Q1 2023 HubSpot Inc Earnings Call
Rajiv.
Okay.
Thank you.
Okay.
[music].
<unk>.
Good afternoon, and thank you for attending today's Q1 fiscal year 2023 earnings conference call.
My name is Danielle and that will be the moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers.
If you'd 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. Mr. Mcglashan you May proceed.
Thanks, operator, good afternoon, and welcome to hotspots first quarter 2023 earnings conference call.
Today, we'll be discussing the results announced in our press release that was issued after the market closed.
With me on the call section and Jeremy <unk>, Our Chief Executive Officer, <unk> Shah, our cofounder and CTO and Kate Bueker, our Chief Financial Officer.
Before we start I'd like to draw your attention to the Safe Harbor statement included in today's press release.
This call, we'll make statements related to our business that may be considered forward looking within the meaning of section 27 of the Securities Exchange Act of 1033 as amended.
Section 20, <unk> of the Securities Exchange Act of 934 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.
The expected impact of the restructuring expected growth FX movements and business outlook, including our financial guidance for the second.
Quarter and full year 2023.
Forward looking statements are called therapy, so 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. This afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
During the course of today's call will refer to certain non-GAAP financial measures as defined by regulation G. The.
The GAAP financial measure most directly comparable to each non-GAAP financial measure user discussed and a reconciliation of the differences between such measures can be found within our first quarter 2023 earnings press release.
In the Investor Relations section of our website.
Now, it's my pleasure to turn over the call to hub spots Chief Executive Officer, Anthony round in harmony.
Thank you so much shock and welcome to everyone joining us on the call.
Today I want to focus on our start to 2023 share observations on the current macro environment and provide some perspective on what generative AI means for hotspot and our customers.
Let's start with our Q1 results.
We had a solid start to the year with revenue growing 30% in constant currency year over year.
We delivered more than four points of margin expansion year over year, bringing operating margin to over 13%.
Total customers grew by 23% to over 177000 customers globally fueled by net customer additions of over 9900 in the quarter.
I am pleased with our momentum coming into the year and the focused execution by the hotspot team.
These results show that our product innovation is in high gear and that our bimodal go to market strategy is working.
Our focus with our bimodal strategy remains clear.
We want to drive volume at the lower end of the market, while driving increased value upmarket.
In Q1, we continued to gain momentum in both segments of the market.
Lorraine, we saw a significant uptick in our net customer additions.
This was driven by strength in pre sign ups.
Pricing optimization place, we ran in our starter edition.
In addition to that hub spot is powerful yet easy to use and we are increasingly becoming the platform of choice for scaling company.
Looking up market, we continue to see our multi hop value proposition resonating more professional and enterprise customers are starting with multiple hubs and over 45% of our E. R. Our install base is now on three or more hubs.
Up market customers are increasingly looking for two things a single source of truth.
It's full visibility across their entire customer journey and clear cost savings in this environment.
Hub spot connected platform delivers both specifically sales have continued to gain momentum in Q1 as customers look to build tighter alignment between marketing and sales to drive more efficiency across the front office.
Liquidity services <unk> e-commerce marketplace as an example.
After adopting sales have been marketing <unk>, they were able to eliminate eight other tools, reducing their overall cost by 50%.
We're able to connect their marketing and sales data to get better insights and drive an increase in their conversion and campaign effectiveness.
This is a great example of our customers driving growth with multi hub, while saving time and budget.
We also saw operations hub come up in more deals as customers focused on consolidation.
This is a clear value of our solution that can connect system automate processes and demonstrate value, especially in this economic environment. In fact over two thirds of our top 25 deals closed in Q1 adopted ups hub.
Leveraging multiple hubs boost efficiency and I'm excited by the value of our customers are seeing from our connected platform.
As you can see our bimodal strategy is working and we will continue to maintain our pace of product innovation.
Next I want to shift gears and share what we're seeing in the macro environment.
Overall, we continue to operate in a tough environment, we're not out of the woods yet.
While we see our top of funnel activity, improving sales cycles remain long and budgets remain under scrutiny.
Decisions by committee have become the norm with multiple executives involved in sales cycles.
It is fair based on my conversations with customers that they're continuing to tighten their belt in terms of budget and we can see this in optimization across seat contact tiers and portal.
Decision makers are focused on budget optimization and continue to spend cautiously.
Despite these challenges we have a solid playbook for executing and driving sustainable growth.
We remain focused on product innovation and consistent execution on.
On the product side, we're cranking.
One of our strategic objective is to become the market share leader in marketing sales and service for scaling companies and we remain focused on delivering depth of features in order to get there.
In Q1 with marketing hub, we moved customer journey analytics to general availability and the strong adoption and usage. We're seeing gives me confidence that we are driving meaningful innovation that served market shares needs today.
With sales hub, we significantly enhanced the sequences tools for upmarket customers with selective threatening and advanced permission ing.
And we moved generative AI E mail functionality to beta.
We also launched a key service hub enterprise feature with multiple knowledge basis.
This has been a top product request from upmarket customers, who need to be able to support various audiences products or brands.
And in payments and Commerce, we introduced <unk> subscription and moved payable invoices to private beta.
I'm thrilled with the progress we are making on our journey to become the number one CRM for scaling companies.
On the go to market side, our strategy has been to focus on total cost of ownership for customers and communicating the value of hub spot.
Our quick time to value and connected platform message is clearly resonating as customers look to become more effective and efficient.
We're driving enablement across both our direct and partner channels and we are keenly focused on value centric conversations.
Looking ahead, we will continue to navigate this macro environment by following our playbook to drive product innovation and consistent strong execution.
Now I want to double click on innovation and share how we're thinking about generative AI and why we are well positioned to add even more value for our customers.
We are in the early stages of a transformative shift.
Generative AI is rapidly changing the landscape in three fundamental ways.
It helps businesses generate content.
<unk> generate insights and generate code all using natural language.
This will be a massive opportunity for smbs and scaling companies.
Activities that once took them time money and deep expertise no longer do with Gen AI.
This shift will enable smbs to reach more customers serve them at record speed with unprecedented relevance.
So what does this really mean for marketing sales and service professionals.
In the simplest terms, we believe AI will guide go to market teams and make them more effective.
This will fuel a new era of AI guided growth for our customers.
When we bring together the power of foundational models with the deep contextual data and hotspot CRM. We can help go to market teams drive better results.
Market tiers can use gen AI to guide them in creating more effective block both E mail campaigns and social content.
Salespeople can use it to guide them to write better prospecting email and deliver more relevant insights for customers.
And service professionals can use gen AI to anticipate customer needs suggest resolutions and offer proactive support.
We believe AI won't replace go to market teams. It will guide them to drive better outcomes, while there will be efficiency benefit we're even more excited about effectiveness gains and the ability to drive guided growth for customers.
While we are in the early stages of journey II hub spot has unique differentiators.
We have unique data and broad distribution hubs.
<unk> CRM data is unified and cohesive, making it easier for AI to ingest and drive relevance.
Second we're at the center of our customers' workflows hub spot is where work gets done so we can bring relevant to generate content and insights across the entire front office.
We're not another AI point solution, we arent all in one CRM platform powered by AI.
Third we've always had a human centric approach and companies with a human feedback loop are at an advantage with AI.
We made a ton of progress in Q1 with the launches of content assistant in public beta and chat spot in public Alpha.
Since our launch in March we've had over 40000 users sign up our chatbot and the early feedback has been very positive.
Content assistant has thousands of users to date, and we're seeing customers leveraging get daily for creating marketing email blockquote landing pages and more.
Ambitiously integrating AI across our entire CRM platform. So our customers don't have to become AI expert to reap the transformational benefits.
I'm incredibly excited about the opportunity AI is creating to deliver even more value for our customers.
Reflecting on the quarter I'm pleased with the progress we made on our path to becoming the CRM platform of choice for scaling companies. Our teams maintain the pace of product innovation and drove strong execution, which was just fantastic to see.
With that I'll turn the call over to Kate to take you through Q1 results in more detail.
Thanks, Chamonix, let's turn to our Q1 2023 financial results revenue grew 30% year over year in constant currency and 27% on an as reported basis.
Subscription revenue grew 27% year over year, well services and other revenue increased 12% on an as reported basis.
Domestic revenue grew 27% year over year, while international revenue growth was 33% in constant currency and 26% as reported inter.
International revenue represented 46% of total revenue.
We added over 9900, net new customers in the quarter, bringing our total customer count to over 177000 up 23% year over year.
<unk> customer acquisition continued to fuel our strong net adds again in Q1.
Average subscription revenue per customer grew 6% year over year in constant currency and 3% on an as reported basis to $11400.
Our ASR PC growth was driven by continued multi of adoption by a professional and enterprise customers offset by the large volume of starter customers. We added at the low end of our bimodal strategy.
Gross retention remained healthy in the high <unk> for the quarter net.
Net revenue retention was 104% down three points sequentially.
Given by further customer optimization of hub spot spend as well as slower expansion across seats contact tiers and portals.
While we expect pressure on net revenue retention in the near term to persist. We continue to believe we can maintain net revenue retention above 100%.
Calculated billings were $533 million in the quarter growing 28% year over year in constant currency and 26% as reported.
The remainder of my comments will refer to non-GAAP measures.
Operating margin was 13% up four points compared to the year ago period.
Operating margins benefited from the restructuring actions, we implemented at the end of January which impacted our head count and facilities costs, including a temporary pause in overall hiring in Q1.
Net income was $62 million or $1 20 per fully diluted share.
Free cash flow was $85 million or 17% of revenue and our cash and marketable securities totaled $1 $6 billion at the end of March.
And with that let's review our guidance for the second quarter and full year of 2023.
As you know many highlighted we continue to operate in a difficult macro environment with customer behavior that is similar to what we saw in the second half of 2022.
Budgets are tight.
Decision by committee has become the norm and customers are spending cautiously on new products, we're looking for ways to optimize existing spend.
Our guidance assumes that these weak macroeconomic conditions persist throughout 2023.
For the second quarter.
Total as reported revenue is expected to be in the range of $503 million to $505 million up 19% year over year at the midpoint.
We expect foreign exchange to be about a point of headwind to as reported revenue growth in the quarter.
non-GAAP operating profit is expected to be between 54 and $56 million.
non-GAAP diluted net income per share is expected to be between 98 cents and one dollar.
This assumes $52 4 million fully diluted shares outstanding.
And for the full year of 2023.
Total as reported revenue is now expected to be in the range of 2.08 to 2.088 billion.
Up 20% year over year at the midpoint.
non-GAAP operating profit is now expected to be between 275 and $279 million.
We now expect foreign exchange to have a neutral impact to as reported revenue and operating profit margin for the full year of 2023.
non-GAAP diluted net income per share is now expected to be between $4 80 and.
And $4 85.
This assumes $52 3 million fully diluted shares outstanding.
As you adjust your models keep in mind the following.
We expect capex as a percentage of revenue to be roughly 5% and free cash flow to be about $245 million for the full year of 2023.
With seasonally stronger free cash flow in Q4.
With that I will hand things back over to yamani for her closing remarks.
If you would like to ask a question. Please press star followed by one of your telephone keypad, we would ask that you limit yourself to one question.
The first question comes from the line of Keith Backman B M. O. Please proceed.
Hi, many thanks, and congrats on a solid quarter and guide.
Wanted to focus my question on generative a you talked about some of the activities and certainly Android to our matches video some time ago, but I wanted to hear how do you plan on monetizing it as you look out over the horizon. So what is it is it a skew is it a pricing activity.
How do you think about monetization and as part of that is when do you think some of these activities will be moved from beta two production environments in other words when my investors begin to see the benefits of a in your financial results. Many thanks.
Hey, Keith Thanks, a lot for your question. This is Dominee go ahead excited about.
It is very transformative you kind of like step back.
Spot got started when there was a fairly big check what's happening and how people buy and that led to us coming up and helping customers on how to market and sell and we think <unk> is <unk> and this is going to really cause our customers to think about how.
K Mart and so and so we think there is a lot of exciting potential in terms of the monetization question. We have a very clear <unk> first principle when it comes to modification, we focus on Donovan customer value first and from there on monetization will follow and we think that this is pretty early days in terms.
Monetizing having said that we're iterating.
That we are getting tons of feedback, especially with cats spot as well as confidence assistant that we just talked about and we are improving these use cases. So we can continue to innovate for our customers and really help them get much more valuable plummeted technology.
Let me do this some of the details are just going to become stable sticks will just be part of our core product and part of how we drive customer engagement and adoption within the core product. Now is there are more specialized use cases, then maybe it goes into higher value additions like go.
And enterprise and will increase or a b longer term and that's all we're thinking about monetization first do you want to focus on delivering value for the product you ask the last question, which was when do we plan to get this into the hands all customers well you know, we launched pretty quickly within the market and.
March it's alpha and beta we're getting a lot of feedback and the teams are pretty excited about having a lot of Pakistan's internally and <unk>. There's a long list of use cases that our teams are working on so I think you'll see us maintain and even accelerate our pace of innovation, where it will be introduced.
Do you think features in weeks not months a quarter, so lots of exciting developments here.
Thank you. The next question comes from the lines of Mark Murphy of J P. Morgan you May proceed.
Thank you congrats on the great execution during the quarter.
How many noticing that hubspot just have such a huge list of free products at this point, there's free Ciara I'm free C. M. S free form builder free you know business templates, so much as free but your margins are expanding despite that.
I'm wondering if you could comment on just how large an energetic.
That that Onramp is from the from free customers at the at the top of the funnel and then for Kate.
Is it boosting kind of your multi year visibility because it.
It feels like you have these millions of little seeds that are there that are that are kind of just starting to sprout and you can probably project forward and and look at how it would turn into revenue.
Hey, Mark I'll get started with the question and then take an answer I loved that question because it really gets to the heart of our strategy.
It's been hot spot got started we had this deep conviction that you want to add add much value for our customers as possible and continue to get the most adoption from a small medium at the list scaling businesses and the sweet tooth is really part of that strategy to get the.
Why this possible is top of the final and by the way, but we do have a ton of value. I mean, you talked about three cm App you know <unk> add a lot of value in the company getting a digital presence in getting started there are a number of other grilled tools and that's clearly the strategy and you know.
Just maybe do something that I, just talked about which is the bimodal strategy. When you have a really wide tunnel, which is what free tools. Like this create then you know we work to continue to Delaware value and so the number of started customers and the conversion from free.
Sign sign up to paid customers increases and we've been looking at this over the past two quarters, we're very happy with how that conversion continues to happen and then even from our started customers. How they continue to get value in terms of per one enterprise. So it's really our strategy for delivering value that's at work.
And Kate maybe you want to address the second part of the question there.
Yeah sure thing Thanks, Mark I think there's a lot of reason to really love the strategy of our product.
Would not say that increased visibility over the long term is one of them and that's a that's a really great low cost way to get lots of customers using hot spot really early in their business life cycle and you know we think it creates a lot of interesting dynamics over and above the economics, which I can talk about.
You know create the nice mode, a competitive note for us against low and disruption. It also enhances pretty dramatically the value of our overall popcorn just based on the scale of customers at the low end.
Some portion of those starter customers will upgrade to pro and enterprise over time, I think you already know that oftentimes that happens with a bit of a after sales cycle that we also like but this is really just one of many emotions that will drive growth over time.
Thank you. The next question comes from <unk> of Geoffrey's you May proceed.
Hi, great quarter, guys, Yeah, I I feel like for the last couple you've talked a lot more about margaret customers in and how much the portfolio is attracting larger customers and I think sales up it's been an integral part of that in the majority of the product seems to be really unlocked.
In this next year customer size I'm, just curious if you think that that's.
Even bigger key then then marketing <unk> majority to unlocking those larger customers that you've been talking more and more about.
Thank you so much for that question.
Yeah, we're really happy with sales pub as well as what it unlocks market I think you know marketing hub is a billion plus you know kind of product line. That's got the ability to go to multi billion in sales pub is a 500 million plus business that can go.
Multiple billions and both of them are kind of going at Farnborough Super happy with that now specifically looking at <unk> <unk> steady March over the past few years to build the functionality that it to market business needs to have at the system breakfast and I.
We've reached that point, we have hit that critical mass for an upmarket customer B R. A viable alternative to other legacy enterprise options within the market and sale pub is now a magic <unk> hot spot.
And this is a couple of reasons right on the product side, we're now serving larger customers and more sophisticated use cases, the steady drumbeat of product releases that you've been hearing from us or just all aimed at expanding our market time and these are custom object.
CRM customization deeper permission name more features for admin all of that is working in.
In addition to that over the last couple of quarters. We're also adding our ability to serve more sophisticated use cases right I just talked about sequencing that's something of market customers have needed much more ability to do in addition to that sales intelligence forecasting all of these are areas.
Within the product so huge kudos to the product team for keeping the pace of innovation that serves upmarket customers really well. In addition to that are going to want to decide the investments that we have made in upskilling, our reps as well as department ecosystem is working our sales team <unk>.
Breathe in our product every single day, so it's very easy for them to show failed demo and how that actually works with marketing <unk> and drive their own productivity and partners are very much involved in this journey of us going up market. So you know it looks the the momentum really comes down to <unk>.
Needs of our customers in this moment and we're very happy with what they're seeing and how they're able to Delaware for our customers.
Thank you. The next question comes from the lineup Elizabeth quarter of Morgan Stanley You May proceed.
Great. Thank you so much I wanted to hit on the really impressive kind of net customer ads and get a better sense for where the incremental demand is coming from kind of beyond that initial expectation for around 7000 a quarter.
Are you seeing hot spot actually displace other vendors or is there still a lot of greenfield deployment at the low end that you're landing if that can just terrible is this trend. Thank you.
Yeah. Thanks, Elizabeth I think in general these are really small early stage companies that are in large part trying our free tools and converting from free tools into starter and so I would think most of them are coming from a more greenfield place then.
Hotspot displacing someone else.
Now if I look at the corner of recorder trying to <unk> customer add like we are obviously very excited about the 9900, new add the vast majority of the increase quarter over quarter is coming up that starter tier and there are a couple of things that are driving it do you have any talked about.
Healthy volume, we are seeing a free sign up so as a result of of our strong top of final demand. We are also continuing to cast pricing optimization levers at as we do frankly on a regular basis and that is also working that said like you. One always has tended to be seasonal.
Really strong I do not accept that we're gonna stay at 9000 customer add but we do feel good about net and continuing to remain strong I would advise seven to 8000 range over the next couple of quarters with the biggest variable they're being how the starter edition space.
Thank you. The next question comes from our end of Joshua <unk> Company. Please proceed.
Mmm.
Hey, there. Thanks for taking my question nice job on the corner here can you give us a sense of how the direct versus the partner business performing over the last couple of quarters here I think last year.
You made the comment that the partner business was performing a stronger into the downturn and what are just you know the dynamics or additional color there. Thank you.
Hey, Josh Thank you for the question.
<unk>.
Both direct and partner are using the App plan. We you know started in the past that are provided me with a partner ecosystem is the want to be able to scale, both selling <unk> Ah servicing with partners.
And in the last couple of years as we have gone up market <unk>.
We have really transition from being a marketing automation company to a CRM platform I really spent a lot of time as well as energy and efforts with our partners to bring them along that journey and that strategy is working so as you looked at like two one department ecosystem performed well.
Well when you talk department of final menu up on top of partners, you'll hear them talk about multi a cough and a <unk>.
<unk> and as well as needing off a little bit upmarket. So they are helping us and that journey and there's just a lot more joined KOL selling and if you step back and think about what our customers want <unk> in this environment make locations they want high returns.
And no risk and therefore jointly executing with partners I'm, having clearer migration implementation and change management plans of any working the direct five is going along with that and so there's there's still a healthy balance off about 40% off our installed base coming from.
<unk> partners and the rest is some are direct and both are executing really well.
Mmm.
Thank you. The next question comes from <unk>.
A R. B C. Please proceed.
[noise] wonderful. Thank you so much for taking my question comment on that.
He continued strong execution I wanted to ask another generative AI question and kind of go back you having to do with your prepared remarks, you talked about the ability for people to hit our businesses to use January I on the backend to generate code I wanted to think about from your perspective, how do you see your ability to use geraghty I maybe.
Iterate features and functionality faster and thankfully.
Narrow the gap with some of the market players that that you know maybe customers want to move on to hot spot, but some of those features and functionality maybe missing guest houses are you thinking about that thanks.
Yeah. Thanks for those questions <unk>. So a couple of things on <unk>, we're making reimbursement to make <unk> part of the hotspot framework that gives us two things. It gives us kind of short term you can market because all of our product means can benefit from the teachers were building in the core platform, but we can.
It has why to put the ability across the entire suite of application or we can have spots. So that's what gets us to the I'm really excited and one thing that kind of gives us an advantage in terms of work with other companies is that you know hotspot <unk> with a organic rebuild for S. M B platform, where all the data cohesively sword and normalized.
And this becomes very very important because in order to kind of get the value from <unk>, you need to be able to kind of you.
[noise] existing data that you haven't thought about having tens of billions of records. It's about having all the data points on individual customers that you can provide context for January I model cause like Oh, we know with what they do to the customer and we know how many times they get a rapid with US read off we have a support ticket and service cover not we know exactly all the fields in Iraq. We have we can take all of that context and use the clubs.
Hi model and what are the benefits to our company's a cup spot that has this kind of very rapid iteration get something in a heavy user goodbye believe I can't believe that they who can actually get something in user pez and get that feedback and have a very tight feedback loop are the ones that wind. So what we've been <unk> levels, the playing field in front of the <unk>.
That are there and we think <unk> weekly position to kind of benefit from <unk>, given our organic approach to building the platform and the way we picked up a framework of the primary colors.
Thank you. The next question comes from the line of Gabriella Borgess of Goldman Sachs You may perceive.
Good afternoon. Thank you I'll I'll stay on the generative AI topic, either <unk> I want to follow up on your comment some leveling the playing field do you think about the longer term. This leads to less crowdedness. The last competition in the front off a stack and then I <unk>.
[noise] about the tradeoff between efficiency and effectiveness what are your thoughts on the potential bear case, if marketing people and salespeople become more productive and hot spot has a seat based model. How do you think about the risks that's seats go down while you're monetizing incremental functionality on the way up if that makes sense.
Thank you.
Great questions Gabriella, Thanks for that maybe it will all start and then darkness, certainly feel free to join here.
We do think of it as leveling the playing field, especially for S. M B and one of the things that you've been very consistent about is taking powerful technology sophisticated technology and democratizing that four S. M B and that's exactly.
What they're trying to do with generative AI.
That's gonna be typically don't have large teams of AI expert sitting and we want to be able to bring it in with the same power and ease of use and that will allow our customers to really compete effectively within the market I think the second question you ask what's really around.
How we think about effectiveness verses efficiency and look I think it's very hard to predict in the longterm or maybe even the next three to five years, what happens with a lot of the jobs from our perspective, you know some jobs are gonna become less relevant and more automated at the same time, a I saw it.
You're going to create more jobs in new skills, it's a little too early to predict longer term, having said that our belief is that a I will not replace humans, but humans, who use a I will go play humans, who don't use AI and we're in the business of helping humans use a I'm much better.
And that's exactly what you're seeing in terms of our strategy. The first stage of our strategies to help people to drive better outcomes lock more in terms of the effectiveness focus and you can already see this happening with confidence assistant and chat spot and that's empowering our customers to drive better outcomes not just like Saint Paul.
Time.
The next day, it just really taking jenner today, I am really making it applicable across all platforms dharmas just talked about how we think about it from a framework perspective, it's like one of our primary colors and repeatable task can be commoditize real value is going to come from the last mile.
Oh off human intelligence. So we are off the mindset that this is going to drive to better outcomes for you know everybody within the front office, sorry, mess anything else that you'd want to add.
Yeah, what is it that just in terms of it because of the long term view on on geography, I. Overall, you know right now kind of 90 <unk>, 95% of the attention calories are in use cases, where we take natural language and convert them to something that humans like a flu b a blog post or an image and it will eventually be video.
95% of the opportunity for companies like Hot spot is actually using natural language clubs in generative models to create codes Medford computer. So we can look at examples like creating a report definition in the hot spot, putting a customer <unk> all of these things where we can type things that were historically only accessible to like a small percentage of the users within the <unk>.
Company and we can expand that mail so that a large report for people that are equipped with a good report and write custom work will actions can do data closing at all these things will just put power tools.
<unk> and they had the many more customers. So we're just very excited about lack of the ability to democratize and make things easy which is what I've always been known for.
Thank you and on behalf of the management team of a bike to ask that you limit yourself to one question.
The next question is from the line of print Breslin Piper Sandler you May proceed.
Thank you good afternoon, obviously really impressed here with with the number of them that adds in Detroit, obviously pretty challenging backdrop I wanted to ask maybe a longer term question around vendor consolidation, which feels like there's a long.
<unk> interior you talked about one customer consolidating eight tools down to you know the the combo of sales habit and marketing hub, where are we adding that in that cross hub.
Cross-sell opportunity relative to the installed base, we're not quite <unk> given the volume increases we're seeing at the at the low end the starter, but it feels like longer term there's opportunities. So could you just address vendor consolidation how meaningful can that'd be as appealing looking up to 24 25 26.
Thanks.
Yes. It is a great question and I do think this is a longer term trend that we are beginning to see and maybe if you're kind of like step back and think about the last couple of years that our customers have come from.
<unk> you know just a couple of different paths either they had a lot of points solution, which become really hard to be able to manage both from a cost as well as the complexity of the overall tax effective are the rent with maybe legacy enterprise class solutions.
<unk> <unk> code themselves into a corner and when I talk to customers now they want something that is powerful that is simple that provides you know the entire disability across to a customer journey and it's cost effective and you look at <unk>. We do all of that this is why.
You know the trends in terms of customer edition, even in the current Matt macro kind of like backdrop is not surprising because it is you know a very clear that they are becoming a platform for S. M. B S. L. A scaling companies now you ask the question of how does it play out.
It's very early days.
When you look at our installed base Advil is gonna be <unk>, it's pretty early days in this type of consolidation and we want to build the best in class marketing sales service, you know solutions that can drive value for customers and so we're going to keep the pace of product innovation and I think.
That we still have long way to go in terms of seeing this consolidation place so.
Thank you. The next question comes from the line of Breath feels of Bank of America. You May proceed.
Oh wonderful thanks for taking my question great start to the year here I wanted to ask about operations hub Yamani, you called it out as an area of strength. We're certainly hearing that from the channel would love to get your perspective to me. This seems like the platform you're running you know two or more hubs you need the glue to automate work flow across different hubs using operation.
Is that why you're starting to see the success now with operations top in other words, you're getting to the point where customers are running you know more customers are running two or more hobbies, they need that glue.
Just any color you are a color on you know, what's driving that operations help strength.
I Love This question, Brad and you actually get the I'm sorry, you wanted to <unk>. It is that we are seeing a macro driven front office unification and I also think that operation Hob is like the perfect glue that brings together no marketing sales other problems, but give the value right I mean, if you.
Really think about what it does it brings data from multiple sources is able to automate like workflows and <unk> better insights from just more sophisticated datasets been so you hit the nail on the head in terms of why operation <unk> an attraction.
Maybe a couple more points of color in terms of how our product that far to asthma go to market efforts have been in this area, we have expanded value for our customers, particularly around data quality now make last year, we launched the major updates to operation.
Pop capability, particularly around data quality and portability and you may remember US you know talking about data quality command center that has been a pretty big hit with <unk> and enterprise customers.
In addition to that we've also wrapped up our own enablement efforts around advanced capabilities.
Selling technical product like data warehouse connectors and custom called actions is always difficult by the way how some good options and <unk> like one of my absolute favorite new features and <unk>, so much value for customers, but one of the things that the abdominal like continue to enable our direct teams and partners to showcase the.
Value of these sophisticated features and so it's still super early innings in terms of operations top but it's an exciting path and I'm very happy with the momentum that we saw in Q1.
Thank you next question is from the line of Alex Zukin Woof Research you May proceed.
<unk>.
Hey, guys. This is Ryan on for Alex Thanks for taking my question and congrats on a great quarter. So my question is around retention at a.
104 per cent this quarter, it did decelerate faster than last quarter and what the environment still tough what's your level of confidence that it can stay above 100 per cent.
And if that is the expectation how are you thinking about when it could normalize.
Yeah. Thanks, very much further question Uhm I.
I think we've talked about this in the past, there's really too tight.
Types of pretension or two pieces of retention that we pay a lot of attention to internally furniture attention that we refer to as customer dollar net revenue retention uhm.
Customer retention, we continued to see general stability in customer retention in the high eighties, we expect that grocery attention is gonna hang in in that zone for that the rest of 2023.
On the net revenue retention side, you were right. We did see a step down of three points from Q4 into Q1, and we're seeing that step down across all the same reasons that we've been talking about for the last few corners.
There is a pressure that we're seeing from our customers really optimizing there's been hot spot that is particularly notable in contact and seats and we're also seeing some of our multi portal customers now leveraging some of the market features to consolidate their portals Ah and hot spot.
In addition, we are seeing customers upgrading seats and contacts at a slower rate than we have in the past and we think that we're gonna continue to see those pressures going into Q too.
But where is the where we think that we're gonna see some balance is a couple of other trends. We continue to see solid trends in upgrading you see the volumes from starter into professional at you know pretty consistent upgrade rates, we're seeing a bit of benefit from some of our recent pricing adjustments.
And that in combination with the solid gross retention really isn't that high eighties is what gives us confidence that we can routine that router attention above 100 for 2023 [noise] Nope, we still believe that 110 is the right benchmark for us in terms of net revenue attention over the longterm, but that.
That's gonna require more normal macroenvironment.
Thank you. The next question comes from <unk> Oppenheimer You May proceed.
Great. Thanks for taking my question. This one's geared towards your case I believe last quarter you characterize the the the macro environment is kinda not better but not worse as you as you exit Q1, what what's the what's the right thinking in terms of what's baked into the outlook.
Yeah. Thanks for the question you know I I tried to share in my prepared remarks, a bit of color around just that the external environment really does remain difficult and we assume that it remains difficult throughout 20 twenty-three uhm that said you know as you know we've approached guidance in a very consistent way we.
Did the same thing in Q1, and really tried to set guidance that contemplates you know a whole variety of scenarios are baseline assumption is that the remainder of 20 twenty-three feels like he won it feels like the back half of last year. You know it's still early in the year in the external environment has been really volatile.
F X has been very volatile and we wanted to deliver against guidance with that baseline assumption or even if things get a little bit worse.
Thank you. The next question comes from the line of Michael Taryn of Wells Fargo. You May proceed.
Hey, there. Thanks I appreciate you taking the question.
There are so many good big picture questions I'd like to ask but I'll I'll I'll I'll go into a matrix question instead, because it's something we're getting some questions on there are some moving pieces in terms of currency with respect to the results.
[noise] assumptions with a guide.
And so if we look at the Q1 number.
The changing currency for the rest of the year it looks like the second half constant currency assumptions for revenue might actually come down to touch on a constant currency basis. So I just don't understand if that interpretation is accurate and may be just help us without the currency movements versus just any fundamental change and and what your thinking through uncomfortable.
It would be rest of your guys obviously.
Great job across the board all the Q1 results just I'm looking for some clarity there. Thanks.
Yeah. Thank you you know we executed we're happy with the execution in Q1, despite the challenging macro and you know as you point out we raise the full year by the full amount of the Q1 beat which I think does speak to the confidence that we have in the business, but have you heard from both you how many neither macro remain <unk>.
<unk>, it's very volatile, including a X.
We're not out of the woods, yet and on top of that we're still early in the year and so we took all of this into account when we set the guidance for the year.
Philosophy on guidance remains the same now we're aiming to put out guidance that we have a high degree of confidence in being able to achieve them.
Mm across a variety of scenarios.
Thank you. The next question comes from Brian Peterson, Raymond James You May proceed.
Alright, Thanks for taking my question and congrats on the show a quarter. So I wanted to unpack, what's driving you ever <unk>, we we kind of get them that a little bit, but it's just amazing to see then it adds in that fingers Phillip three per cent year over year. So is is the clarksville sales cycles in the enterprise.
It was actually getting better or the vendor consolidation or or wife with customers. Like you know I I'd love to just maybe understand what's happening up mortgage cause I figured it'd be growing three per cent.
Yeah. Thank you again for that one there's really two things happening in his RPC. We continued to see multi have adoption broadly across our professional and enterprise customers and that is all set by the volume that we're seeing at the low end if we just.
Look at professional and enterprise.
So if you see continued to be up double digits in constant currency in Q1, it's the headwind from the volume of starter customers that is moving to a S. R. P. C from that sort of double digit level to 6% in constant currency.
Thank you. The next question comes from <unk> <unk> William Blair You May proceed.
Perfect. Thanks for taking my question.
Maybe another one from Europe for you I'm, just trying to reconcile a little bit.
Comment about upgrades still happening right customers wanting more capabilities more features versus they're still being from headwinds around optimization C. Contacts et cetera is there any kind of characteristics amongst other customers that you can point out.
Maybe we could we could hang onto where you're saying specific vertical or specific customer size do one versus the other.
Yeah, I mean, it's a good question and these are not new trend for us we've been seeing the same type of pressure and dynamics within our customer base.
<unk>.
Quarters, and what we are seeing is a focus initiative to get the most out of there and with hotspot, but I don't believe we're alone and that and that for US comes in the form of them cleaning up their contacts you know cleaning up you see.
It comes in the fat and consolidating when they're on multiple portals consolidated and you're using all the features that they have signed up for that doesn't mean that our customers are continuing to use more of our products that what we're seeing more and more is that as an upset they're they're doing the cleanup in conjunction with the expand.
<unk>.
Thank you. The next question comes from Parker Lane of Stifel. You May proceed.
Yeah, Hi, Thanks for taking my question circling back to the partner ecosystem Yummy I know you've made some changes there earlier this year compensation levels with partners and what they need to do to continue you know if their relationship financially with Hep spot you want them selling and servicing partners do expect there's gonna be some.
Consolidation in that channel in 2023 2024.
And then what what exactly are you guys doing behind the scenes to upscale those partners to get them in a position to be more effectively servicing the customer base. Thanks.
Okay Parker yeah. Thanks, a lot for the question.
I think maybe two parts there first start with the changes that we made and then answered the second part of your question I'm really pleased with the rest of bombs from the apartment channel and since the announcement and even before the announcement I've spent a lot of time talking to our partners Diamond partners.
In terms of change and just to step back we really looked at our partner commissions N V. R Incentivising or partners to have more consistent engagement with our customers to sell and cold spell more with us and to do more monkey <unk>.
And the partners understand the why behind the change and we're also giving customers a lot of time to be able to adopt which they appreciate and so by the end of the day. The change it that'd be made are going to be a windfall customers and therefore, good for partners S. M a pub thoughts and.
At the margin, we're actually seeing some of the partners increase their engagement with our customers as a result of that.
The second one is the question is do we think it's going to lead to some level of consolidation how do be enabled the partners I I think it it it will and that it's not necessarily because of the commission's changes, but it's because we are moving up market and we.
We are guarding a partner has to be able to scale to better serve the needs of upmarket customers and asked me do that we are definitely beginning to notice that partners are either already consolidating are figuring out ways to scale in there for you know the percentage.
At least partners from pop partners is probably going to increase.
Continue the transition to you know driving multi have asthma, serving the needs of upmarket customers and.
Are focused on partner enable Memphis really hot it's been really on this journey to <unk> to drive more certification. There's the upcoming certification week, that's coming up for partners and we're putting a lot behind that and will continue to drive the level of technical capabilities within the partner ecosystem.
Overall, I'm really happy with a a fonts on where our partner ecosystem Glenn.
Thank you. The next question comes from Terry Tilman of Truest you May proceed.
[noise] great. Thanks, so much for taking the question and congrats on the corner. This is Bobby <unk> curious, where you're seeing globally in terms of strength or weakness across geography.
Hi, Bobby Thanks, a lot for that overall fairly consistent in terms of what they're seeing in North America as well as our international market at K just mention international was about 46 per cent of our overall base and going you know reasonably well there is not.
Not that much of a divergence in terms of the plan you know what we see in terms of the longer deals cycles and more decision makers with across North America International and what we see in terms of the reasons why our customers want you know a hot spot is also consistent we <unk>.
Her quick time to value, which is what is important across all customers and most of the time values matter of weeks not months are you know quarters and customers really care about they're cough and they're consolidating with your platforms and so we see a lot more platforms and <unk>.
<unk> and multi you have conversations Bolton regional as well as international markets and there's sign up a high bar to action across all customers, but we are executing in both markets with consistency.
Thank you. The next question comes from the line of Michael <unk>.
Keycorp you May proceed.
Okay. Thanks.
Thanks for the question Great quarter I wanted to ask about the move up market and how your <unk> from the direct Jones, the director Salesforce perspective.
This is a year in which you're increasing margins and you've had a risk but so what are what are you doing in terms of investing investing in the direct sales channel to try and drive more engagement and how are you managing the cause of it.
Yeah. Thanks, a lot for the question, maybe I'll start with my kids and.
What they're doing with the sales team and take feel free to add in terms of the cough they're.
Me step back and think about why <unk> is working and what is up market for hotspot, we're still very very focused on the two.
222000 employees segment and for US up market is the 200 to 2000 employees segment and if you think about customer Sarah they care deeply about cost savings within this environment and they care deeply about navigating the mackerel at while driving.
<unk> and hot spot helps with both of those we are powerful you know solution, but still very very easy to use and easy to implement and that's what is resonating within a market we've thought about our own sales pins and internally driving the efficiency <unk>.
Talked about this when you are driving more data into the hands of our direct sales reps B R. Arming them with the right kind of total cost of ownership as well as value messaging. This is the <unk> digest level of alignment I've seen between product marketing and sales.
In terms of the key messages <unk> and our teams are very very focused and so I think from an internal standpoint systems automation messaging Ah line men are all in favor of driving consistent execution there.
Thank you. The next question comes from the line of Taylor Mcginnis of UBS you May proceed.
Hi, Thanks, so much for squeezing me in and congrats on a really great quarter, but the ones you margin performance was really strong particularly sequentially.
So are you able to break that down and quantify the drivers of the <unk> well that's like how much was from the restructuring are hiring inefficiencies in the business to help us think about the future margin trajectory in the durability of the progress that we're seeing.
Yeah Taylor was a really good question aren't the Martin upside and <unk> is our expectation is primarily related to the restructuring. So revenue came in a little bit better than expectations on some favorable F X rayed, but we frankly underestimated the impact of restructuring would have on our overall higher.
<unk> plan.
And resulted in really a delay in returning to our regularly planned hiring cadence that's what we're feeling really good about where we are now.
What this means is we are back to sort of return to that normal seasonal pattern in our operating margins for that from this point on through 2023 Q2 margins are gonna declined slightly it's a typical sequential pattern for us with annual merit increases and a return to that investment.
In hiring as well as some hyper connection.
That that we will expect the operating margins are going to extend through the back half of the year with low double digits in Q3 and high teams in queue for consistent with what we provided last quarter.
Thank you and with that will conclude our time of question and answer.
Now like to hand, the conference back over to you how many Rangan C E O for any closing remarks.
Thank you so much for all be engaged questions as soon as the support the call to connecting back again in a few months.
And with that we will conclude today's call. Thank you for participating he may now disconnect your lines.
[noise].