HubSpot, Inc. (HUBS) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Connor [ph] and I'll be your conference operator today. At this time I would like to welcome everyone to the HubSpot fourth quarter earnings conference call. [Operator Instructions] Lisa Mullan, Director of Investor Relations at HubSpot, you may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot's fourth quarter and full year 2015 earnings 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 Brian Halligan, our Chief Executive Officer and Chairman, and John Kinzer, our Chief Financial Officer. Before we start, I'd like to draw your attention to the Safe Harbor Statement included in today's press. During this call we'll make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first fiscal quarter of 2016 and the full year 2016, our position to execute on our growth strategy, and our ability to maintain existing and acquire new customers and partners. These statements reflect our views only as of today and should not be considered our views as of any later date. Please refer to the cautionary language in today's release into our Form 10-Q, which was filed with the SEC on November 4, 2015, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's we'll refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release announcing financial results for the fourth quarter and year ended December 31, 2015, which is located on our Investor Relations website at hubspot.com. Finally, I'd like to convey a chance in the HubSpot Investor Relations leadership. I'm transitioning to another role within HubSpot. I'm super excited to introduce my successor, Chuck MacGlashing, who comes to HubSpot from Putnam Investments. Chuck brings a wealth of knowledge from the buy side where he worked for over 15 years. We're thrilled to welcome Chuck to the HubSpot team. Now it's my pleasure to turn the call over to HubSpot CEO and Chairman, Brian Halligan.

Thanks, Lisa. And welcome, Chuck. Hi everyone and welcome to our fourth quarter and full year 2015 earnings call. Let's jump in and get straight to our results. HubSpot ended 2015 on a very strong note. Fourth quarter revenue increased 56% and non-GAAP operating income margins improved by 12 points year over year. We added 1,262 net new customers, which was the most customers added in a single quarter of all of HubSpot's history. Fourth quarter capped a great year of performance in which HubSpot's full-year revenues grew 57% compared to 49% in 2014. That's not all. What I'm most excited about is that our business is scaling. Not only are we seeing solid, strong revenue growth, but also margin improvement year over year. HubSpot's business is well past the bottom of the J-curve where we can keep investing in future growth while still improving margins. Before I dive deeper into the drivers of the business, one of the reasons for getting so much leverage, maybe the main reason, is reflected in a major milestone we reached this quarter. We achieved just over 100% revenue retention for the first quarter ever. Back in 2013, just two years ago, our total Company revenue retention rate was in the mid-80s, with the customer renewal rate in the high 70s, and only 8 or 9 points of upsell offsetting that. Now we're seeing customer revenue renewal rates in the low 80s and we're getting 20 points of upsell. That's a totally different business model. And with our new add-ons and our new sales products, I'm confident we can keep cracking on that model. What this means is that HubSpot is selling more and more products into our customer base, which is offsetting the natural customer churn of the midmarket, and it's this dynamic that will help keep growing HubSpot into a much, much larger company than we are today. The fourth quarter is a naturally strong quarter for us and it's time when customers tend to spend a bit more in upsells, but while we may dip back down below 100% from time to time, hitting this milestone for the first time sure does feel good. Okay. So, why is our retention so darn good? Well, we're reaping the benefits of the bets we made a while ago on our core market products and the bets we made on our new sales add-on products last year. Warren Buffett once said that someone's sitting under a tree today because someone else planted the seed a long time ago. And that's certainly the case here at HubSpot. Let's look at some of those seeds we planted, starting with our marketing business. Our existing marketing customers are spending more and more with HubSpot and our new marketing customers are spending more from day one, all of which are showing up in our revenue per customer growth of 17%. Now I want to be clear that this revenue per customer growth does not mean we're moving up-market. On the contrary, our mix of new customers across HubSpot, basic, pro and enterprise edition, has remained pretty constant over the past four quarters. What's happening is that our newer courts are just buying more of our products. Now you may be saying, okay, Brian, but will this mid-teens ARPU growth continue? And yeah, I think it will. And here's why. There are two things I look at when I look at the sustainability of customer revenue growth. First, I look at the percentage of the marketer spend on HubSpot. In our State of Inbound Marketing Report, we looked at the average marketer's budget in the midmarket. And the results show that most of the time HubSpot represents 10% or less of a mid-marketer's budget, which means we can still see strong revenue per customer growth in our target market. That's a really good sign. Secondly, I look at how much existing HubSpot customers tend to increase their spend with us. And on average, our customers were spending roughly 17% more per year with HubSpot through upgrades, by growing their contact years with HubSpot, by adding second URLs, now purchasing new sales and add-on products. That's another pretty good sign. When it comes really down to it, HubSpot software works. We help our customers match their marketing and sales with the way modern humans actually shop and buy, and that helps our customers grow. When our customers find success with their products, they naturally want to buy more of it, so HubSpot grows when our customers grow. We're adding tons and tons of brand-new customers each quarter. And remember, we're still in the early innings. We're still just getting started in the greenfield market of 3 million potential customers and we're growing really fast, and working really hard to capture this. And I think we have a unique set of advantages as we go to market to capture these customers. Because our model matches the market, we're inbound versus outbound, we have a great indirect channel with our agency partners and we're selling inside versus hiring a bunch of expensive outside reps. This gives us incredible reach and it gives us a low customer acquisition cost and great economics. Let's take a moment to talk about how the HubSpot indirect channel, our partner channel, not only helps HubSpot's business scale but helps our 2,900 plus partners scale their own businesses. It's pretty darn exciting to be part of such a powerful global movement of growth and change. I recently came across a great blogpost that was written on LinkedIn by one of our partners Blend B2B out of the U.K. In it, Blend B2B's Marketing Director Sean Sweet talks about how the inbound movement changes business in its life when he says the following. "In 2013, before HubSpot had entered our consciousness, we were a young agency eager to find our place in the market. Back then we used traditional sales methods to bring in new customers. Often they weren't a good fit for our business. We didn't qualify our prospects properly, and much of this was the result of the financial pressures we faced. We told ourselves that growth was the priority. We could always be pickier when we're larger, or so we thought. At the time we had just celebrated three years in business. Although we had grown, there was always a high degree of insecurity when it came to our clients. Would they still be with us next month was a regular topic of conversation. Endless meetings, sleepless nights and long days were spent trying to figure out what to do, what service issue we offer, who should we work for, and more importantly, who shouldn't we? How could we recruit better, smarter people, and how could we get our message across? The answer was HubSpot. Although we didn't realize it at the time, HubSpot would solve many of the problems we faced. HubSpot gave us the tools and the training to figure it out, who should we write blogs for, how do we get them to visit our site, how can we get them to complete a form so we know who they are, how can we nurture them through our sales pipeline? Luckily, HubSpot gave us the tools and the training to succeed." Success stories like Blend B2B are a huge part about why I love working here at HubSpot. Just great. Now, last quarter we rolled out a couple of new add-on products I want to talk about. At Inbound 15 in September, we launched three new add-on products. We announced and released a new reporting add-on product. We announced a very exciting new ads product. And we announced a much improved version of our website hosting product. It's the early days, but we're seeing pretty great results from this so far. The ads add-on is live with LinkedIn and it's in beta with Google. Going pretty well. The website add-on is doing really well, and we love to see that because it completes the all-in-one story for marketers. The reporting add-on is going really well too. We've been selling it into our marketing customer base and just recently started selling it into our sales customer base as well. Our add-on products are already having an impact on new customer revenue and we're just getting started. So let's talk about our sales customer base for just a moment. Our free CRM is bringing brand-new folks to the HubSpot platform, where we can really nurture these relationships and help them grow. We know that customers who are using our free CRM tend to get a ton of value out of Sidekick for Business and get a ton of value from a reporting add-on and our marketing products. And selling to these specific customers is pretty easy because there are already super-warm leads. Their product qualified leads, customers who are already using free products in a way that primes and delights them and repeatedly converts them into paying HubSpot customers. We're getting very excited about our free CRM, which is winning friends and admirers every day. People love it, especially our existing marketing customers who are using it, and become stickier. We're also excited to upsell those happy CRM customers with Sidekick for Business and our marketing product too. That's the CRM playbook. That's the plan, and so far it's going really well. The Sidekick for Business product of $50 a month is also doing well. It turns out, people really love the email sequencing and meeting setup functions that are baked right into Sidekick for Business. The product market fit is there and we're focused on making sure the business will scale. Even though it's early days, I can see this business enhancing our growth in the future as we expect the sales business to be at least at $10 million run rate when we exit 2016. You'll hear much more about our sales products on next quarter's call. Now, nothing illustrates our early success on sales better than another customer story. I know. I love sharing customer stories. And this is a great Sidekick customer success story that hammers home how we're having our success. It's the folks over at Ytel, one of our marketing customers, who is just using a ton of our Sidekick for Business product. I recently caught up with Tyler Holliday, the Director of Marketing for Ytel, and he told me some pretty exciting news about how Sidekick for Business is helping them grow. Ytel started out as a HubSpot enterprise marketing customer with a total of 67 employees all told. Six of them were in their marketing department alone. That marketing team has been using the heck out of HubSpot. They use it all, the whole marketing platform, from the top of funnel all the way down. They use our marketing product and loved it. Then they started using our Sidekick product, loved that. And then they swapped out their old CRM to HubSpot, they loved that too. Ytel now has their whole marketing of sales stack on HubSpot. Recently, Tyler introduced his VP of sales to Sidekick for Business. He loved it. Pretty they had another 15 people at Ytel all using Sidekick. And what's even better is that now Ytel plans to add another 15 people, yet doubling their $50 paid Sidekick seats to 30 sales people by the end of 2016. That's it in a nutshell. Ytel is growing like a weed with HubSpot far beyond what they're already doing with their marketing platform. They and so many others are embracing the HubSpot all-in-one platform from soup to nuts, and they're seeing some incredible success as a result. Now before I wrap up, I want to highlight some of the powerful growth we're seeing from our international investments. International is going great. Our international business grew 77% year over year in the fourth quarter of 2015, and you can expect us to keep investing in our international cities in 2016. As you may have heard, we recently announced an office expansion of our Dublin facility in the fourth quarter and we'll be opening a brand-new office in Singapore. I'm also thrilled to report that we'll be opening an office in Japan in the third quarter of 2016. And if you're keeping score at home, that makes Japan our sixth office globally. That growth in international is just setting the stage for more sustained growth over time, much like the fourth quarter of 2015 is just the opening notes of what 2016 is going to bring. As we entered 2016, I feel really good about the momentum we have and the growth that we've seen. Those seeds we planted in our earlier years are starting to bear fruit. And we'll keep planting those seeds as we go into 2016, so HubSpot will keep growing for many years to come. With that, I'd like to turn the call over to John who will discuss the financials. John?

Thanks, Brian. Fourth quarter capped off a great year at HubSpot. As Brian mentioned, we achieved strong fourth quarter revenue growth of 56%, driven by 58% subscription revenue growth, and full-year revenue grew at 57%. The strong performance was driven by record customer additions, higher average subscription revenue per customer growth, and record revenue retention in the quarter. HubSpot ended the quarter with 18,116 customers, up 33% year over year. Customer growth is coming from both our direct channel and our 2,900 agency partners, and is being driven by international expansion and as our inside sales team works the almost 60,000 customer leads generated by our inbound marketing team each month. Average subscription revenue per customer was especially strong, increasing to $11,135, up 17% from the fourth quarter of last year. The increase continues to come from customers adding contacts to their database, upgrading their subscriptions, and adding second subscriptions or additional URLs to their account. We also received a benefit from selling add-on products and our sales products back into the base. But this was relatively small as we just rolled out these new products. Given the recent momentum and the value we provide our customers, we believe that mid-double-digit revenue per customer growth is achievable for the near future. As Brian mentioned, revenue retention had a milestone by reaching over 100% in the quarter. This compares to the high 90s we experienced in the first three quarters of 2015. We saw strong customer upsells and cross-sells in the quarter, due in part to yearend spending. And this drove us above 100%. This achievement was the culmination of multiyear investments and the scalability and the ease of use of our product, but also from all the work the team has put in to improve both how we support and onboard our customers. Going forward, we expect our net customer adds to grow year over year, while the annual percentage growth rate could moderate slightly, as we see the anniversary of the significant gains we achieved last year from improvements in our customer renewal rate. There's structural customer churn in the midmarket, but when you upsell enough into the base, you can get revenue retention above 100%. This in turn drives up the lifetime value, which is key to building a model that will scale in the midmarket. That is only part of the equation as you need to pair it with an efficient customer acquisition model. At HubSpot, we built our business in a way that is different from other companies that try to sell into the space. One, we go through indirect channels with 40% of our new business coming through our partner channel. This is great for our customers and partners but also for us as the partners bear much of the sales and marketing costs. Two, we use inbound marketing, which is a much more cost-effective way to get new customers. And three, we use an inside salesforce to convert these leads to customers. Inside sales is easier to scale and comes at a lower cost than the traditional enterprise sales force. With these three forces combined, our customer acquisition costs are the level where we can efficiently go after the midmarket. As we continue to grow the average subscription revenue per customer, deliver strong retention rates, and our customer acquisition cost stays in this range, HubSpot can keep expanding margins while investing to grow the business. On to calculated billings. Calculated billings, defined as revenue plus the change in deferred revenue, for fourth quarter 2015 came in at $63.3 million, up 55% versus the fourth quarter of 2014. We are pleased with our billings growth, especially given the tough comparison from the 65% billings growth in the fourth quarter of last year. Next, let's look at our margins. Non-GAAP operating margin continued to expand even as we invested in growth, coming in at a negative 8% margin in the fourth quarter. This is a 12-point improvement year over year and a 2-point improvement from the third quarter of 2015 after removing the seasonal impact of our inbound conference expenses. International performance was strong in the quarter, growing 77% year over year. International now represents 25% of our total revenue and should continue its strong growth given our recent global expansion. Also, given the strength of the U.S. dollar, FX had a negative impact of 4% on our revenue growth. In order to meet the rapid growth, we continue to bring on new space for our expanding team. We are opening a new office in Japan later this year and we expanded our signed new leases for our facilities in Cambridge, Dublin, Sydney and Singapore. You can see the impact of this expansion in the higher CapEx in the fourth quarter of 2015. This build-out will continue into 2016, and you can also expect to see higher CapEx in the first quarter of 2016. After that, capital expenditure should moderate as we complete these expansion projects. At the end of 2015 we had just under 200 employees outside the U.S. and a total of 1,157 employees at HubSpot. Turning to the balance sheet, we ended 2015 with $145 million of cash and marketable securities and we had no outstanding debt. CapEx, including capitalized software, was $7.4 million, reflecting our facilities expansion. Also, operating cash flow in the fourth quarter was healthy as we generated $2.6 million of operating cash flow in the fourth quarter. With that, let's dive in to guidance for 2016. The first quarter of 2016, total revenue is expected to be in the range of $54.7 million to $55.7 million, representing year-over-year growth of 45% when using the midpoint of the forecasted range. Non-GAAP operating loss is expected to be in the range of a loss of $6.6 million to $5.6 million. Non-GAAP net loss per share is expected to be in the range of $0.20 to $0.16. This assumes approximately $34.7 million basic shares outstanding. For the full year 2016, total revenue is expected to be in the range of $248 million to $251 million, representing year-over-year growth of 37% when using the midpoint of the forecasted range. Non-GAAP operating loss is expected to be in the range of a loss of $27 million to $24 million. Non-GAAP net loss per share is expected to be in the range of $0.78 to $0.66. This assumes approximately 35.3 million basic shares outstanding. Also we will be providing full-year guidance on cash flow but will not be providing specific updates on the quarterly calls. Full-year cash flow from operation is expected to be in the range of 4% to 5% of revenue. Full-year CapEx is expected to be approximately 7% of total revenue and will be heavily weighted to the first half of 2016. I'd like to reiterate that we're still on track to achieve sustained free cash flow in early 2017. Finally, a couple of items to keep in mind as you're modeling 2016. You should generally expect flat to slightly worse operating margins in the first part of each year as we get a jump on hiring and experience payroll tax resets. As we start to scale with these investments, you should continue to expect us to deliver ongoing operating margin expansion. We signed a multiyear agreement with Amazon Web Services for our hosting costs that will impact first quarter cash flow but will give us a scalable infrastructure for our product with predictable costs as we continue our rapid growth. As you think about how revenue per customer, customers and billings growth trend going forward, please note that we have seasonally strong results in the fourth quarter, especially for our billings and revenue retention. Lastly, our inbound conference will be in the fourth quarter this year, which will drive higher marketing expenses and impact our operating margins during that period. Summing up the fourth quarter and 2015, the success of our growth initiatives are showing up on our ongoing improvements and revenue retention, our healthy customer growth, and our strong annual subscription revenue per customer results. I'm excited about HubSpot's trajectory into 2016 and I look forward to updating you on our progress throughout the year. With that, I'll hand the call over to Brian for his closing remarks. Brian?

Thanks, John. To close, I'd like to share a few new accolades HubSpot received in the fourth quarter. Boston Globe named HubSpot as the number one large company to work for in Boston. HubSpot was also named the fourth best place to work in the United States on Glass Stores Employed Choice Awards. You'd be amazed, maybe you already know how much that sort of thing helps when you're recruiting top talent. Not to be outdone, Fortune ranked HubSpot as the second best medium-sized company to work for in tech. HubSpot's culture was also named Entrepreneur's top company culture for 2015 in the large enterprise category. It's a huge, huge honor, and thanks to our whole team. I want to thank our 1,157 employees, our partners, our customers and our investors for building the HubSpot we know and love today, and for helping us build an even more wonderful HubSpot for years and years to come. It's a pleasure and honor to work arm-in-arm with you every day. Operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is open.

Great. Thanks so much. Brian, at the beginning of the year, do you guys do any sort of sales reorg or is there any change in distribution that you look at as you roll out more of these products and your strategies?

Hi, Brendan. No major reorg this year. We made a couple of tweaks in the sales organization every year, tweaks around segmentation, a couple of tweaks around compensation plans that'll help us grow faster and gain more leverage. But no big sales reorg at this point, no.

Great. And then, John, as I looked at the guidance, the one thing I noticed is that, at least in the 2016 guidance, your stock-based comp expense has gone up pretty considerably this year from 2016 versus 2015. Obviously partly that's additional employees. But is there any change in your strategy there? And would we expect to see that same kind of increase as we thought about future years?

Yeah, Brendan, good question. As you think about stock-based comp, remember, stock-based -- well, our options and [inaudible] years. And as you issue equity post going public, we price this a lot higher. And so you get a bit of a catch-up once you get that normalized costs going through the P&L. And so that's the catch-up we see in 2016. You're right, going forward, it should -- the increase should modify, but that's just the fact that, you know, we now have two years with the larger stock price than we did when we went out when we, you know, we only had the 2014 pre-IPO price.

Great. And then just one last one, Brian, on the international side, you mentioned Japan and that sixth office. Should we expect a seventh to eighth office this year?

Probably not this year, but I would think the year after we'll keep layering in new offices. They're working out great. We did Dublin, boy, a couple of years ago, and that has been just great. The employees we've picked up over there are fantastic and they're killing it. They're absolutely killing it. And then we've done Australia, that team's really picked up, and we did -- just did Singapore and about to do Japan. So our international investments have gone very smoothly, and I think you can expect more in the years to come. But probably not another one this year.

Great. Thanks a lot guys.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open.

Hey guys. Thank you very much for taking my questions. So the thing that really stood out I think to everybody is the revenue retention rates taking up above 100%. But within that, the unit retention rates obviously also ticked up. So, how much of that improvement is being driven by your continuous investment and your support organization? And where do you see your actual unit retention rates trending going forward?

Yeah, Stan. It's John. So, yeah, we've definitely got good benefits over the last couple of years, from the underlying customer renewal rate and then the upsell on top of that. You know, as we got over 100% in the quarter, it was definitely both, but a little more on the upsell rate. You know, we've gotten very little benefit from add-on products, that was nice little uptick. But we still continue to see people come onboard, add a lot of contact tiers, buy second URLs, all those things that are kind of working. You know, as I think about going from here on out, like Brian said in his prepared remarks, you know, it could bounce around a little bit. But as we think about if it could go higher, I think it would be more on the upsell. We've kind of hit the low 80s in our customer renewal rate, and we are focused on SMB or the midmarket, and there is just some structural churn in that market. But when you can acquire customers and those customers that stay with you spend enough to offset what you're losing from the customers that are churning, the model really works. And you see it in the revenue retention and you also see it in the great customer economics.

Yeah. Just add on to that, Stan. It's Brian. One of the things I think that are real core competitive advantage for the Company that's going to serve us well for a long time, is that decision we made to go after SMB and not drift up into the enterprise. And I think there's a couple of keys to nailing an SMB model that I think we've done a pretty good job on. One is to keep the costs to acquire a customer low and scale that at volume. And the way we do that, there's sort of three things we do on that. First, we do inbound marketing, not outbound marketing. So it's much cheaper. We pull people into us. We got over 6 million visitors to our website in January. We're getting over 60,000 leads a month. Just a lot of interest getting pulled into us. The second is we use inside sales versus expensive outside sales. Inside reps are fantastic. They're marketing ninjas. They really help the customers figure this stuff out. And the third is we use an indirect model. We have all these resellers. 2,900 other companies out there align with us, representing our products. So that's kind of the first key to scaling in SMB, is, how do you keep your costs to acquire low even as you add gas into the engine. The other side of that is total lifetime value. I think what gets companies in the SMB is there's a natural churn rate. You have companies that will go out of business in SMB. The key for us is filling that divot in of the customer churn with upsell. And that's a real key. We've been able to do that this quarter, we got our retention rate up over 100%. And so that keeps that total lifetime value quite high over time. And our total lifetime value has really, really expanded over the last couple of years. As our average revenue per customer has gone up and as the retention's gone up, our customers are just worth a lot more. It turns out, Stan, doing this stuff is pretty hard. There's not a ton of SMB companies that have been super-successful. I think we're going to be one of them and I think we're kind of writing that playbook. It's not an easy playbook but I think we're getting close to mastering it and it's going to serve us well for many, many years to come.

That's great. Very helpful. Thank you guys. And two very quick questions for John. You mentioned the big Amazon Web Services deal on hosting that you signed and that should impact 1Q cash flow numbers. Do you still expect Q1 numbers to be positive for cash from operations? And also you mentioned 4% impact from FX on revenue. Is it fair to assume that the impact on billings was maybe, you know, a point or two higher than that? And that's it for me. Thank you.

All right, Stan, yes. So I'll answer your questions in reverse. On the FX impact, the billings was a little bit less. It was more like 2%. The euro was strengthening throughout that period. And so, a little bit less of an impact on billings. On the Amazon Web Services contract, yeah, we still, even with that cost, we still expect to be cash flow -- operating cash flow positive in the first quarter. We just wanted to make sure people understood that it could be a little bit tempered just given some of the upfront payments we need to make on that AWS deal.

Great. Thank you very much.

Your next question comes from the line of Brent Thill with UBS. Your line is open.

Thanks, Brian. You were really clear on your forecasts for the ARPU growth on the mid-teens. And I guess just underscoring your confidence in that is, when you look at the buying more upfront, it seems like you're also seeing potentially a mix shift at some point from pro to enterprise. I know you mentioned that renewal or the uptake of the subscriptions has been pretty consistent. But I'm just curious if you could just talk about what you saw with the more buy-in upfront and how do you see that continuation? And also, how do you look at just some of the existing installed base, thinking about the move from pro to enterprise?

Sure. How you doing, Brent? I guess I would say, if you would have looked at our cohorts over time, let's say from 2013 to 2014 to 2015, the cohorts are just getting much more valuable and they're getting valuable in a couple of ways. One is they are spending more upfront. And the second is they're buying more of our products later on in their lifecycle. In terms of the upsell in the pro to enterprise, here's how I kind of think about HubSpot. If I go back in time, for a long time HubSpot cost $250 and there was no other options to it, it was just $250. And then we put in our first axis of pricing which was your basic or your pro, your enterprise. And people moved -- there's a little bit of move between basic and pro and pro into enterprise. And then we put in a second axis of pricing which was our contact tier [ph], the more contacts we manage for you, the more you pay. And then the newest access are these new add-ons, the ads product and the reporting product and our website add-on. And that's just starting to -- that's just starting to kick in. That's a brand-new wave. And then the fourth tier will likely be the, you know, the second line of business, in sales business. So, all of these layering in of new axes of pricing is enabling us to just get a lot more value out of our customers and to deliver a lot more value out of our customers. And we kind of expect that ARPU growth to continue. Just one of them is the pro to enterprise. John, I don't know if we've seen an uptick in pro to enterprise. I don't think we have.

No. We really haven't. I mean it's really the contact tiers and the second URLs and now a little bit with the add-on products in the sales business.

Yeah.

Okay. And the macro question of how you can keep flying underneath the radar of what every other tech company is saying as the macros -- macro clouds are moving in. What kind of gives you more confidence assuming this as we move forward through the year that no one wants the macro to slow, but if it does, what are the safety nets that you feel you see that are put in that give you more confidence based on what is increasing cloudy outlook?

Sure. We're looking at the same forecasts as you and we're also -- yeah, we look with great interest at LinkedIn and Tableau and all the stuff that's been going on. We haven't seen a thing in terms of headwinds in economy. One of the nice things about being CEO of HubSpot is I get daily reports on what's going on in the business. This really is a daily type business. And so I get a daily report on lead generation, on new sales, on retention, on pipeline, all that kind of stuff. And no signs of anything in any of those reports. It's all good. And we're a little -- we knew we were going to get this question and we're asking ourselves about the economic impact as we read the news just like you guys do. So John and I did a little tour of the sales floor yesterday and we went around and we met individually with nine different sales reps up on the sales floor and we picked the more experienced ones. And they were nine for nine in saying that they haven't heard the word economy or any pushback in the market from it. So we're feeling absolutely nothing at this point. Now, if there were a big downturn, if 2008 happens again, we certainly are not completely immune to it, but at this point we're not seeing a thing. I don't know if there's anything you want to add to that.

Yeah, Brent. So I think to Brian's point, obviously we look at things very closely, and like Brian said, we look at things daily. And I think it really, us even more than other companies, given that we work at a monthly pace, I mean I think we would see it before other people might see it. And as we built out the plan this year, we built in contingencies and levers if we did see something. As you think about our expense base, we still spend a lot of money on sales and marketing to acquire new customers. In fact, I think 70% of our costs are headcount related. And when you're growing headcount 30% to 40% a year, it's a huge lever if you do see something in the economy or you see some pullback in our productivity of our sales reps or something on retention. You can actually, you know, dial that back and you can, you know, offset what you might see on the top line. So we haven't seen it yet and we still think that the market's very under-penetrated. We have a great greenfield opportunity here. So we're going to continue to invest prudently, but obviously, keep an eye on what's going on out there.

Great. Thank you.

Your next question comes from the line of Terry Tillman with Raymond James. Your line is open.

Hey guys. I'm compelled to say, great job on the quarter.

Thanks, Terry.

Thanks, Terry.

Yup. First question just relates to, Brian, as you are adding more products to the mix and your value proposition increases with the customers, what are you doing though in terms of making sure those customers on face value is like, well, that's no-brainer, I need sales enablement tools in various products like that further down the funnel. But are you adding to your account management or your relationship management teams to make sure those folks have actually been leveraging those additional tools? Because it seems like, in the SMB market, it's -- the churn can happen because it just -- they're not using the tools well enough. So what are you doing to back up the product innovation to make sure they're actually going to use these additional products?

That's a really good question, Terry. On the marketing -- we really still run our sales business as a startup within a startup. There are some nice overlapping, we're starting to get some synergies. But we're trying to get that thing in and of itself, really cranking it, another very high-growth business inside HubSpot. And so it's not completely integrated yet. I think you'll see it be completely integrated probably in 2017, so it's separate. We do have an account management function inside of HubSpot, and those account management do a terrific job of onboarding customers, helping them get the value of HubSpot, of implementing the inbound methodology and the tools at the same time. And that's a pretty good-sized organization. They do a pretty good job. But no major additional costs going on there. They're doing things to become more efficient and work smarter, but no huge change there yet.

Okay. And I guess the inbound event, I mean it's fun to go to, we have great access to your customers so it's really helpful to us. But what I'm impressed by, thousands of folks that are not customers. You've been doing this long enough now. From an event marketing standpoint and taking into account what John talked about in terms of the customer adds in fourth quarter, have you got it down to a science, and how helpful is that actual event in closing business in the second half of the year? And again, I'm compelled to say, nice job. Thanks.

Thank for the kind words. The events key for us. It's more -- we try to run it like an industry event more than a HubSpot user group or product conference, so that's why you see that dynamic of many of the folks being there not being HubSpot customers. And I'll be honest with you, for years and years when we ran it, we didn't even really concentrate much on having sales meetings and things like that there. We hired a new VP of sales from Salesforce.com, a guy named Hunter. It's terrific. And one of the plays he brought over from Salesforce.com, is, why don't we have room -- a set of rooms at the inbound conference where we can have our sales reps and account managers to meet with prospects, one-on-one coach them about the new products. And he started doing that two years ago. We did it a bit last year. And we're starting to see that as a momentum creator in the sales process and upsell process. So you're likely to see more of that going forward.

Thanks.

Your next question comes from the line of Alex Zukin with Stephens. Your line is open.

Thank you guys for taking my question. I guess, first maybe, can you talk about the continued investment in the partner channel both to just expand the number of partners but also to empower kind of the largest ones? And also maybe dovetailing around what's the services revenue strategy going forward, how should we think about the growth on this line, and just the general strategy as you build out the partner channel?

Sure, I'll take the beginning and maybe you the services. Partner channel is doing great. It's about 40% of our business these days. And we're working on both sides of the equation. We're adding more partners and growing the 2,900. That number will grow. At the same time, we are investing quite a bit in our biggest ones and trying to get the biggest ones even bigger. And I'll give you an example of that. Next week we're having all our diamond and platinum partners here at Cambridge. I'm going to spend the day with them. Actually the diamond partners are coming over to my house for dinner. And we invest a lot. We have a whole team of enablement that teaches them not only about inbound marketing but teaches them how to sell more effectively and how to create a culture. We invest a lot in these companies. And so it's both sides. I think your key question is, are you investing in growing that base or just investing in getting the big ones bigger? And we're -- it's going really well, so we're investing on both sides of that question.

Yeah, Alex, it's John. So on the services mix. Service is now about 7% to 9% of revenue and is down a little bit in the fourth quarter. And I think as you think about the base growing, and we don't really sell services as much in the base, it's really something we do to onboard our new customers, and so I think that you should expect to see services in that 7% to 8% in the near future. It's more onboarding. It's not integration, it's not implementation as we might say with bigger companies. It's more to make sure that those companies are successful.

Yeah, that's great. And maybe just one follow-up. You know, one thing I've always really appreciated about HubSpot is that you're not just selling kind of a technology, you're selling a methodology. So, maybe, Brian, can you talk about what you're seeing around the sales cycles? Do they compress at all as inbound as a theme continues to pick up steam, where you don't have to necessarily educate the buy about inbound as much? And maybe where are we in that progression?

Sure. Good question, Alex. I think if you peel it back, why do people buy from HubSpot, I think there's three reasons why. The first is they like our inbound philosophy and pulling people to them versus interrupting their way into the customer's -- potential customer's pocket. It resonates with them. It works particularly well on the SMB space. So they like the philosophy of how to market today in a way that really matches the way humans actually do their shopping and buying. The second reason I think people buy from HubSpot is the software is all-in-one and very easy to use. You don't have to learn a bunch of user interfaces, you don't have to pay a bunch of bills and call a bunch of different support lines. Everything is together with HubSpot. It's very easy to use and powerful at the same time. Because all these tools are together in one platform, you get this really nice one-plus-one-equals-three effect across the whole platform, kind of like you get when you use multiple Apple products. And the third is we're very helpful folks, it turns out. So we have a very helpful blog, we have an academy that trains people on this stuff. We have a terrific support team. So if you call in to support, you're likely going to have an answer to your call and have a real human on the line within 60 seconds. And it's those three things that sort of line up that make us really valuable to these SMBs. Their strategy and everything sort of lined up to really serve these SMBs well. In terms of the market, it feels like it's gotten much better and more mature over time. I can remember, five, six years ago, I'd spent a lot of time evangelizing, waving my hands about the changing nature of humans and how people are spending far more time in social, far more time in search engines, far more time on their mobile phones, and that there's this big shift going on, and that marketers needed to change the way they market to match it. And more and more people are coming to us with the realization that, gosh, humans are changing and we need to change the way we market itself. And so it's -- I feel like we've crossed the chasm. Still a lot more market to go though. Still really bullish on the target market and the potential here.

Got it. Thank you guys. And congratulations on a great quarter.

Thanks, Alex.

Thanks.

[Operator Instructions] Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open.

Hi, good afternoon. This is actually Albert Chi on for Mark. I'll echo my congratulations on a great quarter, Brian and John.

Thanks.

This is more of a -- thanks. So this is more of an upsell question, but I wanted to ask about the CRM product that you guys have and how you think about it fits into the broader CRM landscape, especially against incumbents. So is there a specific focus on keeping it lightweight and maybe SMB targeted? And how do you balance that against monetizing additional CRM features such as a reporting module? Thanks.

Yup. That's a really good question, Albert. I'm really bullish on the CRM. I talk -- I like that. I really like that quote, somebody sitting under a big leafy tree today because somebody else planted a seed a long time ago. And we planted a bunch of seeds a while ago around pricing and packaging, a whole bunch of stuff that are driving the results we're having these days. I think the seed we planted last year around CRM is going to be a big, big leafy tree that we're going to be sitting under for years to come. A couple of thoughts on it. There's more CRM weekly active users right now than our marketing product weekly active users. So I see that as like an uncoiled spring. There's all this potential energy in there and we haven't unlocked that energy yet. I'm really, really excited about that. The product itself, you nailed it, we built it for SMB, we built it for mere mortals, to be very easy, to be one-plus-one-equals-three, to be an awesome product. I happened to be on a site called G2crowding or G2crowd.com, and looked up CRM this morning. And there are 50 different CRM products on the market. So there's a lot of them. And HubSpot, even though the product's pretty darn new, is already number two on the list of CRM products. So the product is pretty darn good, and it's free. So I think it's really interesting. What we're working on today around that CRM is, how do we monetize an active CRM team that's using it to get them to purchase our $50 Sidekick for Business product? And that's sort of a big focus of mine these days. And that's starting to go pretty well. People are buying that Sidekick for Business product. Sales reps are really liking it. It's early, but feeling good about that. I think you'll see us maybe later this year and next year starting to focus on, how do we turn those free CRM users that are loving that CRM into not only sales product users, but how do we turn them into marketing customers as well. There's a lot more work to do here, a lot of potential energy in the system. Feeling really good about that and the potential for long-term competitive advantage.

Got it. That's helpful. Actually one more on your international business. So it sounds like it's going pretty well, and I know you rolled out some of the five local languages at inbound, or since inbound. How much of that success in the international growth do you think came from the languages versus just opening offices and establishing presence? And do you intend to roll out more of the languages anytime soon?

That's a really good question. I think we were doing pretty well before the languages. It depends on the country, but in some countries they were using the English version pretty well. But languages have definitely helped though. We rolled out the languages in inbound and we've really seen its reeling over the last month or so where in those countries people are really adopting the languages. So we haven't -- there hasn't been enough time and assistance to see what the impact is on new customer generation and retention. It makes sense to me that those customers will be happier using the products in those local languages and that we'll be able to sell more customers. But really don't have any data on it yet. We haven't talked a lot about additional languages. We're sort of focused on those right now, unless you know something I don't, John.

No. I think that's right.

I think we're sticking with those five for now. I wouldn't be shocked if we did more down the road though.

Thanks very much.

Your final question comes from the line of Michael Huang with Needham & Co. Your line is open. Michael Huang - Needham & Co.: Thanks very much, and good afternoon. Just a couple of quick ones here. So, Brian, I know it's early with the new add-on product announced at Inbound, and in your prepared remarks you had mentioned that they're all doing well. But I was wondering if you could provide us with like a stacked ranking of how they're doing or at least share with us kind of which ones are likely to see the strongest adoption as we get through this year.

Sure, Michael. I would say the reporting has done really well. A lot of our marketing customers are using it. We have very basic reporting inside our marketing product, and this reporting add-on does a bunch of stuff that they wanted that just makes sense. And so that's done really well. Very happy with the progress on that. The website add-on, we've actually had that for a while. We enhanced it quite a bit for the release in September at Inbound. And that's picked up. So the velocity on that has picked up, the product's really strong. What's nice about that website product is, when you're using HubSpot, we want our customers to use all of our products and not have any other marketing software out there. There's a ton, ton of leverage if you're using it. It's the cat's meow if you've got that CMS, you're using it with HubSpot. In terms of the ads product, that's pretty new. We've got LinkedIn ads set up. So if you're a HubSpot customer, you can buy a LinkedIn ad. And it's valuable. The Google Ad Words part of it is still in beta, and we have a bunch of people using it, it's going to work great, but we haven't finished that part of it. Later this year we'll pull that out of beta. I think there's more potential with that as that comes out of beta. But feeling good about the add-ons. That was our strategy, is, could we build new interesting stuff for our customers that would be valuable? And that play seems to be working pretty well so far. Michael Huang - Needham & Co.: Awesome. And could you remind us? I mean, is the channel at all helping in selling the, you know, these paid add-ons, or, you know, is that still to come? Maybe you'd share with us out of your 2,900 indirect channel partners, what percentage of them right now are actively helping to push these products?

Not -- I don't have that number. I'm not sure. But yeah, I think they're helping us. In particularly you think about a marketing agency, they do advertising for their customers. And to be able to do that all-in-one under HubSpot, that'll be good. They do reporting for their customers that want reports. So that makes sense. They build websites for customers, so. It's just early. I mean, I don't have any data, it's early innings. But I suspect that's going to be a big play for us, is having the channel partners selling the add-ons as well. Michael Huang - Needham & Co.: Awesome. Okay. And just last question for me, in terms of the record net adds that you added in the quarter, was wondering, I mean was there anything kind of one-time in nature around that, you know, perhaps inbound or anything else? And I guess as we're thinking about 2016, and I know you don't guide specifically around that, but is that a new -- a level that we should be trending from or, you know, should be kind of stepping back down a little bit? Thanks.

Yeah, Michael, it's John. Yes. So we definitely had a really good net adds quarter. You know, the fourth quarter definitely has some seasonal benefit to it. You know, we do get a little bit of the yearend budget flush not nearly as much as like an enterprise company, but we do get a little bit of that. And if you look at the seasonal patterns, it can step up a little bit in the fourth quarter. So, you know, it modulate off of that number, but we continue to expect, you know, add a lot of customers given the huge opportunity in front of us. Michael Huang - Needham & Co.: Great. Thanks so much guys.

Great. I want to thank everyone for joining the call and look forward to seeing you all on the road. Thanks a lot.

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