HubSpot, Inc. (HUBS) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to HubSpot Fourth Quarter and 2016 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] I'll now turn the call over to Chuck McGlashing, Director of Investor Relations. You may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot’s fourth quarter and full year 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 first fiscal quarter of full-year 2017 and 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 into our Form 10-Q, which was filed with the SEC on November 02, 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 fourth quarter ended December 31, 2016, which is located on our Investor Relations website at HubSpot.com. Now, it’s my pleasure to turn over the call to HubSpot’s CEO and Chairman, Brian Halligan.

Thanks, Chuck. And good afternoon folks. Thanks for joining us today as we review HubSpot’s fourth quarter and full year 2016 earnings results. Let's jump in and get right to it. HubSpot ended 2016 on a strong note. Fourth quarter revenue increased 44% and non-GAAP operating margins excluding our inbound event, improved by seven points year-over-year. Fourth quarter closed out a great year performance for HubSpot's full year revenue grew 49%. Total sales and marketing customers approached 28,000 and non-GAAP operating margins grew by over nice points. Very happy with our 2016 results. And right from the start, our mission is to build something special here at HubSpot, something our grandchildren could be proud of, but really happy with how things have gone. More than 10 years in, HubSpot has had a $300 million plus run rate in revenue. We're under our own steam from an operating cash flow perspective, great stuff. And it's all a result of incredible work from everyone on our team, but we're not even close to being done, not by longshot. We want to build something much, much bigger. We want to have a bigger impact on more customer's lives, a bigger impact on our partner's lives, a bigger impact on more of our employee's lives. We're an ambitious group here at HubSpot. With that in mind, I want to tell you about the steps we've been taking towards evolving HubSpot from a single product company to a multiproduct company with a goal of becoming the midmarket growth platform, something we're calling One HubSpot internally and I am pretty darn excited about it. When I personally think of One HubSpot, I think of it like this; we've got this big marketing business where things are going great. The team that go to market with the three I's, inbound marketing, inside sales and our indirect partnership. This approach continues to serve us incredibly well in that business and we also have the sales business at HubSpot. It has grown up to the point where we're not only merging it with the marketing business, but we're actually adopting part of the go-to-market model that's made it so successful so far. Early on, we made an important strategic decision to keep the sales business separate from our marketing business. The typical playbook would've called for us optimizing short-term revenue by selling the sales product right back into our marketing base, but keeping it as a standalone product has allowed to iterate and adapt the business model and figure out some really important stuff. And what's happening now is relining it all under one unified HubSpot brand. Great, because we're taking this hot sales business where we have a couple dozen sales reps and a handful of partners selling it and we're bring it to the entire inside sales organization, in our entire indirect partner channel and letting them sell it. Big opportunity here, very, very excited about it. So why are we doing this? We learned a ton from the sales business over the last year one, thing that worked for sure is the premium model and it works because more and more customers want to see real value out of our product before a company extracts value. Our sales product does exactly that and as these free sales users convert to paid, it's showing up in the numbers we care so deeply about. As it turns out that the cost to bring on a new customer through our sales channel is an order of magnitude lower than our traditional marketing channel and see why we're excited. We're going to take everything we've learned in sales and apply that to the rest of our business. Our traditional inbound model has always tried to match the way we go to market with the way people actually shop and buy. I think today humans are getting really, really used to self-service. We here at HubSpot admire companies like Stripe, Atlassian and Shopify. When companies use their products, they're learning more and more about the value it gives as they go. They use it, they love it, they buy it, the refer it, it's great. Humans increasingly aren't interested in a sales and service model with a heavy human touch at every turn. It's just the reality of how people want to shop and buy subsidies. They're going to lean heavily into this lighter touch approach in a big way. Second big driver behind our One HubSpot initiative, we've also round our gross stack customers. These are customers who use both our sales and marketing platform and whose companies have gone all-in on HubSpot. Our gross stack customers get tremendous value from the alignment of our marketing, sales and CRM products, but at the end of the day, what they're looking for is help just growing their business and that's no surprise. Companies aren't interested in merely just aligning their sales and marketing divisions to make process more efficient anymore. Improved alignment is nice to have, but ramping growth that's a must have. Companies demand more. Sales and marketing software can't just promise you better internal alignment. It needs to drive fundamental business growth and that's exactly what the HubSpot gross stack is here to do. It's about a marketing team that can give their sales team a steady stream of leads, filling up each salesperson's calendar with appointments to start off their day. It's about a sales team that converts those leads more quickly, thanks to contacts and automation and it's about companies that can harness the power of an all-in-one platform to focus their entire team around driving business growth and what's incredible is that when customers are successful with the HubSpot gross stack, they tend to be more valuable, happier and longer term customers for us. It's still early days, but we're seeing a nice uplift in both customer retention and net promoter score out of our gross stack customer base, where our customers win and we win, everybody grows. That reminds me of a conversation the team recently had with Jesse Mayhew, a customer of ours from MachineMetrics that actually came to our premium HubSpot for startups channel. MachineMetrics has developed a real-time manufacturing analytics platform, which helps businesses make faster, better informed decisions on their manufacturing footprint, typical stuff. Anyhow, we were catching up with Jesse about the benefits of an all-in-one platform and he said quote, "the ability to align our sales and marketing efforts into a single platform has been invaluable, but we've adopted HubSpot to drive growth. Growth is king for us right now and HubSpot has honestly become our front office platform to drive that growth. We're using the HubSpot Academy to train our new salespeople. We're creating more advanced content pieces and campaigns. All of our sales calls and customer outreach including your entire website goes through HubSpot. It's a bit unoriginal, but you become our hub." Jesse went out to tell us what premium meant and their decision to consider HubSpot. Quote, "products like your free CRM and HubSpot for start-up mean absolutely huge difference for us. I was relatively new to the company. I didn't have a ton of budget to work with at the time but being able to get so much value upfront, frankly as much value as we were getting out of our old paid CRM was instrumental in getting my execs to sign up in the entire HubSpot platform". It honestly made the difference. Jesse finishes by saying; quote "we're bought in on HubSpot across our company from top to bottom. We recently started to substantially grow our team, bringing on two inside sales hires, a couple of customers success people and will likely hire someone to help with integration. This is all great, but we're most excited about being on track to grow this business into something that looks very different this time next year." Wow, I want to thank Jesse and MachineMetrics team for their time and insights and particularly so powerfully what the HubSpot platform means for their business. What I'll be personally obsessing about in 2017 and beyond is going to be running this One HubSpot place, so we can grow the number of customers for using the entire growth stack and watch them grow by using it. The team is off to a great start, but there's still a whole lot of work to be done. I think we're going to look back on this someday and say wow, One HubSpot really was one of those defining moments in HubSpot history when we began to grow into a true multiproduct company for the growth-minded midmarket. Okay with that, I'll turn it over to John to take you through the financials and our guidance.

Thanks Brian. The fourth quarter capped off a solid year for HubSpot. We delivered strong revenue growth, saw big improvement in margins and delivered positive operating cash flow, all while making significant investments for our future growth. Fourth quarter revenue grew 44%, driven by 46% subscription revenue growth and 15% services revenue growth. Services growth was impacted by the promotion we ran last quarter, where we heavily discounted onboarding in exchange for upfront annual payments. HubSpot ended the quarter with 23,226 marketing customers up 28% year-over-year. Average subscription revenue per customer was up 13% year-over-year to $12,592 as marketing customers continue to grow their subscriptions. It's worth noting the marketing customer count now includes the recently introduced $50 per month marketing starter product, which drove a slight improvement in our marketing customer growth, but also weighed a bit on our average subscription revenue per customer. We're happy with the short-term trade-off of adding incremental customers at a lower price point, given the future upgrade opportunity we get with those customers. As Brian mentioned, there are couple of initiatives that you will hear more and more from us. First, we're embracing the premium model, which helped us get to nearly 28,000 sales and marketing customers this year and will allow us to scale the business going forward. To clarify, the 28,000 excludes customers who only have the legacy $10 per month side kick product. Second, we're actively selling customers on the gross stack. This is a key focus for us given the increased value these customers get, coupled with the early results we've seen in retention. Both of these tie into our One HubSpot initiative. We will be aligning our reporting with that initiative by providing new metrics in 2017. Our new reporting structure will include total sales and marketing customers, total average subscription revenue per customer and milestones as we hit gross stack achievement. We'll still communicate some of our old metrics for a couple of quarters, but our focus will be on these new metrics that are better aligned with the way we will judge our success going forward. Deferred revenue came in at $96.6 million, growing 48% year-over-year. While calculated, billings defined as revenue plus the change in differed revenue, came in at $88.8 million up 40% versus the fourth quarter of 2015. The billings growth exceeded our expectations due to a strong December, which benefited from a successful inbound event. Please remember 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 billing. For the remainder of my commentary, I will discuss non-GAAP results. Now let's take a look at our margins. Fourth quarter gross margin came in at 79% up four points year-over-year and up slightly versus the prior quarter. Fourth quarter subscription gross margin came in at 84% up three points year-over-year and flat sequentially. Fourth quarter services gross margins came in at a negative 21% down five point sequentially. The promo we ran in third quarter, which I mentioned with revenue impacted services margins as well. With that said, we expect services margins to improve in 2017. Fourth-quarter operating margins improved seven points to a negative 2% margin when you exclude the impact of the inbound event. In the quarter, we recorded approximately $1 million of compliance cost for doing businesses is certain jurisdictions. Absent this one time catch-up G&A as a percentage of revenue would have been flat sequentially. International revenue performance continues to be strong growing 67% year-over-year, representing 29% of our total revenue in the quarter. The international growth rate was helped by the migration of our sales pro business on to our new billing system. Historically, we weren't able to capture a sales pro customer's country of record. The all sales pro revenue defaulted to domestic revenue. Excluding this benefit, international revenue growth would have grown 59%. At the end of the fourth quarter, we had a total of 1,597 employees at HubSpot at 38% year-over-year. CapEx including capitalized software was $4 million in the quarter, down from $7.4 million last year. The decrease was a result of less office space build out in the quarter. As build outs pick back up in early 2017, we expect CapEx to increase in the first half of the year and average 8% of revenue for the full-year. With that, let's dive into guidance for the first quarter of 2017. Total revenue is expected to be in the range of $78.5 million to $79.5 million. Non-GAAP operating income is expected to be between a loss of $3.5 million to $2.5 million. Non-GAAP net income per share is expected to be between a loss of $0.10 to $0.08. This assumes approximately 36.2 million basic shares outstanding and for the full year of 2017, total revenue is expected to be in the range of $349 million to $353 million. Non-GAAP operating income is expected to be between a loss of $11.5 million to $7.5 million. Non-GAAP net income per share is expected to be between a loss of $0.30 to $0.22. This assumes approximately 36.7 million basic shares outstanding. As you adjust your models for 2017, keep in mind the following. From a revenue perspective, 1Q '16 benefited from an extra day of revenue given the leap year. Also, a stronger U.S. dollar will drive a couple of point headwind to revenue growth for the full year of 2017. On the margin front, we expect the normal seasonal headwinds from early hiring, payroll resets and annual compensation adjustment to put pressure on margin expansion in the first half of 2017, but we continue to expect margin expansion for the full year. Our inbound event will be shifting back to the third quarter in 2017, which will impact the timing of marketing expenses. We expect to be free cash flow positive for the year. As you think about the quarters, we anticipate strong free cash flow in the first and fourth quarter and free cash flow to be negative in the second and third quarter, given a material vendor payment in inbound event. With that, I'll hand the call over to Brian for his closing remarks, Brian?

Thanks John. In the spirit of kicking off another new year, I wanted to share a personal goal I have for HubSpot in 2017. I obviously think the One HubSpot initiative will be a big win for our investors, our customers, our partners and our employees, but goes deeper than that because I think it has the potential to drive the whole company to focus more than ever on our ultimate purpose, that is helping our customers and our partners grow their own businesses. We're in this to change people's lives. I said we were ambitious and we are. We want to be the fuel in our customer's engines that helps them grow, to give them real value and with an amazing customer experience. In that respect, I believe our bold bets in delivering that value through our full growth stack have a real shot at creating a defining moment in HubSpot's history. I want to thank our customers, our partners, our investors in each and every HubSpot for helping us build the HubSpot we know and love to this day. Operator, can we please open the call for some questions.

[Operator instructions] Your first question is from Mark Murphy from JPMorgan.

Yes, Thank you. And congratulations on a strong finish to the year. So, I wanted to ask you about linearity during Q4. I think you commented that business was strong in the month of December. Were there any subtle changes perhaps a bit slower during the election or during the inbound conference itself and then picking up in December any more than usual?

Yes, in market, it's John, yeah we definitely saw a little different linearity and December was definitely a bit backend loaded. I think that could have a little to do with inbound, but also, we had a lot of reps and accelerators trying to make calls. So, they really pushed hard in December and I think that led to the strong billings performance for the quarter.

Okay. As well, John I was wondering if you could clarify, were there any special incentives during the quarter, anything designed to benefit the payment terms or the contract duration or other types of incentives or were you strictly referring back to those types of incentives that were in place in Q3?

Yes, that language was around Q3 where we did that services promotion. Nothing special in the fourth quarter.

Okay. The next question I wanted to ask you, is you mentioned that, I believe you said a material vendor payment that will impact cash flow in either Q3 or Q4, could you just remind me what that is or what it relates to and is that a recurring payment or is that one time?

Yes, so we have one of our biggest vendor is that we paid quarterly in the past and now that's going to be in the second quarter in 2017 and that will be annual going forward in the second quarter.

The next question is from Ross Macmillan - RBC Capital Markets.

Thanks a lot, and congrats from me as well. Just two questions for me. First obviously inbound was later this year and you had talked about the fact that that may have had some impact in terms of time to close business given that's all from an event that drives a lot of leads. I just wondered given what you saw close in December, is there anything that spilled over into Q1 or do you think you actually got through most of that lead gen and closed most of it in the quarter?

Yes, we did see a lot of that close right at the end of the year. So, if anything we might have pulled a little forward from January, nothing really spilled forward in the first quarter.

Okay. And then a follow-up just his curious given that you're moving to this One HubSpot initiative, I wondered if you had any estimate today on what percentage of your marketing customers are full stack? In other words, they're using both marketing and Sales Pro product, thanks.

Yes, Ross, this is John. I don't have that exact number for you. Of our gross stack customers, clearly the easier motion so far has been to selling the marketing customers the sales product. The one we need to work on and the one that we think really drives the big value going forward is selling the sales customers the marketing product obviously given the big increase in ARPU and that's one of the things we'll be working on and could be some upside later in the year.

The next question is from Samad Samona from Stephens.

Hi. Congrats on a great quarter and thanks for taking my questions. I was wondering if you could comment a little bit on the partner channel maybe what the contribution there was this quarter and how you're rolling out selling HubSpot sales into the partner channel and what the uptick there has been?

Hey Samad, it's Brian. Thanks for your question. Partner channel is the cranked along doing pretty well. We added a bunch of partners this quarter, put a new leader in place who is really making some positive changes there. So, feeling pretty good about it. There is two things going on with regard to the sales products and the partners. One thing is really just over the last month or two, we've been enabling those agencies we have, over 3,000 marketing agencies if they want to tell the sales product, training them on how to do that, we're doing that now and allowing them to sell it and commissioning them on that. So, we think, this is a nice opportunity there. And we started a brand-new initiative where we want to sign up sales agencies, people who do sales training, sales enablement, services like that and get them started on our sales products right out of the gate. So just getting started on it, looking very promising so far.

And then John, if I could ask one follow-up, if you were to exclude the $50 starter marketing solution from the marketing cloud net ad number in the quarter, can you give us an apples-to-apples number of what that would've looked like in terms of year-over-year growth?

Yes, so that added about a point growth in the customer number, but it actually had just under a point headwind on the revenue per customer number just given the interplay between those numbers.

The next question is from Stan Zlotsky from Morgan Stanley.

Hey guys. Good afternoon. Two questions if I may, one for Brian, as you look for -- as you look into 2017, what are your top investment focus areas and then a quick follow-up afterwards?

I think most of the focus is on -- I think in my head transitioning HubSpot from common application, point solution marketing software company to more of this, building platform front office, system of record for business, a real partner that helps them grow and our investments are really around making that transition. It's a big, big area of focus for me and the whole company and so we're off to the races there. It's going pretty well. Sales business is really cracking. So, that's really the focus. We're pretty laser focused on that one big, big initiative and I think we're going to pull it off and I think it's going to make us very sustainable, high-growth, very profitable company over the long, long haul.

Okay. And then for John, I am not sure I caught the retention rate that you guys saw in the quarter or maybe if you can share with us what it was for the full year as well and just as you're thinking through 2017, where do you see that retention ratio going especially with the sales product ramping nicely. So, that's it. Thank you.

Yes, so that retention rate was in the high 90s still at that level we've been seeing recently and I think it average for the full year high 90s obviously. That's what we delivered pretty much every quarter. As we think about next year, it really depends. The business should sustain high 90s. I guess you would want to know what can take us above 100. We would be getting a lot of people on the gross stack, that's where we're seeing some retention benefits early. It is early, but we have seen some benefits there. So, if we can get those more people on that, they're getting the value of that, the combination of the two products that could be a vector that could take it higher.

The next question is from Richard Davis from Canaccord Genuity.

Hey thanks very much. So one tactical for John, any thoughts on the impact of consistency of the numbers as you kind of roll out the new accounting rules in 2018 and then I guess for Brian, you guys are doing a very good job of expanding the product line and concentric circles and I know you don't want to tip your hats on stuff, but at least broadly speaking, is there direction where you might have new features and functionality obviously the next couple years or something directionally or is it just so much stuff in the mind and the current area that will keep you busy thanks.

Yes, Richard, the new rules are really going to impact the old perpetual software models much more than that SaaS model. So, we don't expect to have a meaningful impact there. There are some other things around commissions, but we're already amortizing commissions like some people who recognize them up front, but now you have to recognize them over time. There is also something on leases, but that should be immaterial to us. So, no big impact on the accounting side for us.

Richard, it's Brian, thanks for your question. We came out of the marketing product, we're building a nice business there, its growing fast and the sales products going very well. Still in the early cycle there, really happy actually the way that's going. As we make progress, I wouldn't be shocked if I were you to see us roll out additional functionality. I am not going to tip my hand as to when or what at this point, but certainly we want to take advantage of opportunities to add more value to our customers and build a bigger business as they come up.

Got it. Thank you.

The next question is from Alex Zukin from Piper Jaffray.

Hey guys. Thanks for taking my questions. So, with some of the focus on One HubSpot, can you maybe Brian talk about the impact of any on sales productivity in the quarter or any disruption that you observed or in general may be comment how that combining of the sales teams is going and then I have a follow-up?

That’s a great question Alex. So far so good. The kind of the rollout this year of One HubSpot has gone pretty much as expected so far is the way I would categorized it. There is stuff that has gone really, really well and stuff where you have more work to do. That stuff's that's in my head that is just super exciting is that sales business has grown like a weed. It’s a superhot product that we took from maybe a dozen, little over a dozen reps selling it to giving it our wholesale force in our wholesale channel. The lighter touch premium models are really starting to work for us. It’s just exciting that will lower cost to acquire customers. I like that touchless model because if you just look at our overall customer count, that is really growing quite fast, if you count all our customers that's really -- the install base is really getting quite big and growing nicely, the total customer count is quite interesting. The growth stack that John hinted a bit is like we're getting, I think we're getting pretty good at the motion of selling our sales product to our marketing customers and there is a lot of marketing customers to sell to. We made some progress on that so far this quarter. More work to do there, lot more work to do I would say on figuring out how to sell our marketing product to our sales customers and those sales customers that’s really growing quite nicely, that’s a big opportunity in front of us that there's a lot more work to do. And just in general we're kind of five, six weeks into the year. There is a new motion. There's more learning to do. There's more baking repeatability of the new motion to do. There's more work to do on systems, but so far so good. It's gone as I have expected so far. I think we’re going to have a good year and this One HubSpot thing is going to really work for us and for all you guys.

Perfect and then John may be one for you, any numbers around the sales growth for the year or any customer counts that you can share and then maybe as we think about this One HubSpot and more of the sales pro customers or combined customers, are there any headwinds we should think about in terms of billings growth in 1Q? I realize in our guiding for billing, but anything we should think about as remodels.

Yes, so in the sales pro count, we're now over 7,000, which is nice step up on that side. Like Brian said, it's really working well. Yes, as you think about the billing side those are more monthly customers. So, a bit of a headwind there. As we thought about fourth quarter we were really, really happy with that 40% billings growth. As we said, we had a really good December. So, as you think about the first quarter and billings on that side, a couple things to keep in mind is just the fact that what happened in the fourth quarter, also just with the headwind on FX. So, I think about a low 30s billings growth in the first quarter and then we'll see how the rest of the year plays out, but if some of these other motions get working, we'll take it from there.

The next question is from Jesse Helsing from Goldman Sachs.

Thank you. This is [Dana] on for Jesse. I have one for maybe John and one for Brian and the guidance implies and I saw you already have margin improvement and I was just curious as to where you expect most leverage to come from and another question that I had was on the add-ons, just wondering how they're trending in terms of adoption. I know with the inbound you announced a bunch of new enhancements and just wanted to see if you had any early signs of improvement in adoption because of that?

On the margin expansion, it’s kind of old fashion, but we’re going to get a big portion of that in G&A as we leverage those impacts with three ways to become a public company and then you'll see some leverage as well on the sales and marketing side. This new sales motion, this premium try before you can buy, we think it's going to work well and we think that it allows the scale our sales and marketing costs even further. We're going to continue to invest heavily in R&D. If anything, you’re going to hear more and more from us on the automation side, investing and letting the product help us, help us so and really match the way people want to buy these days and then on the gross margin side, maybe a little bit of leverage there, but we're getting product gross margins up to best-in-class levels, so if anything on the gross margin, it’s going to be more to the extent we can make some improvement of the service side and just the mix, the product mix as it becomes a bigger piece.

Dana, its Brian the add-ons are going well. We did make some bunch of enhancements to them at inbound and actually big plans for all three of them this year, the website add-on is going well steady, bunch of cool new stuff coming on the website add-on this year and I'm super excited about reporting add-on. Steady, going well, bunch of new stuff in the pipeline that we're to do there that’s going to be really hot for our customers. And the adds-on add-on also getting better. We started off with enabling our customers to buy LinkedIn ads and then added Google ads and are adding Facebook ads. So, they're going well and I think they're going to get even better over time when products are really coming together.

Thank you.

The next question is from Brad Sills from Bank of America.

Hey, guys. Thanks for taking my question. Just one on the customer profile with the net add numbers that you're seeing still very strong. As the profile of the customer changed in terms of customer size this quarters versus say a year ago, two years ago, are you starting to see larger customers find the tough spot given scalability or has it pretty much remained within that average of 20 to 2,000 customers.

The short answer is it hasn't really changed. One of the things I personally like about HubSpot is we're above the kind of fray of that very small business customers that churn like crazy go out of business like crazy that some marketing software companies have lived down there. We're above that, but we're not up into that enterprise area where it's kind of a Red Ocean of competition and really, really competitive space, there is really nice space in between the midmarket companies that are real businesses, that are growing that have a small marketing team, have a sales organization. And we have a really nice platform for them now to help them grow their business and it’s the platform we have, the software, it’s the training and the education and the methodology, it's the support when they get stuck, it's all the kind of together. I think there's room here to build a big, big platform company, akin to the way salesforce is above us in the enterprise. Oracle, Microsoft, SAP have built this huge, huge platform businesses and I think there's room for one year in the midmarket. We’re right in the nice slice of the market.

Thanks Brian and then one more if I may on ASP growth, if you could compare what’s driving that today versus say a year ago. Mostly a year ago, I think it was pure contact volume ads and pricing versus add-ons, how is that, is that portion of the business and the mix of kind of what's driving that ASP growth versus add-on this quarter versus say a year ago.

Yes, Brad not a huge change. Obviously, the add-ons weren’t really, I guess they just been launched in 2015 fourth quarter, but the mix between obviously CTUs are contact tiers are still the biggest, URL second and then the add-ons next. I think, as you think about this number going forward, I think that more and more it’s going to be to the cross-sell of the sales and marketing and marketing into sales, it's going to be that important lever going forward. Obviously, we'll have the other ones, but that's really exciting and for that, we’re really tapping into a new budget. We had the sales budget. Now we're getting the marketing budget if we have the marketing budget and we're tapping into the sales budget. It just opens up another budget and so from that standpoint, we think that can allow us to keep growing our revenue per customer. Now the one thing to keep in mind is we’ve talked about where -- and we start talking about total customers, which really aligns with how we’re thinking about the business. We want to acquire customers the way they want to start. If they have more of a sales initiative, great start to sale. If you want to become a marketing customer first, that's great, but once they get in, inevitably they're going to have -- they're going to have the challenge that the other faces and so we’d like to sell them the other thing. Now, what that's going to do to revenue for customer is going to be interesting is if we're adding lots of these small customers, when you blend that in, we will -- first of all, the revenue per customer when you blend the two, obviously, it's going to be lower, but over time depending on how many sales customers we had, we could actually see revenue per customer slow in aggregate. Now the same customers themselves are going to grow. It's just when you mix, when you put that mix together. So, it's going to be dynamic way where we’re going to see really strong customer growth and revenue per customer will probably be flat or slightly down.

The next question is from Bhavan Suri from William Blair.

Hey guys, nice job and let me add my congratulations there. Just a first question on the sales channel, you’ve talked about adding these sales enablement, sales consulting companies, just any color on what the pipeline of adding those partners looks like and then what is the time to ramp for those partners look like in absolute days, weeks, quarters, whatever or even compared to what it took to ramp agencies relative to the marketing suite?

It’s a great question. It’s super early on that. We really kicked off this initiative boy, six weeks ago, and just put the team together and so we just don't have a whole lot of data on it. Early sign seem good. There is a lot, just like the marketing agency signs, there is tens of thousands of these agencies out there that do website design, website development, consulting all this kind of stuff and we turn them into software companies. Way it looks awful similar to us on the sale side. We have all these companies that do CRM implementation, sales enablement services, sales training, not quite as many on the marketing side, but there's a lot and we've put out there that we have this free platform and we want to build the channel and they’re starting to come in and it's starting to happen but gosh, that’s really early that's we're five, six weeks into that initiative, so stay tuned.

Got it. Got it and then just one to pick back a little bit on Richard Davis' question just as you think about strategically you've said a lot about platform HubSpot One and adding more functionality obviously inbound and you've got the sales channel now. Does commerce come into play? Is that something at some point where you say okay, we’re going to become system record so I think you use Brian, just to complete the transaction. Is that sort of the way we think this could in five-plus years I am not giving you a timeline but potentially evolve or am I stretching there?

I don't know. I just don’t think you want to tip our hands at this point as to where the platform could go. Right now, we have a nice opportunity with sales and marketing and stay tuned. I think there will be more products over the next five years and it's going to be an exciting ride.

The next question is from Terry Tillman from Raymond James.

Hey good afternoon. I'm assuming you're saving the best questions for last year. Thank you. I guess I wanted to -- oh by way nice job on the quarter, I guess that want to say it here Brian, and I try to hold you here and the vision and route where you're going. So, my question I'm going to phrase it differently, you guys have software that's great at helping companies better brand themselves, drive the demand gen and the lead flow, then now you can help the sales reps really a much quicker way close deals but what about -- what do you do when a customer says hey, you are my front office solution of record, but I need to engage with existing customers on an ongoing basis. Do you just see that revenue opportunity go to others or do you have partners the you bring to the table or kind of more ongoing engagement with an existing customer?

I'll give you a couple comments on it. Nice to hear from you Terry as always. One thing we’re seeing in the market is that your customers -- if you're marketing of course it's really important, your sales is really important, but gosh in 2017, your customers are your best channel to market and word-of-mouth is just the way to sell. That's the way we sell. It's a very strong channel for us. Very important in the decision-making process especially as we get bigger. In marketing and sales and services do blur more and more and so I suspect and I do hear from customers that use our marketing aps to segment their existing customers and nurture their customers in smart ways and they use our sales products with their services people to engage with them in new and more productive ways. But in terms of building let's a ticketing system or a more traditional services app, we haven't gone into that business yet as you know and we have a pretty good partnership with another company that we really like a lot called Zendesk and boy is that integration, they built it on our ATI and the way it works is absolutely fabulous. So, our HubSpot is the timeline of activities that your prospect and your customers take in every time they visit your website. So, the form, there is a press release, anything goes in this timeline and what then that's going to be enable you to do is every time that customer has a ticket or call support, boy, that is an event on that timeline and the reps can see that, the support person can see it, the marketer can segment on it and do smart thing. So, that’s kind of our attitude at this point toward services. It’s a dynamic space. I wouldn't tip my hand as to where we’re going, but I think we would say, we have a nice partnership with those guys at Zendesk and we have -- I don’t have the exact number, I know if you know jump well over 1,000 of our customers are using it and its pretty good.

Awesome. Thank you and I guess John as it relates to -- you're kind enough to give us the impact both positive on new customers. I think it was one point of growth added because of the sales products and then one point dilutive to ARPU, but now you've got a full quarter here where you're really in motion, here in the first quarter in terms of this growth stack initiative. Could we see those deltas, the impacts both good and bad maybe grow as we start moving through the year? Thank you.

So, Terry just to be clear, the numbers I gave you were the impacts on the marketing customers and that impact was from the marketing starter edition. So, there was no impact from a sales standpoint on those customers. So, we talked about the total customers at 28,000 we'll start giving more precision on that total customer number over the next couple of quarters and clearly that will benefit from the sales product.

The next question is from Brent Bracelin from Pacific Crest Securities.

Thanks for taking the question. Two quick follow-ups Brian, I know we're early but I wanted to go back to the one HubSpot 45 days in. What is the sales motion like? Are you leading with sales, are you leading with marketing still? Are you leading with the full new customers buying the full One HubSpot? Any more color, I know 45 days and it's early, but how you're selling the One HubSpot internally.

Yes, great question Brent. We have led into this a bit, but we sell on where they come in. So, we have all these leads coming in for our marketing products and we have all these leads coming in from our sales products and they land in the hands of a sales rep essentially and that sales rep starts where the customer wants to start. So, if they're already using the CRM product and they have started using the sales product and tripped over a limit, that will cost him about that. If they're dealing with the marketing products, we'll talk to them about that. That's been the motion is they try to sell one product in and a lot of times it turns into a more of a platform discussion and a full growth backed discussion, but they tend at least six weeks and this very well may change. They tend to buy one first, hey let's get started on sales and see how it goes and then later if we need more leads, which I think almost everyone is going to, they will have the conversation about the marketing product and vice versa. So, it typically starts with one and then will move to the other, but stay tuned that's new.

Exactly, very helpful color there and then just one follow-up for John. I know you're talking and quite excited about the HubSpot kind of gross stack, what's the baseline we should think about the starting point, 20,000 total customers is the gross stack 5% of that customer installed base where you consider gross stack customers 10%. What's the starting point for your gross stack customer count?

Yes, so it's just over 10% around, 3,000.

The next question is from [Ian] from UBS.

Hey guys, thanks for taking my question, I apologize if I missed this, can you guys disclose what you're at now from a run rate or a revenue size for the sales product?

Yes, we didn’t give that. It was definitely up nicely from where we were before, but we're going to lean into total customers and total revenue per customer going forward. Once again we're not sure if people are going to start with sales and marketing, but it's really when we get those customers and then we grow them over time.

Okay. Okay. Understood and as a follow-up, some of our conversations with your partners just they're suggested they're very excited about being able to sell the HubSpot sales. Can you just update us on how the early reception from them has gone and also whether you're -- historically I believe the metric was around 40% on new bookings came from your partner channel. Is that something that should apply for the sales products as well?

Okay. Good questions. In my discussions with the partners as with yours, they do seem really excited about it. Their customers are asking them to come further down the funnel. They're asking about sales when creating content down there and we're just now training them on the product. We've just enabled the ability to commission them on the product. So, that feels good. They sold a bunch of the sales product in Q1, sorry in January. So, they're off to a good start. They feel really good about that, still early, but they feel good about it. In terms of the percentage and will it be 40% of sales, I doubt personally, do you want to answer this, I doubt it. I think it will be more direct. When people are just buying as in eCommerce transaction off of our website. So, I think it's largely a touch with sales. I do think they will go in and sell services to a lot of those people who bought it directly from us, but I suspect that ratio will be in and this may change, but I suspect it will be lower than 40% when adding cost.

No, I think that's right. I think that makes sense.

The next question is from Tom Roderick from Stifel.

Hey gentlemen. Good afternoon. Thanks for taking my questions. So, Brian I wanted to ask just a little bit about international, haven't heard any questions on that and it looks like 60% growth is the number again here. Can you talk a little bit more about the anticipation for continued growth particularly, in the context of what you guys are doing to build out the channel partner community internationally, thanks?

Thanks for your question Tom. Yes, it's going well. We're happy with it. It's still early I feel like in terms of a growth vector for us. We started in Europe and now it's spreading to Asia and both have a lot of growth ahead of them on the marketing side and boy a ton of growth ahead on them on the sales cycle because the sales business was primarily here in the U.S. So, we're very bullish on it. I think you're going to see both on the -- growth on the direct side and the partner side. We have lots of international partners. lots of them are getting into our top tiers of gold and platinum partners. They hear from all the time. They're doing really, really well. So, I think you'll see a nice balanced growth over time internationally and they don't happen on the direct side and the partner side.

Great. One quick follow-up for me. I guess I didn't here too much on the call today about the impact and demand to the CRM product and then it does seem like that it's driving some attention out there. Can you just talk a little bit more about what you're seeing, you what you saw in the fourth quarter with that CRM product? And then how that product itself will wrap into the reorganized sales efforts as you make it the One HubSpot type of approach with the sales product going into 2017?

Sure. Here's how I think about the CRM product. I think of sort of a dartboard and the CRM is in the middle and people use the CRM and they're getting value and then they’ll start to use our sales application that's the HubSpot sales pro and/or they’ll start to use our marketing application. So, it will be the premium engine that really can drive over time both of our funnel. So, it's exciting. The demand is then solid. If you look at the usage numbers, the weekly active users and the weekly active team using it, it's been going up across Q4 and across Q1. I just looked at the numbers a few minutes ago and I think we nailed it on the product there and there is a big demand in the market and a soft spot in the market for people who are growth businesses and the midmarket who don't want something real heavy, real expensive, real complicated, I think we hit the nail on the head there. So, feeling good about that.

The next question is from Derrick Wood from Cowen & Company.

Great thanks. So it sounds like you're taking a more of a premium approach on the Sales Pro product, would be curious to hear what your expectation are and kind of the average timeframe for a premium to paid conversion? And also, would be curious to hear as you move it more on the sales side, what types of vendors you're competing against?

Sure. You're exactly right. We're leaning into the premium model there. My thesis for the last 10 years in my life has really been for HubSpot and for our customers, the buyers are changing the way they shop for products and buy product and vendors need to transform the way they market and sell and match that and HubSpot is going through that same experience. I feel like people buying sales products and marketing products they want to try it before they buy it. They want to get their -- sink their teeth into it and so we're really leaning hard into the premium model there and it's working. It's starting to scale the unit economics really working it. So yes, and we're going to apply that same thinking on marketing products. So, John talked about marketing starter, boy, that's super early. We're just getting started with that, but that's promising over the long term as well. In terms of the competition for the sales products, it typically Derrick the first kind of grown-up CRM they buy. Look there's other alternatives out there. There's hiring ones that are more expensive and complicated and then there is some lower end kind of toy-ish stuff. I feel like we nailed the usability. We built it for the sales reps, not for the VP of Sales. We really just want to optimize to help that sales rep sell more stuff versus we focusing on the VP of Sales to track stuff and so I think we really nailed it. There is competition down there, but I feel like our positioning is really good. The sales cycle is short. They get in there. They try the CRM, they figure it out, they trip over a limit on the sales products. They buy very, very quickly. Oftentimes they buy right there online, just like you would buy anything online without talking to any human.

Great. And just on the promotions, I guess you ran a promotion of Q3, should we expect any of that behavior going forward or is that really a one-off.

It was really a one-off. I can't say we won't ever do it, but it was just a unique quarter given that inbound wasn’t in the quarter and we wanted to do something to stimulate demand. We do some small things here and there, but this one just stuck out given that it affected the services line and really drove the billing to get more months up front for the customers that paid-up front.

The next question is from Jonathan Kees from Summit Redstone.

Great. And thanks for taking my questions. I wanted to ask I guess couple of follow-ups. One continuing on the competitive picture for that -- this is more for you Brian, you were talking about that nice space and mid-tier space, if you have that CRM that's just right first quarter product if you have the sales pro that's really taking off and you don't see a lot of the big guys down there and the small guys not competing as much, what keeps you up at night? Is it more that someone will pay attention or that some of the small guys will start pricing competitively or do you just sleep well at night?

I don't think the sales part of the business is not keeping me up at night at all. If anything that keep you up at night because I am so excited about it, it's how do I take what I've learned from the sales business, the premium model, the really nice lightweight, easy to use consumers style app, how do I apply that to all the HubSpot, can really grow HubSpot from a marketing software company that's a point app company into how do I turn into and something like Microsoft our salesforce who are a SAP or in Oracle. In that midmarket space there no one who has done it and I feel like we've got the App for it, there's the market for it. We got to execute. Execution is what keeps me up at night. We got to do our jobs as Bill Belichick would say.

Okay. I guess who you alluded for during…

We're based in Cambridge.

You probably took the day off on that Monday. So at least came in later. The second question is regarding the rollout of One HubSpot, you talked about with international there's a lot of Sales Pro potential, there's a lot more underrepresented there versus something like with the U.S. are you rolling out One HubSpot equally both domestically and internationally? Are you looking more the partners here domestically first? Are you looking some more at the sales consultants here in the U.S. first or is it you're doing it across the Board? It doesn't matter what region.

Yes, we're doing it across the board. We started rolling it out all the first week of January same USA and same international.

The last question is from Koji Ikeda from Oppenheimer.

Great. Thanks for taking my question and congrats on the quarter. Just one real quick one for me, when we were at your conference last year, the inbound conference, one of the interesting takeaways from our conversation we had with customers is that we think there is a really good upsell opportunity out there with customers updating from Pro to enterprise and given the pretty good monetization opportunity there, I was wondering if you could talk about what's really driving that push up to enterprise? And is this upsell happening most often at the renewal time or are you actually finding customers wanting to upgrade to Pro at a much earlier pace I am sorry, upgrade in enterprise at a much earlier pace?

Thank Koji, yes, I think there is an opportunity there if I rank all the opportunities in HubSpot, that wouldn't be at the top of my list, but there's an opportunity there. There's feature differences between the products. So, a more sophisticated, larger company, maybe a couple 100 employees with a good-sized marketing team. There are some features in there that they would really enjoy and like and yes, they're upgrading. We're seeing it happening and they typically upgrade at that one year renewal period or at the second-year renewal period as they're growing and needing those additional features. So yes, there's definitely an opportunity there. It's something we can probably harvest even better over time.

Now I'll turn the call back over to Brian for closing remarks.

Yes, I want to thank everyone for joining the call today. We really appreciate it. Happy Valentine's Day.

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