HubSpot, Inc. (HUBS) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is [indiscernible] , and I’ll be your conference operator today. At this time, I would like to welcome everyone to the HubSpot Q2 Earnings 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. [Operator Instructions] Thank you. Charles MacGlashing, Director of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot’s second quarter 2016 earnings conference call. Today, we will 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 would like to draw your attention to the Safe Harbor statement included in today’s press release. During this call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the third fiscal quarter of 2016 and the full-year 2016, our position to execute on our growth strategy including development and adoption of our sales platform, 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 press release and to our Form 10-Q, which was filed with the SEC on May 4, 2016, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today’s call, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results, currently available in our press release announcing financial results for the second quarter ended June 30, 2016, which is located on our Investor Relations website at HubSpot.com. Now, it’s my pleasure to turn the call over to HubSpot CEO and Chairman, Brian Halligan.

Thanks, Chuck. Hi, everyone and welcome to our second quarter 2016 earnings call. Let's jump in and get straight to our results. HubSpot finished up the first half of 2016 on a positive note. Second quarter revenue increased 51% in non-GAAP operating income margin improve nine points year-over-year. We are continuing to see solid revenue growth along with significant margin improvement year-over-year. HotSpot’s marketing business in the steep part of the S curve, which puts it’s in a strong position and be able to invest in future growth area like HotSpot sales, while also still being able to show significant operational leverage. It’s this operating leverage that allowed us to generate both positive operating cash flow and positive free cash, nearly a year ahead of our expectations. John will discuss cash flow and profitability in more detail later on the call. I couldn’t be more proud to the team for delivering this impressive cash flow results along with continue rapid growth. The HubSpot marketing platform is growing strong and I think we are in the very innings. This quarter we added 1,122 customers which brings us up to 20,444 total marketing customers. Our average subscription revenue per customer grew an impressive 18% year-over-year. Our customers are spending more that’s upfront in growing there data base, which allows us to grow right alongside them. They are buying additional subscriptions and they are buying our add-on products. Our revenue retention was again in the high 90 in the second quarter as up sales as up sales and cross nearly completely offset our customer revenue churn. Overall, great financial results, but what is even more rewarding, it have a story keeps on coming back to us from our customers and partners that the combination of HubSpot software our service and our inbound methodology continues to just work. We talk a lot about the global in bound community and HubSpot has already grown way, way beyond the borders of United States. You can see it in the numbers. Our international grew 75% year-over-year in the second of quarter of 2016 and now represents 27% of HubSpot's total revenue overall. Our AMEA head quarter in Dublin has just undergone a pretty hefty expansion. Our Sidney and Singapore offices are cranking along and in June we announced our new general manager for Japan, Yuri Akahira, who is leading the first class of HubSpots in our recently opened Tokyo offices. Welcome to HubSpot Yuri and team. Now many of you have heard me describe the three eyes of our go-to-market strategy that give us such huge advantage in the mid-market and gives us a lot of confidence that our model will scale globally or in the long, long haul. We use inbound versus outdated outbound tactics. We use inside sales versus hiring expensive outside sales reps, we have a driving indirect channel with more than 33,00 partners given HubSpot a reach and scale with our customers that would be pretty darn tough to replicate. But there is even more in our tool kit that puts us to a great advantage, like our ability to provide insight to our customers can drive, innovation in our industry. When we started HubSpot, we studied the modern buyer and realized that the way they live, the way they work, the way they shop, the way they bought had fundamentally changed and we have built that insight into HubSpot, to help our customers match their sales and marketing to the way people actually shops and bought. But change is obviously non a static thing and our customers look to HubSpot to continue to help them reach the modern buyer. We keep learning learning’s and innovating so that platform continues to progress, how the modern human shops and buys. One example of this is how consumers interact with technology. Looking back when we first started our careers in early 90’s the browser was invented. Low and behold, websites proliferated like crazy. In the 2000s Apple and I bet the apps are - billions of mobile apps emerged, we have such power at our fingertips. I think today, it was the very beginning of the next huge wave that’s going to be as big if not than what we have see to-date. You are going to access information through messaging apps where powerful bots sit on the other side waiting to help and frankly, it’s already happening. You can now build a bot on widely used platforms like Facebook Messengers slots. And this led my cofounder Dharmesh to work for weekends and evenings over the past several months to develop HubSpots’ new bot. Yet as of just a few weeks ago, HubSpot has a jackpot, we are calling it GrowthBot, you can access it on Facebook Messenger, SMS and on HubSpot itself. It’s for marketers and sales people who need fast accurate answers to the most pressing business questions. How is your site traffic looking, what is your biggest competitor up to, just as GrowthBot, GrowthBot knows and GrowthBot is ready to help marketers and sales people get the insight they need to make better decisions. We will be talking a lot more about our insides and innovations at the inbound event, so we hope you will be joining us in Boston in Boston in November. Okay. Let's talk about HobSpot sales, where things are going great. Our free CRM product continues to fuel and feed our paid sales pro product. I’m happy to say we have already exceeded our goal of $10 million in run rate for the sales business exiting 2016. There are few things that get me really excited about the HobSpot sales business. First, we are continuing to see strong levels of penetration for the sales product among our 20,000 plus marketing customer base. And second, we are seeing some terrific early traction with customers discovering HobSpot through our free CRM offering, buying HobSpot sales pro and then ultimately moving over into our core paid marketing products. Again it's early innings, but roughly 20% of our new marketing customers in 2016 started using HobSpot CRM before purchasing a HobSpot marketing subscription and roughly a third of our total new marketing customers in 2016 are using our CRM product. Now, these trends are super important for metrics like our marketing product customer retention where we are seeing a nice uplift in the revenue retention of our marketing customer that has purchased our sales product versus the standalone marketing customer. And this is just as exciting, it clearly indicates the huge opportunity to cross sell the thousands of great fit sales customers coming into HobSpot through our marketing product over time. I personally believe that this is one of the more interesting dynamics playing out at HobSpot right now. It reminds me a whole lot of our conversation. I had a while back with Katie Cooper and Bret Cornray from Mobile Reach. Mobile Reach specializes in developing and extending backend enterprise apps and data to mobile devices to improve mobile business processes and mobile workflows. You have an enterprise app that needs to be optimized on mobile device they are the ones you call. In 2015, Katie and team at Mobile Reach had a tough decision to make with their CRM system. It's just too complicated, it’s too full of bugs as Katie put it the product was simply unfixable and it’s time for us to move on. Lucky for us, we had a HobSpot champion at Mobile Reach and Katie up until this point, she has been quietly subscribing to our marketing and sales bots. Using our free educational resources to help her refine her personal sales process and sharing our content with her colleagues as they struggled to solve bigger picture issues like how to break down the barriers between sales and marketing team and how to grow their business. She said, HobSpot is like a shining star in this regard and had my complete trust long before I purchased anything, which gave me a huge head start on introducing HobSpot formally to my company when the time was right. Their first step was replacing their legacy CRM system with HobSpot. And you fast forward them to today and Mobile Reach now has their entire sales and marketing stack on HobSpot. The marketing department is using HobSpot for marketing and content creation and lead generation. Their sales team is using 10 seats of our sales pro addition tools and nurture leads and closed deals and they are using the HobSpot reporting add-on to create custom dashboards and centralized reporting. Best of all, they have used HobSpot software and methodology to establish a whole new way of doing integrated inbound marketing and sales at Mobile Reach. And I’m so proud of that. I love that HobSpot was the trusted source of information for Katie long before her team got onboard with HobSpot and love that she found HobSpot because of our CRM, a channel that didn’t exist for HobSpot just too short years ago. I personally believe that this blurring of the lines between marketing and sales divisions is only going to accelerate and that’s going to keep creating significant opportunities for HobSpot down the road. I want to thank the Mobile Reach team for their business and for sharing their great story. So to wrap things up here, we are only halfway into the year and I feel pretty darn good about our momentum. While there is still a lot of work to do, I'm still really excited about the platform approach in the opportunities that’s been opening up for us these days. With that, I’ll turn it over to John, now to take you through the financial and our guidance.

Thanks, Brian. The second quarter of 2016 was a landmark for HubSpot from a cash flow standpoint. As Brian mentioned, the business delivered $8.6 million operating cash flow and $2.9 million of free cash flow. It’s great to see the company deliver positive a cash flow while continuing to grow rapidly. More on cash flow later in this discussion. Form a top line standpoint, second quarter revenue grew 51% driven by 55% subscription revenue growth while services grew 11%.its important to note, services growth was impacted by some large one time services engagements in 2Q of last year. HubSpot ended the quarter with 20,444 marketing customers up 29% yea-over-year. Average subscription revenue per customer continues to grow rapidly increasing 18% to $11,978 from the second quarter last year. Subscription revenue per customer continues to benefit from customers adding contacts to their database, buying additional subscriptions for the multiple URL adopting our add-on products and from the improving mix within our installed base, as our smaller customers tend to churn at a higher rate than those that stick with us. Deferred revenue is $77.2 million grew 54% in the second quarter, compared to the second quarter of 2015. While calculated billing defined as revenue plus the change in differed revenue came in at $68.2 million up 48% versus the second quarter of 2015. It is important to reiterate the billings growth will vary from revenue growth, due to factors such as billing terms product mix and the timing of revenue recognition versus billing. Now let’s take a look at our margins. Second quarter non-GAAP gross can in at 78% up 280 basis points yea-over-year and up 50% basis points sequentially. Second quarter non-GAAP subscription gross margin came in at 84% up 260 basis points yea-over-year and flat sequentially. This is not unexpected given the significant one time improvement non-GAAP subscription gross we saw in the first quarter 2016. Remember we gained almost three points of gross margin gross margin improvement last quarter as we leverage the new AWS agreement and fine-tuned our hosting infrastructure. Second quarter non-GAAP services gross margins came in at negative 13%. We continue to see pressure on services margin as we ramp up head count for our sales business, international expansion and the deliver recurring services in our marketing business. As we grow into these costs, we expect to see incremental improvement in services margins and eventually run this business in a moderate loss to breakeven. Second quarter non-GAAP operating margin improved 200 basis points sequentially to a negative 4% margin in the second quarter 2016. The sequential improvement came from merely from leverage and G&A and sales and marketing. International revenue performance continue to be strong in the quarter, growing 75% yea-over-year. International now represents 27% of our total revenue and they continued a strong growth given our global expansions. At the end of the second quarter of 2016, we add 2083 employees outside the U.S. and a total of 1,431 employees at HubSpot, up 43% yea-over-year. We continue to hire at aggressive pace slowly in the quarter to meet the significant long-term opportunity we see in front of us. The improvement in operating loss coupled with the timing of hosting is semiannual bonus payments resulted in record operating and free cash flow. CapEx including capitalized software was $5.7 million in the quarter as we continue to build out our facilities in Cambridge, Dublin and Singapore. CapEx spend should be lower in the second half of the year and will round about 8% of revenue for the full year. Given the aforementioned timing benefits, we continue to expect full-year 2016 operating cash flow as a percentage of revenue to come in at the high end of our 4% to 5% guidance. With that, let's dive into guidance for the third quarter of 2016. Total revenue is expected to be in the range of $67.2 million to $68.2 million. Non-GAAP operating loss is expected to be in the range of a loss of $5.2 million to $4.2 million. Non-GAAP net loss per share is expected to be in the range of $0.14 to $0.12. This assumes approximately 35.4 million basic shares outstanding. And for the full-year guidance for 2016, total revenue is expected to be in the range of $263 million to $265 million. Non-GAAP operating loss is expected to be in the range of a loss of $20 million to $18 million. Non-GAAP net loss per share is expected to be in the range of $0.55 to $0.51. This assumes approximately 35.2 million basic shares outstanding. A couple of items to keep in mind as you adjust your models. Our inbound event is in the fourth quarter this year instead of the third quarter, which will impact marketing expenses and cash flow timing relative to prior years. It will also impact third quarter billings as the third quarter will not have the same tailwind as the prior years from the inbound event. We expect third quarter free cash flow to be slightly positive and fourth quarter to be negative given the inbound expenses. With that I’ll hand the call back over to Brian for his closing remarks. Brian?

Thanks John. This June we reached a big milestone, our 10-year anniversary. The number of lessons we have learned in the last 10-years could fill in an encyclopedia, but if I had to point to one thing that stands out more than all the rest it's this. If you want to build the great company, the one that literally transforms the way bid market businesses grow, you got to put the customer in front of everything. Like my co-founder and friend Dharmesh says, people don’t value marketing and sales software, they value marketing and sales success. And I think you spot on. I think if you want to deliver true measurable success, the kind of success that’s sustainable in its scale, you have to put your customers first. There is another milestone this quarter that means as much to me if not more, reaching the 20,000 customer mark, because you know without those customers we wouldn’t be here talking to you. We are laser focused on delivering more and more value to our customers becoming the indispensible platform for their continuing growth. That means we have to keep solving for them each day by helping them with their marketing and sales success in delighting them all along the way. So in closing today’s call, I want to thank our 1,431 employees, our partners, our investors and you guessed it, our customers for helping build the HubSpot we know and lasted this day. Operator, could we please open the call for some questions.

[Operator Instructions] Your first question comes from Brent Thill with UBS. Your line is open.

Brian on sales, it sounds like you are having really good traction there. Can you maybe just expand on some of the milestones that you are encouraged by and I know you are throwing up the up the caution flag for all this [ex-Q2] (Ph) side on the revenue side, but how should we think about this for a long-term. How you are finding the opportunity and marketing?

Sure. Nice to hear from you Brian. The sales business is very interesting, this year we made it a - I call it start up inside of HubSpot, it’s run standalone and what we want to give into that business, we get the growth growing and get the unit economics of the customers are highly profitable for us and we really see the expectations on that. We really got the thing growing fast, we have got the premium model starting to work, I’m really happy with the way it’s going. I think the exciting opportunity ahead of us on the sales side is really very small team working on that today. As we look forward getting full force of HubSpot behind those sales pots are relatively large inside sales at a very large agency partner team in getting them selling not only a marketing product or a sales product. So going very good about it, I like the potential revenue we can drive, I like the fact that we are going to have customers that are that are full stacked customers that rely entirely on HubSpot to grow their business. I think we have become much more strategic to the and then happened so, you know feeling great about it.

And real quick just for John, not to nitpick but the customer number growth fell below 30% for the first time and while realize the comps are big and you have some seasonality in Q1,Q2 and things over the net new customers adds. Anything just to read into that seasonality or the numbers just, from what you are seeing that is really relevant?

Yes Brent. A couple of things on that first of all, if you remember throughout last year, customer retention, while overall retention was improving and the underlying customer retention was improving. So that was really billing those numbers. Three or four quarter ago we go to the high 90%, 100% range and we kind to been there, since then obviously good level to be at and that’s it’s B space. Underlying that the customer retention inside of that was a low 80, once again good place to be in the SMB. So no longer getting that additional benefit from a customer growth with that improvement in the underlying customer attention. The other thing to remember is, we purposely give out marketing customers, so that our average subscription revenue for customer can be tracked over time. You guys can see the progress we are making there. But the one thing is that I doing that we don’t talk about sales only customers, and obviously Brian just talked about all this, excess we have had there. We have lot more relationships were building, our future customer that we can sell, additional sales products into as Brian as we talked about the, the call, we can sell marketing into as well. So a lot more customer relationships that can just, we are reporting on the marketing side but, we feel like we can continue to grow our customers from here now.

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

So, high level question and on Billings in a quick follow-up, so I realize Billings is a secondary not for you guys, but I’m sure we will all be getting a question for investors tomorrow. Since we saw 1% quarter on quarter growth a walk us to some of the put and takes of Billing dynamics based on the quarter and what happened quarter on quarter and then may be just add a quick follow-on on and I think some qualitative commentary on just the different marketing add-ons and what kind of momentum you are seeing there? So thank you so much.

So I will start with the billings question. First of all, if you think about it ex-the impact of FX, we had about one point headwind from FX and that kind of flip flop the first quarter we actually had two point tailwind. So if you look at those two numbers, there is a little bit of normalization that has to go between those two quarters. The second thing is we also obviously had really strong comps coming out the last year. I mean we were growing in the high 50s in the second quarter and I think that even accelerates the 60% in the third quarter of 2015. So people should keep in mind as they think about the third quarter there. The other thing to keep in mind is as the sales business continues to really do well, it actually puts a little bit of headwind on the billing side, because there is customers who generally monthly build customers and you might get a month or two upfront from them versus the marketing customers where we have gotten six to seven months upfront. So, our goal is to contribute to it. Having said that, in a business at this scale is still growing billings in the high 40s, we feel really good about where we are.

How you are doing Stan, it's Brian. I would say that we are doing well. I wouldn’t say they are spectacular but solid and I would give you some color on the reporting is going well, lots of our customers are buying it. Good news there is there is a lot more functionality to come on reporting and I think there will be a lot of value creation for our customers over time there, very new products, pretty rough with high potential. As probably good news on that is in the last week or the week before, the Google product teams certified our AdWords product and blessed it and so we can let the horses go in that product. There should be some good momentum there going forward. Now we have LinkedIn ads and Google ads that are all set up. In the third on the CMS that’s been solid growth. Last week, just last week, there is a company called G2 Crowd, which when I think of the Internet the Yahoo is the restaurant the G2 Crowd is to software. G2 Crowd came out and said that’s our content management system was the best one on the market, that’s number one or where we have the content management system on the market, incredibly valuable when you buy our website management content, management system with the marketing product. So I think it's going well. I think we execute and hit the gas on those parts, continue to innovate and sell them and I think it’ll be a good story.

Your next question comes from Mark Murphy with J.P. Morgan. Your line is open.

Thank you very much, and congratulations on the solid ongoing results including the positive cash flow. So Brian, I wanted to ask you regarding your bots, which you mentioned in your script. Do you have any thoughts on the pricing and the potential for widespread adoption there? And then I am just wondering also would that remain internal facing for marketing professional? Or is that something that you think could address customer questions on a Web site over time?

It's a really good question there. Here is generally how I think about bots and sort of like in the 90s Web sites came out and people start accessing information by websites in the early, what you call the older 2000, what you call that? You had the proliferation of mobile apps, new access information through those. I think over the next 10 years these bots are going to be a third way to access information and it will be a really good way. it's early innings today and it doesn't seem like it’s going to come to fruition, but in the background it’s all kinds of new technology app, that I think this will be a fix deal. So the way I think at the pot today, is the third way to access your information in HubSpot and by the way you can also access information in other systems like Google Adword and Google Analytics and different website. So it’s an overall GrowthBot, were you can access information inside of HubSpot and inside of other marketing apps. In terms of where it goes and its adoption, you bring up an idea that we talked around too, that hey you can navigate your website today, via traditional menu structure and that’s said, there could be a whole new way to navigate a website and that’s via a bot. So that something we are keeping an eye on and I think it’s an interesting opportunity. In terms of pricing for now, we are getting in a way, just doesn’t feel like something we charge for, we see how it goes, very, very early and it’s a life cycle. And we are going to keep an eye on, how the industry develop, how our bot does and it may just be an another way to get that your HubSpot information and confirmation on the internet or may be something we can monetize. We are going to bring out to come back for that questions later because [tools] surely can answer it.

Okay great, and I actually have a quick follow-up, John I’m just wondering, if you might have any incremental thoughts on how to model Billings growth in Q3 even qualitatively just because, we are mindful it’s an unusually tough comp and temporarily. And so you mentioned the timing of inbound fall differently than this year. Billing growth sequentially is about 14% last year, is there any way presumably we would trend it below that level for this particular Q3, but is there any other guidance you might give us on that?

So Mark, obviously we don’t guide the Billing, but let me give you something to think about. So like you said inbound was in the third quarter last year, was in the first week of September and so had a lot of time throughout the month to actually get the benefit of that. Obviously this year it’s in the fourth quarter, so that definitely takes away, some opportunity for our sales people to interact with customers and things like that. We grew Billing and with the high 40’s this quarter, having defiantly, I would definitely be careful on that, given the tough comp if anything Billings were accelerating from the second to third quarter 60%, like you said and it was a really big number. So defiantly I would be conscious on that front as you are thinking about third quarter, but as we go to fourth quarter, may be longer-term, we think that 40s is a good place to be.

Your next question comes from Ross MacMillan with RBC Capital Market. Your line is open.

Thanks, I had a question for Brian. Just given the early success you are seeing with sales and given that a lot of the sales deals seem to be conversions from free CRM product how are you thinking about when you actually open up for sales products to all your channel partners. When does this product really become what I think of as fully GA where every partner in theory could be selling this and you kind of unleash it on the market in totality?

Very good question Ross. I suspect next year would be some timing for that, we need to get ready for it and get our systems ready for it. But I think next year we can see it being equip through all the channels of HubSpot. The other thing I think will be interesting that’s in front of us use the free CRM as the tool today to generate customers for sales product. We can also use the free CRM to generate customers of marketing bot, we haven’t don’t much about, but there is some nice opportunities in that.

Your next question comes from Brad Sills with Bank of America Merrill Lynch. Your line is open.

Just another question on sales. What history have you seen there when your customers are coming in? What are they typically coming from? Are these just rather additive or replacement? And if replacement, where are they coming from in a Greenfield where are they coming from as well. How are they managing sales without package software?

Great question. It's a variety like the call we had, the call I mentioned on the prepared remarks, that was someone coming actually some [sugar] (Ph) CRM over, and you have got people coming from all different CRMs. There is a lot of low end CRMs that people have used and didn’t love that were really built for tracking sales, not for helping people make sales. And they start trying our CRM, really like and see how it accelerates the sales reps activity and behaviors in ways they hadn’t seen before. And so there is a fair amount of slopping out of other system. There is a fair amount of it's their first CRM they have ever purchased. There is a lot of that that’s going on that hey we started the company two years ago and we have got three sales reps and we have been using spread sheets or Google Docs or something but we need our first CRM. They try ours, it’s real easy to try it on the web, experience is nice and then they up sell to HubSpot. We are not trying to go into the enterprise and rip and replace existing well implemented CRM, its more coming from below, it's more of a ground play from the bottom.

And then one more if I may, just on ASP, obviously you are seeing real traction there with sales some of the add-on products. What about the tiered volume ads? I know it's been over a couple of years now since you have made that pricing change. Could you describe how that business has been going as well? Thank you.

It's John. So when we look at the up sells the contact, your upgrades are still the biggest driver of our up sell, so that’s still going well, customers getting more successful of inbound marketing, adding more contact in database. Then as we look down the up sell we still are getting customers buying second URLs. We are starting to get some of those add-ons that Brian talked about and then we are getting some people buying the sales product though it hasn’t been active and this is definitely something that is still in front of us to really sell those sales products back into the marketing base.

Your next question comes from Alex Zukin with Piper Jaffray. Your line is open.

Brian, on the partner channel, we have heard of some changes that you guys have made in the partner program that are designed to kind of further improve your go-to-market. Can you talk about those changes, what is changed and what is working better now than it was?

Sure thanks a lot for the question. I think the first big change we have made is we put a new leader in place, the guy name David McNeil, the gentlemen we hired from Salesforce who really like and he is digging deep on it. One of the things you did recently that I thought as awesome was he went to the West Coast spent a bunch of time at Google with their partners folks at Autodesk and was into a really learning, how to build a highly scalable partners system. You know we got a partners system today, it’s about a $100 million business today, about how do we create it’s partner model, order of magnitude bigger than the one we have today. The thing that really working well for us is our tier partners, the diamonds and platinum are doing awesome selling really well. I think where we get room to really improve is to think about, which partners to bring on, how to bring them on, how to teach them and bring them up to speed and work with them. I think that needs some work and I think there is some real low hanging fruit that we can be able to develop to get a nice growth in that partner program.

Got it. Thanks Brian. Then John, one for you another acceleration in ARPU growth to 18.3%, what is the right way to thing about the sustainability of ARPU growth this years, is 18% the right number, is there some reasons that will fluctuate below that meaningfully and the back half of the year?

Good question Alex, on as you think about our ARPU remember that's an average subscription revenue for the customer and as you think about it, given at the revenue base metric, revenue is influenced by what is happened over the last four quarters. Just based on the nature of revenue recognition and so we really been benefiting from the accelerating growth throughout last year. So as we look at that going forward, we would expect that to be in the mid-teens, potentially coming down a little bit but we think we can continue to grow our revenue per customer in the future.

Your next question comes from Bhavan Suri with William Blair. Your line is open.

Just a follow-up on the partner channel, when you look at the agency partners, have you guys thought of sort of quantifying how much of their customer base has been penetrating, what that opportunity looks like. I’m not sure I understand sort of how that sort of captive opportunity could play out in the next three to five years?

There is something we are looking at, there is two opportunities there , one is when the partner agency comes on and they have got a handful of customers, how do we work together to get them on the HubSpot platform that one initiative that we are working on that, if there is opportunity there. The other initiative is, how do we get them going and building a follow up net new account. So both of those, were there is opportunity to improve there. I don’t think it’s one of the other. Everything that happens with the partner channel that they probably don't get enough credit for is the partners also spend a fair amount of time calling on the existing customer base. And they go to a customer and say, hey, you want to review your website, we can help you with that and you want to run a campaign, we can help you with that. So partners only bring in new accounts, but they go in grow or existing account. So they are very, very valuable for us and I think we can grow along a number dimensions there.

Yes I guess I was getting to even with their existing accounts you think that some going to them and say, hey we can do xyz for you and build - put you on the HubSpot that. How far do you guys or have you saw through how that opportunity is penetrated and the quick follow-up, is there anything you need to do to the partners, someone brought up the question about enablement but is they sort of training, education, increasing go-to-market to them sort of get behind the CRM offering?

Look it’s early, I think there is an defiantly an opportunity as you point out to go sell to more of our agency partners customers, you know the Platinum and Diamond they have done a great job of selling not only to their customers, but going out partnering with us to gather lots and lots of new customers. I think we need to improve and there is a nice opportunity to do that with the newer partners. In terms of the CRM the sales and sort of the same story. The bigger agencies that around look for a while live it that have a bit of a sales spend are starting to offer the CRM and sales offerings, but we don’t have a formal program yet. I think there is a nice opportunity. Today we have 3,300 marketing agency partners. We still need to build a whole agency program that brings on sales partners and I think of sales partners I think of the tens of thousands of sales training companies out there. How do we leverage into that channel the way we leverage into the marketing channel. So that’s a nice opportunity you will see action on that in the next couple of quarters I suspect.

Your next question comes from Richard Davis with Canaccord. Your line is open.

Thank you. So two questions, so one to what degree you kind of aspired to move up market into higher price points, especially in a world where you are going to see more than likely some turbulence against firms that sensibly or adjacent to you guys whether its [indiscernible] whomever and stuff like that? And then the second one is I have seen a bunch I guess you would loosely call the sales enablement apps companies out there that are really more features than businesses. How do you think about buy versus build and sales enablement? Thanks.

We don’t actually want to go out market, and here is my rationale for it. If I look at the software industry breaking out into there is enterprise software companies and there is [CB] (Ph) platform companies, IBM is a platform company, Oracle, certainly Salesforce, Microsoft, Adobe, there is a bunch of them out there. And they sell lots of applications and help businesses run their operations and grow. There is lots of companies that sell to little companies, everything from GoDaddy that went out today to Constant Contact, and there is lots in the [indiscernible] you know the one or two or three person company, knowing to it and fair amount of that. And we think there is a big, big, big white space in between these mid market growth companies that we can build our own platform company. We can build this company sort of like Oracle or like IBM or Microsoft where we started in marketing. We started really at the top of the funnel of marketing and moved down in the middle funnel into the marketing automation. Now we moved into the bottom of funnel into CRM and sales. And so we think there is a big, big opportunity to build a platform company, all a lot of the way the Oracle and the Salesforce, the IBMs and Microsoft have done. And so we are not anxious to move up and tangle with those guys. We like where we are. We think can build something good. The second question you have it was actually really good one around sales enablement. There are indeed lots of these app companies popping up. And we are watching them carefully, and a couple of comments on that. One, is if they are building something that is unique, has some special access to data or maybe is using artificial intelligence of it's smartwear has something that’s hard for us to build. We may pick it up. But for the most part, we are pretty good at building software at HubSpot. We got a great R&D team. We have great access to talent here in Cambridge. We are having good time recruiting here in Cambridge and we have terrific team. So we are not rushing to go and cobble together bunch of other sales and inlet system. The other reason we don’t rush to do it is one of the reasons that HubSpot is so powerful isn’t very much all-in-one. You built it from the ground up with a really nice user interface. You don’t have to go deal and learn a whole bunch of UIs, it's really nice. So we want to be careful not to ruin that. Having said that if we find something really special, we would pick it up and buy it. I guess one more comment Richard, because it’s such a good question my friend. We see ourselves as a stack Company most of those sales enablement company that you are product looking as the same one I’m looking at. They are mostly built to work on top of Salesforce.com and Salesforce.com has done a nice job there. We want to build our stack and we want to be able to make it really easy for customers to came in, one user interface, one bill to pay, one number to call on support, make it very simple from your model business to take advantage of the internet and really grow.

[indiscernible] great.

Your next question comes from Brendan Barnicle with Pacific Crest Securities. Your line is open.

Thanks so much John, I apologize if this was covered in the comments. I was late getting on today. Pro services were sort of flattish sequentially or up sort of more modestly what we seen, is that the we should be thinking about that going forward, if you guys gone to sort of made the saturation point more and more we can just go to the channels and we talked a lot on this call about, how successful you guys are been building up that channel.

Now it’s a good question, I mean, the first quarter the second quarter can have some seasonality to it, the first quarter gets the huge benefit from delivering what we sell in the fourth quarter. And you know as in the second quarter builds up in the first quarter which is a even it slightly lower quarter from a services stand point. You didn’t quite see that last year, just because as we talked about there were some large deals and that definitely weighed in on the services growth rate from that stand point. But we are focused on growing the subscription revenue, we think that services defiantly will, grow at a slower pace. And we will look at services, there is a way to enable customers be successful. Really make sure we try to keep our customers as long as possible and make them successful and so that’s why you see in the margins as well. We really think , we can get that margin closer to breakeven over a longer-term, but we are never going to maximize that services merger, we really just want to maximize that subscription line items, make us customer successful.

Terrific. thanks for the additional clarity.

Your next question comes from Tom Reddick with Stifel. Your line is open.

I wanted to hit on the international segment here, that was my question, apologize if you guys touched this in more detail, in the prepared comments. Like Brendan, I had to jump probably late, but I’m looking at the number from the queue and say they look like you are about $6 million sequentially, even with some added revenue headwinds in total and international continues to do very, very well. So what I would love to hear more from you is as you guys have opened up yet another office in A-Pac and as you have more experience and you build an international. What is the partner community looking like in those region, how much success are you having establishing new partners there versus the direct sale and how do you think about that opportunity on the agency channel partners going forward out in those regions?

Tom it was a good question. it’s start with agencies overseas so let’s take Europe, we basically started Europe with agencies and then we were layered indirect. First, we layered indirect in the UK with the English-language products. And then overtime we built a French language and in the Spanish language, a German and a Portuguese version of the product, then we started selling direct in addition to channel partners in Europe. As we move over to Asia it’s kind of a similar play book, were we started indirect all over Asia, actually and just now we are starting to layer indirect sales forces. We layered indirect but I guess a year ago we started in Australia a little longer, John?

Yes, those are longer yes.

We start in Singapore two quarters ago, and they are working on South Asia and we are just starting Japan. In fact, I am heading over to Japan in three weeks to do the product and office branch over there. In Japan like the other countries starts with agency partners and then we layer indirect. So that’s the playbook we use, it's working really well for us. We haven’t seen a lot of push back. The acquisition of new agencies in international has been good and the productivity has been real good.

Wonderful. One of the things I think we have gotten a number of questions on this call, relative to the entry level CRM product. And of course you guys have a nice relationship with Salesforce.com. Wondering if you can address just as you gain more traction with your own CRM products. If you can address how that relationship is evolving with Salesforce and just maybe perhaps remind us as to the timeline of that relationship, how long its sport of locked in for?

We did a deal with Salesforce I guess about a year or so ago that was a five year deal. And it's based - the way I would describe it, it's a purposeful competition arrangement where we both agree that we are going to cooperate like crazy on joint accounts. And we both agreed that we would also compete from time-to-time on marketing and sales and that we will be talks about it and with all behave well and would sell to the customer. And I think half of the Salesforce.com they get that and they want to take care of the customers out two week. So feeling good about the relationship I have personally got a good relationship with those folks over there and it's working just as we thought it would. We do cooperate a lot and we do compete a lot and I think it's working fine and really happy with the way it's going so far.

Your next question comes from Eric Lemus with Raymond James. Your line is open.

Question for you, John, looking at the implied guidance for the fourth quarter on total revenue, correct me if I’m wrong, but it looks like there is a bit of a deceleration for the fourth quarter. Is there any one time items that you can talk about or am I just looking too much into that?

Yes I mean as you look out obviously we only guide in the next quarter, I know you can back in, so we really focus on the next quarter. We talked a little bit about the Billings challenge in the third quarter just given not having inbound and just comp on that side as well. So it's still weighs out, so that’s about what is going to happen there.

Your next question comes from Scott Berg with Needham & Company. Your line is open.

Hi Brian and John, congrats on a good quarter. I have one question in particular and apologize if it's been asked, I too have been call jumping. But on your customer addition, you commented 20% came from the free CRM products in the quarter. It’s kind of a two part question. One, what type of customers are those coming from, are they your basic level customers, are they more your professional customers, or enterprise, trying to understand maybe the size is there. And then what is the right way to think about those conversions going forward? Is it within the segments that you are seeing today or is that ball maybe over the next 12 to 24 months?

Really good question. The number we gave is of the cost of the new customers we sign up for our marketing product, 20% of them were using our CRM product before they purchase the marketing product. Which I think is really encouraging, it’s not something we focused on, it will be something focused on down the road. I suspect if you roll the clock forward that percentage, I think it should go out and looking at Chuck here to make, I think it doesn’t get mad at me, but I suspect that 20% should go up. Our CRM product is pretty early, it’s getting a lot better over time and we’re going to start focusing on how to turn CRM users into marketing customers over time. So I suspect that 20% number has room to improve. I guess that’s my first thing, and my second answer is, the way I think of CRM is started kind of low and will move up over time, it’s sort of classic, sort of bottom up play. I’m going to guess that the CRM users are hair smaller on average then the marketing customers and as we add functionality to that CRM product, I think you will see the average size of those customers signing up to grow as well.

Great, at the moment, I’ll turn back in the queue. Thank you.

I want to thank everyone for jumping on the call and look forward to see you all in our inbound conference in November. Thanks a lot everyone.

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