HubSpot, Inc. (HUBS) Q1 2018 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 the HubSpot Q1, 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. I will now turn the call over to Charles MacGlashing, Director of Investor Relations for HubSpot. You may begin your conference.

Thanks, operator. Good afternoon, and welcome to HubSpot's First Quarter 2018 Earnings Conference Call. Today, we'll be discussing 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 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, within the meaning of the section 27A of the securities act of 1933 as amended and section 21Eof the securities exchange act of 1934 as amended. All statements other than statements of historical fact are forward looking statements, including statements regarding management’s expectations of future, financial and operational performance and operational expenditures, expected growth in business outlook, including our financial guidance for the first fiscal quarter and full year 2018. Forward looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise these forward looking statements. Please refer to the cautionary language in today's press release, and to our Form 10-Q, which was filed with the SEC on February 13, 2018, 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 as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed in a reconciliation of the differences between each of the non-GAAP financial measures and the comparable GAAP financial measures can be found within our first quarter 2018 earnings press release in the Investor Relations section of our Web site at www.hubspot.com. Now, it's my pleasure to turn over the call over to HubSpot's CEO and Chairman, Brian Halligan.

Thanks Chuck. Good afternoon, folks. Thank you to all of you for joining us today as we review HubSpot's first quarter 2018 earnings results. We are off to a great start to the year overall with 39% revenue growth, 5% non-GAAP operating margins and 44% customer growth bringing our total to nearly 45,000 total customers. Now underneath those numbers I'm happy with the traction we've gotten with our premium model where about half of our new customers use our free product before they buy it. I am happy with the gross stack adoption which is over 10,000 total gross dot customers now. I am happy with the improvements we are making on the overall customer experience. Now one of the biggest -- in the last year is when I speak with our customers, I see that the reasons they are buying from us have really shifted over time and their word-of-mouth is increasing becoming one of our biggest growth drivers. In fact, I stopped thinking about our business like a traditional sales and marketing firm. It's more like a flywheel where the customers are the main driver that pulls new prospects in. That flywheel spins at the rate of our customers delight. I think it was great way to think about our business 10 years ago when our sales and marketing was the loudest voice in the market, but in todays market our customers' voices, they are the loudest. This shift in the way humans make buying decisions is the first big reason why we are launching our Service Hub product line. We want to enable our customers to grow better by matching the way they go-to-market with the way modern buyers actually evaluate and buy products today. We want to enable our customers to create a delightful end-to-end experience and start to get their own flywheel spinning. There's another shift of foot in human behavior, that's the second big reason why we're getting into the Service Hub of business. People's expectations of service have dramatically changed just over the last couple of years. Traditionally, if you had a problem you call support, wait on the phone, spend 10 minutes describing yourself and your problem, not get your question answered, get transferred and do the whole thing over it again until you gave up or you had your question answered. This was just the way things work life in the big city for us humans but not anymore. Today, if humans have a problem or a question for a vendor, well they start with Google and they expect to find an answer. If not they go to the vendors website or Facebook and expect to chat with someone who will quickly find the answer. If not there then they call and they expect that person to be clue full and have all the context they need to answer your question quickly and completely. That leads me to the third reason why we get into the Service Hub business, building a modern system then enables a vendor to create that modern service experience is very complicated. To do it right, you'd need a knowledge base system, an SEO system so those knowledge articles could get found in Google, a chat system for your website, a messaging system for Facebook, a bot builder, a ticketing system, a Net Promoter Score system and a customer marketing system, and all that would need to constantly sync with your CRM system. All very doable if you'd like to buy eight systems, pay eight bills and learn eight user interfaces, but it's just too painful for a smaller medium-sized business to pull this off today. We spoke to Jay Perkins, he's co-founder of kettlebell Kings a fast-growing creator of kettlebell equipment and content from Austin, Texas, and we talked to him about the Service Hub, he nailed it, he said Service Hub is going to give our entire team quick access to what a customer's experience has been like. What they purchase, what emails have received in track all of that in one place as opposed to flipping back and forth between different systems. Jay gets it, he's talking about kettlekings desire to create a modern service experience and how Service Hub is going to help them pull this off. As you can probably tell I'm excited about the opportunity to help companies building fantastic end-to-end experience with their customers, and move from an old-school funnel mentality to a new-school flywheel mentality. Service Hub Pro is available starting today and it's priced at $80 per seat with a five seat pro bundle required to get started. Okay moving on I want to make a couple of quick comments on the EU general data protection regulation or GDPR because I know it's on top of people's mind. As you probably know GDPR is legislation the European Parliament adopted to give individuals a lot more control over their personal data. There's a lot in this legislation but in spirit I think the Europeans have it right. GDPR fits very well with HubSpot's grow better philosophy and methodology. At its core GDPR it's about using personal data fairly for those who have opted in and letting them know what you're doing with their personal data. But it's not about is buying a code source list in spamming those contacts. We're very supportive of GDPR and its principles. We've recently published our GDPR product roadmap detailing the product features we have. We will also continue to help our customers be GDPR compliant by May 25th and beyond as new legislation is adopted such as the EU. E privacy regulation. And while a sweeping regulation like this carries a risk of some headwinds for the overall industry in the short run, as customers adjust to a post GDPR era. We think helping our customers stay compliant with this legislation, as well as other data protection best practices will pay off in the future as it aligns perfectly with our grow better philosophy. Okay. With that I'll turn it over to John now to take us through the financials and our guidance.

Thanks Brian. I'm really pleased with the first quarter results. We delivered strong revenue growth nearly $18 million of free cash and $5.6 million of non-GAAP operating profit. First quarter revenue grew 39%, driven by 40% subscription revenue growth and 25% services growth. Subscription revenue continues to grow faster than services and now represents 95% of revenue. HubSpot ended the quarter with 44,894 total customers which was up 44% year-over-year, while average subscription revenue per customer came in at $10,016 which was down three 3%. As Brian mentioned, we continue to be pleased with the progress on our three big initiatives around growing our premium customer base, improving the ways we can delight our customers and growing our gross stack adoption across our nearly 45,000 customers. We continue to see a bunch of customers buying sales and marketing together up front. This helped us surpass 10,000 gross stack customers in the quarter. Another trend that continued in the quarters that a majority of our new sales business is coming from our $400 five seat sales professional product. All of this is good for our customers and our business, however, as I mentioned last quarter these two trends and other factors were likely caused quarter-to-quarter variability into our up sell rates. Deferred revenue came in at $150.8 million, growing 43% year-over-year. While calculated billings defined as revenue plus the change in deferred revenue came in at $126.2 million, up 38% versus the first quarter of 2018. Billings's growth benefit from the gross stack and sales professional trends I just discussed, as well as a four point benefit from FX in the quarter. Please remember that Billings's growth can diverge from revenue growth in any quarter due to changes in billing terms, product mix or the timing of revenue recognition versus billing. We continue to expect Billings's growth and revenue growth to generally track each other over the long run. For the remainder of my commentary, I will discuss non-GAAP measures. Let's take a look at margins. First quarter gross margin came in at 81.4%, up over one point year-over-year. Subscription gross margin came in at 86.3%, up about one point year-over-year, while services gross margin came in at negative 8.4%, up just over one point year-over-year. First quarter operating margin improved year-over-year to a 5% operating margin even while R&D as a percentage of revenue moved up from 13% to 18%. Given the significant opportunity in front of us, we continue to believe that these investments in product will drive great ROI over time. International performance continued to be strong with revenue growing 67% year-over-year, representing 36% of revenue in the quarter. We continue to see a huge opportunity internationally and are excited to announce our newest office in Bogota Colombia. At the end of the first quarter, we had a total of 2,283 employees, up 37% year-over-year. With another strong quarter of hiring, coupled with lower than expected attrition which sets us up well to on our growth plans. CapEx including capitalized software was $8.9 million in the quarter, up from $7.4 million last year. We still expect CapEx as a percentage of revenue to average about 7% for the year. With that let's dive into guidance for the second quarter of 2018. Total revenue is expected to be in the range of to $117 million to $118 million. Non-GAAP operating income is expected to be between profits of $5.3 million to $6.3 million. Non-GAAP diluted net income per share is expected to be between profits of $0.14 to $0.16. This assumes approximately 41.5 million fully diluted shares outstanding. And for the full year of 2018, total revenue is expected to be in the range of to $489 million to $492 million. Non-GAAP operating profit is expected to be between $22 million and $25 million. Non-GAAP diluted net income per share is expected to be between $0.59 and $0.65. This assumes approximately 42.3 million fully diluted shares outstanding. With the strong performance in first quarter free cash flow, we now expect full-year free cash flow to be between $31 million and $32 million. As you adjust your models for 2018 keep in mind the following. Our inbound event will be held in Q3 again this year, and will result in about a three point impact to third quarter operating margins. Given the move higher in our stock price and some slight dilution from our convertible bond, we're now forecasting a fully diluted share count of 42.3 million shares for the year. With that said, we still expect our stock based compensation expense to be about $76 million for the full year. The convertible debt we issued in 2017 will continue to impact non-cash interest expense, which we expect to be about $5.1 million in Q2. The expense will increase slightly each quarter as long as the debt is outstanding but given it is a non-cash expense, it will be excluded from our non-GAAP results. With that I'll hand the call back over to Brian for his closing remarks. Brian?

Thanks John. Today with the launch of Service Hub we now have three strong pillars in our suite on top of the CRM that's scaling extremely well with our premium entry point. John mentioned that we cranked up our R&D investment and I think that you're really going to start seeing some of those investments pay off. Over next year I think we have the opportunity to make more progress on the suite vision than we have in the whole last four years. I think we're coming up on some of the most interesting times in the HubSpot history for our customers, for our partners and for the HubSpot team. What's going on now from a product perspective is unlike anything I've seen during my entire time at HubSpot? Okay. I want to close by thanking our customers, our partners; our investors in all the HubSpoters around the globe for helping us with our mission to help millions of organizations grow better. Operator, can we please open up the call for a few questions. Question-and-Answer Session

[Operator Instructions] Your first question comes from Tom Roderick with Stifel.

Hi, guys. Thanks for the chance to ask a question. So Brian if I could I'd like to ask the first question just on the Service Hub Pro, a product you announced pricing today. And great start on that, you had talked a little bit about what that offering might look like when you got back at the user conference back last fall. Curious if you could just sort of update us as to some of the key features, what customers have been interested in throughout the beta and how we might think about where that product could go over time with additional features? Thanks.

Great, nice to hear from you Tom. Pumped up about the Service Hub product. I've been playing with it, it's exciting. I think it's the best product we've ever launched. There's four key pieces of it out of the gate. There's a knowledge base in there that's really solid so built on top for content management system, but slotted in here a ticketing system, a surveying sort of Net Promoter Score system where you can do surveys of your customers and slice and dice that data and do good customer marketing and then a conversations tool so you can do really nice conversations on your website for support. And then that's all combined with all the goodness inside our free CRM system. It's included with automation and secluded with emails including with all that other good stuff. So I don't get it I think it's pretty full-featured, the team's done an excellent job, and the feedback during the beta has been really solid. So feeling great about it.

Fantastic, quick follow-up for you just in thinking about is a new product and the flywheel approach you talk about here your customers being some of your best advocates. As you guys think about how to spend on sales and marketing, how does that impact the customer acquisition costs and maybe the profitability of the model longer term? Does that mean you can sort of rely more on your customers and word-of-mouth and the channel becomes a little less important? How does it change the way you think about the way you build for sales and marketing? Thanks.

That's an excellent question. Like kind of the DNA of HubSpot had been shifting over time, I'm a sales guy by training and we're really invested aggressively in sales in the early days of HubSpot. The center of gravity we're moving to be more of a customer centric, product centric company. We sell our product now with a lot of help from our product. It's freemium version and so I think you'll see and you're starting to see actually in the P&L this quarter a bit of a shift where the year-over-year increase the amount we're spending in sales and marketing that's down a little bit, whereas the year-over-year increase in the amount we're spending on R&D is up a little bit. So that's starting to shift and I think it's a really positive thing for us and for our customers and for our partners over the long haul. Really bullish on what's going on there. Our product organization is on fire, the recruiting has been on fire, the retention -- we built the Service Hub and it looks really good. And there's a whole bunch of other exciting stuff that you'll see over the course of next year. So I think we're going to see a nice return on that R&D investment that's going on.

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

Hey, guys. Thanks for taking my question. Just wanted to ask another one on Service Hub. With sales you know starter and pro you started with a real nice installed base of already free users. Do you feel like with Service Hub you already have that installed base already within your overall customer base from which you have a natural kind of up sell motion to sell the premium version in?

Yes. Brad that's a good question we've got 44,000 paying customers today, and I think that'll be the first target for it. They're already using us for marketing. They're using us for sales. I think it will be very natural for them to pick Service Hub up and buy it then the next big pool is the hundreds of thousands of companies that are using our free CRM product. I think that's a really good pool, maybe they haven't purchased the sales product of the marketing product. And I think we'll see some customers as their first step pick up the Service Pro product. I think you'll see that going on. And so there's a big, big growing, fast-growing installed base of free users, fast growing installed base of paid users that'll be fertile soil I think for us to go into to sell the Service Hub.

That's great, thanks Bryan. And then and also on Sales Pro that now the pros been out now for a couple quarters few quarters. Are you starting to see that real departmental expansion take hold in the installed base going from one or two users to now five with Pro and then go from there and also kind of which you could describe where those users are coming from, what were they running existing, or are they running something alongside another solution? Thank you.

Yes. Sales Pro is going really well. We announced that product last quarter, and the uptick has been super strong. Very happy with the way that's gone. What we've seen a lot of frankly are people right out of the gate buying Sales Pro. They want the features in there. So they used to buy one or two seats of the sale starter, now when they're kicking off a lot of our users are just starting off with the five seats of Sales Pro. That's kind of the dynamic that's going in the market. In terms of competition, there are a lot of little small companies that sell CRM to really small businesses, so there's a lot of --you probably wouldn't have heard of them, but there's a lot of private companies and there's a lot of swapping out of those systems for HubSpot CRM in HubSpot sales Pro. There are some bigger systems that people may have put in place that they haven't fully implemented or integrated and they haven't got their other sales reps to start using it, through seeing a fair amount of people swapping that type of stuff out. And then just a lot of companies where it's the first CRM system they're buying the first kind of grown up one is the way it I describe it and there buying HubSpot and sales Pro. So it's kind of coming from a few different angles. What is not coming from is going into a giant implementation of some other vendor CRM system that has hundreds of seats and they've configured it and customized it and integrate it and then we rip and replace it. That's not the game we're playing. It's more; we're growing kind of with the economy and staying in sort of our sweet spot. And it's going great and I think there's a ton of upside left in that sales Pro product line.

Your next question comes from Terry Tillman from SunTrust Robinson Humphrey.

Hey, gentlemen. It's actually Terrel or Terry. Thanks for taking my question. And actually I'll make it easy. I first like to start with a remark or just a food for thought and then just one question for you Brian. Since you opened up the Columbia office, it feels like maybe that could be an investor analyst or field trip down there just saying.

That's a brilliant idea.

So my question is because of all the product innovation you've been putting out there, you got these three main pillars now, and then you talked about still continuing to innovate and kind of leaning into this kind of sweet and gross back approach. What I'm curious about is you do have these three pillars how much more do you need to invest in the innovation there? Because I think if it seemed like there can be a risk of over-engineering and you're focused on mid market you don't want to over engineer your products. So how much of your R&D and your innovation investments going forward will still be on these three pillars as opposed to maybe some other things we haven't contemplated or making the products work better together. Thank you.

That's a great question. So what we can -- we'll come up with today is the Service Hub. It's exciting what we haven't been bragging about it because it's more of a niche audience, but a powerful important niche is a tremendous amount of progress we've made on the platform side of HubSpot over the last few months. So today we actually have our partner day, we have all our biggest North American partners in today and tomorrow. And I spend a bunch of time with them. And yesterday we had all our connect partners and we had our 100 largest connect part and those are software companies who build into HubSpot. But we announce today seven new APIs into HubSpot. So an API into our analytics pipeline and API into tickets, a whole bunch of these new API that enable our partners to build custom integrations to connect HubSpot to other systems to extend the functionality of HubSpot. And to really open up our ecosystem of partners. And what you can do with HubSpot. In addition to that over the last couple months, we've announced a bunch of new integration, Shopify integration, super psyched about that. New Instagram integration, deeper Facebook integration, Facebook for work integration. Just today we announced a new stripe integration which we think is really hot. And so lots and lots of room to innovate on the platform side. So we can build a big community of software developers and partners that can extend and integrate HubSpot in really dynamic and interesting ways. So when I look out, I've been at HubSpot now for 12 years, it's been a really good run so far. I feel like there's more 12 years of good run, lots of innovation left in our heads. Lots of innovation that we can do in small and medium business. And I think one of the things we're good at -- we're not good at everything, but one of the things we are good at is not cluttering the app and cluttering the user interface. We are more on the Apple side of the world. We want to keep it simple. We're very opinionated about UI. And we want to continue to appeal to that SMB market. And so that's a little bit less of a worry for us, but lots more to do, we've got our three hubs. If you look at the three hubs, there are some gaps in there in terms of products you can imagine where we might go there. Lots of improvements needed in the marketing product, sales product, service products, lots of enhancements on the platform side coming. So we're not nearly done my friend.

Your next question comes from Richard Davis from Canaccord.

Hey, thanks very much. Brian so when you kind of think of like I don't know the next three to five years or so is there a limit or in terms of average revenue per customer or per user per month that you can get to and you know the reason I'm asking is it you know you and I saw what happened to Markedo when they moved up market they ended up looking like Sonny Corleone at the toll booth. So I'm just trying to figure out where you kind of seek because it feels like you could go pretty wide but not have to raise your prices to enormous levels. Thanks.

Yes. I agree with that. If you think about it the thing about that ARPU number. I saw the number I actually obsess over Richard because there's some things on that ARPU number, there are real tailwinds and some things that are headwinds. For example, we came out with our starter product line. That's kind of a headwind to how much we charge, but it creates an opportunity to bring more customers in. So we can move up the stack later. At the same time there's lots of room to innovate. For example on that marketing Enterprise product and to build more functionality in there. And so the ARPU it's actually a tough one even for us to put our finger on where that's going to go over time, because there's room in the product like our pro product line I think is really solid. A marketing Pro and sales Pro, boy, there's lots of opportunity in the starter product lines and those enterprise product lines to build really awesome functionality and to really map our value across the entire SMB supply and demand curve. I think there's room there, a little above us and a little below us on the functionality side and the value side that we can create.

Your next question comes from Stan [Indiscernible] from Morgan Stanley.

Hey, John. Thank you so much for taking my question. So the first one before just going to want to come back to the Service Hub for a second. How did you guys approach of setting the price level for Service Hub and the 400 bucks per month for the minimum five users essentially applying 80 dollars a user versus some of the other customer service software vendors that are out there? And then I have a quick problem.

Yes. Stan, its Brian. I'll take that one. We looked at all the competitive offerings out there. While we notice when we talk to the end buyers of software, there's a couple things going. The first thing that we see this going on is companies today are trying to transform the way they service their companies. From a model that's very telephone intensive, information intensive, long --you call in you went on hold, you talk to a support rep, you give them ten pieces of information, you describe the problem, and inevitably they can't solve a problem. They transfer you; you wait on hold again, give the same ten pieces of information, describe the problem, can't solve it and so forth and so on. That's just the way it's worked forever, and what companies are trying to do is modernize their approach. So that first of all you don't call, you start in Google and how do you get your question answered in Google first. We can't find even Google actually people get a little irritated you can't find in Google. They said well you go to the site you expect be able to chat and find the answer. If you can't find that, well, the last step is you pick up the phone and call but when you call you shouldn't be have to ask 10 questions and go through that long laborious process. You expect to be connected to a really cool, cool rep who has contacts you can solve it. And so we're in the business of helping companies modernize it. When we talk to people trying to modernize it, what we inevitably find out is they have to buy two, three, four, five, six, seven, eight different systems to try to pull that modern support motion off. Very similar frankly to what happened when you first went into marketing. In marketing, people are trying to do modern marketing, buying a website, a blog, SEO, social, marketing automation, analytics. It was super complicated for mere mortals to do. And so when I look at that price point, I say well its 80 bucks if you have to buy four or five different applications it's probably 200 bucks. So I think it's priced I think the price point is going to work for it and the time will tell of course, but I think we've nailed the price.

Got it, thank you. And then just a very high-level question on your infrastructure. We saw recently that you are going to be moving some infrastructure over to the Google cloud in addition to your core which is built on AWS. How did you approach this thinking around I guess diversifying into Google cloud infrastructure in addition to AWS and as we think about this going forward is this something that could hypothetically benefit your subscription gross margins in the future? Thank you.

Okay, thanks Stan. I guess my first comment would be very large and happy AWS customer. My second comment would be I think it's prudent for us as stewards of the business and service providers to our customers to diversify and you relying a lot on these vendors. So having both AWS and Google seemed like a very good idea for us and for our customers. It just seemed like the prudent move and then the Google deal we've got a really good relationship with Google and the relationship extends way back where we're super tightly integrated one of their best partners on the Adwords side. And we have new interesting partnership things we're doing with them on the G sweet side, we're deeply integrated to gmail and to calendar and to drive and there's a lot more we want to do with them. And so that's kind of - that was kind of our thinking around it. We like the idea of having two different vendors for this kind of thing. I don't know, John, you want to comment on the margin.

Yes. I mean obviously to Brian's point we're always going to keep our vendors and partners honest and we'll do whatever we can on that price front, but we already have a really good deal with Amazon but obviously we'll do whatever we can on that front, but we really like having two providers to really de-risk and allow us to make sure we're keeping everybody honest.

Your next question comes from Mark Murphy from JP Morgan.

Hey, guys. This is [Indiscernible] sitting in for Mark. Thanks for taking my questions and congratulations in the corner. I want to just be dig a little bit deeper on the sales cloud. We have seen a pretty rapid growth on that business I mean I guess I don't know the user numbers but if I look at the growth stack numbers that has probably tripled in the last 12 months or so. Is there a way to basically size that business? Has it hit kind of a milestone if you don't want to give a number I mean is that a $50 million run rate at this point in time. And the second question is do you think Service Hub would see a similar kind of a trajectory when you think out the next few years?

Those are good questions. We're not planning on announcing a milestone on this call. Maybe inbound I'm not sure I am thinking on that, but yes you're right the business is growing really rapidly when we first hatched the idea of building a sales hub product out of our CRM product. It's growing faster than our expectations. We are really, really pleased with it. I think we have the nail on the head on the product, it's what the market wants, sales guys are selling, and customers seem to really love it. In terms of the service product we don't know yet. We think it can grow very fast right out of the gate. There's really good interest from our partners and our customers. It was the number one enhancement request from our customers if you go on like the boards where people request enhancements of HubSpot. It was the number one thing on there so it's hard for me to say how fast it's going to grow, whether it's going to be faster or slower. But I think it's going to be similar, pretty hot on it.

Okay I just want to follow up on one comment that you had made on GDPR. I think you said it could be a near-term headwind for the industry. Could you elaborate on that please?

Again we're not real sure. I would say on GDPR we're ready for it. We've done a bunch of depth work and a bunch of marketing and evangelism around it. And we've particularly over in Europe it's a real issue that people are talking about a lot. We've been over there, evangelizing our perspective on it and we're getting really good uptick on it. What I like about GDPR is it's inbound, it's very HubSpot. I think over the long haul it would be good for us because the way people have to go to market is going to have to be GDPR compliant and HubSpot got a very GDPR-ish way of going to market. We evangelize creating content, pulling people in through Google organic, doing social media in an organic way. We've got a very kind of user first the human way of doing it. And so over the long haul I think GDPR going to benefit us quite a bit. We don't know exactly what the impact will be. We've done some analysis on it. We think it'll be minimal. It's not keeping me up at night, but there could be a tiny little impact from it. And you want to add that John?

No. I mean I think that's right I mean our customers from time to time take out the contact that they're not using. So it's already something they do so I mean to see a big change.

Haven't seen any change yet but we're keeping an eye on it.

Absolutely.

Your next question comes from Alex Dukan from Piper Jaffray.

Hi, this is Taylor Reiners on for Alex. Thanks for taking my question. I wanted to follow up on the question related to Google cloud. I mean the press release you mentioned that it'll allow you to invest more in the current Google cloud product integrations and accelerate growth in your free CRM product. I was wondering if you maybe comment on what is driving that incremental traction as a result of the partnership. And then maybe if there are any other partnership opportunities with public cloud vendors from go to market standpoint.

It's an excellent question; it basically is just deepening the partnership with Google. We've got integration with Gmail and integration with Google Drive and integration with Google Calendar. And there's more we can do to make it flicker and easier and more deeply integrated. And so we're working on that we've got a really good relationship with those guys to get a lot of respect for Google, and there's teams of folks on both sides talking about are working on how we make that integration richer. One of the things that's key about our CRM and one of the reasons our CRM has done so well in the market we sort of built it right in from scratch into that suite of Google products and sales reps like that they live -- they live in G suite or they live in Outlook. And that we think we can do an even better job of that. And Google's up for helping us and partnering with us on it .So yes that's sort of what we're thinking about. In terms of another big partnership opportunity with them a big cloud opportunity, hard for me to say that at this point on this call. Google sort of a natural partner when it comes to that though.

Got it and then just quick follow-up you mentioned that the FX tailwind during the quarter was about four points to the top line. Could you give us what that looks like for guidance?

Yes I mean we don't specifically give FX impact on guidance, but we probably provide range of outcomes and we would generally expect it to be a around this range, if it increased or decreased rapidly obviously that would put us at the low end or the high end of that range.

Your next question comes from Koji Ikeda from Oppenheimer.

Great, thanks for taking my questions, and congrats on the quarter. Question on the product suite here now that you have marketing and CRM and sales and with the service product announced today or going GA today I just wondering what's the right way to think about the pace of new product introductions over say the next three to five years/

Well two question Koji. I kind of think of HubSpot like this. When Dharmesh I started 12 years ago, it was effectively a very fancy blogging tool with some search engine optimization and social capabilities on it. That's kind of step one, step two was build out kind of a full marketing suite with marketing automation and landing pages and all that stuff. Step that step two basically building that, step three was well let's build a CRM system in a sales hub. And step four is really building the Service Hub. And so we've kind of move when I think about HubSpot in my own head, we move from an app company to a full suite company. There's more opportunity in the front office for us to build more functionality. There are more opportunities for us to innovate within the marketing hub sales, hub service and CRM to continue to evolve with the way humans actually shop and buy stuff. Lots more innovation left. So we're not done with that. But I kind of think of our next step in the journey as becoming much more of a platform company. We have this connect program and we have some API that people are building, it's a vibrant community. We think that community can be far more vibrant. We can open up far more of the product and do much more there. And so that's kind of how I think of it in my head. There's more we can do in the suite and a lot more we can do in the platform. When I think of HubSpot and the game we're playing today, it doesn't feel like we're in the seventh or eighth inning, it feels like we're still in the second or third inning of the hub spot journey. Lots more innovation, lots more ideas intermission my head for interesting things to build and more value to deliver.

Great, thanks for that. And just as a follow-up question wanted to hit on the competitive landscape out there. Just segmenting the opportunity maybe between the 100 and 2000 employee space and it appears that some of the competition out there may be heading down market. A little bit more aggressively in the past with some lighter versions of their product suites. Are you are you seeing any changes in the competitive dynamic in that customer segment that's one 100 to say 2000 employees?

Not really, we track all the competitive dynamics and we track sales cycle. I haven't seen a big change. You're probably referring to Salesforce they come out with their new essentials product. And we're keeping an eye on it. We haven't seen honestly we just haven't seen a ton of it. I'm not exactly sure why we haven't. I have some theories on why that is but there hasn't been a big shift on that. And I think genetically Salesforce has done an unbelievable job and moving into the fortune 500. They're killing it, they're doing nine figure deals, and they have a lot of respect for those guys. Genetically we're sort of programmed from the Fortune 5 million. And I think we're exceptionally well position there. Our win rates are high our product value we deliver is high. So honestly no huge shift that we've seen.

Your next question comes from Jennifer Lowe from UBS.

Great, thank you. Just looking at sort of how the business is evolved with the marketing cloud, it was always focused on maybe not B2B but on informed sales, the sales force automation products are sort of related to that where you have a very personal relationship with your customers and it strikes me that with service you could potentially address a broader set of needs in scenarios where maybe it's not that same customer intimacy that you have or the inbound approach that you have with marketing and sales. So I'm just curious if you think about the service cloud and how that could potentially evolve over time. Do you see that is addressing a larger set of customers than maybe you were able to address with your first two product lines?

It's a really good question. Maybe, that's not sort of where my head's out at for the next couple years. So many B2B companies. They're right in our sweet spot, have support and service organizations. They may have a support call center and then they also have people who do services and serve their customers. It's just so much opportunity there to help them. And have it all on one platform is super beneficial to them. Maybe down the road we could open things up to more B2C type customers, but it just feels like there's so much untapped opportunity in the B2B world. We announced also that integration with Shopify might lead you to a similar conclusion. I think we're going to get a lot of customers through that Shopify integration, the integration slick and the types of customers with Shopify customers that are buying HubSpot are of course or e-commerce companies, but a lot of them are more considered purchases. For example, I just heard this morning that Airstream is a customer, Airstream those awesome [iconic shower] other than RVs where smallest things are awesome though. And their customer and that sort of typical, so, yes a consumer will buy it, but it's more of a considered purchase. So for now we're kind of sticking in our swim lane and trying to drive value in there, and down the road we may consider opening that up to a bigger thing. I think the time for us is super interesting though in just the B2B world and the consider purchase B2C world where we started in marketing, we moved into sales and CRM, and now into service. So we've had a nice cam expansion over the last couple years. And we got to get after it.

And just one more for me. Looking at the gross stack customers you have now is it still predominantly marketing customers full-featured marketing customers that buy sales or are you starting to see more sales customers buying marketing or marketing starter addition customers becoming bigger if there being a shift there that we should be aware of?

It's both; a lot of people are starting with sales and then buying marketing. A lot of people who have been using marketing are buying sales. The only surprise I think we've had is the number of people who are buying both upfront. The sales people are very effective in selling it. And I think it's --I think what's going on in the market it reminds me of people are either Apple -- people used to be either Apple people or Microsoft people. And for me I'm an Apple person. I have an iPhone. I have everything's Apple. I think companies are going to be the same way. They're going to want a hub or a backbone that's one system. They're going to want to buy those applications. That are going on partner with and connecting other applications that sync really well with that. And I just think we're starting to see more and more of that particularly in the SMB market, where they saying, they are going to buy marketing. We're going to run our front office on HubSpot. And I think you've seen that with Salesforce up market in the enterprise. They've done a really nice job of selling their full suite to big companies. And I think that's my personal opinion is that's the way the world's going. And we've been pleasantly surprised with the uptick on that gross stack particularly up front.

Your next question comes from Brian Peterson from Raymond James.

Hi, guys. Thanks for taking the question. So Brian I wanted to ask you under agency partners I'm curious with the uptick or receptivity has been to the sales Pro product. And what role you think the agency partners may play in the go-to-market motion for the Service Hub?

It's an excellent question, Brian. If I step back and think about the agency partners. When we started the program we were a marketing company. And so all the agencies we signed up were marketing agencies. And most of them started as website development companies frankly and then we taught them how to do inbound and kind of turn them into software and service companies. And it works remarkably well. As we moved into CRM and sales, well of course we evangelize this idea of you should offer more services and help them with sales and marketing. We don't force anyone to do it. We evangelize it, a lot of them have done it and a lot of those agencies are selling sales Pro and putting in CRM and really cranking out there with it and we're super proud of it. A lot of them say we don't -- we're not interested in that. We're genetically designers and we're website designers and were it a stretch in the first place for us to get into marketing automation. I think the same thing will play out on the on the service side, where all the folks who are selling sales and marketing together now, they're going to end up selling the full suite of product. They're going to actually go to market I believe with this new idea of you're not selling a funnel transformation project, you're selling a flywheel transformation project. And if you really want to grow your business, you have to do all of these things well. And so that's kind of what's going on underneath the covers there. So one thing that's a little different that's interesting that we started to see in the last year is there's a bunch of now CRM agencies that are more IT centric. Let's say that are built on CRM not starting from marketing. They're starting to sell that sales product and then we introduce in the marketing product. The same types of thing are happening the other way. And so it's hard for me to predict exactly where it goes over the long haul. But it's going pretty well. That partner program is growing fast. The super profitable for the most part those partners are really happy. We've got most of our best ones in here today. And I'm bullish on the long term prospects of it.

Great, thanks Brian. John maybe a follow-up for you. Just you have a lot more that you're offering today versus a few years ago. Any help on how should we be thinking about retention going forward? Thanks guys.

Yes. So we again in the quarter we were in the high 90s and still the customer retention were still in the low 80s. So feeling good about that. We talked a bit about this dynamic Brian brought up about, we're seeing a ton of the gross stack coming up front, as well as we're seeing the sales professional buying multiple seats. And so all those dynamics play into that number. We think we can stay in high 90s bump around 100 depending on how the cross-sell and up sell happen in the quarter. But longer-term, we think that with customer hub and some of the other products, we could get up above that but the good thing is you can see even in the quarter, we were able to grow Billings at 38%. And so it's interesting because we actually have seen the percentage of our sales actually higher as a new sales percentage. So we're getting more of that new sale that then longer-term we can cross sell people.

Yes. I'm not too worried about it. I think over the long haul we'll be well over 100. The customer dollar retentions been super steady. What's going on underneath the covers is people are buying more stuff upfront and that's the sales Pro product instead of buying a seat and then upgrading and upgrading, they are buying the whole thing upfront. And that's the gross stack and the lead flow has been fantastic. And so I think about it I agree with John, I think it'll bump around a little bit, but over the long haul I think it would be well over 100.

Your next question comes from Ross MacMillan with RBC Capital Markets.

Thanks so much. Brian I was just curious on GDPR given your customers sizes, GDPR mostly so that your European customers are thinking about this now or is it spreading into domestic customers as they think about sort of applying this type of legislation sort of universally I guess just curious as to kind of what you're seeing in your sort of adoption trends within your surveys et cetera?

Yes, it's mostly Europe. There's some interested in the US where people are have global companies but all of the noise all of the activity is out of the Dublin office, in the Berlin office, and they're super happy with what we're doing over there. I don't know --we even analyzed the numbers to try to predict what the impact will be. I just --I don't think it's going to be a big impact frankly. And I think over the long haul like I said I think it's going to make us more attractive to customers because inbound in GDPR kind of synonymous as opposed to we compete with some companies in their playbook really is a buyer system, file list, import it and span the heck out of it. That's not very GDPR centric. So I think it'll be good. I'm feeling good about it over the long haul.

That makes sense. Thank you I mean maybe one for John. Can you just talk about the growth in the Americas and is that one question I've had is if that's a clean number now in other words is that truly just Americas location-based customers or is it possible that that is somehow muddled in terms of your own data tracking between customers that may have international operations and how they don't get counted in the revenue mix maybe just some clarification on that would be helpful

Yes. I mean clearly I guess if it's a global customer. If we saw them in the US, we'll count it as US, but I mean it's a pretty clean number, still growing in the high 20s down a bit quarter-over-quarter. But we still are really pleased with that growth and we talked a lot about the international versus domestic growth. We continue to look at our unit economics and international looks great. We have been adding a lot of sales reps there. We just talked about opening up the Bogota office as well. And so as long as that's better we'll lean into it. As we think about domestic as well the customer hub probably more of a sell into the base at the beginning that definitely could help out the US as well. But we're happy --we're growing fast and still think that there's a long runway there.

I think what's cool is what's going on internationally. We made it two --if you think about two huge bets, big bet on offices Dublin office, Germany office, Singapore, Australia. We started to open these offices and the second big bet was localizing the entire experience of Spanish, French, German, Portuguese and Japanese and the ripping growth we are seeing is just we're starting to get a nice return on those investments. And I think there's a lot more growth to be happened, particularly Europeans is doing a fantastic job and that is growing really, really well and the market is giant. And so I feel great about that, unit economics are better over there and so when we were looking at --when John and I sit down, we're looking at looking at a spreadsheet with it where should we put our reps. we put in internationally because it's growing so fast and that's where the investments are. And then we don't put as many in the US. So I'm comfortable with the way we do it. We look at profitability. We look at unit economic and we make -- we kind of pour gas on the hot fire. I'm delighted with the way some of those international investments are paying off.

Your next question comes from Kirk Materne from Evercore ISI.

Kirk battery name from Eric or is I this is Tom Allen for Kirk. Can you just talk about which verticals you're seeing strong results for marketing and the growth cloud and whether it's B2B or B2C industries? Also are there ways that you'd consider creating a more vertically aligned sales effort?

Yes, good question. It's mostly B2B Tom, some B2C but its more considered purchased and more expensive product. And it really has been since the early days of HubSpot. In terms of verticalization, it's not really one vertical like we do these pie charts internally of the verticals, and there's lots of colors on the pie chart and other is by far the biggest segments of it. And so there's no real specialization in a vertical. HubSpot fundamentally is a horizontal company, it's a horizontal platform. We see ourselves as an evolving platform and to the extent that the verticals would appear and there would be solutions for them, let's say there was a vertical for nonprofits or for universities or for manufacturing. We would like third-party partners and developers to build solutions on top of around and integrate into HubSpot. So we could build really, really nice solutions there. We're unlikely to do that ourselves.

Your next question comes from Scott Berg from Needham.

Hi, guys, congrats on the good quarter. On the essence of time I'll just ask one question. Brian I had a random chance to talk with a salesperson for my competitive service best product today. And you tell them how competitive pricing is in this space how do you sell against that here going forward with that --with pricing pressures team will be new element out there?

Yes. I mean I think we're really well positioned. I think what companies are going to want to do is particularly an SMB is standardized on one platform. And leverage that platform to create a really awesome end to end, gorgeous experience for their end-users. And so I think we're uniquely positioned in that instead of buying a whole bunch of different applications, and weaving them together and paying a bunch of different bills and having different user interfaces to learn, and having all those applications have to sync back and forth with your CRM, you buy one, you buy Service Hub. There is no thinking; it's the same database as your CRM. And I think if you do the analysis. I think we're going to actually be a lot cheaper and you're going to be able to create a better experience for your customers if you use HubSpot. That's what we've seen so far. People are psyched about it and I think we're really good uptick on it.

Your next question comes from Bhavan Suri from William Blair. Q - Bhavan Suri Hey, guys. Thanks for taking my question. Just one that's probably a little broader here but you sort of touched on this idea. I'm glad you've been talking about it the user events and things like that about sort of making this a lower touch model removing some of the friction, and sort of shifting to a place where it's a little more self-service or the partners doing more of the work. A lot of business you think about sort of automating this whole service marketing sales journey, where do you think that plays out not today but three to five years in terms of like do you think you have to retool the front-end and how it's sold? Do you think have to retool with buying process? You've retool the partner process or do you think that it's just education and simplification? I'm just trying to understand so what investment will it take to become sort of a less frictionless more self-service approach especially for the SMB type guys?

That's a really good question. The processes are kind of coming together. We've been working on that for a while and gradually the percentage of our business that's coming in touchlessely have gone up quite a bit, where they start using the free CRM, they're using and enjoying it without talking to a rep today they can buy that sales product, they can buy the service products today. We've already got a bunch of orders come in for the service hub product; most of them have come in touchlessely. And so that's been that --that ships been sailing what I'd like to do is just get that percentage of our customers who are buying touchlessely up over time because that makes our model more profitable and more compelling. I also just think it matches the way people want to buy separate for it. Just imagine yourself, Bhavan, if you're a marketer or salesperson, you've used HubSpot your last two companies, you join your new company, you want to buy it and I just think you're going to go over to our site and buy it. I don't think you're going to have to want to talk to a sales rep and go through its sales process. You're just going to buy it like you would buy Dropbox or spottily or any other service. So that's kind of where we're headed. It's not going to happen overnight of course, but gradually the percentage of our business that's coming in super low friction with no touch is starting to tick up. I like the way that's going.

That was our last question at this time. I will now turn the call back over to Brian Halligan, CEO of HubSpot.

Yes. Thanks everybody for hopping on the call. It's been a pleasure talking to you. Our business is really good. I look forward to keeping the conversation going. I look forward to seeing you all in person at September at our inbound conference. Thanks a lot.

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