Q2 2019 Earnings Call

Good afternoon. My name is Mike and I will be your conference operator today at this time I would like to welcome everyone to the Hubspot Q2, 2019 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

If youd like to ask a question. During this time press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

I will now turn the call over to Chuck Macglashing head of Investor Relations at Hubspot you May begin your conference.

Thanks, operator, good afternoon, and welcome to Hubspots second quarter earnings conference call today, well be discussing the results announced in the press release that was issued after the market closed.

With me on the call. This afternoon as Brian Halligan, our Chief Executive Officer, and German keep her our chief financial Officer.

Before we start I'd like to draw your attention to the Safe Harbor statement included in today's press release during this call and make statements related to our business that may be considered forward looking within the meaning of section 27, a of the Securities Exchange Act of 933 as amended.

In section 21 E of the Securities Exchange Act of 934 as amended.

All statements other than statements of historical fact are forward looking statements, including statements regarding regarding managements expectations of future financial and operational performance and operational expenditures expected growth.

Business outlook, including our financial guidance for the third fiscal quarter of 2019.

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 was filed with the FCC on May seven 2019 for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

During the course of todays call well refer to certain non-GAAP financial measures as defined by regulation G.

The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our second quarter 2019 earnings press release in the Investor Relations section of our website at Hubspot dotcom.

Now, it's my pleasure to turn over the call to Hubspots, CEO and Chairman Brian Hogan.

Thanks, Chuck Good afternoon folks. Thank you for joining US today's review Hubspots second quarter 2019 earnings results Q2 was another strong quarter for Hubspot with 36% revenue growth in constant currency, 8%, non-GAAP operating margins and 35% customer growth, bringing our total customers to nearly 65 staff and really happy with our results in the quarter.

Let's talk about how we're thinking about the world. These days a significant opportunities ahead of us in some of the investments we've made to position us to make the most of them.

Over the last year, we've rolled out the biggest expansion to our product footprint in history with the introduction of a slew of new products and tiers that filled in the gaps across our entire Hubspot suite.

As we've done so we've seen terrific cross platform adoption reached nearly 25000 multi product customers this quarter and our youngest product. The service hub has surpassed 5000 paying customers great stuff.

Expanding functionality when their own products isn't enough. We've been building a platform that enables our customers to connect all of their front office applications into Hubspot.

This will enable us to truly manage and orchestrate our customers' entire end to end customer experience for them.

Today, if you're a hubspot customer you obtain integrations that we built more than 300 integrations built buyer out partners in many many more lightweight integrations you can access through our partnerships with Ipos companies. This is starting to really work today, our customers on average integrate more than five different third party applications without with Hubspot.

This year, we're adding fuel to the platform fire by opening up even more apiay coverage and significantly increasing our investments in the overall developer experience through our partners will be able to do more in our customers themselves will be able to do more we're just getting started here and there is a lot of promise to increase the value we provide to our customers over time.

This platform initiative its a flywheel play the more users we have the more attractive it is for developers to integrate more attractive our product is the more users we have and so forth and so on.

That's why we recently launched email and adds in the free CRM offering this free CRM offering is truly unique in the market and we expect it will attract lots of new users to the platform, we want hubspot to be attainable for the growth companies of the future want to get started on the right foot.

As I mentioned today, nearly 65000 companies build their go to market model on Hubspot, we take that responsibility very seriously. So earlier. This year, we made the decision to significantly increase the number of product and engineering resources invested in reliability performance security infrastructure and usability, we set new standards for every product team to meet and funded a fully dedicated team solely focused on overseeing and testing the strength of our key infrastructure systems.

I think these investments are going to be a double win over the long haul and that that will improve our overall customer experience and enable us to deliver better higher quality products in the future.

Before I finish I want to follow up on the 8% operating margin I started with in my opening remarks as Kate we'll talk about in the second we delivered a little more operating leverage than I would have expected or frankly hope because we fall in the hair behind on our hiring.

I'd say it was due to our own execution and the good news is we made some corrections in how we approach. This we're making good progress already we're rapidly catching up.

We're aiming to accelerate our hiring in the back half of this year.

That said Im really pleased with the progress we've been making on the suite platform in the go to market. The gears are in motion in the opportunity in front of US is quite large with that I'll hand, it over to Kate.

Thanks, Brian , let's turn to our strong second quarter financial results and our guidance for the third quarter.

Second quarter revenue grew 36% year over year in constant currency and 33% as reported.

Q2 subscription revenue grew 34% year over year, well services revenue grew 23% year over year, both on an as reported basis. Hubspot ended Q2, with 64836 total customers, which was up 35% year over year.

Average subscription revenue per customer in Q2 was $9913 down 1% year over year and up slightly from Q1.

Domestic revenue grew 28% well international revenue growth was 50% year over year in constant currency and 41% on an as reported basis.

International revenue represented 40% of total revenue in Q2 up three points year over year.

Deferred revenue as of the end of June was $198.1 million, a 29% increase year over year.

Calculated billings was $167.9 million up 34% year over year, both as reported and in constant currency.

The remainder of my comments will refer to non-GAAP measures.

Second quarter gross margin was 82% up nearly two points year over year.

Subscription gross margin was flat year over year at 86% well services gross margin was positive again in Q2 at 7%.

Second quarter operating margin was 8.4% up three points from Q2 of last year.

While we're pleased with the operating leverage that we delivered.

Our margin expansion benefited from lower than expected hiring in the first half of the year.

At the end of the second quarter, we had 2924 employees up 20% year over year.

We have made operational changes and additional investments that we believe will help re accelerate hiring in Q3 and Q4.

But will also result in less operating margin expansion and we delivered in the first half of 2019.

Net income in the second quarter was $17.6 million or 37 cents per diluted share.

Capex, including capitalized software development cost was $10.3 million or 6.3% of revenue in the quarter.

As we noted on our last call, we expect capex to be heavily weighted to Q3 and Q4 as a result of the build out of our new Dublin facility in the second half of the year.

We still expect Capex as a percentage of revenue to be 7% to 8% in 2019.

Finally, our cash cash investments and marketable securities totaled $994 million at the end of June .

With that let's dive into guidance for the third quarter of 2019.

Total revenue is expected to be in the range of $168 million to $169 million.

non-GAAP operating income is expected to be between eight and $9 million.

non-GAAP diluted net income per share is expected to be between 22 and 24 cents.

This assumes approximately 48 million fully diluted shares outstanding.

And for the full year of 2019 total revenue is expected to be in the range of $663 million to $665 million.

non-GAAP operating profit is expected to be between 54 and $55 million.

non-GAAP diluted net income per share is expected to be between $1.39 cents and $1.41 cents.

This assumes approximately 47.1 million fully diluted shares outstanding.

We now expect free cash flow to be between 62 and $63 million for the full year.

As you adjust your models keep in mind the following.

At current spot rates currency would have a one to two point negative impact to as reported revenue growth in Q3.

And a one point negative impact to revenue growth in Q4.

This equates to a $1 million to $2 million increased headwind to as reported revenue growth relative to our prior forecast.

As a reminder, we will be holding our 2019 inbound event in September and anticipate it will have three points of negative impact to third quarter operating margins. In addition.

We would expect free cash flow to be slightly positive in the third quarter, given the timing of inbound related payments.

We expect the fourth quarter to be a strong quarter for free cash flow.

To close the second quarter was another strong quarter for Hubspot, we look forward to seeing you at our analyst day at inbound on September 4th.

With that I'll hand, the call back over to Brian for his closing remarks.

Thanks, Kate our suite product play is delivering a ton of value for customers our platform flywheel players gaining serious momentum among integration partners and are expanding user base.

Investment in the core product is setting us up well the solid scalable infrastructure to deliver an even better customer experience now and in the years ahead.

Okay, I want to close by thanking our customers our partners are investors in all the hub smart as around the globe for helping us with their mission to help millions of organizations grow better I hope to see you all at analyst day in just a few weeks operator could we please open up the call for a few questions.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad to withdraw your question press the pound key.

We will pause for a moment to compile the Q and a roster.

Your first question comes from of uncertain from William Blair.

Hey, guys, it's actually Arvind Bhatia on for Brian Thanks for taking our questions.

So it's been it's been a couple of quarters since thing to build out the full suite and including the new enterprise tier subscriptions.

I was just hoping you'd be able to touch on the customer upgrade activity, you've you've been seeing since that enterprise here was fully built out.

Should we should we be thinking of this more as a as a new landing point for customers are still very much a.

An upsell to happen so that happens overtime.

Good question I'll take this one is Brian .

You're right last last year, we really did make some nice improvements the enterprise pure products and Hubspot enterprise marketing sales and service, we had kind of a step function lots more good work being done on the enterprise later this year and next year.

I'm really really quite excited about the potential there.

I would say the enterprise products. So far is a little bit of both we're seeing a decent amount upgrade activity out of a pro customers and a decent amount of new nothing surprising me either way I don't know Kevin I don't know.

Oh things continue to be.

Good leaders into the enterprise skew its probably 60 40 new customer.

On balance.

Okay very helpful. Thanks, and then.

Just kind of on that on that following up on that point a little bit.

It seems like Theres, two kind of counterbalancing forces here on the on sales cycles. It's on one side, it's it's the freemium offering that presumably.

Increases or passing through the sales cycle here and then the enterprise to your on the other end just if we zoom out a little bit how are you what kind of impact are you seeing overall on a on sales cycles with these with both of these offerings and are in the market now.

And I think you hit the nail on the head we've got lots of customers coming in on shorter cycles on their new starter tier and grew stronger tier and some customers coming in slightly longer cycles with the enterprise product, particularly if theyre going to buy enterprise suite. So I think you actually hit the nail on the head with your question and its balancing out that it hasn't changed much over the long haul or the standard deviation is a bit higher.

Got it all right. Thanks for taking my questions.

Your next question comes from the line of Chris Merwin from Goldman Sachs.

All right thanks very much.

I wanted to ask about international looks like that was up I think 50% on an organic basis in the quarter, which is a very strong acceleration from last quarter. So maybe you could just talk a bit about what is inflected in those markets. Some other vendors actually have called that challenges. There. So just curious what you are seeing in the quarter on the demand front. Thank you.

Yes, I wanted to start with a clarification on the grocery so international was up 50% year over year in constant currency that basically flat.

From last quarter last quarter, it was up 42% and as reported in this quarter, it's up 41 as reported.

Yes, I think international is going really well and I think it's a result of a lot of investment we've made over the last several years big investment into Dublin.

It's been cranks, along Weve opened a bunch of other offices.

We translated the not only the product, but the whole experience into five different languages and I. Just think we're getting a nice return on it I've heard a bit about some softness from other vendors in the demand environment, we havent seen that so far.

Okay, great and if I just sneak in one more just as it relates to CRM could you talk a bit about which type of customers are taking the product. So far is it more the kind of SMB or is it more in your enterprise segment and is proving to be helpful. In terms of driving higher retention as customers build and more integrations there.

Yes, definitely I would characterize it as when we first came out with our.

Spreading out of marketing into a full CRM offering.

Little tiny companies are buying it but as time goes on those products are getting a lot stronger.

And lots of small startups are buying it but decent mid sized companies are starting to buy as well.

Feeling really good about our offering these days.

Okay. Thank you.

Your next question comes from the line of stands Lasky from Morgan Stanley .

Hey, guys.

Good afternoon, and thank you Mike for taking my questions.

Really really impressive quarter.

And maybe just a a couple of.

Details for me.

How did the on net revenue retention trend in the quarter.

Yes, so I think that revenue retention in Q2 was just under a 100% we typically see a bit of a step up from Q1 to Q2.

As part of normal seasonality, we saw that again this year.

As you know and we've said probably every quarter.

Retention numbers bounce around a little bit from one quarter to the next they continue to do that.

But we think over the long term we are comfortable in retention levels around 100% I would give the same kind of answer eyes on the sales question earlier, it's hovering bounce around right around that 100% like it has for a while theater deviations little higher you've got started products, which are a little lower and then you've got enterprise gross when customers a little higher but we're pretty comfortable where it is.

Okay, Perfect and then maybe just a a high level question, we saw a blog post.

Intra quarter about on the Hunter moving on as head of sales.

Maybe just kind of fill us in on.

Hi on the opportunity that he's gone after and how you guys are thinking about the transition.

All of that roll off going forward. Thank you.

Sure It really actually quite happy for Hunter, He's a great job for us over a five six years varied in.

And he's taken a new gig Hunter lived in Toronto, So use commuting to Boston and that was quite a grind forms. So what's cool about his new gig. It's one it's a CEO gig and I'm happy for him and proud to these CEO and I think it can be great.

And two is able to live in Toronto and be around his family. So Super Super happy for him I'm, the interim chief customer officer for Hubspot. So I've got hunters old job in marketing and sales and service reporting intimate really enjoying it.

And.

Don't plan to have this job forever hire an executive search firm to do it through a search for a chief customer officer for Hubspot, That's gone pretty well Stern interview people I think we'll get a really good person to backfill them. We have a great brand, we're a great place to work.

I'm very confident we can find somebody great, but I will say is going to be patient on it and try to find the right person. We've got a great team in place today, So I think I've got the.

Got the ability to be patient, but so far so good on being the FCC interim CEO and replacement of Hunter and and whatnot.

Okay perfect. Thank you so much guys.

Your next question comes from the line of Ken Wong from Guggenheim Securities.

Thanks, a lot for taking my question guys.

I wanted to ask about half our PC that obviously ticked up Q over Q just wonder if you can help us flesh out how much of this was maybe attach related some of this was SKU mix.

Any color there would be great.

Yep.

So it was nice to see that we had a quarter of ants RPC, where were sort of flat to up Q1 Q2, I think the primary driver of asked RPC for us continues to be product mix. So.

As sales and marketing.

In marketing starter customers could become a bigger and bigger component there sort of a headwind to EPS RPC on the thing on the opposite side of the coin we have a growing number of multi product customers a growing number of enterprise customers. There are sort of the tailwind of that and so.

On balance this is where we came out for the quarter. So again, it will continue to to move around but.

We were pleased with the result in Q2.

Kind of the same thing.

It's bounced around the same level standard deviation the gone up kind of the same story on all three thanks.

Got it and then you mentioned with with email now part of CRM.

Expect to attract a lot of new customers can you can you talk about what you've seen so far and should we be expecting a similar monetization path and timeline from this particular cohort of customers.

I think it's going to go really well keep rolling clock clock back a year, we added email to the starter skew and that's a good thing so the business really happy with that and this year, we're rolling it into our free CRM along with ads into the free CRM. So that free offering is powerful there's two things I like about that Ken.

The first is it really helps our our kind of platform flywheel, the more users of our products and more companies using it and actively using it more developers are we going to want to integrate their offering into hubspot and so important. So I was really positive reinforcing loop. There. So I think that will pick up.

The second thing I really like about that is.

Well, what I have in my head about Hubspot is we want to catch him early there, it's dharmesh and I and in turn starting Hubspot basically out of.

Conference room in business School.

And eventually now we've got 3000 employees, we actually want to get companies like Dharmesh and I mean earned working on have a.

Out of a conference room. So this is a really easy way to get them early and grow with them. So it's early but positive sign some more.

Great. Thanks for the color guys.

Your next question comes from the line of Kirk Materne from Evercore.

Oh, thanks, very much I'll echo the congrats on the quarter, Brian in your prepared remarks, you mentioned sort of serious momentum around some of your integration partners and I was wondering if you could just add a little color. There you know how that maybe impacting customer acquisition. This quarter, just general feedback as you continue to sort of broaden and expand this platform play I'm just kind of curious if you can maybe give us a sense of.

The relationships with integration partners today versus maybe a year ago, just to put some context around that thanks.

Sure that's a great question Curt thanks.

I think about spot.

As we're kind of in the middle of this ecosystem that is around US and you guys. All know about our marketing agency program has gone really well over time, it's 40% of our business, we're starting to find him lots and lots of non marketing agency more sales CRM type implementers, there and so thats a very healthy.

Nice part of our ecosystem.

The application partner ecosystem is much much newer but is super promising we've got over 303rd party application software companies that have built integrations into hubspot as well as a lot of these kind of neutral I pass companies, who build richer integrations, the hubspot and what that does is a couple of things.

It enables our customers to use our product to craft or go to market, but also use all the other applications. They use in any other application. They can possibly think of in pull all those things together to craft a really compelling go to market model and that they'll run really that whole go to market model on Hubspot. So I think thats very important as we look into the future Hubspot is going to shift from really from an applications company to much more of a platform company. So really really happy with the progress on that stuff and I think it will increase there is a lot of investment going into this.

For example inside of our product organization more and more of the footprint of our product won't be opened up into an open API that third party companies can integrate into its a little bit limited now, but thats been increasing quite a bit there's just more opportunities for innovation, we are going to happen over time.

Our marketplace will get better over time. This thing is going to be a really interesting next vector and hubspots growth and I'm really excited about.

Super Thanks, Brian .

Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch.

Hey, guys great. Thanks for taking my question I wanted to ask if you could comment on activity you've seen in that kind of next tier up market within your target range with enterprise.

Investments you made in the enterprise features last year's inbound.

500 to 2000 employee size company think you're you're going after more aggressively so.

Any commentary on activity in that segment of the market would be helpful. Please.

Hey, Brad I think its Brian .

It's going well and the way we segment our business is two to 25 employees small business 25 to 200 is kind of mid market than 200 to 2000, and we call that corporate we actually don't call it enterprise internally.

And the new products are doing a better job of matching the requirements of that market and I feel like we're just getting started in there last year, we announced a bunch of new functionality in the enterprise product suite. There is a lot more stuff. We're working on that I think is going to be really solid in there over the next 12 months so feeling good about it overall.

That's great. Thanks, and then with the investments you've been making in the platform.

Do you see an opportunity to kind of go bigger here with potentially more emphasis on the marketplace or an app store kind of a full scale program there.

I think over the long haul I think that that's in our sites.

Right now we're not we're right now we're just trying to decrease the friction for a third party company, who want to build on the integration or or be part of our ecosystem want to make it really easy for them to do that so we don't want to put up.

Barriers to that but over time I think art.

Our thinking we'll ship there and it will be come in of itself a line of business over time, but we don't want to hamper the innovation that's going on now.

Great. Thanks, Brian .

Your next question comes from the line of James rather for from Stephens, Inc.

Hey, Thanks for taking the questions a couple from me. The first is on the gross stack I think you mentioned that you're now at nearly 25000 gross stack customers and I recall that number was south of 20000, just two quarters ago. So just curious what are the main drivers of that growth in the stack and is this an inflection in the bundling of service. Thank you.

Yes, so I think it maybe have snuck up on you because we basically have decided that we would give you milestone updates, but not reported out.

One quarter to the next.

It's been a continued evolution, where we see.

More and more customers adopting the full platform.

I would say we have then.

We've been pleased to see that actually lots of those customers are actually buying hubspot upfront and that's the majority of the new multi product customers.

Okay. That's helpful. And then a second one on the product itself I know you were coming off a big period of product innovation inbound last year, all that all the new products tiers hubs that you announced it seems like you kind of have your bases covered in terms of the current product. Theres also also incremental improvements will continue to make but I'm. Just curious what's the next phase of the product you've commented about being able to launch more hubs.

Perhaps what's your interest level in commerce or payments or something along those lines over the long term.

I'll take that one.

I would just say well first of all you're right last year with a big product here, we really build out our our product grid really proud of it I think we executed well none of those products will ever be done thats kind of how we think about product. They can always be better and they are continually being improve their being proved right now while were on the call.

In terms of new opportunities.

I think of it is kind of two ways Theres. This week that we are building and we have three hubs today you can imagine in over the long haul next call. It two three years, there will be more hub. There's you mentioned a couple of potential opportunities, but theres several.

Potential opportunities and are ahead for us to create new hubs that will deliver more value to our customers and enable them to grow better so more opportunity. There and then the second thread. We can pull one is more on this platform side not monetizing that today, but you can think over the next two three years, a nice opportunity as we continue to grow hubspot for us to monetize that and so the way I think about hubspot, it's still very much the early innings like this product and our business is going well, but we feel like we've got a much bigger more interesting business in us over the long haul.

Thanks, Congrats on the core.

Thank you.

Your next question comes from the line of Jennifer Lowe from you.

Great. Thank you.

Maybe just to extend on that.

Product vision, if you look at what Smith, I think a lot of companies to sort of come away around to the Hubspot way of thinking trying to have more of a unified view of the customer you had that from day one.

But one of the big talking point from a lot of providers is this concept of a customer data platform and being able to pull in multiple data sources create that one unified viewed to go to market with you've got that with the suite and the third party integrations with platform, but is that sort of a NAV to be equivalent to what maybe isn't desk is thinking about with their sunshine platform or do you think there's more that you can do on that unified customer data profile side.

Yes, I think 10 desk in some spot and a lot of people are coming to the same conclusion at the same time is what you really want as a customer is to create a absolutely delightful and experience for our customer and just having a good product. These days is that enough you have to create a great great experience for your customers and to do that it's actually quite tricky today, particularly if you have a whole bunch of different databases, a whole bunch of different applications and thats stuff doesn't talk to each other so more and more we've been predicting this for a while we think people pick like a core hub and Salesforce is the hub, obviously hubspot as the potential hub in inside of that hub will be a CDP well you will store all that data from all those different applications and may be able to report out on that data and really interesting ways. So that's the value prop we see emerging over time for Hubspot that is a good way to think about our platform initiative is really heading in that direction.

Okay, great. Thank you.

Your next question comes from the line of Michael Turits from Deutsche Bank.

Hey, great. Thanks, good afternoon.

You have a sizable customer base. These days to extends across geos products fit the profile of the financials remains remarkably consistent just wondering if you can talk more around what it is that help sustain that profile I know the product vision, we've talked about a bit here, but is there anything else you can add in terms of your observations there as the business continues to scale.

Yes, I think.

Brian has said the word sort of.

Certainly a balance at the high end imbalance at the low end.

Probably three or four times during this call I think the overarching customer profile.

Steve the same for us because we're innovating sort of on both ends of the spectrum and there is a balance that.

Sort of continuing to manifest itself within the overall customer base.

If you have a different.

I understand the question.

Okay [laughter].

Well, maybe I missed your question do you want to.

No no.

I think look I think look we see businesses with longer tails of customers that have challenges delivering this consistent of results from a financial perspective, and so obviously you know the way we're looking at the business is different than what Brian might be looking at but Thats just kind of the observation that I was curious to kind of skews out more commentary around.

Okay as my as GB Sherman, our Chief Executive Officer would say, it's very simple.

Executive leadership.

[laughter].

I think one of the things that sustained as well.

Over time.

Is.

We're just we just don't sit still I mean, we don't sit still for half a second here.

We feel we have in our heads a vision for what we can deliver in terms of value for a customer that is far beyond what we are doing today, we do feel like we're very much in the early innings and we're chipping away at it we're making progress and if it were super Super Super focused on delighting, our customers and I think at the end of the day when we're focused on delighting the customer the customers are rewarding us and I think the investors see it in the results I also think we've got very good financial management, our head of Investor Relations has its act together our CFO has their act together I think we are halfway decent planning I think I think we have good financial controls in here as well.

That's great just stunned.

Quick quick one if I can in terms of the commentary around hiring is there anything else you can add in terms of key focus areas. There does that present any obstacles, we should be aware of in terms of near term initiatives or just anything else you can add there.

I'm glad you asked about that.

The core issue, we had was really in recruiting capacity issue. We just didnt have the number of recruiters we needed to hit our goals.

It's a pure execution issue on our side and kind of took our eye off the ball on it so.

Anyway, we didnt execute well on that I would say our eyes very much on the ball for that for the last several weeks actually.

A couple of months that are recruiting capacity is way up.

The good news is attrition has been pretty solid we're still a very good place to work and I think we will be for a long long period of time and so the employees come in they stay and they seem to enjoy it and tell their friends. So overall.

I feel like were make I kind of like it's too we didn't execute well, but I feel like we made great progress over the last few weeks I think it will be a blip on the recruiting radar over the long haul and I think we're on a good path.

Okay, great. Thank you.

Your next question comes from the line of Terry Tillman from Suntrust.

Hey, good afternoon can you hear me okay.

Yes sure Cantor.

Yes. Thanks, So I guess the first question as it relates to just the platform integrations, Brian have you all seen any kind of statistics in terms of retention patterns or greater propensity to buy more products from customers that have those five integrations on average that's the first question yes.

Yes, like a lot of platform vendors the more integrations you have.

The more value, we get out of the product to speak here are the more too.

The more committed you are in so as we make more integrations available in better quality one.

I think that will be a tailwind that will offset some of the headwind that we get on the starter products in terms of retention. So yes, very much failure zapping right about that.

Okay, and then on the service maybe an update in terms of just another quarter into at the size of the average customer you're seeing and just maybe how it's comparing to the same timeframe. When you had brought out sales. Thank you and congrats.

Feeling great about service.

Yes.

I would say I'm delighted we are up to 5000 customers on it.

One of the things I look and you pointed this out in your question is when I look at sort of a year into this the sales have initiative what were the revenues as the growth rates versus a year into the service definition of what that looks like and service that is lapping sales have it's really doing quite well.

Having said that the way we build products as we get something good in the market and we try to make it better and better and better serve is a long way to go on that thing and.

It improves every day and I think I think thinking of potentially a nice big business for us.

Your next question comes from the line of Samad Samana from Jefferies.

Hi, good afternoon, and thanks for taking my questions.

Okay, maybe one for you as you thought about the updated guidance how did you factor in the hiring plans shifting from one one H to to age and how should we think about that in terms of productivity ramping or the overall kind of productivity of the company as we start to think even beyond 2019, I know, it's a little bit early and then just a follow up question from there.

Yes.

Sure. So I think as you know like Theres, a lot that goes into our thinking on guidance.

Overall, we haven't changed the framework at all.

But as we work through guidance for this quarter and the update for the full year.

I think the biggest piece actually was FX.

In my comments I noted that we had an incremental headwind from FX in the back half of the year. It's obviously a lot more volatile than we've seen so.

That was a big factor.

But we certainly would have also incorporated any impacts from.

Flow hiring in the first half and what we've told you for the full year.

Great and then Brian if I could.

On service hub 5000 paying customers I'm curious how many of those are standalone that are either just using service type on its own and versus how many are part of part of growth stack deployments and then maybe in that vein not to get three questions into one but I'm curious if you're seeing customers that are starting with sales and service as a package and then moving into marketing or marketing is usually attached to either one it does on there when they're a multi product customer. Thanks.

It's a good question some on most of the business is cross sell.

Service up being purchased upfront with sales or upfront with marketing are all three or service hub being tacked onto a customer who's got one or two of those up we are starting to see some net new customers coming in and service seven as that product improves over time.

I think you'll see more and more of that that happens a lot on the sales have products really proud of the progress on that in a way that we cross sell as well as its a magnet to pull in new customers. So I think that will develop over time.

Great. Thanks for taking my questions and congrats on the quarter.

Thanks Mark.

Your next question comes from the line of frame Mcdonald from Needham and company.

Hi, This is Alex on for Ryan I, just would like to know given a constant changing dynamic in the UK regarding Brexit has this impacted purchasing decisions are spending trends as we get closer to the 30 Onest deadline.

Also what sort of major impact have you built in.

For FX for the percentage of Brexit and then can you remind me.

The exposure you have there.

I'll take the first half.

We haven't seen anything yet Alec.

Check in once in a while and that team, but the demand environment hasn't changed a whole lot.

Yeah.

Yes, we've obviously seen a lot of movement in the currency over the last period of time, and we tried to take that into account as we look for in our guidance.

GBP denominated revenue as call it mid to high single digit percentage of overall revenue.

Great. Thank you.

Your next question comes from the line of Tom Roderick from Stifel.

Hey, guys. Thanks for taking my question. So I guess, what I'd like to do is go all the way back to the headlines here, which is yes.

Getting at the point that your billings and subscription revenue both we accelerated on reported levels had on constant currency level. So fantastic job on both of those I guess, what I was hoping to get at it in a little bit more detail as.

If there's if there's anything you'd call out to highlight what was clearly some some better than expected to execution and.

Coming off of last quarter, where you can add that you're very very open and candid about some of the challenges with the outage. It would just be helpful to understand where the any sort of onetime compressors last quarter or one time positive beneficiaries. This quarter that would that would sort of altered the level of how you think about the natural run rate of the business.

Not really I think Q2.

We were pleased with.

You know performance on the top line.

I think frankly, we continue the way the Tas economics work to benefit from really strong performance in sort of Q4 Q1. So.

Nothing really to call out there.

Okay and then.

Maybe I'll just sort of follow on with that with the comment that you had on the hiring.

Anything behind you know the.

The hiring and the timing of some of the new hires that might impact the way we think about.

Billings growth or or new sales efforts in the second half of the year do you feel like that maybe perhaps.

Putting behind where you want it to be on sales capacity or is that just much more comment on hey.

Just be aware, we're going to we're going to ramp up the hiring that'll impact the way you think about margins and really not a comment on sales capacity or productivity.

I think that's a good question that the hiring were behind kind of across the board not just in sales, but we are a hair behind on.

Sales hiring.

I don't know what impact it will have probably have a slight headwind on the second half of this year, but I wouldn't think it would be huge.

Okay great.

Bryan Real last quick one for you one of the things we heard from some of your partners and customers is that the the content management system seems to be coming a very popular add on can you just sort of talk about that in particular as one of the add ons that seems to be catching some traction and the impact it's having on us.

The overall stack approach.

Sure.

We did something with that last year, where we decouple bit.

From the marketing hub for a long long time, you have to buy the marketing hub with the content management system now thinking is the content management system Standalone and connected to your free CRM.

With the sales product for that has done well in that product gotten a lot better over the last year I'm proud of that development team Thats one of the it's one of those cases, where they have been grinding on it it's not like one hail Mary pass, but she is making that probably every day every day that product gets a little better. So nice progress on that and I was surprised you asked about that you've been doing your homework.

But it is going well.

Wonderful. Thank you guys great job.

Your next question comes from the line of Brian Peterson from Raymond James.

Hi, guys, Kevin here on for Brian Thanks for taking my call.

Just a quick one from me you've previously talked about looking to drive more of a self serve touchless motion, particularly across the starter products can you remind me how youre seeing that trend as a mix of your new customer adds and maybe where you see the potential for that going forward.

Yes, it's going pretty well like over time, what we want to do is kind of tilt our go to market, where on the enterprise or corporate side little bit of a heavier touch and on the charter side, we want to make that lighter and lighter touch over time, so we're starting to see.

The number we track is the percentage of our.

Customers in revenue that comes in where they started with a premium offering and that's gone quite well really pleased with the progress on that and does a freemium model definitely working for us Im glad we switch and I think we're going to get nice returns over the long haul on that Kevin and just to put a number around that one of the numbers that we shared historically is that about two thirds a little over 60% of our net new business is coming through with the customer that starts in a free product and then ultimately purchases of pain product and that that's held up quite well in that 60% plus range.

Understood. Thanks.

Your next question comes from the line of Mark Murphy from JP Morgan.

Hi, Thanks for taking our question. This pendulum on behalf of Mark Congrats on the quarter I wanted to ask you about the partner ecosystem.

You, obviously have a pretty robust ecosystem in inbound marketing the thousands of agencies and some of your partners have added sales and then.

But with the recent addition of services I guess, how important is it for Hubspot that these partners support all the three productive jobs.

So that they can evangelize the flow through et cetera.

Having versus selling separately.

Sure.

You are right. This partnership is going well for us.

It's still about 40% of revenue and very pleased with the performance in there it's going great that partner channel is going to get some love over the next 12 months is some nice enhancements, we're going to make to that channel that will that I think our existing partners were really like and I think we'll make it very attractive more attractive to new types of agencies site and what we're seeing sort of underneath if you won packet is our existing agency partners. We've got thousands of them most of them started with that their marketing agencies really or search engine optimization or social media website development.

And many of them have embraced the flywheel and embrace sales and services and particularly the ones that are growing with this and are tiered they're doing a really nice job of spreading out and selling the whole product line. Many of the smaller ones are kind of sticking with marketing and we're okay with that at the same time, we started a new channel program to attract.

Sales consultants IC consultant implementers not extend tier ones that are in the kind of fortune 500 land, but sort of small or mid market wasn't that I was just looking at the numbers on that right before I walked in the room and that's that's picked up nicely. So I'm pleased with the partner program I'm pleased that we have this nice ecosystem I think of Hubspot is a much more resilient, adding a lot more value to the community into the customers because we have this giant ecosystem around im really pleased with the progress on it.

Okay. Thanks for that.

Kim.

Just to put a finer point on the sales hiring.

Can you talk about your headcount plans for that for the year I mean, directionally, maybe if you don't want to give numbers.

Kevin.

Should we see the growth.

Then 2018, where you ended 2018.

I'm not sure that I heard the last part of the question, but we obviously are going to comment specifically on sales hiring but we.

I think we share every quarter.

Our ending head count and we do expect that we would see a reacceleration in head count growth in the back half of the year.

And that was our last question at this time I will now turn the call over to Brian Halligan, CEO and chairman of Hubspot for closing remarks.

Yes ill see you all in a couple of weeks at inbound looking forward to it.

This concludes today's conference call you may now disconnect.