Q2 2023 HubSpot Inc Earnings Call
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Hello, and welcome to the Q2 2023 earnings call. My name is Alex and I'll be coordinating the call today.
Next I'd like to ask a question at the end of the presentation. You May Press Star followed by one on your telephone keypad.
Wed like to withdraw your question you May press Star two.
Okay.
My flashing head of Investor Relations.
Please go ahead. Thanks, operator, good afternoon, and welcome to our second quarter 2023 earnings Conference call today, we'll be discussing the results now.
That was issued after the market closed.
With me on the call this afternoon.
You won't get our Chief Executive Officer, Dr. Michelle <unk>, our co founder and CEO and Keith <unk>, Our Chief Financial Officer.
Before we start I'd like to draw your attention to the Safe Harbor statement included in today's press release.
During this call, we'll make statements related to our business that may be considered forward looking within the meaning of section 27, a hang of the Securities Exchange Act of 1933 as amended and section 20 <unk> of the Securities Exchange Act.
Horsemint.
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 impact of the restructuring.
As expected growth and business outlook, including our financial guidance for the third fiscal quarter and full year 2023.
Forward looking statements reflect our views only as of today and except.
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.
Our Form 10-Q, which will be filed with the SEC. This afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
During the course of todays call well refer to certain non-GAAP financial measures as defined by regulation G.
The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between such measures can be found within our second quarter 2023 earnings press release in the Investor Relations section of our website.
Now, it's my pleasure to turn over the call that spot Chief Executive Officer.
Johnny.
Thank you so much and welcome to everyone joining us on the call today I want to highlight our continued momentum in Q2 reiterate our playbook for winning in this macro environment and close with updates on our generative AI roadmap as well as insights based on customer usage.
Let's jump into our Q2 results.
Q2 was a solid quarter for hotspot with revenue growing 26% year over year in constant currency.
We've done about 700 basis points of margin expansion year over year, driving operating margin to 14%.
We've talked about our strategy for balancing growth and profitability.
<unk> executing against the strategy.
I'm really happy with the operating leverage we Denver, while driving growth in the quarter.
Total customers grew by 23% to over 184000 globally fueled by over 7600 net customer additions in the quarter.
I'm very pleased with the strong results in Q2, the consistent performance demonstrated by our team and the momentum we have in becoming the platform of choice for scaling companies.
Q2 results were driven by two key themes, our ability to deliver product innovation for our customers.
Our ability to consistently execute our bimodal go to market strategy.
As you've seen over the past few years, our bimodal strategy is working.
Our starter tier continues to fuel volume on the low end up the market driven by product and pricing optimization.
That said the story in Q2 was about up market momentum with continued growth in multi hub as well as full suite adoption.
We saw more new customers, starting with multiple hubs fueling larger deals.
One third of our pro and enterprise customers are now on three or more hubs, which is up by four points year over year.
In addition, we continued to see sales have picked up steam with larger customers.
Our investment in upmarket functionality like customization and extensibility and governance is paying off as we win bigger deals the sales hub.
Service hub also gained traction upmarket in this quarter with 12 of our 25 largest deals, including our service hub attach.
Companies are looking to improve handoff across their marketing sales and service team and they want to clear shared view of customer insights by.
By connecting sales hub and service support can lock tickets that the sales team can now see because theres one central contact record.
That context helped sales team close deals and as just one example of why our connected front office platform is so powerful.
Take marine Max a national about retailer for example, this one hub spot their legacy CRM, what's causing a disjointed customer experience. They couldnt effectively that leads from marketing to sales because the CRM was difficult to use sales reps learned adopting it.
Since switching to hotspot and adopting marketing hub sales hub service hub and op hub Marine Max has increased annual revenue by 113% and reduced their average sales response time from days to minutes.
They now have a shared visibility across the entire customer journey, leading to a better and faster customer experience.
I love hearing that are connected value proposition is resonating and that our product innovation is driving clear value for customers.
Now I want to shift gears to talk about the macro environment overall.
Overall customer buying trends remain steady.
Budgets remain under scrutiny multiple stakeholders continued to be involved in decision and while buying trends have not improved they have not gotten worse either.
Customers are continuing to optimize their budget and we can see this optimization across seat additions contact tiers and portals.
BARDA bi has risen but companies are continuing to invest in digital transformation and prioritize platform level decisions.
This is where our hub spot shine.
We have a proven playbook for driving growth with our product innovation and focused execution.
On the product side hub spot continues to win by being extremely easy to use and extremely powerful under the hood.
Our product innovation is in high gear I want to highlight just a few developments from the quarter.
With marketing hub, we double down on Omnichannel by moving Instagram wheels into public beta as market tiers increasingly focus on short form social video.
We also introduced event visualize her to give customers, even more insight into their audience with activity and get deeper analytics on customer behavior.
With service hub, we introduced content assistant into inbox. So that service teams can leverage <unk> AI to respond to customers faster across various channels.
We're also enabling teams to summarize customer conversations Virgin AI and move that functionality into private beta in Q2.
Lastly, on our path to building a more customizable and extensible CRM, we released customized pipeline news, enabling our customers to edit their view based on currency and tax that are specific to their business.
We also improved permission from user management for custom objects. This has been a top request from our enterprise customers.
Our pace of product innovation is just cranking and I'm very pleased with the progress we're making in becoming the platform of choice for scaling companies.
On the go to market side, how we sell is why do you win.
We've built a competitive moat with three go to market motions product driven partner driven and direct sales driven.
Our customers tell us that the way our sales and customer success teams serve them sets us apart.
They see a notable difference in our team's ability to move quickly to demo the value of hotspot articulate clear platform consolidation benefits and nine up the best partners to deliver services.
Over 40% of all new customer and existing customer expansion is coastal and influenced by our partners just awesome stuff.
While the macro environment remains challenging what we sell and how we sell continue to be unique differentiators for hotspot to drive durable profitable growth.
Lastly, let's shift gears to talk about everyone's favorite topic generative AI.
Last quarter, we talked about Gen AI and it is a transformative shift for Smbs and what this means for marketing sales and service.
In short, we believe AI will not replace go to market teams. It will guide and assist them to drive better customer outcome.
Today I want to provide an overview of how we are building an entire layer of AI assistance across our platform, how our customers are responding and what our unique differentiators are with AI.
We launched jackpot earlier this year and it has quickly grown to 70000 total users.
With 20000 prompts ingested weekly.
Our customers tell us that they like our weekly updates they love how quickly we are innovating with new AI capabilities and they're getting value from the breath of actions chatbot is helping them take.
Customers are using chatbot to prospect for good fit companies based on location industry recent news and more.
They're creating entire campaigns with SCO research blocked hydro generation and image generation all from within chat spot.
The easy chat interface combined with the power of hub spot platform, however, customers eager for what's next with chatbot.
We also launched content assistant earlier, this year and since moving into public beta in June adoption has grown by tenants with 26% of our enterprise customers using it today.
Customers are describing content assistant as a game changer, because they can quickly generate social copy block content prospecting email all based on insights without having to leave hub spot.
Content assistant and <unk> Gen AI into our customers' natural workflow, helping them work faster and smarter right where they are.
As I look at our AI roadmap, we are ambitiously building AI into the entire CRM platform. So our customers can get even more value from our platform.
To help scaling companies power their entire customer journey with AI and we believe we can help them leverage AI better than other platforms for three reasons.
First data is the fuel for AI and hotspot is unique data while other platforms provide data on who your customers are hotspot has data on who your customers are what they did across channels, what they bought and when we bring together the power of large language model with deep contextual first party data and <unk>.
Spot CRM magic happens.
Hotspot is where work gets done in the front office, we own the workflows that scaling businesses use everyday.
We're beginning to see this play out with content assistant usage that I just mentioned.
Finally, Gen I need human intervention to work responsibly and with all of those had a human centric approach to product innovation.
Committed to having strong customer feedback loop and implementing that feedback very quickly, we're well positioned to become the AI leader for scaling companies and we're moving fast.
We are prioritizing AI use cases, no roadmap and without giving too much away AI is going to be a major theme at our inbound conference in September .
I'm really excited for you to learn a lot more about our AI strategy and roadmap at our upcoming conference.
Reflecting on the quarter I'm very pleased with how our teams are driving the pace of product innovation, focusing on iterating fast with AI, while executing on our bimodal strategy.
This focus and alignment is what will continue to set us apart to drive durable and profitable growth.
With that I'll turn the call over to Kate to take you through our Q2 financial results.
Okay.
Thank you <unk>, let's turn to our second quarter 2023 financial results.
Revenue grew 26% year over year in constant currency and 25% on an as reported basis.
Subscription revenue grew 26% year over year, while services and other revenue increased 23% on an as reported basis.
Domestic revenue grew 25% year over year, while international revenue growth was 29% in constant currency and 26% as reported.
International revenue represented 47% of total revenue in Q2.
We added over 7600 net new customers in the quarter.
Our total customer count to over 184000 up 23% year over year.
Average subscription revenue per customer grew 3% year over year in constant currency and 2% on an as reported basis to $11400.
Our ASR PC growth was driven by continued multi hub adoption by a professional and enterprise customers offset by the large volume of startup customers. We added at the low end of our bimodal strategy over the last few quarters.
Gross retention remained healthy in the high <unk> for the quarter net.
Net revenue retention was 103% down one point sequentially driven by continued spend optimization by our customers across seat addition, contact tiers and portal.
While we expect pressure on net revenue retention in the near term to persist we continue to see strong gross retention and believe we can maintain net revenue retention above 100%.
Calculated billings were $542 million in the quarter growing 22% year over year in constant currency and 25% as reported.
The remainder of my comments will refer to non-GAAP measures.
Operating margin was 14% up seven points compared to the year ago period.
On a year over year basis operating margin benefited from the restructuring actions. We took at the end of January as well as a seasonal shift in hiring into Q3 and Q4.
While these factors have helped drive a step change in operating margin, we continue to invest in critical areas such as product innovation AI.
And internal systems and data to ensure we're building the foundation for continued margin expansion as we scale.
Net income was $71 million or $1 34 per fully diluted share.
Free cash flow was $60 million or 11% of revenue and our cash and marketable securities totaled $1 $7 billion at the end of June .
And with that let's review our guidance for the third quarter and full year of 2023.
As Jonny highlighted we continue to operate in a difficult macro environment.
Customer budgets remain tight decisions by committee are the norm and customers continue to look for ways to optimize existing spend.
Our guidance assumes that these weak macroeconomic conditions persist throughout the second half of 2023.
For the third quarter total as reported revenue is expected to be in the range of $532 million to $534 million.
Up 20% year over year at the midpoint.
We expect foreign exchange to be a one to two point tailwind to as reported revenue growth in the quarter.
non-GAAP operating profit is expected to be between 67 and $69 million.
non-GAAP diluted net income per share is expected to be between $1 20 to.
The $1 24.
This assumes $52 6 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 $2 116 to 212 2 billion.
Up 22% year over year at the midpoint.
Now expect foreign exchange to be a half a point tailwind to as reported revenue growth.
non-GAAP operating profit is now expected to be between 293 and $297 million.
non-GAAP diluted net income per share is now expected to be between $5 24.
And $5 29.
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 $260 million for the full year of 2023.
With seasonally stronger free cash flow in Q4.
And with that I will hand things back over to you nominee for her closing remarks.
Thank you so much Kate I want to close with our commitment to building a sustainable and equitable company one of them.
Goals as an organization is to build a company future generations will be proud off and making progress on our environmental social and governance efforts is a critical part of that journey.
We released our annual sustainability report in Q2, and I want to highlight a few key developments.
On the environmental side, we submitted our targets for validation by the science based targets initiative, joining over 5000 companies committed to ambitious climate action.
Work to build a more diverse and inclusive company, we reached 47% female representation companywide nearing gender parity.
We launched our customer Trust center for our customers. So they can learn more about our security privacy compliance and governance practices.
I'm really proud of the progress we are making to build a diverse and sustainable company.
I want to thank our customers our partners and our shareholders for the continued support of hub spot and a big Thank you to all our employees, who are executing with focus and solving for our customers every day.
Look forward to seeing many of you at our analyst day as part of our inbound 2023 event on September 6th with that operator, let's open up the call for questions.
Thank you.
Wonder if you'd like to ask a question you can press star followed by one on your telephone keypad.
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Please also limit yourself to one question only thank you.
Sure.
Our first question for today comes from semi Simona from Jefferies. Your line is now open. Please go ahead.
Hi, good evening and thanks for taking my question.
300 to 2000 employee segment and look we've had a lot of focus and investments going into the upmarket segment. So we're gaining traction for a variety of reasons, including all of the ones that you just mentioned, but maybe just to give a little bit of color I'll start with what you're seeing with.
<unk> market customers and there are a couple of customer trends that B C up market first off off market customers are consolidating on platforms.
What would the last couple of years, they've bought a number of disparate systems and this is the time that they're focused on eliminating cloth, but also getting clearer disability across the entire customer journey and so that's driving interest seemed a second thing is focus this your four upmarket customers <unk>.
Been on sales productivity head count is constrained in this environment, but customers still need to hit their growth targets, so their meaning into equipping their sales reps with the right technology solution that needs to be successful and we certainly see larger sales <unk> deals with an R.
A customer buying pattern.
Now, having said that up market has been a strategic priority across the company both from a product and go to walk upside a product has gotten much better and it's neat meeting the needs of up market customers and this has been a constant drumbeat across the past few quarters and ultimately a product is.
Easy to use but very very powerful under the hood and that's a differentiate or I think the perception has also improved upmarket, we're gaining momentum with exact some scaling companies and we've always had like a great relationship with Cmo's in the marketing organization, but now C. O C. F O C O O no.
<unk> and understand the value of pub spot there as well and then finally I think both the product about the partner teams as soon as the direct teams are really able to clearly communicate the value of hot spot as well as drive cost savings for our customers and how we sell is also <unk>.
Been so very pleased with the progress of market and thank God all of those factors really play into it.
Very helpful. Thank Dominie <unk> September .
You there.
Next question comes from Elizabeth <unk> Morgan Stanley .
Can you. Please go ahead.
Great. Thank you very much for the question I was hoping you could provide a little bit more color around the dynamics of new launch free products. Yeah was there any sort of pent up demand in the beginning that that could be waning and impacting the new user sign up or how big of a funnel do you have to still work through on converting this free sign up to <unk>.
<unk> customers. Thank you.
Thanks, Elizabeth This Kate I will start and then others can join if they want.
I think you're asking about the free sign up just because you saw a sequential drop in our net customer additions I will confirm that that is very much a dynamic happening with darter, we did see a quarter over quarter decline in starter the free products that you highlight are one of our number.
Things that we used to drive demand at the low end of our bimodal strategy, we consistently look too functionality down into our freedom starter products, we consistently experiment with pricing and packaging, we're launching free tools on a regular basis and so there is a.
Normal I've been slow to the free user base and ultimately the starter additions that you'll see from one quarter to the next.
Thank you.
Yeah.
Next question comes from bulk Murphy of J P. Morgan.
And finally could you. Please go ahead.
Thank you very much and congrats on the results you want.
At the last analyst. The I believe you are a kid had mentioned that Bill club had a cost you $450 million in a R. R.
Mmm It had done that would mid fifties group at that time, and interestingly went back and looked at this it was growing faster than marketing hope was when it was outside.
And.
Realizing that most companies never have that kind of a second or third act.
Could you explain what is it that is propelling sale tub, so rapidly and.
Whenever the economy does return to normal foods do you think that that can continue to carve out a stronger than what we saw historically with marching cloud.
Mark that's that's a great insightful question you know I I think like this goes back to the fact that we are in the middle of a fairly big transformation, a tub spot one that we've been talking about for many years, we've been on this journey to golf from.
<unk> to sweep the platform and when we go from App, the Swede and failed pub becomes allergic to my front door than it actually drives you know faster adoption within the installed base. So the second product and the third product and fourth product they have the benefit of having the.
Install base off the first product and that's kind of what you're beginning to see I think that you know again, maybe kind of dissecting the customer trends from what V. C internally from the customer side every leader that I talk to they're looking at ways to Ella.
<unk> call, but drive better results and over the last couple of years, they bought a ton of points solutions in there either struggling to integrate those solutions are the cost of the solutions are prohibitive and we are now being seen as a powerful cost effective platform within this environment and that.
Helps with sales tub kind of momentum because if you are a marketing help customer then makes a lot more sense to get sales Cobb or if you're looking at ways to drive cost savings than buying multiple hudson kind of eliminating cough, while getting better customer insights is working I think.
The other part of it is that one of our strategic priorities. This year was to double down and focus on driving product leadership and marketing sales and service Hall, and that's exactly what our product teams are focused on innovating and that's what you're seeing.
Lay out with sales pub, because it's now really magic Dimmitt front door, you know too hot spot and we've talked about the steady drumbeat a product releases that are aimed at expanding our market opportunity with himself Cobb and we're also driving our ability to serve more sophisticated use.
Cases, and just this past quarter in queue to re released sequences on mobile driving more prospecting efficiency with reporting better embedded pipeline metrics. All of these are just examples of functionality within our sales Tom the drive up market momentum and things that our customers.
Have been asking for so I'd I'd go back to you know second third Hobbes. All this have the benefit of the first one and when customer needs meet with product innovation meet with go to market execution. Then we begin to see the consistency of the results of your seem now.
Thank you next question comes from <unk> from <unk>.
<unk>. Please go ahead.
Oh wonderful thank you so much.
So you think about you know your your continued momentum pop market going head to head with with some of the larger competitors Uhm what are the pieces of feedback we hear from customers is that there are certain enterprise great features and functionality that they don't quite yet have available natively in hot spot how do you think.
[noise] about using generative <unk> to speed up the development you know around a lot of those enterprise great features and be even more competitive against some of the kind of more traditionally up market, but but also maybe legacy competitors. Thanks.
Yeah, Great question I'll I'll start the N a dumbass feel free to decide chime in there on the development side as well look I I think you know our our focus is really that 22, two 200 to 2000 customer base and you're absolutely right.
I think the list of innovation and list of things that we can continue to do to expand our share of that market is there and that's exactly why this is our number one priority within the company you Wanna, you know increase that product depth and leadership within that mark at them. So.
There's a long list of innovation that we are we know we're working on and our product and pace of innovation within product has been pretty high over the past few quarters exactly for that reason. So we can meet the needs of the customers I do think at the same time, they look at us as a way to get disability occur.
Roth all of the products that are organically build while eliminating the cost which is why you see us as a platform of choice you know for these enterprise companies now Jimmy I, you know certainly has the potential to accelerate productivity not just in front of.
This functions, but also for engineering and it's certainly something that we are looking at but it's pretty early days in terms of driving driving the pace of innovation, even further feel free to add their yeah. One thing I'll add is that drove it yeah. I think it opens up an entire like a generational opportunity I've I've been in the CRM software for 30 years now.
Since pre cloud. So we saw once advanced the Internet came cause I'm kinda entire named industry around you know that'd be CRM I think we're gonna see something similar with <unk>.
Lots of approach has always been kind of democratize technology is kind of coming up and focus on S. M. B. So I think what opportunity. This opens up for a rough spot is to say hey, we're tackling that's gonna be we wanted to do the same thing you did when we launched our Ciara and we said we want every company to be able to benefit from having a really good CRM now.
Let me see Jersey I features coming down the road. Our philosophy is we want every company to benefit from an AI powers CRM. So how do we take all these features that are now right now market, leaving but how do we make them and diffuse them and democratize illegal available. So I think it creates an opportunity for us to capture more mind share and market share with an S. That'd be the market, we're focused in and it's a once in a <unk>.
Generation opportunity.
Thank you next question comes from Brian Peterson of Raymond James <unk>. Please go ahead.
Hi, Thanks for taking my question. So I wanted to maybe get it off off about it and took it so it'd be worth it for a second and you're able to understand is the vendor consolidation trend that you're saying is that there isn't happening in the mid market as well or is there may be more about what's been rationalization bear with me.
Maybe understanding of your prescription.
Yeah, Brian I think it's happening in mid market as well, there's there's absolutely no doubt that we see it in four off mid market is that 22 200 person company. That's what we call us mid market and if you look at what is driving vendor consolidation across.
All of the segments that we are in it's the last couple of years of how you know customers have grown S. M. B's were thrown into the digital environment post the pandemic and during the pandemic. They went in and bought a number of points solutions and or are they went and got some enterprise class of.
Lucian and both of those have proven to be pretty costly in terms of maintaining the text back but also pretty brutal in terms of getting customer insights and so if you look at a mid market company. They are also in the same place of looking at eliminating costs, while driving better customer in.
Sites and we did receive the same trend play out within mid market and again, we begin to see more multi hub and even full sweet.
<unk> and enterprise deals within the mid market segment.
Thank you next question comes from Alex's, who can Wolf research.
Lunchtime open. Please go ahead.
Hey, guys such as Ryan on for Alex. Thanks for taking the question. So just a quick one number attention it seems like the deceleration.
Slowing so if you look at some kind of a month over month basis does it start to improve at all.
Back out for the quarter like in June and then you know how should we be thinking about whatnot, that's perfect trough kind of going forward.
Yeah. Thanks for answering the question net revenue retention, you're right on the quarterly math for the quarter net revenue attention was 103, which was down one I don't think we're gonna comment on monthly trends here, but I will make a couple of comments on net revenue return.
<unk> the first I guess, maybe I'll just start with the good news, which is our customer dollar retention, which we refer to gross retention externally remained steady in the high eighties, which provides a really nice foundation for us around net revenue retention overall.
The area, where we continue to see challenge is the same one we been talking about for a number of quarters, which is on that net upgraded right.
So kind of going back to the back half of 20th 2022.
There was more consumption driven motion like seats and contacts for us.
<unk> to be pressured uhm, we're seeing that both on the downgrade side, but we're also seeing lower volume of customers, adding contacts emptied.
In addition.
And then finally customers would you heard both the harmony and I talk about this in our prepared remarks are really looking to optimize their spend across the board by from adjusting additions and consolidating or portals onto a finger single hotspot instant really looking for ways to maximize the wrong from our platform.
Ask a really hard question, which is like when's. It gonna turn and I will admit is like really difficult to predict obviously, it's dependent at least in you know a decent amount on macro pressure what I will say is that we feel good about our ability to retaining our customer retention at that high eighties.
Level and we feel good about our ability to retain net revenue retention above 100.
Thank you next question comes from a project sales of Bank of America.
Please go ahead.
Oh wonderful. Thank you I wanted to ask a question on a I a lot of exciting use cases, it sounds like already for in your customer base around chest spotty you'd content assistant how are you thinking about the modernization here are these is this baseline functionality that just continues to drive the boat do you think you might put some of this functionality into.
Mhm additions maybe separate skews just any any color on how you're thinking about the modernization opportunity for Ya. Thank you.
Yeah. Thanks, a lot for that question. Brian . This is dominating Oh, we're very clearly excited about generative a I. It is a pretty big transformative shift and I I think we look at it as being bell position to serve the S M b market and his.
Darkly if you've looked at hot spot, we've done a really good job of taking powerful sophisticated technology and bringing it to bear within the S. M. B market in this market is quite different from you know other other kinds of segments because they typically don't have you know a I M L exports and resources and so we take it.
Our job pretty seriously to take a powerful technology and democratize. There now specifically on your question on monetization, we have a very clear first principle when it comes to monetization and our principal is that'd be focus on delegating customer value first and from there monetization will follow and we're <unk>.
Going to apply that same first principle to AI and when you think about this market clearly in the early stages of Iterating.
Ah fast and adding value for customers, we're beginning to see that with both jackpot and content assistant and all of the use cases that we have in beta so far one we know what value. We are adding to customers then would likely follow Ah bimodal strategy monetization and <unk>.
What I mean by that is on one hand will likely democratize AI features and make it available in our premium and starter tears to drive adoption, you've seen that play out we've taken really high value features and added it to free them starter and that helps with adoption, but that also helps as in on.
<unk> other tears and then the second part of what will likely do is drive higher value and E. S. P. With more specialized features and this can certainly come in the form of adding certain features to hire additions like pro and enterprise. It can also come from packaging AI features into more specialized Adams.
So we're certainly thinking about all of that but the first priority for US is move fast earache fast and add a ton of value for customers specifically within the S. M. B segment, we Wanna be the AI leaders within the S. M B segment and for scaling companies.
Thank you next question comes from my debris on the purchase of Goldman Sachs.
It's not open. Please go ahead.
Good afternoon. Thank you K I'm looking for a little bit of color on the constant currency billings deceleration that you saw this quota and I realize that you just talked about how difficult. It is to predict the background. So I'm, hoping you could share a little bit on some of the leading indicated that you and the team look at to try to get ahead of underwriting account on the macro and <unk>.
Essentially to start wrapping hiring again, thank you.
Yeah. Thanks for the question I'll I'll try to give a little bit more color on the billings because I will admit it's a little bit of a head scratcher this quarter mm.
As we what we try to ground ourselves on is constant currency revenue growth as sort of a baseline assumption that constant currency revenue in constant currency billings will grow together.
And this card of what you thought it was a little bit more of a gap and you saw this really unusual thing where you had constant currency billings growth dipping below as reported billings gross and yeah I would just like <unk>.
<unk> has two components to it has revenue and it has the change in deferred revenue and well currently with a headwind to revenue. It was actually a tailwind to deferred revenue, which is why there was this three point tailwind to billings growth in the corner.
And if you just look at that <unk> impact that's half the gap between constant currency billings growth in constant currency revenue growth.
Other than that there's not the trends are largely the same as the ones that we've been talking about you know we continue to see a little bit of a decline in duration as our mixed shift away from marketing and into sales and service shipped away from new into installed it but we expect though.
Two growth rates to come back together and Q3 is we have a more normal FX comparison.
Thank you next question comes from <unk> Company belongs I'll open. Please go ahead.
Hi, there. Thanks for taking my question. If you look at the customer dishes in the quarter you know clearly they're very strong at over 7000 again can you just help us understand the price change on the starter bundle how that impacts the trajectory of the net add after a few months of the change being in the market is there an initial pop in demand.
And then it reverts or what's the cadence following these price changes in.
<unk> was that a contributing factor to Y the number was down essentially thank you.
Yeah, I'll I'll start you know that as we're we're down a bit from Q1 to Q too, but they were very much in line with the expectations that we had it internally and the expectations that we shared on the call last quarter. The other thing to note.
They were much more balanced across additions and what we've seen over the last couple of quarters.
In both Q4 and Q1, we are actually pretty surprised by the stronger performance and starter that was really the driver of the overall new customer edition.
So yes started then decline a little bit but it is in line with our expectations and we frankly would expect that it would sort of stay in and around these levels over the next couple of quarters.
Thank you next question comes from Terry Tilman of tourists.
Could you. Please go ahead.
Hey, guys. This is Joe me resolve <unk> I. Appreciate you taking the question I'm just curious on the three 223 and four two twenty-three employed revenue God, it's looking like about 18% growth year over year.
X F X and acknowledging or in the tough macro I'm. Just curious is that decline from the first time does that more macro prison or is that something that you're seeing as.
As far as you're you're an individual and are are being affected.
Yeah, maybe I'll, just kind of take a step back in and talk about how we approach guidance we.
Approached guidance and a very consistent way I'm I'm just I just finished my fifth year at how fun and we have approached guidance in the same way every quarter during that period of time and the way that we approach. It has been you know we tried to create a set of numbers.
That we feel good about our ability to deliver across a variety of scenarios and we took exactly the same approach this quarter, both yamani and I shared in our prepared remarks that the external environment remains challenged and that is what is the foundational baseline assumption.
For our guidance on that said, we Wanna put forward guidance that we can deliver even if things get a little bit worse from here.
Thank you next question comes from Michael <unk> Your lifestyle open. Please go ahead.
Alright, you got Michael Burgoyne for Michael turn here.
I wanted to ask on.
Someone to talk with you about it but you've you've mentioned number of times you've added quite a few features a crossover <unk>, notably sales hub and as you incorporate and everybody I, which we just have the price of your discussion maybe could help us understand how you might think about are there increasing prices are taking more more of the value to deliver to your customers.
Thank you.
Yeah, Michael I I appreciate the question. Thank you are.
Pricing philosophy has not changed and if you step back and think about what our pricing as well as packaging philosophy has been we add value first and then we think about pricing changes next and when we had this discussion on AI monetization I mentioned exactly the same thing which is add value for.
<unk> and then kind of look at pricing and you're absolutely right that'd be about a tremendous value in terms of sales hub you know when we look at pricing packaging changes for.
For example, last year, we increased marketing <unk> enterprise pricing, but that was after consistently adding value for years of adding value into that tier and when we do that'd be very very comfortable on the impact. It has in terms of our customers and so <unk> <unk> follow exam.
<unk>, that's the same pricing philosophy, whether it comes to a I R. It comes to fail tub. Ultimately, we think that you know where the early stages of some you know fairly big transformations, the transformation of off going from apt to sweep the platform as early the transformational boss going to upmarket bizarrely the <unk>.
Now the big shift that's happening with AI as early and across all of that our focus is add value and gain market share an adoption and then monetize.
Thank you next question comes from Michael <unk> <unk>.
Can you. Please go ahead.
Hey, guys can interesting discussion around and are are so like it's the same kind of question around M. F. R. P. C. When <unk> when you think that could start to <unk> up and you know and associate the question for you soon.
What are you coming to them.
<unk> P C being stronger.
For two years as opposed to being dragged down by starter. So so what was what was that break out like <unk>.
<unk> are not going forward in between tours this quarter.
Yeah. The anthropocene, obviously, the other side of the coin to net customer additions I think there's a little bit of a difference across the two matrix in the sense that you are talking to you as a little bit more of a lagging metric as it reflects because revenue was the numerator. It reflects the activity that we've seen over the.
Last four quarters, so anything that you're gonna see in terms of movement and quarter is going to be a little bit more muted. What you did see with anarchy C. As it expanded up in the low single digits, which is like what we expected and what we shared with you last quarter and the drivers are the same ones that we talked about last quarter. The continued <unk>.
Progress with multi have adoption and professional and enterprise was the big driver of the expansion, but again there was an off that based on the significant <unk> that we have seen over the last four quarters at that starter here now.
As far as the answer P. C outlook, we think it's gonna sort of hang in and around these like low single digits for the next couple of quarters Uhm, but you are right. If we stripped out starter we would see an AD therapy see that is expanding at a higher rate.
Thank you Uhm next question comes from <unk> <unk>. Please go ahead.
Yeah, Hi, Thanks for taking the question here you how many hope spots always been a very horizontal platform and as you're making this up market shipped to you see any appetite in the enterprise category in particular for more industry specific features and tools and as you think about the future penetration of this opportunity is it necessary to have.
Those type of tools or do you feel like there's enough you know work being done in a partner community and integration that can you know supported helping you use good sir.
Yeah, Great question Parker I think it's more of the ladder. If you. If you think about you know the big transformations that bear on we're going from this apt to sweep the platform, we're kind of going from the smaller end of S. M. B two up market.
Customers and both of those are still fairly early innings, and if we look at our market share penetration across both of these if you know single digits and we think that with the level of product innovation, that's happening as well as the focused execution, we have the opportunity to.
Kind of you know take it to a strong double digits in terms of market share. So there's a lot of opportunity that is left that is still very much horizontal our list of innovation and list of things that we can bring to add value to our customers remains really real Boston long and so we're going to focus on.
All of those opportunities and I think it also gives us a tremendous opportunity to drive more market share games as well as adoption within within our markets and as you said like partners are certainly leaning into certain vertical and they're more than welcome to continue did like you know do that but.
That the opportunity is still early stages with the tremendous run way ahead of us for for our strategy now.
Thank you next question comes from my <unk> <unk> <unk> <unk>.
Your lifestyle open. Please go ahead.
Hi. This is another one for Keith Thank you for the question.
Touch on commission changes in any incremental feedback you might have on reactions. There and then second part would be having any effect on the decrease in <unk> to add.
So let me start with the first part which is the Hartner Commission changes were really pleased with the response from the partner channel and you know I I've.
I've talked to many of <unk> and leads partners before the change after the change and we have consistently getting feedback from my apartment channels and we spent a lot of time communicating to our partner channel on why we are changing this and if you step back and think about it we want to drive.
Consistent value added engagement with customers and we won our partners to be able to drive a multi <unk> adoption within our customer base and so the commission changes were very much Ah line to where we are going at the company and in fact, we have scene partners increase engagement.
Now with our customers as a result of the change which is a really nice bonus and I think it's a win for customers partners and in terms of hotspot, you know and maybe K. If you want to add on the starter I don't think Department Commission change had any back on the starting at ads, but you can certainly.
Comment.
Yeah, I would I would agree the partners tend to be focused more market and our customer base and so the impact that they would have they they did not have any impact on the quarter over quarter change and and that customer us.
Thank you next question comes from what Cook a ton of ethical good on his phone open. Please go ahead.
Thank you very much Yao Ming I was wondering if you could just talk a little bit of.
Just.
<unk> is that while I got it.
<unk> you see you have a little bit ahead of me in terms of what you're doing in the hotels and just any I guess commentary on on the geographic.
Graphics perspective, and there's several different you're saying in the U S vs stays outside the U S. Thanks [noise].
I I didn't get the first maybe 10 15 seconds of the question I got the G. O differences can you repeat the first part please.
Oh I'm sorry.
Could you repeat it again.
Look at that.
Across my chest.
Okay, I think I got the Geo differences I you know, so Oh say no notable.
Notable differences across our major markets and what I talked about a customer buying patterns. You know on one hand, you know there it didn't get better it didn't get worse very similar trends in terms of looking at budget, having multiple stakeholders involved in decision, making and and dry.
Living in a project. So I think that has remained consistent so no notable differences and maybe the other part of the question was really you know are there any differences that you would think about up market multiple sales pub adoption or multi hop adoption and again no. Notable differences I think the broader themes.
Coming back to what we are seeing a cross the pipeline lot more sales initiatives. This year, where our customers are focused on driving sales rep productivity locked more multi called adoption at people want to make sure that they are getting disability across their entire cussed.
<unk> pipeline and a lot more platform consolidation as they look to eliminate cough as well as get just much better return for their investment and across all regions, where you know seeing the trend of becoming a platform of choice for the scaling company. So high bar faction across all <unk>.
<unk> would be continued to be very focused on executing to meet that high bar.
19, a final question for Tonight comes from it Tyler Mcginnis of UBS belonged to file open. Please go ahead.
Yeah, Hi, thanks, so much for taking my question <unk> margin. So it looks like the four Q guide implies mid teen and previously the outlook called for high teens I know you have some good outperformance in the quarter and it looks like the three Q outlook is a little bit is a little bit higher. So is it just the shifting of you know expenses between <unk>.
<unk>, maybe some prudence in the forecast or is your view on for queue up extra changed or.
The level of investment I guess is there anything new that you would flag.
Yeah. Thanks for the question Uhm, we are very pleased with the progress we're making this year on expanding our margins you saw record, 7% increase and margins year over year and Q2 and.
He just sort of take a step back and think about what's driving that you know we took a bunch of action through the back half of last year to really pull back on hiring pretty significantly and then we did a restructuring in January and that is really showing up in the year over year leverage.
If you think about where regarding for the full year. We are are operating profit margin guidance is 14%, which is a bit more than four point <unk>.
Year over year increase over over 2022.
What I would tell you is we've been very prudent in hiring that we've made in the first half of the year. You know we came out of the risks at the end of January and we want it to be very strategic about where are we we're adding heads.
And as a result, we have we will see more are hiring take place in Q3, and Q4 of <unk> of this year versus our original plan and that is what is what is what you're seeing in the you know seasonal margin and our guys.
Thank you we have no further questions for today, so that I can cook.
Today's conference cool. Thank you all for joining you may now disconnect your lines.
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