Q2 2024 HubSpot Inc Earnings Call
Harry: Good afternoon and welcome to the HubSpot Q2 2024 earnings call. My name is Harry and I will be your operator today. At this time all participant lines are in a listen-only mode and there will be an opportunity for question and answers after management's prepared remarks.
Operator: If you would like to enter the queue for questions, you may do so by dialing star followed by one on your telephone keypad. I would now like to hand the conference over to Senior Director of Investor Relations, Ryan Burkart. Please go ahead.
Harry: If you would like to enter the queue for questions, you may do so by dialing star followed by one on your telephone keypad. I would now like to hand the conference over to Senior Director of Investor Relations, Brian Burkart. Please go ahead.
Ryan Burkart: Good afternoon, and welcome to HubSpot's second quarter 2024 earnings conference call. Today we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Yamini Rangan, our Chief Executive Officer, Dharmesh Shah, our co-founder and CTO, and Kate Bueker, our Chief Financial Officer.
Ryan Burkart: Thanks, operator.
Ryan Burkart: Good afternoon and welcome to HubSpot's second quarter 2024 earnings conference call.
Speaker Change: Today we will be discussing the results announced in the press release that was issued after the market closed.
Speaker Change: With me on the call this afternoon is Yamini Rangan, our Chief Executive Officer, Dharmesh Shah, our Co-Founder and CTO, and Kate Bueker, our Chief Financial Officer.
Ryan Burkart: 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 27A of the Securities Exchange Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements, other than statements of historical fact, are forward-looking statements, including those regarding management expectations of future financial and operational performance and operational expenditures, expected growth, FX movement, and business outlook, including our financial guidance for the third fiscal quarter and full year 2024.
Speaker Change: Before we start, I'd like to draw your attention to the safe harbor statement included in today's press release.
Ryan Burkart: Forward-looking statements reflect our views only as of today, and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our Form 10-Q, which will be filed with the SEC this afternoon, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we will refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure, most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between such measures, can be found in our second quarter of fiscal year 2024 earnings press release in the investor relations section of our website. Now, it's my pleasure to turn the call over to HubSpot's Chief Executive Officer, Yamini Rangan.
Speaker Change: During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Speaker Change: All statements, other than statements of historical fact, are forward-looking statements.
Speaker Change: Including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, FX movement, and business outlook, including our financial guidance for the third fiscal quarter and full year 2024.
Speaker Change: Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements.
Speaker Change: 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 discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.
Speaker Change: During the course of today's call, we'll refer to certain non-GAAP financial measures.
Speaker Change: 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 of fiscal year 2024 earnings press release in the investor relations section of our website.
Speaker Change: Now it's my pleasure to turn the call over to HubSpot's Chief Executive Officer Yamini Rangan. Yamini?
Yamini Rangan: Thank you, Ryan, and welcome to everyone on the call. Today, I'll share our Q2 2024 results, discuss trends driving our momentum, and highlight early wins from our Spring Spotlight product launch. I'll also reiterate our strategy and playbook for winning both in the short and long term. Let's dive in.
Yamini Rangan: Thank you, Ryan. And welcome to everyone on the call. Today, I'll share our Q2 2024 results, discuss trends driving our momentum, and highlight early wins from our Spring Spotlight product launches.
Yamini Rangan: I'll also retrace our strategy and playbook for winning both in the short and long term. Let's dive in. Q2 was a solid quarter for HubSpot, with revenue growing 21% year-over-year in constant currency.
Yamini Rangan: Q2 was a solid quarter for HubSpot with revenue growing 21% year-over-year in constant currency. We delivered another quarter of operating margin growth with 270 basis points of margin expansion year over year, driving our operating margin to 17%. I'm really happy with the operating leverage we are continuing to deliver while driving growth. Total customers grew to 228,000 customers globally, driven by over 11,200 net customer additions in the quarter.
Yamini Rangan: We delivered another quarter of operating margin growth with 270 basis points of margin expansion year-over-year, driving our operating margin to 17%. I'm really happy with the operating leverage we are continuing to deliver while driving growth.
Yamini Rangan: Total customers grew to 228,000 customers globally, driven by over 11,200 net customer additions in the quarter.
Yamini Rangan: I'm thrilled to see customers consolidating on HubSpot, the consistent focus on innovation and execution demonstrated by our team, and the momentum we have in becoming the customer platform of choice for scaling companies. Our starter tier continues to fuel volume on the low end of the market, driven by product and pricing improvements. We have removed friction and made it easy for customers to get started with HubSpot. We have streamlined the checkout process so customers can now make clearer decisions about the functionality and seats they need.
Yamini Rangan: I'm thrilled to see customers consolidating on HubSpot, the consistent focus on innovation and execution demonstrated by our team, and momentum we have in becoming the customer platform of choice for scaling companies.
Yamini Rangan: All started here, continues to fuel volume on the low end of the market, driven by product and pricing improvements.
Yamini Rangan: We have removed friction and have made it easy for customers to get started with HubSpot.
Yamini Rangan: We have streamlined the checkout process so customers can now make clearer decisions about the functionality and seats they need. But most importantly, we're delivering compelling value for business owners focused on driving growth and needing better visibility on customer trends in this environment.
Yamini Rangan: But most importantly, we're delivering compelling value for business owners focused on driving growth and needing better visibility on customer trends in this environment. As a result, we're seeing strength in free sign-ups and starter ads. In the upmarket, our Q2 results were driven by multi-hub and large-deal momentum. We saw more customers start with or expand into multiple hubs, resulting in larger deals. Over 45% of new business in our pole plus tiers came from customers using three or more hubs. Within customers adopting multiple hubs, we saw three popular combinations. Marketing and Sales Hubs are the main front doors.
Yamini Rangan: As a result, we're seeing strength in free sign-ups and starter ads.
Yamini Rangan: In upmarket, our Q2 results were driven by multi-hub and large-deal momentum.
Yamini Rangan: We saw more customers start with or expand into multiple hubs, resulting in larger deals.
Yamini Rangan: Over 45% of new business in our pole plus tiers came from customers using three or more hubs.
Yamini Rangan: Within customers adopting multiple hubs, we saw three popular combinations. Marketing and sales hubs are main front doors. Marketing sales and service hubs, innovation in service hubs is driving momentum. And marketing sales and content hub, after content hub launch in April .
Yamini Rangan: Marketing Sales and Service Hubs; innovation in Service Hubs is driving momentum, and Marketing Sales and Content Hub after Content Hub launch in April. The higher mix of multi-hub deals and the momentum we have with upmarket customers led to larger wins in Q2. Upmarket customers want to simplify and consolidate their tech stack, and our focused investments to serve their needs and our pace of innovation make us their top choice. Okay, let's talk about the pricing model changes that we introduced in early March and how it's progressing.
Yamini Rangan: The higher mix of multi-hub deals and the momentum we have with upmarket customers led to larger wins in Q2.
Yamini Rangan: Upmarket customers want to simplify and consolidate their tech stack and our focused investments to serve their needs and our pace of innovation make us their top choice.
Speaker Change: Okay, let's talk about our pricing model changes that we introduced in early March and how it's progressing.
Yamini Rangan: As a reminder, we lowered the price point to get started with HubSpot, removed seat minimums to reduce friction to upgrade, and created a core seat for customers who want to edit CRM records. We did this to make HubSpot easy to buy and easy to grow with.
Speaker Change: As a reminder, we lowered the price point to get started with HubSpot, removed seat minimums to reduce friction to upgrade, and created a core seat for customers who want to edit CRM records.
Yamini Rangan: When we made these changes, we expected them to lead to lower initial ASPs, higher volumes of customers, and more upgrades and expansion over time. In Q2, we continue to make progress on driving higher volumes to offset the ASP declines and expect this to happen in the next few months as we focus on enablement. We continue to see solid expansion trends with a multi-point increase in net revenue retention rates at month three for customers on the new pricing model as they buy exactly what they need and expand when they need more.
Speaker Change: We did this to make HubSpot easy to buy and easy to grow with.
Speaker Change: When we made these changes, we expected it to lead to lower initial ASP, higher volume of customers, and more upgrades and expansion over time.
Speaker Change: In Q2, we continue to make progress on driving higher volume to offset the ASP declines and expect this to happen in the next few months as we focus on enablement.
Speaker Change: We continue to see solid expansion trends, with a multi-point increase in net revenue retention rates at month 3 for customers on the new pricing model, as they buy exactly what they need and expand when they need more.
Yamini Rangan: Overall, we continue to have high conviction that the pricing change is the right decision for our customers and, therefore, for HubSpot. To round out Q2, let's talk about the innovation we drove with our Spring Spotlight product launches and how they're driving momentum. In April, as part of our first Spring Spotlight, we introduced major updates to Service Hub and launched Content Hub. The Service Hub update was a big unlock.
Speaker Change: Overall, we continue to have high conviction that the pricing change is the right decision for our customers and therefore for HubSpot.
Speaker Change: To round out Q2, let's talk about the innovation we drove with our Spring Spotlight product launches and how they're driving momentum.
Speaker Change: In April , as part of our first Spring Spotlight, we introduced major updates to Service Hub and Launched Content Hub.
Yamini Rangan: It now supports both customer support and customer success teams on a single unified platform. We saw the number of wins with 100-plus service seats grow 55% year-over-year and 30% year-to-date. In addition, we saw a 200% increase in portals closing tickets in Helpdesk since the relaunch.
Speaker Change: The Service Hub update was a big unlock. It now supports both customer support and customer success teams on a single unified platform.
Speaker Change: we saw a number of wins with hundred plus servicses grow fifty-five percent year-over-year and thirty percent year to today in addition we saw two hundred percent increase in portals closing tickets in helped us since the relaunched
Yamini Rangan: In terms of Content Hub, our goal is to provide an AI-powered content marketing solution that can help marketers create and manage content. And the response has been fantastic. The attach rate for Content Hub to Marketing Hub has tripled since the launch and is now nearly 50% for new Marketing Hub vendors.
Speaker Change: In terms of Content Hub, our goal is to provide an AI-powered content marketing solution that can help marketeers create and manage content. And the response has been fantastic.
Speaker Change: The attach rate for Content Hub to Marketing Hub has tripled since the launch and is now nearly 50% for new Marketing Hub events.
Yamini Rangan: This high attach rate is being driven by innovative AI features like Content Remix, AI Blogs, and Brand Voice. Brands like TripAdvisor, World Wildlife Fund for Nature, and Morehouse College are all using HubSpot content solutions to grow. Overall, we're thrilled to see our product innovation drive value for our customers. Okay, on to the macro environment. We're seeing the same trends as last year and Q1, slower decision making, more decision makers involved, and scrutiny on the business case and value before spending. When decisions are made by committees, it often includes CEOs, CFOs, CROs, and many times require boards or VCP firm approval.
Speaker Change: This high attach rate is being driven by innovative AI features like Content Remix, AI Blog, and Brand Voice.
Speaker Change: Brands like TripAdvisor, World Wildlife Fund for Nature, and Morehouse College are all using HubSpot's content solutions to grow. Overall, we're thrilled to see our product innovation drive value for our customers.
Speaker Change: Okay, on to the macro environment.
Speaker Change: We're seeing the same trends as last year and Q1. Slower decision making, more decision makers involved, and scrutiny on business case and value before spending.
Speaker Change: When decisions are made by committees, it often includes CEOs, CFOs, CROs, and many times require board or VCP firm approval.
Yamini Rangan: The bar for buying continues to be high, and we also see companies consolidating on fewer platforms that can help them grow. We're executing on our clear and proven playbook to drive growth in this environment. Let me step back and connect the dots on our playbook where we are seeing momentum this year and how this sets us up for both short and long-term success. Our playbook for executing in any macro is clear.
Speaker Change: The bar for buying continues to be high. We also see companies consolidating on fewer platforms that can help them grow.
Speaker Change: We are executing on our clear and proven playbook to drive growth in this environment.
Speaker Change: Let me step back and connect the dots on our playbook where we are seeing momentum this year and how this sets us up for both short and long term success.
Yamini Rangan: We solve for our customers, help them grow by providing an AI-powered customer platform, and drive the pace of innovation that can make it easy for customers to stay ahead. HubSpot excels when we know exactly who we are serving, and we have never been more clear. We are determined to delight growth professionals in marketing, sales, and service at scaling companies and help them grow. This focus on solving for customers and deep listening has resulted in clear momentum in customer acquisition. More importantly, it has led to strong retention, with customer dollar retention consistently in the high 80s.
Speaker Change: Our playbook for executing in any macro is clear. We solve for our customers, help them grow by providing an AI-powered customer platform, and drive the pace of innovation that can make it easy for customers to stay ahead.
Speaker Change: HubSpot excels when we know exactly who we are serving, and we have never been more clear. We are determined to delight growth professionals in marketing, sales, and service at scaling companies and help them grow.
Speaker Change: This focus on solving for our customers and deep listening have resulted in clear momentum in customer acquisition.
Speaker Change: More importantly, it has led to strong retention with customer dollar retention consistently in the high 80s.
Yamini Rangan: As a company, we're doubling down on our customers and are energized about helping them grow. The way we help them grow is by providing an AI-powered customer platform, which includes best-in-class engagement hubs, smart CRM that unifies customer data and teams, and a connected ecosystem with app and solution partners. This platform strategy is working as more customers consolidate on HubSpot to lower costs and drive growth. In June, we crossed over 1 million active app integrations installed by ProPlus customers, with more than 35% of them using 10 or more active app integrations.
Speaker Change: As a company, we're doubling down our focus on our customers and are energized about helping them grow.
Speaker Change: The way we help them grow is by providing an AI-powered customer platform, which includes best-in-class engagement hubs, smart CRM which unifies customer data and teams, and a connected ecosystem with app and solution partners.
Speaker Change: This platform strategy is working as more customers consolidate on HubSpot to lower cost and drive growth.
Speaker Change: In June , we crossed over 1 million active app integrations installed by ProPlus customers, with more than 35% of them using 10 or more active app integrations.
Yamini Rangan: Customers are bringing more data together within HubSpot and driving more insights from that data. In addition, we made a choice to embed AI in all of our hubs and within our smart CRM, and this strategy is beginning to pay off. The early traction with Content Hub and the step change and attach rate of Content Hub to Marketing Hub is just one example of that strategy. According to our customer Sandler, HubSpot AI has been a game changer for their marketing and sales teams, helping both groups create personalization at scale with messaging, actionable insights, and increasing new prospect engagement with our brand by 25%.
Speaker Change: Customers are bringing more data together within HubSpot and driving more insights from that data.
Speaker Change: In addition, we made a choice to embed AI in all of our hubs and within our smart CRM and this strategy is beginning to work. The early traction with Content Hub and the step change in attach rate of Content Hub to Marketing Hub is just one example of that strategy working.
Speaker Change: According to our customer Sandler.
Sandler: HubSpot AI has been a game changer for our marketing and sales teams, helping both groups create personalization at scale with messaging, actionable insights, and increasing new prospect engagement with our brand by 25%.
Yamini Rangan: Customers have an appetite to drive more growth powered by AI, and that's where we are focusing our efforts. In addition, we expanded support for sensitive data, which moved into beta in Q2. HubSpot's sensitive data solution makes it easy for customers to protect sensitive personal information to support their compliance with regulations like GDPR. This expands our opportunity to serve more customers in industries like healthcare, financial services, and insurance, and makes it easy for customers to manage complex compliance processes. Early adoption looks promising.
Speaker Change: Customers have an appetite to drive more growth powered by AI, and that's where we are focusing our efforts.
Speaker Change: In addition, we expanded support for sensitive data, which moved into beta in Q2.
Speaker Change: HubSpot's sensitive data solution makes it easy for customers to protect sensitive personal information to support their compliance with regulations like GDPR.
Speaker Change: This expands our opportunity to serve more customers in industries like healthcare, financial services, and insurance, and makes it easy for customers to manage complex compliance processes.
Yamini Rangan: Existing enterprise customers are using new features to manage sensitive data, and they're seeing higher conversion rates and average selling prices with new customers. Our pace of innovation and focused execution have been crucial to our success now and will help us grow in the long term. Reflecting on our results and progress, our strategy is working. I hope that it is abundantly clear. We run our business for the long term and are focused on solving for our customers, innovating our platform, and prioritizing strong execution.
Speaker Change: Early adoption looks promising. Existing enterprise customers are using new features to manage sensitive data, and they're seeing higher conversion rates and average selling prices with new customers.
Speaker Change: Our pace of innovation and focused execution have been crucial to our success now and will help us grow in the long term.
Speaker Change: Reflecting on our results and progress, our strategy is working. I hope that it is abundantly clear we run our business for the long term and are focused on solving for our customers, innovating our platform, and prioritizing strong execution. This has been and will continue to be our priority.
Yamini Rangan: This has been and will continue to be our priority. And that is what will continue to set us apart to drive durable growth and create long-term shareholder value. With that, I'll turn the call over to Kate to take you through our Q2 financial results.
Speaker Change: and that is what we'll continue to set us apart to drive durable growth and create long-term shareholder value
Speaker Change: With that, I'll turn the call over to Kate to take you through our Q2 financial results. Kate?
Kate Bueker: Thanks, Yamini. Now, let's turn to our second quarter 2024 financial results. Q2 revenue grew 21% year-over-year in constant currency and 20% on an as-reported basis. Subscription revenue grew 20% year over year, while services and other revenue increased 18% on an as-reported basis. Q2 Domestic revenue grew 20% year over year. International revenue growth was 22% in constant currency and 21% as reported, now representing 47% of total revenue. We added over 11,200 net customers in Q2, ending the quarter with a total customer count of 228,000, growing 23% year over year.
Kate Bueker: Thanks, Yamini. Let's turn to our second quarter 2024 financial results.
Kate Bueker: Q2 revenue grew 21% year-over-year in constant currency and 20% on an as-reported basis.
Kate Bueker: Subscription revenue grew 20% year-over-year, while services and other revenue increased 18% on an as-reported basis.
Kate Bueker: Q2 domestic revenue grew 20% year-over-year. International revenue growth was 22% in constant currency and 21% as reported, now representing 47% of total revenue.
Kate Bueker: We added over 11,200 net customers in Q2, ending the quarter with a total customer count of 228,000, growing 23% year-over-year.
Kate Bueker: Again this quarter, the strength in customer additions was driven by momentum at the low end. Average subscription revenue per customer was $11,200, down 2% year-over-year in both constant currency and on an as-reported basis. ASRPC continues to be driven by several offsetting facts.
Kate Bueker: Again this quarter, the Strength in Customer Additions was driven by momentum at the low end.
Kate Bueker: Average subscription revenue per customer was $11,200, down 2% year-over-year in both constant currency and on an as-reported basis.
Kate Bueker: ASRPC continues to be driven by several offsetting factors.
Kate Bueker: Positive impact from an increasing number of professional and enterprise customers adopting multiple hubs, offset by the headwind from the continued strong volume of lower ASP starter customers we've acquired over the last year. Gross retention held nicely in the high 80s, and net revenue retention was stable at 102%. While we continue to see strong customer dollar retention and downgrade trends, customer upgrade rates remain challenged, similar to Q1. We expect this behavior to continue in the back half of the year with net revenue retention holding around current levels. Calculated billings were $648 million in Q2, growing 20% year-over-year in both constant currency and as reported. The remainder of my comments will refer to non-GAAP measures.
Kate Bueker: A positive impact from an increasing number of professional and enterprise customers adopting multiple hubs.
Kate Bueker: Offset by the headwind from the continued strong volume of lower ASP starter customers we've acquired over the last year.
Kate Bueker: Gross retention held nicely in the high 80s, and net revenue retention was stable at 102%.
Kate Bueker: While we continue to see strong customer dollar retention and downgrade trends, customer upgrade rates remain challenged, similar to Q1.
Kate Bueker: we expect this behavior to continue in the back half of the year with net revenue retention holding around current levels
Kate Bueker: Calculated billings were $648 million in Q2, growing 20% year-over-year in both constant currency and on an as-reported basis.
Kate Bueker: The remainder of my comments will refer to non- GAAP measures .
Kate Bueker: Q2 operating margin was 17%, up 3 points compared to the year-ago period. This was driven by the continued impact of our go-to-market efficiency and infrastructure optimization efforts. Net income was $104 million in Q2, or $1.94 per fully diluted share. Free cash flow was $92 million in Q2, or 14% of revenue. Finally, our cash and marketable securities totaled $1.9 billion at the end of June. With that,
Kate Bueker: Q2 operating margin was 17%, up 3 points compared to the year-ago period, driven by the continued impact of our go-to-market efficiency and infrastructure optimization efforts.
Kate Bueker: Med income was $104 million in Q2, or $1.94 per fully diluted share.
Kate Bueker: Free cash flow was $92 million in Q2, or 14% of revenue.
Kate Bueker: Finally, our cash and marketable securities totaled $1.9 billion at the end of June .
Kate Bueker: Let's review our guidance for the third quarter and full year of 2024. As Yamini shared, we continue to operate in a challenging and volatile external environment, and our guidance assumes that the difficult demand environment persists through the back half of the year, but it does not get materially worse. For the third quarter.
Kate Bueker: With that, let's review our guidance for the third quarter and full year of 2024.
geominei: As Yamini shared, we continue to operate in a challenging and volatile external environment, and our guidance assumes that the difficult demand environment persists through the back half of the year, but it does not get materially worse.
Kate Bueker: Total as reported revenue is expected to be in the range of $646 to $647 million, up 16% year-over-year at the midpoint. We expect foreign exchange to be a slight headwind to as reported revenue growth in the quarter. Non-GAAP Operating profit is expected to be between $107 and $108 million. Non-GAAP Diluted Net Income Per Share is expected to be between $1.89 and $1.91. This assumes 53.5 million fully diluted shares outstanding and for the full year of 2024.
geominei: For the third quarter,
Speaker Change: Total as reported revenue is expected to be in the range of $646 to $647 million, up 16% year-over-year at the midpoint.
Kate Bueker: We expect foreign exchange to be a slight headwind to as-reported revenue growth in the quarter.
Kate Bueker: Nongap Operating Profit is expected to be between $107 and $108 million.
Kate Bueker: Non-gap diluted net income per share is expected to be between $1.89 and $1.91.
Kate Bueker: This assumes 53.5 million fully diluted shares outstanding.
Kate Bueker: Total as reported revenue is now expected to be in the range of $2.567 to $2.573 billion, up 18% year-over-year at the mid-period. We now expect foreign exchange to have a neutral impact on as reported revenue growth for the full year. Non-GAAP operating profit is now expected to be between $437 and $441 million, and non-GAAP diluted net income per share is now expected to be between $7.64 and $7.70. This assumes 53.4 million fully diluted shares outstanding.
Kate Bueker: And for the full year of 2024, total as reported revenue is now expected to be in the range of $2.567 to $2.573 billion, up 18% year-over-year at the midpoint.
Kate Bueker: We now expect foreign exchange to have a neutral impact to as reported revenue growth for the full year.
Kate Bueker: non-GAAP operating profit is now expected to be between $437 and $441 million.
Kate Bueker: non-GAAP diluted net income per share is now expected to be between $7.64 and $7.70. This assumes 53.4 million fully diluted shares outstanding.
Kate Bueker: As you adjust your models, please keep in mind the following. We now expect CapEx as a percentage of revenue to be 4 to 5% and free cash flow to be about $380 million for the full year of 2024, with seasonally stronger free cash flow in Q4. And with that, I will hand things back over to Yamini for her closing remarks.
Speaker Change: As you adjust your models, please keep in mind the following.
Kate Bueker: we now expect capex as a percentage of revenue to be four to five percent and free cash flow to be about three hundred and eighty million dollars for the full year of two thousand and twenty-four was seasonally stronger free cash flow in q four
Kate Bueker: And with that, I will hand things back over to Yamini for her closing remarks.
Yamini Rangan: Thank you so much, Kate. To close out, we have a large opportunity ahead of us, and we are well on our way to becoming the number one customer platform for scaling companies. Our pace of innovation is high, and our focus on driving usage and value with our customer platform and AI is clear. I look forward to seeing many of you at our Analyst Day at InBound on September 18th and sharing the progress we've made this year and the confidence we have in building an enduring company.
Yamini Rangan: Thank you so much, Kate. Close out. We have a large opportunity ahead of us and we are well on our way to becoming the number one customer platform for scaling companies.
Yamini Rangan: Our pace of innovation is high and our focus on driving usage and value with our customer platform and AI is clear.
Kate Bueker: I look forward to seeing many of you at our Analyst Day at InBound on September 18th and sharing the progress we've made this year and the confidence we have in building an enduring company.
Yamini Rangan: I want to thank our customers, partners, and investors for the continued support, and a huge, huge thank you to all HubSpotters around the world for staying focused on solving problems for our customers every single day. With that, operator, let's please open up the call for questions.
Kate Bueker: I want to thank our customers, partners, and investors for the continued support. And a huge, huge thank you to all HubSpotters around the world for staying focused on solving for our customers every single day.
Speaker Change: With that, Operator, let's please open up the call for questions.
Operator: Thank you. If you would like to ask a question, please dial star followed by 1 on your telephone keypad now. If you change your mind, please dial star followed by 2 to exit the queue. When preparing to ask your question, please ensure that your phone is unmuted.
Speaker Change: Thank you. If you would like to ask a question, please dial star followed by 1 on your telephone keypad now. If you change your mind, please dial star followed by 2 to exit the queue.
Speaker Change: When preparing to ask your question, please ensure that your phone is unmuted locally.
Operator: And finally, in the interest of hearing from as many of you as possible, please limit yourselves to just one question each. And our first question today is from the line of Samad Samana of Jeffreys. Please go ahead. Your line is open.
Speaker Change: And finally, in the interest of hearing from as many of you as possible, please limit yourselves to just one question per person.
Speaker Change: And our first question today is from the line of Samad Samana of Jeffreys. Please go ahead, your line is open.
Samad Samana: Thank you. Hi Yamini and Kate and everybody. Thanks, as always, for your time. Good evening.
Sumad Samana: Thank you. Hi, Yamini and Kate and everybody. Thanks, as always, for the time. Good evening. Yamini, it's great to see the growth sustain and stabilize above 20%.
Yamini Rangan: Yamini, it's great to see the growth sustain and stabilize above 20%. One of the things that we're particularly curious about is where growth has changed the most in the portfolio over the last six months. So, i.e., like, how did the growth rates across the main hubs look and have they all slowed in an equal manner? Is there a particular hub where new business growth has reaccelerated or is doing better than expected? Just curious if we can maybe peel that back a little bit. Thank you so much.
Speaker Change: One of the things that we're particularly curious about is where growth has changed the most in the portfolio over the last six months. So, i.e., like how did the growth rates across the main hubs?
Speaker Change: look and have they all flowed in an equal manner? Is there a particular hub where new business growth has reaccelerated or is doing better than expected? Just curious if we could maybe peel that back a little bit. Thank you so much.
Yamini Rangan: Hey Samad, thank you so much for the question. I appreciate your support as always.
Samantha: Hey Samad, thank you so much for the question. I appreciate your support as always. I'd say the answer starts with our strategy of becoming a customer platform for scaling companies.
Yamini Rangan: I'd say the answer starts with our strategy of becoming a customer platform for scaling companies. And when we sat down to think about that strategy, we said that we were going to build best-in-class engagement hubs, but most importantly, we were going to build a platform that unifies data insights across all of those hubs. And if I were to point to 1 thing that we've seen in the last few quarters, it would be the multi hub momentum.
Sumad Samana: And when we set on that strategy, we said that we're going to build best-in-class engagement hubs, but most importantly, we're going to build a platform that unifies
Sumad Samana: Data insights across all of those hubs. And if I were to point to one thing that we're seeing in the last few quarters, it is the multi-hub momentum.
Yamini Rangan: And I said this during the prepared remarks, there are more common combinations of multi hub wins that we're seeing, starting with our front doors of marketing sales, followed by sales, marketing, and service. And then, certainly, this past quarter, we saw more content hubs attached to the primary hubs. And maybe if I step back and approach this from a customer perspective, our customers acquired a bunch of point solutions, and they are struggling to integrate all of those data points into actionable insights and control the cost. And they're looking for much better ways to be able to get all of that information into a single platform. And we are that platform of choice.
Sumad Samana: And, you know, I said this during the prepared remarks, there are more common combinations of multi-hub wins that we're seeing, starting with our front doors of marketing sales, followed by sales
Sumad Samana: Marketing and Service and then certainly this past quarter we saw more content hub attached to the primary hubs.
Sumad Samana: And maybe if I step back.
Sumad Samana: And approach this from a customer perspective. Our customers acquired a bunch of point solutions and they are struggling to integrate all of those data points into actionable insights and to, you know, control the cost.
Operator: We're able to connect all of the data across marketing, across sales, across service into a single platform. And the power of HubSpot is not just in a specific hub. It's really in the insights that we deliver across multiple hubs in the platform. And so if there is a story to take away, it's really that multiple hubs are gaining momentum across the past few.
Sumad Samana: And they're looking for much better ways to be able to get all of that information into a single platform. And we are that platform of choice.
Sumad Samana: We're able to connect, you know, all of the data across marketing, across sales, across service into a single platform, and the power of HubSpot is not just in a specific hub. It's really in the insights that we deliver across multiple hubs in the platform. And so if there is a story to take away, it is really that multiple hubs is gaining momentum across the past few quarters.
Operator: Thank you. Our next question today is from the line of Mark Murphy of J.P. Morgan. Please go ahead. Your line is now open.
Mark Murphy: Thank you. I'll add my congratulations on a very nice execution in a difficult environment.
Speaker Change: Thank you. Our next question today is from the line of Mark Murphy of J.P. Morgan. Please go ahead, your line is now open.
Yamini Rangan: And just continuing on that point that you just made, Yamini, I was wondering if you could update on that phenomenon in terms of the traction of your payments product. Since it became one of your primary colors, I'm wondering how the customer activity is evolving there beyond simple, you know, payment processing and moving into what you just described, the ability to produce a quote, build a line item, and CRM, kind of track it across the whole HubSpot platform, maybe kicking off other actions. Is that the behavior that you see evolving and related to that? Just wondering if there is any way you could characterize the payment volume or kind of monetization you're seeing in payments.
Speaker Change: Thank you. I'll add my congrats on very nice execution in a difficult environment.
Speaker Change: And just continuing on that point that you just made, Yamini.
Mark Murphy: I was wondering if you can update on that phenomenon in terms of traction of your payments product since it became one of your primary colors. I'm wondering how the customer activity is evolving there beyond
Speaker Change: Simple, you know, payment processing and moving into what you just described, the ability to produce a quote, fill the line items in the CRM.
Speaker Change: kind of track it across the whole HubSpot platform, maybe kicking off other actions. Is that behavior that you see evolving and related to that? Just wondering if there is any
Speaker Change: anyway you could characterize the payment volume or kind of moni monetization you're seeing in payments
Yamini Rangan: Hey Mark, thanks a lot for that question. I think, you know, the way to think about it is exactly the way you posed the question, which is that it is a part of that connected platform. Everything comes down to that.
Theymar: Hey, Mark. Thanks a lot for that question. I think, you know, the way to think about it is exactly the way you posed the question, which is it is a part of that connected platform. Everything comes down to that. When we got started on the payments journey, we had a very key hypothesis in terms of the value that we can add to customers, which is bringing commerce data, transaction data, payments data into the CRM is going to be valuable for our customers. And we are certainly seeing that play out in terms of the payments journey. As you know, last year, we expanded payments to be able to support other processes and bring for customers to bring their own processes like Stripe.
Yamini Rangan: When we got started on the payments journey, we had a very key hypothesis in terms of the value that we can add to customers, which is bringing commerce data, transaction data, and payment data into the CRM is going to be valuable for our customers. And we are certainly seeing that play out in terms of the payments journey. As you know, last year, we expanded payments to be able to support other processes and allow customers to bring their own processes like Stripe.
Yamini Rangan: And that has had the impact of opening up our opportunity and having more customers, more international customers, come on to our payments platform. And certainly from a functionality perspective, we have continued to drive innovation. The bigger area of focus for us this year has been driving product-led growth for our payments platform. And you can see this within our navigation. You can see it within our product.
Theymar: That has had the impact of opening up our opportunity and having more customers, more international customers come onto our payments platform. And certainly from a functionality perspective, we have continued to drive innovation. The bigger area of focus for us this year has been driving product-led growth for our payments. And you can see this within our navigation. You can see it within our product. You can access payments directly from our navigation bar now. And that has continued to improve the discoverability of payments.
Yamini Rangan: You can access payments directly from our navigation bar now, and that has continued to improve the discoverability of payments. In terms of payments volume, we've seen really good payments volume. We've seen the number of monthly transacting customers grow into the thousands, and we're very pleased with the momentum there. And the other thing that we have seen is that when customers transact with HubSpot, the percentage of the revenue that they're flowing through HubSpot is much higher than we had expected.
Speaker Change: In terms of payments volume, we've seen really good payments volume, we've seen the monthly transacting customers grow into the thousands, and we're very pleased with the momentum there. And the other thing that we have seen is that when customers transact with HubSpot, the percentage of the revenue that they're flowing through HubSpot is much higher than what we had expected.
Yamini Rangan: Now, all of this is good, but I would continue to say that this is a longer-term bet. And we are, you know, while we feel really good about the progress, it is a strategic bet. And we are willing to be very strategically patient as we continue to see the progress within that. But again, it would come back to the value of our customer platform within each of our hubs as well. Thank you so much for the questions.
Theymar: Now, all of this is good, but I would continue to remain that this is a longer-term bet, and we are, you know, while we feel really good with the progress, it is a strategic bet, and we are willing to be very strategically patient as we continue to see the progress within that. But again, it would come back to the value of our customer platform within each of our hubs as well as commerce. Thank you.
Operator: Our next question today is from the line of Brad Sills of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Speaker Change: Thank you so much for the questions.
Brad Sills: Oh, great. Thank you so much.
Speaker Change: Our next question today is from the line of Brad Sills of Bank of America Merrill Lynch. Please go ahead, your line is open.
Yamini Rangan: And it is great to see the progress with the multi-hub deals. I guess I wanted to go back to a comment that was made earlier in the call that, you know, the upgrade environment is challenging. And that's been the reason behind some of the delays here in, you know, that are macro-related to some of the larger deals. I guess on that note, is it also due to the fact that you're seeing these multi-hub deals, more multi-department deals, more strategic kind of deals that could also be, you know, requiring more board level approval, more multi-departmental sign off, that's also causing this delay?
Brad Sills: Oh, great. Thank you so much. And great to see the progress with the multi hub deals. I guess I wanted to go back to a comment that was made earlier in the call that, you know, the upgrade environment is challenging. I guess
Speaker Change: And that's been the reason behind some of the delays here in
Speaker Change: I guess on that note, is it also due to the fact that you're seeing these multi-hub deals, more multi-department deals,
Yamini Rangan: In other words, how much of this is macro that's causing some of the delays you're seeing, you know, versus the fact that HubSpot is now becoming more of a platform, you know, company that is seeing, you know, multi-hub deals?
Speaker Change: More strategic kind of deals that could also be, you know, requiring more, you know, board-level approval, more multi-departmental sign-off, that's also causing this delay. In other words, how much of this is macro that's causing some of the delays you're seeing, you know, versus the fact that HubSpot is now becoming more of a platform, you know, company that is seeing, you know, multi-hub deals.
Yamini Rangan: Hey Brad, thanks a lot for the question. So in terms of the macro environment, very consistent with what we saw in Q1, and what we described as customer trends, which is slower decision making, committee buying, and high scrutiny of budgets, certainly requiring board and other approval, that does lead to lengthening of the deal cycle. And we talked about that. Now, the counterplay for that is that, as we talk to customers, they want to consolidate on fewer platforms, and HubSpot is becoming that platform.
Speaker Change: Hey Brad, thanks a lot for the question. So in terms of the macro environment.
Speaker Change: very consistent with what we saw in Q1. And what we described as customer trends is slower decision making.
Brad Sills: Committee buying and high scrutiny of budget, certainly requiring board and other approval, that does lead to lengthening of the deal cycle, and we talked about that.
Speaker Change: Now, the counter play for that is that as we talk to customers, they want to consolidate on fewer platforms, and HubSpot is becoming that platform. So in fact, we see that, you know, there's a lot more value that we can add by providing an organic customer platform. And so that actually speeds up the deal. So there's like counterbalancing impact of what we see from the macro to the trend that we see in terms of consolidating to fewer platforms. So I would say that those two play off each other. Broadly, when we talk to customers, you know, even when they are not ready to make a decision, it's mostly not now for HubSpot.
Yamini Rangan: So, in fact, we see that, you know, there's a lot more value that we can add by providing an organic customer platform. And so that actually speeds up the deal. So there's a counterbalancing impact of what we see from the macro to the trend that we see in terms of consolidating to fewer platforms. So I would say that those two play off each other. Broadly, when we talk to customers, you know, even when they are not ready to make a decision, it's mostly not now for HubSpot and not necessarily a no. And they always come back a few quarters or even a few months later and see the value of consolidating on HubSpot.
Speaker Change: And not necessarily a no, and they always come back a few quarters or even a few months after and see the value of consolidating on HubSpot.
Operator: Thank you. Our next question is from the line of Aleks Zukin of Wolf Research. Please go ahead. Your line is open.
Aleks Zukin: Hey guys, thanks for taking the question. And congrats on solid execution in a difficult environment.
Speaker Change: Thank you. Our next question is from the line of Alex Zukin of Wolf Research. Please go ahead. Your line is open.
Aleks Zukin: I want to ask you a two part question because it occurs to me that just on the margin side, that's the sequential margin improvement that you guys saw some of the best I think you've ever posted. And particularly if I look at the sales and marketing line, so maybe just walk through kind of where that leverage is coming from, where it can go. And then separately, if you look at your cash position today, $2 billion or so with really, really strong free cash flow generation, as you think more about that consolidation of tools and stack, maybe Yamini, your viewpoint, given the private market environment and the plethora of assets available there, kind of how does HubSpot look at this opportunity set to continue to broaden that value drop?
Alex Zukin: Hey guys, thanks for taking the question and congrats on solid execution in a difficult environment.
Alex Zukin: I want to ask a two-parter because...
Alex Zukin: It occurs to me that, just on the margin side, that sequential margin improvement that you guys saw, some of the best I think you've ever posted,
Alex Zukin: and particularly if I look at the sales and marketing line.
Speaker Change: So, maybe just walk through...
Speaker Change: oh
Speaker Change: Kind of where that leverage is coming from, where it can go.
Speaker Change: And then separately, if you look at your cash position today,
Speaker Change: Yeah, $2 billion or so with
Speaker Change: Really, really strong free cash flow generation. As you think more about that consolidation of
Speaker Change: of tools and stack.
Yamini Rangan: And maybe, Yamini, your viewpoint, given the private market environment and the plethora of assets available there, kind of how does HubSpot look at this opportunity set to continue to broaden that value proposition?
Kate Bueker: Maybe I'll start, Yamini, with the margin question, and then you can dive in. Thanks, Aleks, although I will note the sharp violation of the one-question rule.
Speaker Change: Maybe I'll start, Yamini, with the margin question and then you can dive in. Thanks, Aleks, although I will note the sharp violation of the one-question rule. We were very pleased with the margin performance that we had in Q2. Operating margins did come in a little bit better than we had expected. Revenue came in a little bit better, including some help from ESSEC, and then we had a modest shift out of expenses from Q2 into the back half of the year. That said...
Kate Bueker: We were very pleased with the margin performance that we had in Q2. Operating margins did come in a little bit better than we had expected. Revenue came in a little bit better, including some help from ESSEC, and then we had a modest shift out of expenses from Q2 into the back half of the year. That said, the primary drivers of year-over-year leverage were really two things. One was improvements on the growth margin side.
Speaker Change: The primary drivers of year-over-year leverage were really two things. One was
Kate Bueker: Our team has had some really nice wins optimizing our core product infrastructure, and you're starting to see the impact there. And, as you noted, we are also continuing to make some progress here on driving go-to-market efficiency. I would note a particular strength there in services and support.
Speaker Change: Improvements on the growth margin side. So our team has had some really nice wins optimizing our core product infrastructure, and you're starting to see the impact there.
Yamini Rangan: And as you noted, we are also continuing to make some progress here on driving go-to-market efficiency. I would note a particular strength there in services and support.
Yamini Rangan: Yeah, and in terms of our strong balance sheet position, as well as how we plan to use it, look, it really comes down to our philosophy that we want to build a beautifully crafted customer platform for customers. Now, the traditional playbook has been acquiring your way to growth.
Speaker Change: Yeah, and in terms of, you know, a strong balance sheet position as well as how we plan to use it, look, it really comes down to our philosophy.
Yamini Rangan: that we want to build a beautifully crafted customer platform for customers. Now, the traditional playbook has been acquiring your way to growth. We think that is detrimental for customers' growth, and we have always prioritized customers' experience and customer growth. So, as we look at potential ways in which we can continue to expand platforms, we'll do so organically. We'll certainly look at technology and talent that will allow us to move faster on product innovation, but we will also make sure that we are doing that without disrupting our customers' experience and making sure it is really seamless.
Yamini Rangan: We think that is detrimental for customers' growth. And we have always prioritized customers' experience and, you know, customer growth. So, as we look at, you know, potential ways in which we can continue to expand platforms, we'll do so organically. We'll certainly look at technology and talent that will allow us to move faster on product innovation, but we will also make sure that we are doing that without disrupting our customers' experience and making sure it is really seamless.
Yamini Rangan: So, you know, we've certainly done things like clear bed, but in both cases, we have really spent the time to integrate it back into the customer platform to deliver on the promise of the customer experience. And so you can expect us to continue to do that.
Yamini Rangan: We've certainly done things like Clearbit as well as PySync, but in both cases we have really spent the time to integrate it back into the customer platform to deliver on the promise of customer experience. And so you can expect us to continue to do that.
Operator: Our next question is from the line of Brent Bracelin of Piper Sandler. Please go ahead, your line's open.
Yamini Rangan: the
Speaker Change: Our next question is from the line of Brent Bracelin of Piper Sandler. Please go ahead, your line's open.
Brent Bracelin: I think you take a question here. I wanted to go back and touch base on the generative AI journey here. I think it was about a year ago that you guys first started talking about and integrating AI into the platform. I know early on, we had fears that that might be a drag on margins as you took on additional costs. But if I look at the margins, the gross margins, they've actually gone up in the past year.
Speaker Change: I think you take a question here. I wanted to go back and touch base around the generative AI journey here. I think it was about a year ago you guys first started talking about and integrating AI into the platform. I know early on we had fears that that might be a drag on margins as you take on additional costs. But if I look at margins, gross margins, they've actually gone up in the past year. So what have you learned as you've integrated AI into the platform? The opportunity for HubSpot to leverage AI and what parts of the AI strategy are you confident it's going to work and other parts of the AI opportunity? Do you think there's less optimism? Thanks.
Brent Bracelin: So, what have you learned as you've integrated AI into the platform? The opportunity for HubSpot to leverage AI, and what parts of the AI strategy are you confident are going to work, and other parts of the AI opportunity? Do you think there's less optimism? Thanks.
Speaker Change: It's a great question. It has been a year plus and I think we started launching our AI innovation in March last year and our
Yamini Rangan: It's a great question. It has been a year plus, and I think we started launching our AI innovation in March last year, and our strategy has been twofold. The first one is that we would embed AI into our hubs and into the whole platform. That is, we're not going to charge a separate cost for AI or build a separate SKU.
Yamini Rangan: Strategy has been twofold.
Yamini Rangan: The first one...
Yamini Rangan: is that we would embed AI into our hubs and into the whole platform. That is, we're not going to charge a separate cost for AI or build a separate SKU.
Yamini Rangan: And the rationale behind that strategic choice was to remove friction for our customers, to introduce as much innovation to their day-to-day work, and then drive adoption. And if you look at that strategy, it is working. And the best example that I can kind of say that that strategy is working is Content Hub. So, as you know, we just relaunched Content Hub as part of Spotlight.
Speaker Change: And the rationale behind that strategic choice was to remove friction for our customers, to introduce as much innovation to their day-to-day work, and then drive adoption. And if you look at, you know, that strategy, it is working.
Yamini Rangan: And the best point that I can kind of like say that that strategy is working is content hub.
Yamini Rangan: And if you look at the features that are driving adoption, as well as the higher attach rate of Content Hub, it's all AI features. Content Remix, our reps, our partners, love actually showcasing Content Remix to our customers. And when customers see Content Remix, they immediately get, like, excited, and they're beginning to adopt it. Because, you know, you can take one piece of content, maybe a written blog, and turn that into videos, into social posts, into emails, and it does so beautifully and saves customers a ton of time.
Yamini Rangan: So as you know, we just relaunched Content Hub as part of Spotlight, and if you look at the features that are driving adoption, as well as the higher attach rate of Content Hub, it's all AI features.
Yamini Rangan: Content Remix. Our reps, our partners, love actually showcasing Content Remix to our customers. And when customers see Content Remix, they immediately get excited and they're beginning to adopt. Because you can take one piece of content, maybe a written blog, and convert that into videos, into social posts, into emails, and it does so beautifully and saves customers a ton of time. And so we're finding that our strategy of embedding into the hub and platform is working well.
Yamini Rangan: And so, we're finding that our strategy of embedding into the hub and platform is working well. The second bet that we said is that we want to add a ton of value before we begin to monetize value separately. And that is also playing out.
Speaker Change: The second bet to be said is...
Speaker Change: We want to add a ton of value before we begin to monetize value separately, and that is also playing out.
Yamini Rangan: Part of what we want to see is repeat usage by customers. And we're definitely seeing traction in the enterprise and pro tiers, which is where we have driven adoption. But we're also going to be very principled about making sure that the value is repeat value before we begin to monetize. And so I think those are things that are working.
Speaker Change: Part of what we want to see is
Yamini Rangan: repeat usage of customers. And we're definitely seeing traction in enterprise and pro tiers, which is where we have driven adoption. But we're also going to be very principled about making sure that the value is repeat value before we begin to monetize. And so I think those are things that are working. Look, if I maybe take a step back and say,
Kate Bueker: Look, if I maybe take a step back and say, how is AI developing? There's just a, you know, it's kind of developing the same way the internet did. It starts with the networking infrastructure layer, and it starts with large language models, and it takes a while for application innovation to take place. And we are very quick in terms of innovation but strategically patient in terms of seeing this technological transformation take shape for a customer.
Speaker Change: How is AI developing? There's just a, you know, it's kind of developing the same way internet did. It starts with the networking infrastructure layer. It starts with large language models, and it takes a while for application innovation to take place. And we are very quick in terms of innovation, but strategically patient in terms of seeing this technology transformation take shape for our customers.
Kate Bueker: Just one quick note to add, since we're talking about margins, developments we've seen in the AI industry overall are this continuous and relatively dramatic reduction in the cost for these flagship models, right? So we've seen OpenAI has kind of led the field, Quad came out with a comparable flagship model that's close to GPT. There are open source models now, and OpenAI just announced another 30 to 50% reduction in price. So we're seeing dramatic decreases in the cost of actually rolling out these AI features. So we're not anticipating any impact on margin in the near term.
Speaker Change: just one of ick no dastsions we're tal about margins that developments we see intheai industry overall is this continuous and rrelatively dramatic reduction in the cost for these flagship models right so we've seen open i look i led the field clock came out with a comparable fl of model thats st the g pt there open source models now and open i just announced other thirty to fifty percent reduction in frice so we're seeing
Speaker Change: Dramatic decreases in the cost of actually rolling out these AI features, so we're not anticipating any impact to margin in the near term.
Operator: Thank you. Our next question today is from the line of Gabriela Borges of Cogman Sachs. Please go ahead. Your line is open. Good afternoon, thanks for taking the question. Yamini, I wanted to follow up on the
Operator: Thank you. Our next question today is from the line of Gabriela Borges of Goldman Sachs. Please go ahead. Your line is open.
Speaker Change: Thank you. Our next question today is from the line of Gabriela Borges of Goldman Sachs. Please go ahead, your line is open.
Gabriela Borges: Good afternoon, thanks for taking the question. Yamini, I wanted to follow up on the prepared remarks around HubSpot achieving HIPAA compliance.
Gabriela Borges: Help us understand how meaningful this milestone is. Is there a way to think about...
Speaker Change: What percentage of deals perhaps you wouldn't be invited to because you didn't have HIPAA compliance or how much this expands the time opportunity for you because you now have access to those customers and health care and financials. Any caller that would be helpful.
Yamini Rangan: Yeah, Gabrielle, thank you so much for that question. And yes, we are pretty excited about this fairly big milestone. Our partners, you know, are super excited about this. Our customers are excited about it, too. And maybe just to take a step back, what we announced in Q2 is that we're making it easy for customers to protect sensitive personal information to be able to support compliance with regulations like GDPR and HIPAA. And what that means is that we will now support audit logging, authentication features, account security recommendations, and all of those things that customers need.
Speaker Change: Yeah, Gabrielle, thank you so much for that question. And yes, we are pretty excited about this fairly big milestone. Our partners, you know, are super excited. Our customers are excited about this. And maybe just to take a step back, what we announced in Q2 is that we're making it easy for customers to protect sensitive personal information to be able to support compliance with regulations like GDPR and HIPAA. And what that means is that we will now support audit logging, authentication features, account security recommendations, all of those things that customers need. But more importantly, it is going to help us open up our TAM and be able to protect sensitive personal information.
Yamini Rangan: But more importantly, it is going to help us open up our TAM and be even better at addressing the needs of customers in verticals like healthcare, financial services, and insurance. And this is a super exciting longer-term opportunity. And we think that it's really going to make HubSpot a great solution for those verticals and customers with those kinds of use cases. And in terms of Q2, the momentum out of the gate and the customer interest has been very good to see.
Speaker Change: We are even better at addressing the needs of customers in verticals like health care, financial services, and insurance, and this is a super exciting longer term opportunity and we think that it's really going to make HubSpot a great solution for those verticals and customers with those kinds of use cases.
Yamini Rangan: The majority of the activations are from our enterprise customers, which is really not surprising because they have the most sophisticated needs in terms of managing sensitive data. We have seen healthy pickup, both in terms of ASP as well as conversion rates in terms of those areas. And so there's a lot more to come, but it certainly makes us an even better fit in larger portions of the market. Our next question today is from the line of Elizabeth Porter of Morgan Stanley. Please go ahead. Your line is open. Great, thank you very much for the question. I wanted to ask about the net new customer ads in the quarter.
Speaker Change: And in terms of Q2, the momentum out of the gate and the customer interest has been very good to see. Majority of the activations are from our enterprise customers, which is really not surprising because they have the most sophisticated needs in terms of managing sensitive data. We have seen healthy pickup, both in terms of ASP as well as conversion rates in terms of those areas. And so there's a lot more to come, but it certainly makes us an even better fit in larger portions of the market.
Operator: Our next question today is from the line of Elizabeth Porter of Morgan Stanley. Please go ahead. Your line is open.
Speaker Change: Our next question today is from the line of Elizabeth Porter of Morgan Stanley. Please go ahead, your line is open.
Elizabeth Porter: Great, thank you very much for the question. I wanted to ask about the net new customer ads in the quarter. When we back out clear a bit from last quarter, it does look like ads improved sequentially, and it sounds like we're starting to see some of the benefit from higher new logos under the new pricing model.
Speaker Change: So my question is how should we think about the unlock to volume of new customers under the new pricing model and any change to the initial view for the roughly 10K ads per quarter through the year? Thank you.
Kate Bueker: Yeah, thanks, Elizabeth. We are encouraged by another quarter of really strong customer additions. You heard from me in the prepared remarks that the strength was really, again, driven by another healthy quarter of additions really at that low end, which is a trend that we've been seeing now for call it four to six quarters. You know, as we have been said before, I mean, you've heard it from me before, net customer addition is not an input metric for us. It is an output metric.
Speaker Change: yeah thank theliliveth we are encouraged by another quarter really strong customer additition you heard from me in the prepared marks that the strength what really again driven by another healthy court quarter of editions really at that low end which is a trend that we've been seeing now for call it for to six quarters
Speaker Change: um
Speaker Change: You know, as we have seen said before, I mean, you've heard it from me before, net customer addition is not an input metric for us. It is an output metric. And it's a trend that moves around from quarter to quarter.
Kate Bueker: And it's a trend that moves around from quarter to quarter. You know, given the volume is really at that low end, if you think about it, in any given quarter, we typically would be running multiple experiments within the STAR customer base. And the experiments would be from things like optimizing purchase flows, optimizing activation, there may be pricing and packaging plays, there may be top of funnel demand kind of plays in any quarter. And so it's hard to kind of tease out one impact from another, just given how many different things could be going on. In particular, it's hard to tease out the impact of the
Speaker Change: You know, given the volume is really at that low end, if you think about in any given quarter, we typically would be running multiple experiments within the STAR customer base.
Speaker Change: And the experiments would be from things like optimizing purchase flows, optimizing activation, there may be pricing and packaging plays, there may be top of funnel demand kind of plays in any quarter.
Speaker Change: And so it's hard to kind of tease out one impact from another, just given how many different things could be going on. In particular, it's hard to tease out the impact of the new season.
Kate Bueker: Pricing Model. What I would highlight is that for Q2, we did see a nice step up in pro customer additions, which I would be able to associate, or I would assume would associate more directly with the CBA. Now, all that said, as I think about the back half of the year, we will start to have a number of pretty large cohorts from a year ago that are going to come up for renewal in the next couple of quarters.
Speaker Change: pricing model what i would highlight is that for q two we did see a nice step up im pro customer addeditions which i would be able to associate or would assume to associate more directly with the se tht
Speaker Change: Now, all that said, as I think about the back half of the year, we will start to have a number of pretty large cohorts from a year ago that are going to come up for renewal in the next couple of quarters.
Kate Bueker: And sort of given the combination of those large cohorts that are coming up for renewal and the fact that you've heard from both Yamini and myself that we continue to see macro weakness, particularly in small business, my expectation for net ads in the back half of the year is $9,000 to $10,000. The next question today is from the line of Terry Tillman of Truist. Please go ahead. Your line is open.
Speaker Change: And sort of given the combination of those large cohorts that are coming up for renewal, and the fact that you've heard from both of Yamini and myself that we continue to see macro weakness, particularly in small business.
Speaker Change: My expectation for net ads in the back half of the year is $9,000 to $10,000 per quarter.
Speaker Change: The next question today is from the line of Terry Tillman of Truist. Please go ahead, your line is open.
Dominique Manza: Hi, this is Dominique Manza on for Terry. Thanks for taking the question. So just looking at some of the significant currency moves recently, I'm just curious as to whether your foreign exchange outlook has changed at all and if you're thinking about any additional hedging strategies.
Operator: Yeah, thanks so much for the question. You are absolutely right.
Speaker Change: Yeah, thanks so much for the question. You are absolutely right. Currency has been incredibly volatile here over the last period of time. We tried to provide some guidance or some perspective in our guidance. At this time last quarter, we were expecting
Speaker Change: A bit of a headwind to the year from currency and we are basically neutral for the year.
Kate Bueker: Currency has been incredibly volatile here over the last period of time; we tried to provide some guidance or some, you know, perspective in our guidance. At this time last quarter, we were expecting, you know, a bit of a tailwind for the full year from currency, and I'm sorry, a bit of a headwind for the year from currency, and we are basically neutral for the year. In terms of hedging, you'll see in our 10-Q, we have started to do cash flow hedging.
Dominique Manza: In terms of hedging, you'll see in our 10-Q, we have started to do cash flow hedging that has some very modest impact on overall revenue.
Operator: That has some very modest impact on overall. The next question is from the line of Parker Lane of Stiefel. Please go ahead. Your line is open. Yeah, hi, thanks for taking the question. Yamini, you cited a bunch of really healthy metrics on the service.
Speaker Change: The next question is from the line of Parker Lane of Stiefel. Please go ahead, your line is open.
Parker Lane: Yeah, hi, thanks for taking the question. Yamini, you cited a bunch of really healthy metrics on the service side of the business, including the 100 plus seat
Parker Lane: Customer Cohort being up 55%. I was wondering if you could talk about maybe two or three of the features that came out as part of the relaunch that are most appealing to those larger customers, and if the composition of the competitors has changed at all, given the number of features you brought to the table.
Yamini Rangan: Yeah, thank you, Parker, for that question. I am excited about the innovation within Service Hub, and I'm also very excited to see customer adoption. You know, there were probably three big things that happened with the Spotlight and Service Hub relaunch in April. The first is that, for the first time, we are actually serving the customer success persona within our customers, and that brings together the customer success and support teams. We know customer success leaders right now care a lot about retention, and that is why we launched a new workspace specifically for customer success managers to be able to track and manage their book of business.
Parker Lane: Yeah, thank you, Parker, for that question. I am excited about the innovation within Service Hub, and I'm also very excited to see customer adoption.
Speaker Change: You know, there were probably...
Speaker Change: Three big things that happened with the Spotlight and Service Hub relaunch in April . The first is that
Dominique Manza: For the first time, we are actually serving the customer success persona within our customers, and that brings together customer success and support teams.
Dominique Manza: We know customer success leaders right now care a lot about retention, and that is why we launched a new workspace specifically for customer success managers to be able to track and manage their book of business, and that's certainly very welcome by our customers.
Yamini Rangan: And that's certainly very welcome by our customers. The second is that we did a complete overhaul of the help desk, which now has a new and unified ticket and conversation interface. And with the new unified help desk interface, we have seen a 200% increase in the number of portals closing.
Parker Lane: The second is that we did a complete overhaul of helpdesk, which now has
Dominique Manza: New and Unified Ticket and Conversation Interface.
Dominique Manza: And with the new unified helpdesk interface, we have seen a 200% increase in the portals, closing tickets in helpdesks.
Dominique Manza: and an increase in the number of portals that are closing 20 plus tickets so it's
Speaker Change: showing that be you know kind of continuing to drive the usage there and then i would say maybe the last thing is that it's not one you a specific enterprise feature but it's a whole set of features that we have launched like advanced sla more robust drrouting better support management all of which
Speaker Change: is aimed at serving our upmarket customers who just need much more sophisticated needs for their support teams. And as you rightly pointed out, that is leading to 100 plus service hub seats. But I will also tie this back to my earlier comment about platform. The momentum that we see in service hub is not just a hub specific momentum. It is really the value of having service sales and marketing teams work together and have this single unified view of their customer. That is what we are really pleased about.
Operator: Thank you. The next question is from the line of Ken Wong of Oppenheimer. Please go ahead. Your line is open.
Speaker Change: Thank you. The next question is from the line of Ken Wong of Oppenheimer. Please go ahead, your line is open.
Ken Wong: Great, appreciate you guys giving me a question. I just wanted to circle up on a dynamic you guys called out last quarter where you guys saw a shift towards lower quality leads. Just wondering if that's normalized back to partner source leads or is that still an issue you guys are running into?
Ken Wong: Ken, thank you so much. Yes, it has normalized back. It's really in a healthy place right now. And maybe just to step back, in Q1, we shared that we saw a mixed shift at the top of the funnel from partner-sourced and qualified leads to more rep-sourced leads that tend to take more time. And we're definitely seeing good progress on the partner as well as the QL side. And maybe just a little bit more context.
Ken Wong: Ken, thank you so much. Yes, it is normalized back. It's really in a healthy place right now. And maybe just to step back, in Q1, we shared that we saw a mixed shift at the top of the funnel from partner-sourced and qualified leads
Ken Wong: to more of rep source leads that tend to take more time. And we're definitely seeing good progress on the partner as well as the QL side. And maybe just a little bit more context, there are a couple of ways in which we engage with partners. The first is actually co-selling where the partner team and the HubSpot sales teams work closely together. And that co-selling motion has been doing really well and has been consistently up. In the first half of this year, it was up by 71%.
Yamini Rangan: There are a couple of ways in which we engage with partners. The 1st is actually co-selling, where the partner team and the HubSpot sales teams work closely together. And that co-selling motion has been doing really well, and it's been consistently up in the 1st half of this year. It was up by 71%. Partner sourcing is the other activity where partners actually bring more deals. And this is where we saw a bit of weakness in Q1.
Ken Wong: The partner sourcing is the other motion where partners actually bring in more deals, and this is where we saw a bit of a weakness in Q1, but as soon as we saw that in early Q2, we rolled out clear enablement plays to both partners as well as
Yamini Rangan: But as soon as we saw that in early Q2, we rolled out clear enablement activities to both partners as well as partner development resources within HubSpot. And we've been laser focused in terms of execution. And based on all of that, we have seen that mixed shift back to what we normally would see and what we are happy with. So I feel pretty good about the trends going into the second half as well as the mix of demand as we go back into the second half of the year. Thank you. The next question is from the line of Brian C. Peterson of Raymond James. Please go ahead. Your line is open.
Ken Wong: Partner Development Resources within HubSpot, and we've been laser-focused in terms of execution, and based on all of that, we have seen that mix shift back to what we normally would see and what we are happy with, so I feel pretty good about the trends going into the second half, as well as the mix of demand as we go back into the second half of the year. Thank you.
Operator: Yeah, thanks. Thanks a lot.
Yamini Rangan: I think there is a learning curve, and our sales teams, as well as the partner teams, are settling into that seat motion. And, you know, as we have said, the changes that we launched as part of this pricing change were to lower the price point to get started with HubSpot, remove the seat minimum so that our customers can upgrade to pro and enterprise without any friction, and then create a core seat for customers.
Speaker Change: The next question is from the line of Brian C. Peterson of Raymond James. Please go ahead, your line is open.
Jonathan McCarry: Hi, thank you. This is Jonathan McCarry on for Brian . Maybe kind of related to that last question, but I'm curious after a few months now, the new pricing model, how would you say the sales reps have adjusted to that? Was there any sort of learning curve there still in process or was that a relatively seamless transition for the team? Thanks.
Speaker Change: Yeah, thanks. Thanks a lot. I think there is a learning curve and our sales teams as well as the partner teams are settling into that seats motion. And, you know, as we have said, you know, the changes that we launched as part of this pricing change was to lower the price point to get started with HubSpot, remove the seat minimum so that our customers can upgrade to pro and enterprise without any friction, and then create a core seat for customers. And all of that, we expected ASPs to go down and the volume of customer wins to go up and then better upgrades over time. And, you know, as you pointed out, this is a slightly different motion for us.
Yamini Rangan: And all of that, we expected ASPs to go down, and the volume of customer wins to go up, and then better upgrades over time. And, you know, as you pointed out, this is a slightly different motion for our sales reps. It is a higher velocity motion.
Yamini Rangan: So, we've been really focused on enabling our reps on the steps that they can take, the qualifications that they have, and how they can progress the deals quickly. And we're beginning to see the overall volume offset the ASP. And so we're pleased with the progress, but it's taking a little bit of time. And I'm really happy with how our sales teams have responded to the change in direction. But overall, it's progressing as we want it to.
Speaker Change: Our sales reps, it is a higher velocity motion. So we've been really focused on enabling our reps on the steps that they can take the qualifications that they do and how they can progress.
Speaker Change: The deals quickly and we're beginning to see the overall volume offset the ASB and so we're pleased with the progress but it's taking a little bit of time and I'm really happy with how our sales teams have responded to the change in motion.
Speaker Change: But overall, it's progressing as we want it to.
Operator: Thank you. The next question is from the line of Michael Turin of Wells Fargo. Please go ahead. Your line is open. Hey, this is Michael Berg. I'm from Michael Turin. Thanks for taking the question. I want
Operator: Thank you. The next question is from the line of Michael Turrin of Wells Fargo. Please go ahead. Your line is open.
Speaker Change: Thank you. The next question is from the line of Michael Turin of Wells Fargo. Please go ahead, your line is open.
Speaker Change: Hey, this is Michael Berg. I'm from Michael Turrin. Thanks for taking the question.
Michael Berg: I wanted to ask on the new pricing model in a slightly different manner. One of the points you referred to several times on this call is
Speaker Change: Ryan Burkart, Kathryn Bueker, Charles MacGlashing
Michael Turrin: Yeah, thank you so much for the question. We obviously pay a lot of attention to our starter upgrade rates, and I think the good news is that starter cohorts continue to upgrade really at healthy rates, pretty consistent with what we've been seeing over the last few years, even with the healthier volumes that we have seen over the last few years. Our next question today is from the line of Tyler Radke of Citigroup.
Speaker Change: Yeah, thank you so much for the question. We obviously pay a lot of attention to our starter upgrade rates, and I think the good news is that starter cohorts continue to upgrade really at healthy rates, pretty consistent with what we've been seeing over the last few years, even with the healthier volumes that we have seen over the last few quarters.
Operator: Our next question today is from the line of Tyler Radke of Citigroup. Please go ahead. Your line is open.
Operator: Please go ahead. Your line is open. Thank you for taking the question. Maybe this one is for Kate. Can you just help unpack?
Speaker Change: Our next question today is from the line of Tyler Radke of Citigroup. Please go ahead, your line is open.
Tyler Radke: Thank you for taking the question.
Tyler Radke: Maybe this one for Kate. Can you just help unpack the moving pieces in the full year revenue guide? You know, obviously it sounds like currency was a factor that
Speaker Change: Flip a little bit more positively, but is there any type of incremental softness as it relates to macro or the pricing model in the guide if we just sort of compare your prior guide with the currency and the
Speaker Change: the next, you know, the quarterly beat as well. Thank you.
Kate Bueker: Yeah, I mean, what I would tell you is that we're very pleased with the results in Q2. You heard both Yamini and I say in our prepared remarks that we're seeing the macro weakness persist, and we've been hearing similar sentiments from peer companies who've already announced. And our guidance assumes that the difficult demand environment continues in the back half of the year, but it also does not assume that it gets materially worse.
Speaker Change: Yeah, I mean, what I would tell you is, like, we're very pleased with the results in Q2. You heard both Yamini and I say in our prepared remarks that we're seeing the macro weakness persist.
Speaker Change: We've been hearing similar sentiments from peer companies who've already announced, and our guidance assumes that the difficult demand environment continues in the back half of the year, but it also does not assume that it gets materially worse.
Kate Bueker: As we looked to set guidance, we took a step back and looked at a range of scenarios as part of that process, consistent with what we already, we always do. And I know that, you know, there's been concerns more recently about broader economic challenges, but we have a lot of confidence in achieving the guidance that we put forward.
Tyler Radke: Right. As as we looked to set guidance, we took a step back and looked at a range of scenarios as part of that process, consistent with what we already we always do.
Speaker Change: And I know that, you know, there's been concerns more recently of broader economic challenges, but we have a lot of confidence in achieving the guidance that we put forward.
Operator: Our next question today is from the line of Arjun Bhatia of William Blair. Please go ahead. Your line is open.
Speaker Change: Our next question today is from the line of Arjun Bhatia of William Blair. Please go ahead, your line is open.
Arjun Bhatia: Going back to AI a little bit, can you just help understand where you might see AI adoption in the product portfolio first or where you are seeing it first? And then, more specifically, on Service Hub, I also wanted to ask what capabilities you're baking in there. And if there is any kind of this shift to self-service from your customers, do you need to change your seat-based pricing model at all in Service Hub, or is that something that you're contemplating?
Arjun Bhatia: Perfect. Thank you. Yamini, maybe one for you on...
Arjun Bhatia: Going back to AI a little bit, can you just help understand where you might see in the product portfolio AI adoption?
Speaker Change: Ryan Burkart, Kathryn Bueker, Charles MacGlashing
Speaker Change: from your customers do you need to change your seat-based pricing model and all in service sumers of anything that you're contemplatingif
Yamini Rangan: Okay, multi-parter, I'll take the, you know, kind of the first part of the question, which is where are we seeing adoption momentum, and then take the service hub separately. So if I look at our customers, marketing teams have been the leading adopters of AI. And specifically, content use cases have the highest adoption, with 65% of our AI users already leveraging content. I talked a lot about, you know, Content Hub. One of the reasons why we, you know, doubled down on Content Hub is that we know that content is important to attract customers, but everything in terms of how you create content and how you distribute content has changed. And that was kind of the strategy behind Content Hub.
Speaker Change: Okay, multiparter. I'll take the, you know, kind of the first part of the question, which is where are we seeing adoption momentum, and then take the service hub separately. So, if I look at our customers, marketing teams have been the leading adopters of AI, and specifically content use cases have the highest adoption, with 65% of our AI users already leveraging content features. Thank you.
Speaker Change: I talked
Tyler Radke: A lot about, you know, content hub. One of the reasons why we, you know, double down on content hub is that we know that content is important to attract customers, but everything in terms of.
Tyler Radke: The, how you create content and how you distribute content has changed. And that was kind of the strategy in terms of content hub. So, in terms of AI, we're seeing repeat usage for.
Yamini Rangan: So, in terms of AI, we're seeing repeat usage for generating audio from blogs, language translation, text editing, writing emails, you know, summary. A lot of the content use cases are the ones that our customers are leaning into, and maybe the more important indicator is that it's just becoming built into their daily workflow. So, that's area number one.
Tyler Radke: generating audio from blog, language translation, text editing, writing email, you know, summary. So a lot of the content use cases are the ones that our customers are leaning in. And maybe the more important indicator is that it's just becoming built into their daily workflow.
Dharmesh Shah: I do think service is the next use case. Customers are getting pretty comfortable with leveraging AI for improving resolution times as well as driving self-serve via, you know, chatbots. We've seen a 40% repeat usage rate in portals that have activated the AI chatbot, and when they are using the AI chatbot consistently, we're seeing a 30 plus percent resolution rate improvement. So, these all are early indicators that there is value, and service has a lot more room, you know, in terms of continuing to drive value. I don't know, Dharmesh, if you have a comment on Service Hub as well.
Tyler Radke: So that's area number one. I do think service is the next use case. Customers are getting pretty comfortable with leveraging AI for improving resolution times as well as driving self-serve via chatbots. We've seen a 40% repeat usage rate in portals that have activated AI chatbots. And when they are using AI chatbots consistently, we're seeing 30 plus percent resolution rate improvement. These all are early indicators that there is value and service has a lot more room in terms of continuing to drive value. I don't know, Dharmesh, if you have a comment on Service Hub as well.
Dharmesh Shah: Yeah, just a quick note on the kind of question around, you know, seats, possible seat pressure, the way we think of it. We rolled generative AI out across the entire engineering team last year, and we think, you know, different roles will be impacted differently by generative AI. And we thought, you know, a 20% measurable improvement in productivity across the engineering team. And we don't think that reduces the number of engineers that we're going to want.
Dharmesh Shah: Yeah, just a quick note on the kind of question around, you know, seats, possible seats pressure, you know.
Dharmesh Shah: You know, the way we think of it is, you know, we rolled Jerniv A out of...
Speaker Change: Ryan Burkart, Kathryn Bueker, Charles MacGlashing
Dharmesh Shah: We have a long, multi-decade roadmap and vision for what we want to do there. On the service side, you know, lots of service orgs are currently kind of managed towards kind of optimizing how many people are necessary to manage a fixed number of customer interactions. How many tickets can we handle, and those kinds of things.
Dharmesh Shah: We don't think that reduces the number of engineers that we're going to want. We have a long, multi-decade road map and vision, what we want to do there. On the service side, you know, lots of service orgs are currently kind of managed.
Speaker Change: towards kind of optimizing how many people are necessary to manage a fixed number of customer interactions, how many tickets can we handle, and those kinds of things. And as you heard Yamini note, we're moving this kind of persona shift towards customer success. So we think how this plays out over the long term, is that we're not going to be optimizing for customer interactions, we're going to say, can we have more interactions that are more valuable, and kind of lift the overall productivity and value that these customer teams provide. And so our thinking long term is that, yes, it may reduce the overall headcount, but we think
Operator: And as you heard Yamini note, we're moving this kind of persona shift towards customer success. So, we think how this plays out over the long term is that we're not going to be optimizing for customer interactions. We're going to say, can we have more interactions that are more valuable and kind of lift the overall productivity and value that these customer teams provide? And so our thinking long term is that, yes, it may reduce the overall headcount.
Operator: But we think as we add value, we will kind of share our fair share of that value. So, we're simply focused on driving more value with AI and making our customers more productive. We think in the fullness of time, that'll still play out nicely. Thank you. The next question is from the line of Sitikantha Panigrahi of Mizuho. Please go ahead. Your line is open. Thanks for taking my question and going back to seed-based pricing.
Speaker Change: As we add value that we will kind of share our fair share of that value, so we're simply focused on driving more value with AI, making our customers more productive. We think over the fullness of time, that'll still play out nicely.
Operator: Thank you. The next question is from the line of Sitikantha Panigrahi of Missouho. Please go ahead. Your line is open.
Speaker Change: Thank you. The next question is from the line of Siti Panigrahi of Mizuho. Please go ahead, your line is open.
Siti Panigrahi: Thanks for taking my question. And going back to the seed based pricing changes,
Siti Panigrahi: You previously talked about this new model being net neutral to ARR for the year.
Speaker Change: So, I'm wondering if you could provide an update there, and what are you seeing in terms of the volume versus price dynamics in Q2 until August , and is this still a neutral ARR impact, still the expectation?
Kate Bueker: Yeah, thank you, Siddhi, for the question. Yes, we are still expecting that the SEITS model change will be neutral to growth for 2024, as you heard from Yamini, and we continue to make progress with the new sales motion, and we're expecting another sequential improvement there in Q3. The other thing we're seeing is really solid expansion trends. We talked about a multi-point increase in our net revenue retention at month three from customers that are on the new model, as a result of the fact that they're just purchasing what they need when they get started, and they're upgrading in real time.
Speaker Change: Thank you, Siddhi, for the question. Yes, we are still expecting that the CEAS model change will be neutral to growth for 2024. As you heard from Yamini, we continue to make progress with the new sales motion, and we're expecting another
Tyler Radke: Sequential improvement there in Q3.
Speaker Change: The other thing we're seeing is really solid expansion trends. We talked about a multi-point increase in our net revenue retention at month three from customers that are on the new model as a result of the fact that they're just purchasing what they need when they get started and they're upgrading in real time.
Speaker Change: And that gives us added confidence in that six to eight point increase in net revenue retention for seats-based customers that we shared last quarter.
Operator: Thank you. Our next question is from the line of Kirk Materne of Evercourt ISI. Please go ahead. Your line is open.
Kate Bueker: And that gives us added confidence in that six to eight point increase in net revenue retention for SEITS-based customers that we shared last quarter. Thank you. Our next question is from the line of Kirk Materne of Evercore ISI. Please go ahead. Your line is open.
Speaker Change: at
Speaker Change: Thank you. Our next question is from the line of Kirk Materne of Evercourt ISI. Please go ahead, your line is open.
Kirk Materne: Yeah, thanks very much. Kate, it was actually a very nuanced change, but you did pick up CapEx a little bit from 4% to 4% to 5%. I'm just curious, is there anything, is that AI related? I mean, I realize that's a very small, absolute number, but I'm just kind of curious how we should read that, if there's anything directionally to read into that as we, you know, start thinking about 25% as well. Thanks.
Kate Bueker: Yeah, no, I appreciate the question. The largest part of our CapEx is actually capitalized software. And there are a couple of things that are driving that tick up from what you noticed as four to that four to five. One is that we have been investing in an outsized way in our product and engineering organization. And so that would, that would, in itself, lead to an increase. The other thing that we're seeing is that the share of time that engineering teams and product teams are spending on developing new features and functionality is actually increasing. And it's that combination that's driving that little increase in CapEx.
Speaker Change: Yeah, no, I appreciate the question. The largest part of our CapEx is actually capitalized software. And there's a couple of things that are driving that tick up from what you noticed as four to five. One is that we have been investing in an outsized way in our product and engineering organization. And so that would
Kirk Materne: That would in itself lead to an increase. The other thing that we're seeing is that the share of time that engineering team and product teams are spending on developing new features and functionality is actually increasing. And it's that combination that's driving that little increase in capex.
Operator: Thank you. The next question is from the line of Eamon Coughlin of Arclays. Please go ahead. Your line is open. Hey guys.
Operator: Thank you. The next question is from the line of Eamon Coughlin of Arclays. Please go ahead. Your line is open.
Speaker Change: Thank you. The next question is from the line of Eamon Coughlin of Arklays. Please go ahead, your line is open.
Emin Kaganoff: Hey guys, this is Emin Kaganoff from Ryan MacWilliams. Thanks for taking the question. In 2Q, can you just maybe touch on the contribution to net retention from pricing, seats, optiering, and cross-sell? And has this changed versus 2Q, and then could this change as the price change rolls through the existing base? Thanks.
Kate Bueker: Yeah, thanks for the question. Maybe I'm going to take a step back and maybe talk about net revenue retention in general. Just as a reminder, net revenue retention for the quarter was flat at 102, and we saw a really consistent set of trends that were influencing net revenue retention for Q2. The first is that we continue to see really strong growth retention in the high 80s. Second, we've been seeing stabilization over the last few quarters here on downgrades, and we saw that continue into Q2, particularly with seats in contact.
Speaker Change: Yeah, thanks for the question. Maybe I'm going to take a step back and maybe talk about net revenue retention in general.
Kirk Materne: the
Speaker Change: As a reminder, net revenue retention for the quarter was flat at 102, and we saw really a consistent set of trends that were influencing net revenue retention for Q2.
Kirk Materne: The first is that we continue to see really strong growth retention in the high 80s.
Kirk Materne: Second, we've been seeing a stabilization over the last few quarters here on downgrades, and we saw that continue into Q2, particularly with decent contact.
Speaker Change: And then finally, we have been seeing a challenge with our upgrade motions, and we continue to see challenge in the quarter with expansion motion, even though we've seen those early positive signs with the new seat space pricing model that you talked about.
Kate Bueker: And then finally, we have been seeing a challenge with our upgrade motions, and we continue to see challenges in the quarter with our expansion motions, even though we've seen those early positive signs with the new seat space pricing model that you've seen. So net-net, we think that net revenue retention is going to remain around 102, give or take a point in the back half of the year, and that it's really an external environment improvement and the maturing of that seed space model that's going to take a few more quarters before we start seeing anything.
Speaker Change: So, nut nut. Go to Beadaholique.com for all of your beading supplies needs! Beading supplies needs! Go to Beadaholique.com for all of your beading supplies needs! Beading supplies needs!
Speaker Change: We think that net revenue retention is going to remain around 102, give or take a point in the back half of the year, and that it's really an external environment improvement and the maturing of that seed space model that's going to take a few more quarters before we would start seeing something trend up.
Operator: Thank you. The next question is from the line of Taylor McGinnis of UBS. Please go ahead. Your line is open.
Speaker Change: Thank you. The next question is from the line of Taylor McGinnis of UBS. Please go ahead, your line is open.
Taylor McGinnis: Yeah, hi, thanks so much for taking my question. Since there's some rounding in the constant currency growth rates and numbers, Kate, are you able to offer a little bit more color on how the second half 2024 Constant Currency Revenue Growth Guide now compares to the implied second half 2024 Constant Currency Revenue Growth Guide given last quarter? Because I guess if you use like some of the rounded numbers, it would suggest it might be a little lower.
Taylor McGinnis: Yeah, hi, thanks so much for taking my question. Since there's some rounding in the constant currency growth rates and numbers, Kate, are you able to offer a little bit more color on how this second half 2024 constant currency revenue growth guide now compares to the implied
Speaker Change: Second half 2024 constant currency revenue growth guide given last quarter.
Speaker Change: Because I guess if you use like some of the rounded numbers, it would suggest it might be a little lower. So if that's true, can you maybe comment on what might be driving that extra conservatism on the back of what looked like to be a really solid 3Q? And if you are seeing anything at the start of 3Q in the July month, that might be driving some of that. Thanks so much.
Taylor McGinnis: So if that's true, can you maybe comment on what might be driving that extra conservatism on the back of what looked like to be a really solid 3Q? And if you are seeing anything at the start of 3Q in the July month, that might be driving some of that. Thanks so much.
Kate Bueker: Yeah, no; I appreciate the question. Let me see if I can clarify a little bit here. Your math is roughly right. Our updated full-year guidance is up by $15 million at the midpoint. And this includes a bit more than $10 million of FX benefit in the back half of the year, based on the latest forecast, knowing that FX has been highly volatile. And, you know, when you take a step back and sort of, I'll reiterate some of the comments that we made in both prepared remarks and an earlier question, the external environment remains challenging, right? There is a high degree of uncertainty in the macro, and the foreign exchange market has been incredibly volatile.
Speaker Change: Yeah, no, appreciate the question. Let me see if I can clarify a little bit here.
Speaker Change: Your math is roughly right. Our updated full year guidance is up by $15 million at the midpoint, and this includes a bit more than $10 million of FX benefit in the back half of the year, based on the latest forecast, knowing that FX has been highly volatile.
Speaker Change: And, you know, when you take a step back and sort of, I'll reiterate some of the comments that we made in both prepared remarks and an earlier question, the external environment remains challenging.
Speaker Change: There is a high degree of uncertainty in the macro and the foreign exchange market has been incredibly volatile.
Operator: And so, as we always do, we ran a bunch of different scenarios as we evaluated our back half guidance, and we always want to put forward a set of guidance that we feel really confident in our ability to achieve. And I think that's what we did again. Thank you. And the final question in the queue today is from the line of Jackson Ader of Peacorp. Please go ahead. Your line is now open. Great. Thanks for taking our questions, guys.
Speaker Change: And so as we always do, we ran a bunch of different scenarios as we evaluated our back half guidance, and we always want to put forward a set of guidance that we feel really confident in our ability to achieve, and I think that's what we did again this quarter.
Operator: Thank you. And the final question in the queue today is from the line of Jackson Ader of Key Corp. Please go ahead. Your line is now open.
Speaker Change: Thank you, and the final question in the queue today is from the line of Jackson Ada of Key Corp. Please go ahead, your line is now open.
Jackson Ada: Thanks for taking our questions, guys.
Jackson Ada: My question is on, I think we've lapped.
Jackson Ada: The initial
Jackson Ader: I mean, look, I think that what we have shared over the last quarter on the pilot program and ANZ still holds, which is we see a strong and healthy customer base because people are buying what they want, and they're upgrading as they need it. And we see net revenue retention that is 6 to 8 points higher than what we see under the legacy model.
Speaker Change: I mean, look, I think that what we have.
Speaker Change: shared over the last quarter on the pilot program in ANZ Still Holds, which is we see a strong
Speaker Change: And healthy customer base because people are buying what they want. They're upgrading as they need it. And we see net revenue retention that at month 12 is 6 to 8 points higher than what we see under the legacy model.
Operator: Thank you. This will conclude the HubSpot Q2 2024 Earnings Call. Thank you to everyone who was able to join us today. You may now disconnect your lines.
Speaker Change: Thank you. This will conclude the HubSpot Q2 2024 earnings call. Thank you to everyone who was able to join us today. You may now disconnect your lines.