeah. Thanks for taking my question and congrats from me as well in terms of the strong execution you Albany I had a question related to partners partners over time Levy Blue's partners have grown up with your own scaled up as you're all skilled out, but they become pretty big themselves but.
I'm curious if we could get an update on partner influence or a percentage of the business. That's from partners and if you could just unpack a little bit about it sounds like there's some changes where evolution with partners and maybe you can just help us a little bit more on kind of what's been the gating that in and what kind of outcomes of benefits to come out of the work Youre doing there incrementally with partners. Thank you.
Yeah, absolutely I'm happy to take that Terry.
Look I are part of our strategy is working and a few years ago. We went through our partner ecosystem and he said look we're transitioning from marketing automation to CRM platform and our vision is to scale selling and servicing with export partners that is working and our partner.
M. R. R. R. R. R is about 45% compared to the overall so it's a good split between direct and partner influenced them or are we have momentum we are co selling much better over the last three years and partners all behind US now I did mention that we.
We are making a structural change to the commission.
It would be step back our partner Commission was initially set up when have bought had one call and just a couple of additions. This is like you know 10 years ago and then as you all know over the last couple of years, we have expanded our product portfolio. We have added operations hub, we've added CMS hub and we've added more.
Additional to the hub so.
We stepped back and we looked at our partner Commission strategy, we want to incentivize our partners who are now coming along this journey with us to do a couple of things we want them to first be deeply engaged with customers and partners get involved with customers. It leads to better close rates and it.
To better retention and we want to drive that.
Second we want to be enabled to incentivize them on driving more multi hub as well as cold cells and so we just announced I just came from the partner kickoff today.
Well as yesterday, where we announced a few changes to the commission structure, which again incentivize them to have deeper connection with our customers and I've been talking to a number of our top partners over the past few weeks in terms of this change they get it they understand that we are evolving to a multi company.
And they understand that we're going to continue to invest with them. The ecosystem. So I'm overall are excited by the change as well as the evolution of the partner strategy.
Okay.
Thank you next question comes from Gabriella gorgeous of Goldman Sachs. Please proceed.
Good afternoon. Thank you question for Kate and net retention number.
How much exposure you have to growing and scaling customers in the technology vertical specifically looking to understand what's going on with the shift from hiring in the technology vertical perhaps being more of a headwind do you think wanted to seven will be the trough for 2023 and that retention. Thank you.
Yeah.
Yeah, a couple of questions in there Gabriel, but let me let me give it a shot I'm not just maybe start with the facts, which is I shared in the prepared remarks that our net revenue retention in the fourth quarter was 107, which was down a little bit from Q3, but really very much in line.
The expectations that we shared in Q3.
And I think you know, there's really two big components of net revenue retention and one is the gross retention or what we call customer dollar and that's really hung in there very resilient Lee and that high eighties. The other piece is the net upgrade rate and that includes a number of motions.
Some of that you are talking about which are seat upgrades our contact tier upgrades addition, upgrade some cross selling and it's really that net upgrade motion that husband challenge in the economic environment as customers are are both slowing the rate at which they are upgrading but also.
Have a bit of a sharper eye on their overall spend with.
With hub spot and so we're seeing pressure both on the upgrade side and also on the downgrade side.
And in the near term, we expect that that pressure will remain.
We actually think that net revenue retention is likely to tick down again in Q1.
But we feel really good about our ability to hold net revenue retention above 100.
Over the longer term, we continue to believe that we can deliver net revenue retention of 110.
Any healthier macro environment.
Thank you. The next question comes from Rishi jewelry.
Of RBC. Please proceed.
Wonderful. Thanks, so much for taking my questions nice to see continued resilience in the business model, how many I wanted to dig a little bit more into some of the momentum you're seeing with service hub post relaunch.
What is kind of in the momentum you've seen so far and then really importantly, what do you think about the feedback that you've gotten from customers. So far are there any other kind of enterprise grade features or functionality that that need to be developed further in order to be more competitive against you know some of them being comments like the likes of Zen desk or is that something that's all.
Already happening thank you.
Hey, Richard Thanks, a lot for the question look we're very excited about service hub last year was a pretty big gear. We did a relaunch and there were a number of features that moved the needle in terms of service hub and we see that in the momentum in terms of the go to market now I mentioned in the prepared remarks.
Little bit about multi hub momentum a lot more three as little as five a.
You know deal from customer when he said we are seeing and part of that is the strength of <unk>.
Service hub and we are going to continue to focus on it. It's one of our strategic objectives. In 2023 is to go deep in terms of leadership and marketing hub sales hub and service hub and we are evolving to support workspace, we are going to be driving even more omnichannel service through improved calling functionality.
<unk> knowledge base SMS.
The recent Whatsapp launch in Q4 that was a pretty big win and we got a lot of positive feedback from our customers and we're pretty excited to share more there as we do these things, we step back and listen or be getting for multi hub customers RV delivering more value and when the.
Customers begin to use it are we driving improved customer satisfaction and for each of those questions and serve as part of the answer is yes. So we're pleased with it and it'll continue to be a strategic objective this year to drive thought leadership within service hub.
Thank you. The next question comes from Alex Zukin of War.
If research. Please proceed.
Hey, guys.
Thanks for taking my question and congrats on a solid quarter I guess, if we think about.
The shape of the growth curve for 'twenty three.
You know versus 'twenty two.
From the standpoint of customer adds versus yes, RPC how.
Does it change given some of the momentum of market that you're seeing.
Where would you expect it to be similar slightly different and then I guess just to clarify the comment on.
Net revenue retention.
We expect to keep it over 100.
In the short term, but returns are essentially one thing.
Whats, meaning when does that fall off like if you were to think about from a quarterly basis is that.
Is there.
The comps get tough where this activity started.
Meaningless.
As of <unk> of this year, where you start to see that rebound or help us a little bit.
Yeah. Thank you I will try to hit all of your questions I will do my very best Let me just start with the revenue retention question. The short answer is I wish I knew to me, it's very much tied to your view of the macroeconomic environment.
And I think you know when I think about the areas of pressure on the net upgrade rate. They are very much tied to the external environment and as we start to see that were cut like solidify and recover I think that's when you'll start to see net revenue retention recover.
I will then try to address your K P. I question around E. S. RPC in net adds I think you astutely a.
Noticed that Ah things are shifting a little bit here and this is now our second quarter of really strong net customer adds at the low end, we are seeing really nice sign.
Sign ups of our free CRM, we're seeing the free C and that's really resonate and it's that that sort of sign up volume converting into our starter tier that is driving a real strength and net customer adds.
Now as you know, there's a push and pull across a S. R. P. C of net customer adds when its being fueled by that low end of our bimodal and what you saw in Q4 is you know after a period of real strength at the enterprise that drove a S. R. P C up in the double dip.
In constant currency pretty consistently we dipped below 10% in ASR PC growth and that pressure that we're seeing from the success at the low end is going to continue into 2023, and we expect that ASR P. C growth in 2023 is going to look more like a low to mid single.
Digits.
Thank you. The next question comes from our June 38.
Of work of William Blair. Please proceed.
[laughter].
My apologies to the next question comes from Michael <unk>.
Turret.
A key capital.
Please proceed you guys. Thanks, yeah. Thanks, congrats on everything, especially on the margins.
You'll take that margin is it.
Topics extension Alex's question, where you went with that to the extent that you are more focused on ads as opposed to.
So RPC as a driver.
How does that impact the balancing act with margin expansion to the extent that.
You should be getting a lot of <unk>.
Relatively easy leverage kind of answer RPC growth arguably less so.
Most of it.
Yeah, I guess, maybe I'll just start by.
Answering your foundational comment, which is like focusing on ads versus focusing on a S. R. P C.
These are output metrics and I think we've talked about this in the past like our our goal is consistently to drive top line growth and a R. R overtime not to drive growth in one or the other of ASR P C or new customer adds.
And when you see us consistently investing in that by modal strategy. There is going to naturally be some periods of time, where we have more expansion and as RPC and more expansion and other times and a net customer adds and probably that's just.
You know as the balance of new versus installed base sort of moves around.
The other question you had was around leverage and I'm glad you asked we you know we provide a guidance for this year that reflects our ongoing commitment to balancing growth and profitability. We delivered a nice result in Q4 at a full year of 10.
Percent operating profit margin and our guide implies another two excuse me 250 basis points of margin improvement.
So over time, you know we have the.
Financial framework that that shows and demonstrates our about our balance between growth and profitability and we continue to remain committed to delivering against that.
Yeah, I think like arcade hit on all of the points. There. The one thing I would say is as we think about this mid to long term.
And especially as we think about our sales and marketing efficiency look we have product led growth and sales rep growth and partner led growth and all of these are the input engine that then result in our net adds as well as S. RPC and as we think about each of these three.
Product led growth, we're driving more and more initiatives. So we can get efficient sales led growth, we're driving more automation more systems more investments. So we can make our reps even more productive and partner led growth we talked about some of the changes that we are structurally making so that we can become even more efficient and so.
As we think about how we balance growth and profitability. We have short term initiatives and then we have medium term initiatives and we are really committed to balancing both growth and profitability.
Thank you. The next question comes from Brian Peterson of Raymond James. Please proceed.
Oh, hi, Thanks for taking my question and I'll Echo my congrats on the strong quarter.
I'd love to understand on the multi hub adoption and the success. We're having there is that more a function of landing with more hubs and higher attach rate from upstart or tiers or what we're seeing a lot of success on cross sell as well. There's a lot of time spent on the debt down so, but I'd love to understand.
What the cross sell motion has looked like for net new and the existing base and so I think that's that's obviously got a secular perspective.
Yeah.
Yeah, Yeah, I think that's a great question look I think we're seeing both multi hub lamps as well as strong cross sells and let me step back and maybe look at this from the customer perspective, as we talked to customers. A couple of things are becoming very clear.
As they think about 2023, it is a lot about driving sales and marketing alignment the handoff between marketing and sales is all of that's been tricky you know whose pipeline are you getting in is this good quality of pipeline. So if you think about customers. They want Morley they want better campaign effectiveness they want more.
Activity tracking and they want all of this to line up the growth from a sales perspective, and therefore in our conversations we see that there are more multi club starting point more starting points with marketing and sales and operations hub for example in the initial sale so that's happening within.
You know new lands.
And then similarly, what we see is when a customer has adopted for example, marketing or sales and they see the value proposition of hub spot, which is easy to use easy to manage and driving adoption then it becomes an easier conversation to have a cross sell dial.
Along with the VP of sales so the VP of service and so we do find that in the first year of a spot purchase customers have a high propensity to kind of look at additional hubs and get the disability across customer base and so the combination of both of those lead to very healthy three hub as well.
Five club wins from a customer perspective.
Okay.
Thank you. The next question comes from Brad Sills of Bank of America. Please proceed.
Oh, great I'll Echo the congratulations on a real nice finish to the year in a tough environment, maybe maybe if we could drill it a little bit of that that same topic, there, Germany, where are you seeing these these are three and five hub.
Deals, where there's incremental strength across the stack I mean sales and marketing obviously the core it.
It sounds like service hub is strong CMS would love to get some color there and anything on payments. So just any incremental strength across the stack in these larger multiyear deals.
Yeah, Thanks, a lot Brad.
Look I think if you look at our performance in Q4.
We're very pleased because it shows trends in upmarket it showed strength in multi hub and it showed strength in our no and add all starter suite and you know this is our bimodal strategy, our bimodal strategy as we Wanna add volume of customers at the lower end.
And as they scale and as they see value within hub spark they continue to upgrade to pro and enterprise tiers and get even more value from hotspot and that's by modal strategy working and.
In terms of which product areas are we seeing strength.
Suddenly marketing and sales are core front doors, and we are very pleased to see sales have become a magic limit front door lock more conversations on tying sales and marketing that's an area that we've talked about and when they buy sales and marketing and they want a deeply.
Integrate and connect with other systems within the organization at hub comes in in the ups hub, we've talked about how it drives value from an integration perspective, and providing and building on that reporting.
And then service up so across all of our core hubs. We are seeing you know pretty good momentum.
In terms of Commerce now that's a longer term, but we're pleased with the levels of <unk>.
[noise] activation as well as their transaction. It's early early stages and Theres just a lot more to go and as I looked at our strategy. This year, it's super clear, we want to go deep in marketing sales and service and they want to continue to maintain the momentum that we have in commerce and we want to do both of those by focusing.
On the bi modal strategy, which is working I hope that gives you a little bit more color Brad.
Thank you. The next question comes from Josh Reilly of Needham <unk> Company. Please proceed.
Hey, there thanks for taking my question.
One of the interesting points I thought highlighted at the analyst day last year was.
Large mix of starter customers as a percent of total paying customers, which potentially is creating this kind of pent up demand to migrate to pro and enterprise when the market recovers how would you characterize the magnitude of the mix of customers postponing upgrades due to the macro today versus prior slowdowns and is there a point in <unk>.
Where.
These customers need to migrate regardless of the macro or what have you seen in past cycles. Thank you.
Yeah. It's an interesting question. Thanks for that yeah, we do feel like the momentum in the starter customer ads is a great long term strategy for us.
In terms of what we're seeing today around start or upgrades.
The newer cohorts.
<unk> started with us are actually upgrading at pretty healthy rates.
You know we took a number of actions last year to solve for the customer and really drive that volume that we're seeing at the lower end you know, we talked about things like bringing marketing automation down introducing the free CMS and we continue to experiment around pricing and packaging all of that has resulted in.
Like a nice expansion of the number of starter customers that are joining us but at the same time, we watch those cohorts really closely to make sure that their usage and their upgrade patterns are consistent and healthy and they are pretty consistent with what we've seen in the past.
Okay.
Yes.
Okay.
Thank you. The next question comes from Keith Bachman of BMO. Please proceed.
Hi, This is Adam on for Keith first Thank you for taking my question, but I wanted to dig a little deeper into the 2023 revenue guidance.
So I hear your comments on payments.
Payments being relatively early still but I think you've previously commented that you expect contributions to growth next year for payments and then I know we have ongoing contribution from the marketing hub enterprise price hike.
If we could parse out the benefits to each of those for for next year. Thank you.
Yeah. Thanks, so much for the question that you're hitting on all of the all of the details here I would just say payments as we I'll reiterate your omni commerce and payments is early we are investing for the long term and payments.
As I shared with and at Analyst day, It is not going to be a material contributor to our growth or profitability in 2023 on the marketing hub enterprise price change we continue to hear.
Positive feedback on the change again it is not immaterial driver of the results in 2023.
Thank you. The next question comes from Elizabeth <unk> of Morgan Stanley . Please proceed.
Great. Thanks, so much yeah, you talked a lot about deals taking longer and more scrutiny, which we're clearly hearing across the broader landscape. You know I was curious on what you're seeing in just at the top of funnel and how the pipeline is shaping up and anything we should look for outside of just macro factors to help us convert.
That faster in the medium term to near term you know I know you highlighted investments around sales and partners are these more tailwind that youll are after 2023. Thank you.
Yeah, that's great question.
Okay. It's just it's very interesting when we talk to customers two things are happening at the same time smbs are deeply committed to digital and it's a you know there was a question about whether smbs are going to drive you know during the pandemic. There was a question about whether smbs are going to survive. This downturn, but what we find is that smbs are committed to dish.
Adults, they're continuing to build their businesses on digital they're continuing to leverage digital solutions to be able to stay in touch with their customers and I hear this.
Over and over in my conversations with customers in D. C. This within the pipeline now at the same time, what we have been talking about is that they want to understand value deeply they want to buy a little bit more cautiously and that translates into longer deal cycles. I think you know real like everybody else, we're going to continue to monitor and continue to look at.
Leading indicators as we go and.
How does that change our dynamic in how we have adapted our execution I think a few things based on what we're seeing we're leading with value.
Every conversation is about value about delivering quick time to value as well as the cost savings that our customers can see in terms of consolidating on the platform and our.
Our sales team as well as the partner organizations are enabled to have these conversations and our value proposition really resonates. So for us. The go to market has really adopted and from a product perspective.
We're in a place of strength you just heard US talk about Gee do indeed do we've been rated as number one in marketing number one in sales and we've become a platform of choice for mid market companies in scaling companies that are looking at options, whether they are driving productivity are the driving cost.
Savings we are in those conversations so I feel you know even given the macro condition. The combination of our product innovation as well as go to market execution positions us really strongly and then you know we're all as I said before I expect to be at some point this cycle.
Cycle is going to turn and so part of the focus in terms of the leadership team is how do we make strong and thoughtful decisions right now to position ourselves to emerge stronger when the cycle turns. So that's how we think about this year and then beyond.
Thank you. The next question comes from Michael <unk> of Wells Fargo. Please proceed.
Hi, This is Michael Berg on for Michael turn congrats on a great quarter I wanted to double click on the margin seasonality you laid out on your.
Earlier in the call.
When I'm thinking about the back half of this year is there any benefits from the <unk>.
Real estate consolidation that is baked into that number or are those benefits you expect to be seen.
Beyond 2023.
So there is thank you for the question.
They're the benefits of the restructuring will accrue to the business in Q2, Q3, and Q4 as you know we tend to have seasonally stronger back half margins anyway.
There is some amount of real estate benefit in the back half of the year.
And the benefit from the workforce reduction is spread pretty evenly across the quarters.
Thank you.
Our final question will come from the line of ours June Verdi of William Blair. Please proceed.
Hi.
Perfect. Thank you guys for taking the question I.
I mean, maybe one for you just going back to the restructuring a little bit I'm curious if.
There is any impact to the product road map to the launch of new hubs as a result of the restructuring or if this was purely focused on maybe more support type roles, how should we see that impact playing out.
Yeah. Good question Arjun.
Just kind of share some perspective of how we thought about this we've mentioned this a couple of times. This was not a short term cost cutting decision. This was a strategic realignment of our investment so that we can drive long term innovation as well as scalability within the organization. So as we step back we look across.
The company on how best to align our people resources to our strategy. So that we can emerge stronger from this economic cycle and a fact that we have teams with excess capacity like recruiting and services and those were the areas that we pulled back.
Aggressively we also looked at areas, where there was duplicative work and opportunities for us to be much more efficient now to work. The process. We were very careful about protecting product innovation as well as direct quota carrying rules and in fact as we've said a couple of times, we are re investing.
In areas of product as well as internally so that we can drive scalability. So we feel very good in terms of our strategic objectives and our ability to continue to fuel the pace of innovation that we've had.
Thank you and with that we'll conclude our question and answer session for today's call I would now like to pass the conference over to the management team for closing remarks.
Well. Thank you so much everybody would be really appreciate your support but huge thanks to a bot employees customers partners for their resilience as they've navigated all of these times look forward to talking to you all next quarter.
And with that we will conclude today's conference call. Thank you for participating you may now disconnect your lines.