HubSpot, Inc. (HUBS) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is John and I will be your conference operator today. At this time I would like to welcome everyone to HubSpot’s Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chuck McGlashing, Director of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot’s third 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’d like to draw your attention to the Safe Harbor statement included in today’s press release. During this call, we’ll make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the fourth 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 August 3, 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’ll 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 third quarter ended September 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’s CEO and Chairman, Brian Halligan.

Thanks, Chuck. Good afternoon to everyone joining us today as we review HubSpot’s third quarter 2016 financial results. We delivered another strong quarter with revenue of $70.6 million, up 48% year-over-year. At the same time, we generated over $5 million of operating cash flow and over $1 million of free cash flow, that’s the third quarter in a row of positive operating cash flow. All in all, Q3 provided further evidence of momentum and further proof of our commitment that we made at the IPO to grow fast while showing margin improvements. It’s hard to believe that we’ve been a public company for two years already. Really proud of how the team has performed since being public and I’m super excited about the road ahead for HubSpot. Okay, let’s talk about the HubClub marketing platform. This quarter, we added over 1,200 customers, which brings our marketing customer base to more than 21,000. Now that’s just marketing customers, but keep in mind, we are adding thousands of sales customers as well that we can cross-sell and upsell over time. Meanwhile, our average marketing subscription revenue per customer grew 16% year-over-year, which means that our customers continue to spend more with us up front, continue to buy more of our software, continue to grow their contacts database and then we grow right alongside them. This powerful dynamic coupled with our steady and persistent growth in additional subscriptions and add-on product sales has allowed us to maintain a revenue retention rate in the high-90%s again in the third quarter. As we bring the sales and marketing businesses together, it doesn’t make sense to talk about marketing without talking about sales too. More and more, that’s just a fact of life here at HubSpot, given the significant investments we are making to grow our multi-product platform. Frankly, that’s how we will be evaluating our progress going forward, especially now that we’ve surpassed 5,000 paid Sales Pro customers. You know, when we created HubSpot sales as a startup within a startup, we did it, because there was a different buyer and a different set of competitors in the space. We wanted to see if this lighter touch business model could stand on its own. Because of that decision, we really think we’ve created something remarkable, especially when you consider all of that new business we are bringing in with a very light touch model, and how that in turn has held down our cost to acquire new sales customers and significantly improved our LTV to CAC ratio for the sales business. Here at HubSpot, we talk a lot about the concept of smarketing. What’s smarketing? It’s when sales and marketing come together to provide an integrated, seamless and helpful customer experience. Our software is built on the concept of smarketing, so that marketing and sales teams can work seamlessly together. So when our customers use the full HubSpot stack of marketing and sales, they tend to be much happier users and much stickier customers. It’s still pretty early innings, but for the couple thousand full stack customers we’re serving today, we are seeing a good uplift in revenue retention out of this group. We believe that this uplift in retention clearly demonstrates the value of our customers are seeing from adopting the entire HubSpot gross stack. When you think about it, it makes perfect sense. One key cause for the customer churn in our marketing product is, when there is one marketer at a company responsible for using HubSpot. Now, say that person leaves, HubSpot’s left orphaned and the customer’s at risk to churn. But when a company adopts the full HubSpot stack, even if that one marketer leaves, there is still a commitment to HubSpot across the sales organization and vice versa. We’re invariably creating customers who truly rely on HubSpot to help their businesses grow and the value they are able to get from us is significantly higher when they are adapting the full HubSpot stack. So I think this is where the magic lies for 2017, 2018 and beyond. Starting next year, you are going to see us invest heavily across the entire organization to accelerate the growth of these full-stack customers who are gaining so much value from our all-in-one products and services. We’re going to go from a marketing software company with a sales startup inside of it to a true multi-product company next year. We’ve always said that the power of HubSpot is how helpful, human-centric and holistic our platform and philosophy are. Those three special ingredients have helped us grow a global inbound community and this past quarter was a big one for HubSpot. Not only did we grow our international revenue by 62%, but we opened our sixth office with the addition of Tokyo this past July. I traveled to Japan myself to help celebrate HubSpot’s Tokyo’s grand opening and I’m excited about the team we’ve begun to assemble and the opportunity for HubSpot in Japan over the long-term. Now, let’s talk about our agency partner program. Our agency partner program accounts for over 40% of our revenue and continues to fuel our growth internationally. I’d like to take this moment to give an official welcome to all of our new great partners who joined the program in the last quarter, which now stands at over 3,400 marketing agencies. Each one of them committed to delivering a more inbound approach to business worldwide. And at this scale, they are really helping move the inbound movement to places it’s never been, really love our partner program and I’m excited about the vast improvements we will be making to it in 2017. For those interested, you should join us next week at our inbound event to hear more about those exciting enhancements, good stuff coming. Those are all great financial results, but nothing illustrates our success selling HubSpot as a platform better than a customer’s story of growth. We recently had the pleasure of catching up with Sam Brenner, VP of Marketing of BoxCast. BoxCast is a Cleveland-based startup that offers a self-service, end-to-end live streaming platform for organizations. Hundreds of colleges, high schools, enterprise business and churches utilize BoxCast to share their events with the world. It’s super compelling stuff, you should check it out when you get a minute. Sam actually started his experience with HubSpot back in 2013, when he worked at PR 2020, HubSpot’s first agency partner. Sam says that, it was here when I developed my close connection with HubSpot. It kind of clicked for me there. It made sense. It didn’t take me long to understand the value of HubSpot and the inbound approach. That passion for HubSpot stayed with Sam even when he moved on to work at BoxCast. So when we asked Sam what the HubSpot platform did for BoxCast on a day-to-day basis, he said, with BoxCast, everything we do is on HubSpot from our three full-time marketers to our entire sales team in the CRM and two salespeople beginning to use Sales Pro, we have our entire customer website built on HubSpot and everyone from top to bottom has gotten involved. Our sales team in some cases is writing right alongside our marketers. Our co-founders have begun creating amazing content. Everything that comes out of this company comes out of HubSpot. Sam continues, the HubSpot platform has become such an integral piece of our operations here at BoxCast. It finally gave this company visibility and a real alignment between marketing and sales. There is simply no longer any gray areas sitting between our sales and marketing teams. We can now have information-driven conversations around lead scoring, lead nurturing and lead conversion. That sort of capability just wasn’t possible when we were relying on individual features from disparate tool sets. The growth has been so enormous because we’ve opened up this whole new world. Wow, I want to thank Sam and the BoxCast team for their time and their insights and for articulating so powerfully what the HubSpot platform means to them. With that, I’ll turn it over to John now to take us through the financials and our guidance.

Thanks, Brian. The third quarter of 2016 was another solid quarter for HubSpot. As Brian mentioned, we reported strong growth while also delivering $5.3 million of operating cash flow and $1.5 million of free cash flow. As you can see from the results, we continue to execute on the plan we laid out when we went public of growing rapidly while showing steady improvement in profitability. From a top line standpoint, third quarter revenue grew 48%, driven by 51% subscription revenue growth and 13% services revenue growth. Services growth was impacted by a tough compare given that last year inbound was in the third quarter and we get several $100,000 of training revenue during the event. HubSpot ended the quarter with 21,658 marketing customers, up 29% year-over-year. Average subscription revenue per customer for our marketing business was up 16% year-over-year to $12,320, as customers continue to grow their subscriptions with us. Deferred revenue came in strong at $84.2 million, growing 53% year-over-year, while calculated billings defined as revenue plus the change in deferred revenue came in at $77.7 million, up 48% versus the third quarter of 2015. I was really excited about the billings growth as it is good for cash flow, but it’s worth pointing out that it benefited from a 1 point FX tailwind and a 4 point tailwind from an increase in months upfront from a promotion we ran in the quarter. The promotion provided free onboarding to new customers as long as they pay their fully subscription fee upfront. Situations like these are why we always remind everyone that billings growth will vary from revenue growth due to changes in billing terms as well as product mix and the timing of revenue recognition versus billings. Now, let’s look at our margins. Third quarter non-GAAP gross margins came in at 78%, up 3.7 points year-over-year and up 1 point sequentially. Third quarter non-GAAP subscription gross margin came in at 84%, up 3 points year-over-year and flat sequentially. Third quarter non-GAAP services gross margins came in at a negative 16%, which was a slight improvement versus second quarter 2016. As I mentioned in the billings discussion, we ran a services promotion in the quarter that increased the upfront software billings, but put pressure on services margins. The non-GAAP operating margin improved 2 points sequentially to a negative 2% margin and 9 points year-over-year, if you normalize for 2015 inbound expenses. The sequential improvement came primarily from the leverage in G&A and sales and marketing, which benefited from the expiration of our obligation to pay certain historical partner commissions. International revenue performance continued to be strong in the quarter despite a tough comparable, growing 62% year-over-year. International now represents 27% of our total revenue and should continue to fuel our growth, given the huge opportunity globally. At the end of the third quarter of 2016, we had a total of 1,556 employees at HubSpot, up 43% year-over-year. You can expect to see the pace of hiring slow through the fourth quarter, given normal seasonality and the rapid pace of hiring we had at the beginning of the year. CapEx, including capitalized software was $3.7 million in the quarter, down from $5.7 million in the second quarter of 2016, as we had much less office space build out in the quarter. We expect build outs to pick up early next year. For the year, CapEx will run at about 8% of revenue for the full-year. Given the strong cash flow performance, we are raising our full-year 2016 operating cash flow to 5% to 6% of revenue. With that, let’s dive into guidance for the fourth quarter of 2016. Total revenue is expected to be in the range of $73.7 million to $74.7 million. Non-GAAP operating loss is expected to be in the range of a loss of $7.6 million to $6.6 million. Non-GAAP net loss per share is expected to be in the range of $0.22 to $0.20. This assumes approximately 35.7 million basic shares outstanding. And for the full-year guidance of 2016, total revenue is expected to be in the range of $268.2 million and $269.2 million. Non-GAAP operating loss is expected to be in the range of a loss of $15 million to $14 million. Non-GAAP net loss per share is expected to be in the range of $0.45 to $0.43. This assumes approximately $35.2 million basic shares outstanding. A couple of items to keep in mind as you adjust your models. As many of you know who have already registered, our inbound event, which historically have been held in the third quarter is in the fourth quarter this year. So keep this in mind when modeling marketing expenses and cash flow timing relative to prior years. We expect fourth quarter free cash flow to be negative, given the inbound expenses and operating cash flow to be slightly negative. As you begin to model out 2017, please keep in mind the following items. From a revenue perspective, keep in mind that first quarter 2016 benefited from an extra day of revenue, given the leap year. This coupled with a weakening of the euro and pound in 2016 relative to the U.S. dollar will likely drive a couple point headwind to revenue growth in 2017 if currencies remain constant. From a margin perspective, the top line headwinds, I just discussed, coupled with the normal headwinds from early hiring and payroll resets will put pressure on operating margins in the first quarter. Our inbound event will be shifting back into the third quarter in 2017, which will impact marketing expenses and cash flow timing relative to 2016. With that, I’ll hand the call back over to Brian for his closing remarks. Brian?

Thanks, John. I wanted to end with some thoughts around our incredible inbound event that’s set to kick off here next week in Boston. What I absolutely love about inbound, which may come as a surprise to some of you is that it’s not just about HubSpot. Frankly, of the 14,000 plus attendees last year, more than half weren’t HubSpot customers, partners, or anything like that. For HubSpot, this isn’t about holding a user group. This is about celebrating a community. It’s about fostering a movement, the inbound movement. What we try to do here at HubSpot is to recognize changes, productize those changes and democratize those changes by giving midsized businesses the platform they need to make that movement their own. That’s why we love the midmarket so much. That’s why we’re so bullish on the platform we’ve created, And that’s why we will keep building and growing alongside this movement. And that’s why I hope to see you all there next week. I want to thank our partners, our investors, our customers, and each and every HubSpot employee for helping us build the HubSpot we know and love to this day. Operator, could we please open the call for some questions?

Certainly. [Operator Instructions] Our first question comes from the line of Richard Davis from Canaccord.

Thanks very much. One of the big themes that we see coming as kind of this kind of real-time reporter responder system. So basically people have become spoiled by Uber, so everyone wants and important quick response. So when I look at you guys, you have, if I send out a HubSpot e-mail, I can see when someone is reading [and our mesh has a bot] [ph]? So kind of broadly speaking, to what extent do you believe HubSpot is or will be moving in that kind of direction? Because it seems real-time reporter responder seems like a big deal these days? Thanks.

Yes. That’s a good question, Richard, and congratulations first off on the call today.

I appreciate it.

I feel like we’ve been doing that for a long time actually where HubSpot has been pretty close to a real-time system, where as a marketer, let’s say as a marketer, I’ve been an active user of HubSpot for a long time. I post a blog article in HubSpot and within minutes I can see, is that blog article gaining traction or the people visiting it, should I add some ad dollars behind it? What can I do with HubSpot is very much of that sort of real-time very modern perspective and we built that kind of from scratch. In terms of the bot, the way I kind of think about the bot is that, it’s a whole new way to interface with HubSpot. So, generation one of interfaces was the traditional browser interface, so your browser generation two interface was sort of the swipe interface of your mobile phone. I think we are just in the – literally the top of the first inning in the third generation, where instead of typing are swiping, you’re just talking to HubSpot and asking HubSpot questions. And that’s interesting. I think, as a user of HubSpot, that could be very interesting. I think that technology could be applied down the road to anyone’s website. And so instead of browsing through someone’s website, you just ask that website questions, everyone will have a bot some day. So, l I think, we’re well-positioned as these changes are happening in the market.

Great. Thank you so much.

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

Hey, guys, thanks for taking my question. Just one on sales with the success you are seeing there, is that driven at all by customers coming in that are new to the franchise for sales only and then you see some pull through of marketing? Obviously, it’s more often the other way around. But do you ever see examples where the customer might opt for sales first and then add marketing for some pull through later?

Yes, Brad, that’s a very good question. We are seeing a lot of that, where so many of the leads that are coming in and so many of the new customers are net new that we haven’t seen before new customers or new leads into HubSpot. So that’s – one of the things is getting us super, super excited about next year as we shift to a model, where today we’ve got a handful of sales reps selling the sales product that sales product is hot and we hit the nail on the head with that product. We want to give that sales product to our much bigger marketing sales organization, we want to give it to our agency partner channel and just gain a lot more leverage to it. And I think it will be interesting to see how it develops next year. You’ve got a sales rep next year. You have the marketing product and sales product that we’re getting marketing leads, there are going to be sales leads, it would be interesting to see how this develops. But if I were a betting man, I would bet a lot of those reps start customers off with that sales product and then up-sell them the marketing product as they’re getting the need for more leads in their system, that’s definitely a big part of the play book.

That’s, great. Thanks, Brian.

Your next question comes from the line of Eric Lemus from Raymond James.

Hey, guys. Nice job in a quarter and thanks for taking my question. Looking at your gross margin – your subscription gross margin continues to pick up pretty nicely in almost industry high subscription gross margins. Where do we see that going forward? And should we expect you guys to reach some to new levels with AWS, where you get some preferred pricing there?

Yes, Eric, it’s John. Yes, we’ve been really happy with the improvement on the subscription gross margins, obviously, that’s the lifeblood of the company. So we have done a lot of good work with the AWS agreement. There might be a little bit more room there, but I think you’re right, we’re hitting kind of the ceiling on that. I think, as we continue to grow the subscription base and services becomes a smaller and smaller piece and as we endeavor to improve the services and margins a little bit, we could still get some gross margin leverage, but it will come more from that mix than the product gross margin itself.

Okay. Thanks, John. And then Brian, just kind of a high-level question, we are hearing a new buzzword in the industry for artificial intelligence and you guys are talking about the bot. Where do you guys see that down the road as far as sitting into your product set into your customer segment? Is that more of a nice to have tech solutions, or a more monetize of all tech solution down the road?

Oh, no, I think that’s a trend that we can very much capitalize on down the road. I think it can make our offerings far better in the future. The nice thing about AI is all of the hard work that Microsoft and Google and Amazon are doing is, they’re exposing a lot of that technology, for example, through AWS, that we can take advantage of, some mere models can add this to their products. So you are starting to see pieces of it inside of HubSpot. We’re certainly are leveraging that with the bot, where natural language processing has gotten much better through artificial intelligence. You see it inside our lead scoring already showing up, use some of that. So you will see more of that from us down the road. I think it’s going to have a big, big positive impact on our products down the road and how our people buy and how they expect to be served will change, because it’s a super exciting developments that we are pumped about.

Our next question comes from the line of Alex Zukin from Piper Jaffray.

Hey, guys. Thanks for taking my question. So maybe a couple. Just first on the ARPU growth and the customer growth, 16% and 28%, that’s just great and that continue to be great, solid metrics. I guess, I wanted to ask about the sustainability of those numbers, specifically, as Sales Pro comes into fold our ARPU growth and as Sales Pro customers come into the fold on customer growth, when do you expect actually merge? When does that customer growth numbers start to actually encompass also the sales customers?

I think John and I should probably both comment on this. Okay, John?

Yes. So on the ARPU side, yes, the 16% we’ve said the mid-teens in the near future, I think we are right in that ballpark, good to see customers coming in and then adding contact tiers, second URLs, cross-selling them, getting that revenue per customer up. And then the customer growth, I think, you said 28%, I think we had 29% customer growth, so we were – we’re happy with that. I think what’s interesting really and I’ll push it back over to Brian is more and more we’re going to be thinking about total customers, whether they can’t come in on the marketing side or the sales side. We think there’s a great opportunity to bring those customers in and then cross-sell and up-sell them.

Yes, I would second that. The way we are thinking about our business is changing internally, our mental model, Alex, is changing, as the sales business is growing up. As we’re turning from a single product company to a multi-product company, the way we’re thinking about it changing quite a bit. So I think we need to evolve the way we described it to you that matches more closely to way that we are starting to describe it to ourselves. What I like about it and what I like about where we are going is, I think, we’ll be able to apply the lessons we learned from the sales business to lower our cost to acquire a customer over time and apply that to our overall business. The other thing I like about it is, when we say customers who use both products, gosh, they are stickier, and we don’t have that many of them yet. We want to really crank this up next year, when they use both products the customer retention is better and we see the revenue retention would be better. And so we think that this will really improve over the long haul unit economics and allow us to create a lot more value for our customers.

Got it. That’s helpful. And then, Brian, maybe any update on kind of the run rate of the Sales Pro product? I think you mentioned last quarter, it was around $10 million. And then John, if I could sneak in one more, you guys talked about a promotion that you did that impacted billings growth in the quarter. I wanted to ask kind of what the strategy behind that was? How successful it was and the repeatability of that type of promotional activity?

The sales numbers up over the last time, we reported the number. I don’t have the number at the top of my fingers, but it’s cranking is going well. I think we did in the prepared remarks, talk about the number of sales customers, Sales Pro customers and that’s 5,000 now. So we’ll keep you posted on that, it’s going real well.

Yes. So, Alex, we ran a promo in the quarter. We came in at the quarter. We had – we didn’t have inbound in the quarter, and we’ve run promotions from time to time like other companies do. This quarter, we decided to run a promo, where if customers buy Enterprise or Pro and pay 12 months up front, that we would heavily discount their onboarding. And it worked well. It actually drove our billings up. We got about 4 points on the billings, which is good from that standpoint. You guys should think about that from a revenue standpoint, given that part of that was more months up front than just the business, but we like that and that was good. I think as you are thinking about fourth quarter, obviously, we didn’t – we are not going to necessarily run that promo forever. You don’t want to run the same promo quarter-after-quarter, because salespeople and customers don’t respond to the same thing and we pulled billings forward a little bit with that promo. As we look at the fourth quarter, we have inbound there, which we are really bullish on and excited about. But given the 30-day sales cycle and the fact that we have a couple of holidays in that quarter, I think, we’ll need to be careful on the billings growth. So I think about a mid-30s billings growth for next quarter and then we’ll see how that plays out. But I know a lot of people stand up for inbound, but it should be a really good event.

Our next question comes from the line of Stan Zlotsky from Morgan Stanley.

Hey, guys, good afternoon and thank you very much for taking the question – my questions. So first one for Brian. Brian, you mentioned last quarter that you guys will be reorganizing or thinking about reorganizing your sales division to allow your reps to sell both marketing as well as the sales products at some point in 2017. So maybe a two-part question, of how close are you to flipping the switch to allow your reps to sell the full platform of marketing, as well as sales? And two, whenever you have these kind of changes within a sales forces selling motion, you could see some disruptions. And we’ve seen in some of the other companies in software. So how comfortable are you that you will be able to get off to a fast start once you do flip that switch on your sales margin? And then I have a quick follow-up.

Sure. Yes, a good question. We are going to flip the switch on it in January and we have been in preparation mode for last few months, working very hard here to get ready. We’ve got an incredibly smart and capable team here at HubSpot and one of the things, I like about my smart capable team is, that they have a lot of history with each other. We’re working together actually for a long time, while together. It’s a really strong management team. If we have problems, we are pretty good at fixing it. And we may have a hiccup or two, it’s hard to predict what will happen. But I’m pretty confident we will be able to fix it relatively quickly and get ourselves on track. So I think it’s a good move. I think it’s a great move actually. It’s kind of a no-brainer, all the benefits that come with it are going to really benefit HubSpot and its customers for a long, long, long time. So I definitely couldn’t do it unless I thought it was going to work, I know it’s going to work. But yes I will give you that. There’s some risk to it and I don’t think it’s tremendous amount of risk, but there’s a lot of work to do to get it just right.

Okay. And then just a quick follow-up. John, you mentioned that you guys might be stepping up investments in 2017 to really get the sales product rocking and rolling. Is there anything that you’re thinking about as we head into Q4 and people start to roll over their models, how should we be thinking about investments and leverage in 2017? Thank you.

Yes, good question, Stan. Yes, Brian mentioned, we are making investments, as you can imagine, this is a big bet for us and we are going to make sure we put all the wood we can behind that arrow. We’re still committed to delivering leverage year-over-year. But we try to make investments at the beginning of the year to really make them pay off. So with payroll tax reset, as I mentioned on the call, just the leap year not being in the – this year versus last year, you could see a little bit of headwind on the operating margins in the first quarter. But longer-term, we expect to continue to get leverage in the business. And I think you’ve seen that, we’ve been pretty committed to it and getting closer and closer to break-even and we will continue to endeavor against that.

Your next question comes from the line of Mark Murphy from JPMorgan.

Yes. Thank you very much. So, Brian, you alluded to some changes for the agency program coming in 2017. And I guess I’m just curious at a high-level, do you plan to incentivize them more on the sales products, or perhaps add some incentives for incremental lead flow in general? Just any kind of additional thoughts on that would be appreciated and then I have a quick follow-up.

Sure. Thanks, Mark. I guess in my head what I really want is, I want our agency partners to sell more stuff and deliver more value to our customers, and they are doing well. But as I benchmark ourselves compared to best-in-class agency partner programs, I feel like there’s a gap and there’s a lot of work to do. And so hopefully, when you’re in inbound, you will get to go to the agency partner program presentation, one of our senior executive Dave [indiscernible] recently took that program over and he has got a bunch of awesome new enhancements he is rolling out to the program that are designed to do just that. How do we help them grow, and when they grow we grow. And so you’re going to have to kind of stay tuned and listen carefully to that presentation. I think you’ll like what you hear and it should be pretty good.

Okay, will do. And then secondly, I was curious how you would characterize the competitive environment itself during the quarter. There were – at least, a few of your partners seemed to observe a little more benign environment, which is interesting to me. And I guess, I’m wondering if that squares with your view of the landscape in recent months?

I don’t think there’s a big – has been a big bigger. The way I would characterize it is, we compete a little less honestly with Marketo, I think that’s a very good company. It’s moved upstream a bit and so we seem a bit less than our core market and we wish them well. We see sales force a bit more. They have a product called Pardot that we compete with and we cooperate with them at the same time. And so it’s a bit of a wash. It doesn’t feel like any big shifts have happened over the last quarter in terms of the competitive environment. But I’m glad to hear that the partners think it’s more benign, I kind of feel like it’s the same.

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

Hi, Brian. Could you just give us an update on how the add-ons are doing? I think there’s a family of four in that suite with website reports ads and starter how they had adoption of those solutions are going and had a quick follow-up for John?

How are you doing, Brent. I would characterize it is going good, not great. We’ve got lots of people buying the reporting products and lots of our existing customers buying it, they like it. There’s a lot of work going into that. I hope you sit through a principle or a balance presentation there. A lot of customers are buying the add-on for advertisements, lots of work going into that product. I think, there’s upside there. And then the website add-on sort of steady as it goes, lots of our customers buying that. We get a lot of value out of it. I think it’s going good. It’s solid performance, lots of our customers are buying it. I think there’s more we can do. Some of the reorganization we are doing next year is going to set us up to do even better there, some of the product enhancements that are coming in inbound are going to set us up to do even better there. So feel good. I want to feel great six months from now.

Yes. I mean, we were talking the other day, Brian, I were on the add-on side, what’s really exciting for us on the add-ons is, when a marketing reps consult a sales products, it’s not a true add-on, but it’s a true cross-sell, where we can – where they can add more value to the customers and grow their ARPU over time. So in addition to what we have now, we think that’s another a great lever going forward.

So. It sounds like in Q1, if I’m a sales rep, I’m going to have marketing plus add-ons plus sales in my bag. So I’m going to effectively have a lot of the different latitude to run here.

That’s exactly right. It’s a good time to be a sales rep at HubSpot in 1Q.

And real quick for John, what was the impetus for you to run the promo and we totally recognize the industry runs promos a lot. Was there something that you said hey look, inbound is late this year, so we need to get ahead of this just to kind of keep some excitement in the field ahead of that? What was kind of the driver that made you implement that promotion? Can you give us just a quick sense of when the last time you drove the promotion similar to the one you did this quarter?

So, Brent, you like reading my mind. I was just about to answer the question about inbound and you could already answered it. So, yes, I mean the summer months are always a little slower, without inbound, we just want to keep the momentum going. And there was one of the things we just want to see what the trade-off was, where we discounted services heavily and what we’ve got was months up front. I don’t know if we have ever done this specific promo, but this one was pretty successful. We do promos all the time, but don’t necessarily call them out. It was also important to call it out just because it did put a little more pressure on the services margins. So we would have gotten a little bit more improvement on services gross margin had we not done this promo. So once again, we thought it was overall plus for the business, but a little bit of a challenge to the services margins.

Your next question comes from the line of Ross Macmillan from RBC Capital Markets.

Thanks so much and congrats from me as well. Brian or John, just curious, I know it’s very early. But as you look at the customers that you have on the pool stack Pro Sales plus marketing, what do you think you are seeing in terms of that delta and retention rate relative to a customer that’s just on the marketing platform? Is there any way you could sort of help us think about that where it is today? Where you think it could get to relative to your, I think, low weight you see in a retention today. Thanks.

Yes, Ross, it’s John. So we are seeing an improvement there. I’m careful not to give you an exact number. I’m always worried when you have a small sample size and you have early adopters to take those results and then forecast that over the base. But stay tuned on that front when we have more people on it and we’re actively having our sales people. But as Brian said, we actually think this could be – this should be a net positive to retention over time.

Well, maybe just ask another way, if you had one or two marketing professionals and then you think about ruling it out sales, what’s the order of magnitude that increases by? Is it 3x, 4x? Just curious on that sort of average number of users uplift that you are seeing for customer did it up slow? Thanks.

I can answer that one.

Okay, go ahead. Yes.

The way I would answer that is, so let’s say there are marketing customer, Ross, and they’ve got their normal retention rates low 80s customer and high-90s revenue and then they add the sales product, something nice happens there on the marketing side that I like. They’ve committed to basically run their front office with HubSpot– on HubSpot. A big reason our marketing customers churn is, because they have a one marketer and that darn marketer will leave the company. When that marketer leaves the company then we are vulnerable to losing that account. When they’re committed HubSpot is a platform and their marketer leaves, they wait and they hire a new marketer, and that new marketer uses HubSpot. And so there’s some – there’s the obvious uplift we’re going to get from the additional revenue of the salespeople who are buying and using that sales product. But there’s an additional stickiness we’re seeing that we really like and that’s one of the reasons we are making this bet on the reorg for next year.

Your next question comes from the line of Bob Mensuri from William Blair.

Hey, guys, thanks for taking my question and nice job. I just want to touch on mix a little bit. Last quarter you mentioned improved mix within installed base and I know you guys are more focused on the SMB. But can you walk us through the customer lifecycle sort of how big customers can become on your platform? And then would they ever have a need to move off HubSpot to like more enterprise, or sort of, I’m just trying to understand sort of as they grow the scalability and how that’s improved, I’d say, over the last 12 to 18 months?

Sure, that’s a really good question. What’s interesting about HubSpot as I think of who our competitors are, we compete with a whole – we compete with point solutions versus all in one. And so when some I just know what the potential customer today company down in Houston, software company. And they were looking at, should we buy an SEO Consultant Services, should be buy social media tools, and social media management tools? Sshould we buy a website? And then should we buy Marketo? They were looking at Marketo and sales force and then buy an analytics tool. Should we basically buy six different applications with six different bills and six different numbers to call six different UI seller, or should we buy HubSpot? And the nice thing about HubSpot is all in one. You’ve got one user interface, one built it’s very easily used, all that kind of stuff. And so we built it kind of from the ground up from mere model companies that are in this kind of sweet spot mid-market space and that’s really worked out well for us. What we see in the market is if you’re a company that, let’s say, is between 20 and 200 employees, or all in one value prop resonates insanely well. They absolutely love our value prop. They love how easy it is to use. They love the simplicity and they love the power and they love our focus on lead generation and growth. As you get up to be a bigger company, you get 2,000 employees, let’s say, you’re Uber, or you’re Airbnb, or you’re Google, you’re a huge account, those people tend to buy point applications and we lose some of those deals, but we tend to win very well in our sweet spot. We are focused on the midmarket. We build our product for our midmarket. We have our sales motion built for the midmarket or now conferences to midmarket, it’s very focused in there, and that that served us extremely well. Big market, underserved, going really well there.

That’s really helpful color. Thanks so much. Just one quick follow-up here. On the sales cycles, as you have been selling the sales products, are the sales cycles different from the marketing marketing product cycles and sort of just sort of what does that delta look like?

They are very different. The cost to acquire a customer on the sales side is about an order of magnitude less than on the marketing side. The price point is obviously much lower. But the sales motion is much, much shorter. There’s rarely more than one telephone conversation, for example, that happens with the buyer. The buyer on the sale side typically before they were talking to a rep have already used our CRM and are tripping over limits in that CRM very similar to how you would do inside of something like a Dropbox, for example. And so it’s a much lighter, much cheaper, much shorter sale. That’s what we like about it. We want to take some of those lessons and apply it to our whole business.

Your next question comes from the line of Scott Berg from Needham & Company.

And Brian and John, congrats on a good quarter. I have two quick ones for me. First of all Brian, I have a chance to attend a – several different conferences in this market, we’ll call generic and marketing space this quarter. And the one thing that keeps coming back as most memorable is, how fast customers are trying to get in and use products in this inbound marketing, we’ll call, sphere specifically, whether it’s SEO, whether it’s other items, really trying to run that fast and they really don’t know how to do it very well, probably not a surprise. But how much of your business today, do you think it comes from Greenfield completely new activities or customer opportunities versus individuals that may have a solution today, because they all seem to maybe not know exactly what to do in this space properly?

Yes, I think you are a very observant fellow. Most of our customers that we bring on, it depends how you define Greenfield. I would describe Greenfield as, they have a website built on WordPress. They hired their brother-in-law to design the website and do a little bit of optimization on it. They use kind of a premium social media tool and kind of monitor social media. They have Google analytics installed and once every three or four months they look at their traffic. They have an e-mail system. They have MailChimp for constant contact and then they have either spreadsheets or some sort of lightweight CRM system down on the box. That’s our typical customer. They’ve got 20, 30, 40, 50 employees, and they want to grow and they are trying to figure out how to grow and their systems are hard to manage and no one is taking care of them, it’s complicated and we come in and we say, well, it’s easy. It’s all in one and by the way here’s the playbook kind of how you grow. Here’s how you create content. Here’s how you spread it in social. Here’s how you spread in search. Here’s how you pull in new leads and customers. That is very appealing to them. And that’s our typical plight. It’s typically not, gosh, we’ve got sales force installed in Marketo and this big heavy system, and we’ve got to replace it, that’s really not that, we play that game a little bit, but it’s much more Greenfield.

Got it, very helpful. Then last question for me, I don’t know which of you want to answer it. But when you look at your sales product today, you are getting some very strong sales momentum there. But how do you look at that product domestically versus internationally? You’re having traction listed on an international basis, or is this still really trying to seize some opportunities locally before pushing it out more broadly?

Yes, I don’t have those numbers at my fingertips. But one of the interesting things about the sales business is, it’s a true Internet business. So people are coming in from everywhere to come and try our free CRM and upgrade on it. So we’re getting orders and customers from lots and lots of different countries. In terms of the sales power and the marketing power putting behind it, 95% of those resources in the U.S. or most of that revenues from the U.S. at this point, as we move to the model next year and we put this in the bag of our international sales organization, there will be a lot more leverage there going forward.

Your next question comes from the line of Jesse Helsing from Goldman Sachs.

Hey, this is [indiscernible] on for Jesse. I just had a quick question. When you rollout sales, do you plan to roll it out internationally when you push it through a broader sales force? And also in general, when you think about international expansion, what are some of the additional geographies, where you see some incremental opportunity?

Okay. Yes, we do plan to roll it out to the whole sales force, including the international reps we plan to do that in Q1. Just did Japan and just getting ramped up there, we’re still talking about other countries, but lots and lots of opportunities in the rest of Europe. There’s opportunity in South America. There’s opportunity all around the world for HubSpot. And as we move to this light touch heavy Internet-based models, whether users coming in from all over the world, I think you will see us continue to invest and take advantage of those opportunities low-hanging fruit as time passes.

Thank you.

And our next question comes from the line of Samad Simona from Stephens Incorporated.

Hi, good afternoon, thanks for taking my questions. First I was curious, I don’t know, if this has already been asked. But on the CRM, the free solution, could you give us an update on what percentage of new marketing customers are driven by that and same for Sales Pro? And then I have a quick follow-up.

Okay, it’s Brian, I can answer your second question. I don’t have the first one at the tip of my fingers. The second one is pretty much a 100%. So when someone buys Sales Pro, they came in, they started using the CRM, they’re tracking their stuff, they’re loving it, it’s integrated with their e-mail, and they say, hey, I want to do more. I want to use your scheduling software as part of it. So I want to use your e-mail templates as part of it. I want to call out of CRM. They trip over limits. They talk to one of our sales people and they buy the Sales Pro, so it’s a 100% there. In terms of the marketing customers who start on CRM, I don’t know what that is. But it’s certainly got to be a significant number of people and we’re going to lean hard into that next year.

Yes, Samad, this is Chuck. Last quarter, we said it was about 20% of our marketing customers, so new marketing customers began using the CRM before they purchase marketing and about a third of the new customers year-to-date are using the CRM product. We’ll update it that stat at inbound in a couple of weeks or in a week.

That’s helpful. And then when you think about the CRM offering, is there a path to monetization there, or is that for now just more of a lead generation tool?

For now, it’s a lead generation tool. When we decided to go into this space, this space for us is very different than the marketing space. We went to the marketing space, we came up with this inbound concept and we kind of created this inbound marketing software and movement. And so we were the first mover. And CRM is obviously a very different landscape. You’ve got very big established CRM player. So we want to come out with a much disruptive model. And so let’s give it away for free and use it as a lead gen source and take those CRM users and up-sell them power tools for sales reps then enable those sales reps to sell more. There’s more – all I would say I, there is more opportunity for monetization there. There’s more functionality coming that products getting better and fast. And you’ll see more of that at inbound, but at this point, CRM is free.

At this time, we have no further questions. I will turn the call back over to Brian for closing remarks.

Well, I hope you all cancel your bonus fishing trip. We [always come] [ph] to inbound. We look forward to seeing you next week. It’s going to be great.

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