HubSpot, Inc. (HUBS) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the HubSpot Q1 2020 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chuck MacGlashing, Head of Investor Relations. Please go ahead, sir.

Thanks, operator. Good afternoon, and welcome to HubSpot's First Quarter 2020 Earnings Conference Call. Today, we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman; and Kate Bueker, 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 within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the second fiscal quarter and full year 2020. Forward-looking statements reflect our view 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 our Form 10-Q, which will be filed with the SEC this afternoon for 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, and a reconciliation of the differences between such measures, can be found within our first quarter 2020 earnings press release in the Investor Relations section of our website. Now my pleasure to turn over the call to HubSpot's CEO and Chairman, Brian Halligan.

Thanks, Chuck. Good afternoon, folks. Thank you for joining us today. We're on this call to talk about HubSpot's business, but I want to take a moment to recognize the toll this pandemic has taken on so many people around the globe and closer to home right here in the HubSpot community. These are tough times. I hope all of you on the call are staying healthy and managing through this as well as you can. Now let's talk about HubSpot's first quarter earnings results. We came into this year with strong tailwinds. Constant currency revenue growth was 33% in Q1, and non-GAAP operating margins were just over 7%. Total customers grew 30% year-over-year, surpassing 78,000, while multiproduct adoption continued to grow nicely, representing nearly 32,000 customers. On the product front, we kicked off the year with an exciting relaunch of the enterprise tier for Marketing Hub. Marketing Hub Enterprise has always been easy to use, but the relaunch made it more powerful than ever before, with better attribution reporting, account-based marketing, advanced chat targeting and much more. We have an excellent offering that delivers great value to our enterprise segment now, and that's borne out by customer use. This product is 1 in 6 separate enterprise categories from G2, the main peer-based software review set. Now those tailwinds, they continued through much of the first quarter. However, in the middle of March, they were met by strong headwinds as the world felt the impact of the pandemic. Now rather than fight against that wind, we're trying to move with it through a series of plays designed to help our customers and partners reach the gap to better times. When the health crisis hit, our immediate focus turned to helping our customers and partners navigate this sudden economic downturn. With that in mind, we expedited Q1 commissions to all solutions partners, and we offered a 6-month commission prepayment to platinum, diamond and elite partners. To help customers and prospects, meaning to rapidly move their go-to-market strategies online, we took several steps. We lifted e-mail and calling limits and added a collection of features, including meetings, bots and 1:1 video into our free CRM. We also reduced the price of our starter growth suite by over 50% late in the quarter. We did this to alleviate the financial strain for our customers on the starter products and to enable more companies under financial strain to get started with HubSpot. This resulted in a fivefold increase in the run rate of that offering at the end of the quarter. Finally, we gave our team a lot of leeway to offer discounts and flexible payment terms to certain customers under more severe short-term financial strain. The way I like to think about the pandemic for HubSpot is that it's like a big storm that blew into our business in the middle of March. The first few weeks, it's largely just a big 200-mile an hour headwind that hit the new business and retention side of our business at the same time. But over the last few weeks of April, the winds have shifted. I'd say we have 150-mile an hour headwind now, but that's coupled with 100-mile an hour tailwind as business has been picking up. And when I take a step back, that tailwind makes sense. The world is seeing a surge of companies with historically offline, old school go-to-market models leaning into a new school online go-to-market models for the first time. The very platform we sell and methodology we teach was designed to help companies make this shift. These trends represent a long-term tailwind for HubSpot, and I think it's one that will outlast the near-term volatility that we're all experiencing in the current downturn. We have not stopped building for the future. In April, we introduced a new product line, CMS Hub. Similar to Marketing Hub Enterprise, we wanted to combine the ease of use growing companies want with the power they need. The result was the content management system designed to help growing businesses overcome the notoriously painful experience of managing websites at scale. Many companies think they only have 2 options for managing their websites at basic CMS with very limited functionality or a technically complicated one with tons of administrative pains. CMS Hub is a better fit for growing companies that need features like dynamic content, adaptive testing and 24/7 security monitoring. And even some tooling, it starts to blur the gap between websites and web apps all without the heavy maintenance. We've been really pleased to see the positive reception that CMS has had with our customers and our partners despite the macro environment. In fact, given this rare moment in the history when humans are shifted into creating digital experiences that rival in-person ones, CMS Hub might have come along at just the right time. As I said before, these are indeed tough times. Having said that, HubSpot is in a good position to help our customers in the market with large weathered but tough times and come out stronger on the other side. To that end, we're continuing to invest and innovate, and we expect to be in an even stronger position when we come out the other side. Now before I hand it over, I want to share some news that our longtime President and Chief Operating Officer, JD Sherman, has decided to leave HubSpot. JD has been instrumental in driving HubSpot's global growth over the last 8 years and has left an indelible imprint on our customers, partners and employees. JD will stay on until July 1 and will continue as an adviser until the end of the year. He will leave behind a well-oiled operating system and a world-class team that will serve us exceptionally well in the years to come. While I'm sad to see him go, I'm proud of the work we've done and eager to see him become a great CEO wherever he lands. So on behalf of HubSpot, the Board of Directors and our employees around the world, I want to say thank you, JD. We've all grown better because of you. Okay. With that, I'll turn it over to Kate now to take us through the financials and our guidance.

Thanks, Brian. Let's turn to our first quarter financial results and our guidance for the second quarter and full year 2020. The first quarter revenue grew 33% year-over-year in constant currency and 31% as reported. Q1 subscription revenue grew 33% year-over-year, while services revenue grew 2% year-over-year, both on an as-reported basis. Domestic revenue grew 25% in Q1, while international revenue growth was 45% year-over-year in constant currency and 41% as reported. International revenue represented 42% of total revenue in Q1, up 3 points year-over-year. Deferred revenue as of the end of March was $242 million, a 25% increase year-over-year. Calculated billings was $207 million, up 30% year-over-year on an as-reported basis and 32% in constant currency. HubSpot ended the first quarter with 78,776 total customers, which was up 30% year-over-year. Customer net additions exceeded 5,000 for the first time, driven by a strength at the low end of our product portfolio, particularly in our starter suite. Average subscription revenue per customer in Q1 was $10,018, and up slightly, both sequentially and year-over-year. In addition to the proactive product changes Brian highlighted, we have also taken some important steps to help alleviate the near-term impact of COVID-19 for our customers and our partners. These include extending flexible payment terms, offering customer-friendly downgrade alternatives and prepaying some partner commissions. As a result of these actions and the challenged economic environment, we saw a headwind to revenue retention beginning in mid-March. To give you some additional color, we saw our net revenue retention rate fall from over 100% through the first 2 months of the year to the low 90s in March, with the majority of the decline coming from customer downgrades versus cancellations. As you would expect, we saw a larger uptick in churn from customers in our 1- to 25-employee segment relative to our mid-market customers. Given the uncertain economic environment, and the continued impact of our customer-friendly programs, we anticipate our retention rates will trend lower in Q2. The remainder of my comments will refer to non-GAAP measures. First quarter gross margin was 82%, flat year-over-year. Subscription gross margin was 85%, while services gross margin was minus 3%. For the first quarter, operating margin was 7.3%, down slightly compared to the same period last year. Operating margins in the quarter exceeded our expectations as a result of strong revenue performance, higher software capitalization and some expense savings related to COVID-19. At the end of the first quarter, we had 3,578 employees, up 30% year-over-year. Like many businesses, in mid-March, we moved quickly to shift our entire workforce to a remote working environment to protect our employees and our communities. Prior to the pandemic, remote was already our third largest office, and I believe our systems and employees have adapted well. As a reminder, we plan for higher headcount growth in the first half of 2020 as a result of our strong hiring last fall. We continue to expect our headcount growth to begin to slow in the second half of the year. We plan to maintain high levels of investment in R&D in order to deliver on a robust product road map while slowing hiring in G&A and targeted sales and marketing functions to ensure continued financial flexibility. Net income in the first quarter was $16.7 million or $0.35 per diluted share. CapEx, including capitalized software development costs, was $16 million or 8% of revenue in the quarter, driven by the completion of our Dublin facility build out and higher capitalized software development costs related to product innovation. We continue to expect CapEx as a percentage of revenue to be about 7% in 2020. Free cash flow in the first quarter was $7 million or 4% of revenue. Free cash flow was negatively impacted by our $11 million partner commissions prepayment and the extended payment terms we offered to impacted customers. Given these factors, we now expect free cash flow of approximately $30 million for 2020. HubSpot ended the quarter with over $1 billion of cash and marketable securities, and is well positioned to weather this economic downturn. As we look to the future, we remain committed to our disciplined approach to managing expenses while continuing to invest for the long term. With that, let's dive into guidance for the second quarter and full year of 2020. For the second quarter, total revenue is expected to be in the range of $195 million to $196 million, up 20% year-over-year. Non-GAAP operating income is expected to be between $10.5 million and $11.5 million. Non-GAAP diluted net income per share is expected to be between $0.23 and $0.25. This assumes approximately 47.2 million fully diluted shares outstanding. And for the full year of 2020, total revenue is now expected to be in the range of $800 million to $810 million, up 19% year-over-year. Non-GAAP operating income is now expected to be between $40 million and $42 million. Non-GAAP diluted net income per share is now expected to be between $0.88 and $0.92. This assumes approximately 47.4 million fully diluted shares outstanding. Our guidance reflects a view of the business that we are comfortable with, given current economic conditions. Our outlook assumes a challenging economic environment through the second quarter and incorporate a wider range of outcomes to the second half of the year. As you adjust your models, keep in mind the following: we expect an increased foreign exchange headwind to as-reported revenue; at current spot rates, we're now expecting a headwind of 2 points in both Q2 and the full year 2020. With that, I'll hand the call back over to Brian for his closing remarks.

Thanks, Kate. Like many of you, I've spent a lot of time over the past couple of months thinking about resilience. And I'm privileged beyond bounds to be part of the business that can still operate, be able to keep our team employed and our customers moving. Thankful for that every day. That feeling of gratitude also comes with a sense of drive and purpose. The only thing we can count on is that the world will look different on the other side of this. And when it does, I want our company to have been part of helping as many businesses as possible bend not break. Why we made the decisions we made over the last couple of months, and it's why we continue to invest and it's why I wake up every day with conviction. To our customers, our partners, our investors and all the HubSpotters around the globe who are in this fight with us, thank you. Operator, can we please open up the call for a few questions.

[Operator Instructions] Your first question comes from Stan Zlotsky from Morgan Stanley.

I'm glad to see everybody is staying safe and healthy. And JD, you will certainly be missed. So maybe just diving into the results, I think the biggest surprise that we're hearing thus far from investors is that you guys provided guidance for the full year. I don't think people are really expecting that. What gives you the confidence to provide that guidance considering that so many other companies will have pulled full year guidance? And then I have a quick follow-up.

Kate, you want to take that one?

Sure. So yes, obviously, the current environment is a significant headwind for us. It's a significant headwind for everyone. It's frankly a bit unprecedented, and that was not lost on us as we were thinking through how to approach guidance and what scenarios we were running. For Q2, we are assuming that the economic environment remains weak throughout the quarter. We took a bunch of actions early on to help our customers and our partners. And those will have impacts on our Q2 results specifically. And while Brian alluded to the fact that new business has stabilized towards the end of April, we still expect continued pressure on the net new bookings from customer downgrades and to a lesser extent, some cancellations. As for the full year, we always consider a range of outcomes for our full year guidance. In this environment, that range of outcomes is obviously wider than it has been in the past. And I am not an economist. No one frankly knows when the recovery will happen and what it will look like. But our guidance reflects a view of the business that we're comfortable with today even if it takes a while for the recovery to start to materialize.

Okay. Perfect. And then a follow-up for Brian. Equally surprising was the commentary that you're seeing actually a tailwind from COVID impact because it's really forcing some customers to abandon their old traditional ways of marketing and really move to digital marketing with everything that's happening in the physical world. Where are you seeing that coming from? And really what's pushing customers to make that commitment now versus, hey, let's wait it out, let's wait 6 months until if things stabilize and then try to reassess?

Thanks for the question, Stan. And to sort of take a step way back, it's sort of the tale of 3 cities here. First, 2.5 months at HubSpot, we were just cranking, really cranking, about as cranking as I can recall HubSpot. Starting in mid-March for about 3 weeks there, the real -- a mighty headwind in there, 200-mile in our headwind on the new business side and a big headwind on retention downgrade side. Around the second week of April, the last 3, 4 weeks, kind of the third phase of the year, where the headwind slowed a bit. The cancellations and the downgrades, kind of get back into the new normal. And then a tailwind kind of kicked off. And the tailwind, Stan, is -- there's sort of 2 pieces to that tailwind. One of it is what I talked about on the call, sort of business is moving from offline marketing to online marketing. It's a terrible time to be doing offline marketing right now. Moving from outbound to inbound, moving from outside sales to inside sales. Our value prop and our product pretty matches really well on the way people are going to want to go-to-market these days. The second tailwind, certain industries have benefited from COVID-19 like e-learning and medicine, things like that. And I remember, it's like the second to the last day in April, and I have a habit going through the list of orders we get every day, and there was one day, in particular, we had 2 big orders from Europe. One was from a company that's a remote MBA, you can get your MBA remotely, which as you can imagine, is serving here in pandemic environment. And the other one is the company that makes temperature scanners. Again, a company that's really surging and they made sizable orders on the same day. It kind of caught my eye that certainly, some industries are falling up, and some industries are picking up. So I would describe HubSpot as, in mid-March, just a giant headwind, 200-mile of headwind, no tailwind. Last 3 weeks though, the headwind has slowed down and the tailwind has picked up. So I'm feeling cautiously optimistic.

Your next question comes from Alex Zukin from RBC Capital Markets.

It's Dylan Reider on for Alex. Could you speak a little bit to some of the customers where you are seeing heavier impact? The percent -- any quantification that you can give around a percent of your customers that are in those industries? And then just maybe some of the trends and dig into some of the details that you've seen with regards to alleviating customers and providing them with some flexibility as well as some of the trends around getting new -- converting new prospects as well.

Great. I guess what I want you all to think about HubSpot, we have 3 segments. We have 2 to 20 employees, 20 to 200 employees, 200 to 2,000 employees. So people bucket it as same as SMB. I kind of think of it as more M than S. Our biggest segment is that 20 to 200 segment. That's kind of one thing to keep in mind as you think about small businesses and the impact. In terms of the industries, given what's going on, I've taken a new interest in what industries we're in and started to peel into it. We have very little exposure to some of the hardest hit industries like restaurants and stores, like the very -- kind of a very small percentage of our business are in kind of very small restaurants and stores. Airlines and cruises on the larger end, very little exposure to that. So one of the things that's always been good about HubSpot is people always ask me, what are your big verticals, what vertical are you in? And I always kind of chuckle and say, if you had a pie chart, the -- looked at verticals for but the other section of the pie chart would be the biggest. And it's actually serving us pretty well in these tough times.

Got it. That's helpful. And then earlier in the call, you guys spoke to the [Indiscernible] multiproduct customers. Could you maybe speak to some of the differences that you're seeing among your multiproduct customers and within your single product customers as well?

Kate, do you want to take that?

Sure. So our multiproduct customer total ticked up again this quarter. We're close to 32,000 multiproduct customers. I think we've talked about in the past the core retention statistics for multiproduct customers tend to be a little bit better than for our single product customers. We have seen that as it relates to the churn characteristics continuing in the last couple of months.

The next question comes from Arjun Bhatia from William Blair.

A quick one for me. It sounded like, Brian, you alluded to the first 2.5 months of the year going extremely well. Can you maybe just flesh out a little bit what was driving the acceleration in those first 2.5 months? And then the second part of the question is, as you look at April, is there any way to break down the trends between what's happening in Marketing Hub, which is not seat-based necessarily versus Sales Hub and Service Hub, which are priced more on a per seat basis.

Maybe I take the first one, you take the second one, Kate?

Sure.

Okay. I mean a lot of you have been with us for a long period of time. And last year, I think the wrap on last year was sort of a last year on the product side because there are no new hubs and not a lot of fancy new features. It's actually the exact opposite. It was probably our best product year we've ever had. We implemented this main sale methodology that really has worked, and it was a little bit of -- let's take a step back, so we could go faster 2 steps. And the product -- the infrastructure is much better, the security is much better, the speed is much better, the usability is much better. And we're just starting to see that at the beginning of this year. We're getting the 2 steps forward, where we relaunched that Marketing Hub Enterprise product, which went very well, a nice uptick on that, the reception was really good. You probably just saw that we announced CMS Hub a couple of weeks ago. And then while we're announcing new hubs and releasing lots of new kind of optimum functionality, actually, our Net Promoter Score was very high as ever. We're starting to like get into Apple-like range in some of our Net Promoter Scores. We're breaking records every month on that. So product team was really cranking. I think another thing that helped us was the go-to-market organization, had a good planning session last year and had caught up on hiring and was in much better shape coming into this year than last year. So I would say this is obviously disappointing, but I feel like we were really, really good shape coming into this crisis. And I think we're going to come out of this crisis in really good shape. A lot of the plays we've run kind of set us up so that when this thing is over, we're in really good stead to grow very fast.

And then if we look at retention characteristics across the hubs, what you're seeing is that the trends are relatively consistent across the hubs in our portfolio. If you -- again, sort of take a step back and look at retention in that first period of time that Brian talked about late March, what we saw really was an increase in both cancellations and downgrades over that period. It was maybe a little bit more downgrade specific, but both components were pretty significant. What we've seen going into April is that the trend is a little bit different. Retention statistics have fallen a little bit further than they were in March. But the composition of that is different. There is many more downgrades relative to cancellation. The seat rightsizing is one of those things that we are seeing among others. Many of them are -- of the downgrades are a result of the customer-friendly plays that we kicked off as we saw this unfold. So in Q2, we will see heavier downgrades versus cancellations. Hopefully, over time, a good portion of those customers will be able to grow back with us again.

And our next question comes from Samad Samana from Jefferies.

My first question, just on the new bookings side. I'm curious how new bookings, how that shape has been from late March now into early May. And for the customers that are still booking HubSpot, is there any characteristics that are shared? Are they larger -- on the larger side, the smaller side? Any thoughts on new bookings would be helpful.

Kate, do you want to take that?

Sure. I think that Brian kind of alluded to this in March, like sort of shut down. And the first of the segments of the business that picked up was that sort of smaller customer base. So that kind of sub 2 to 20 segment of our business. And I think it was just -- they were sort of faster to action, whereas that mid-market segment of our population really was much more at a holding pattern. And it wasn't until, call it the back half of April, where we started to see some movement in that part of our customer base. I think the one thing that I would note, and you'll see it as we potentially get into other areas is a lot of the customers that we're adding are smaller in terms of just sheer volume of new customer adds, we're seeing really healthy adds at that starter component. And we are adding customers with some much more flexible payment terms than we are used to seeing.

Great. And then, Kate, maybe a follow-up. If -- I guess if it's tough to tease out if you guys hadn't proactively provided the flexible payment terms and the flexible ability to downgrade. But I guess, how should we think about the -- with the inbound interest from customers wanting to downgrade versus what HubSpot proactively offered?

So I think if we look -- we've obviously been looking hard at this. And if we look at the volume of downgrades that we see relative to, call it, the normal course run rate, and we look at the -- one layer down underneath the kinds of downgrades, I would say probably a little more than half of the increased downgrades are associated with really the -- directly associated with the proactive plays that we are running and others are motions that would be more customer-driven.

Let me add a little to that, Kate. One of our strategies here, Samad, was we wanted to -- we would far prefer someone downgrade than cancel, obviously, because we keep them in our system for longer. As this thing passes, they can upgrade down the road. So we kind of -- we made a decision to make it easier to downgrade, and we did that by, one, making our free CRM product richer. We added a whole bunch of cool new functionality in there like 1:1 meetings in video and box, so really help people get started for free. If you bought the starter suite product, we made that far less expensive, easier to downgrade to. And then we gave a lot of room to our front-line managers and contributors on the sales and service side that offer temporary discounts and downgrades to customers. We want to keep them in our system. We had an initial wave of that. That was a pretty good-sized headwind there for 3 weeks. People are -- the downgrades are still higher than they would be normally. But it's quieted down a little bit relative to that last few weeks. It's a little bit of our strategy of we want to be like a coiled spring. So we come into this thing, we don't waste the crisis. We try to provide a bunch of mechanisms to help our partners and customers weather it, and at the same time, when we come out of this, hopefully, they've weathered it nicely and they grow with us. But we've also got a lot of other new customers in the system, new free CRM users, new starter customers. And hopefully, it'll position us really well when this thing is over.

Your next question comes from Chris Merwin from Goldman Sachs.

I just wanted to ask you about the new CMS Hub. I was just looking at the site and I didn't see a starter price there, but obviously, you've got pro and enterprise. So just thinking about who this is maybe geared toward and who some of those early adopters might be? Are the users slightly larger customers? Just curious. Anything you can say about the initial traction there?

Sure. Let's talk a little bit about the CMS for a sec. We've had a content management system since very early days of HubSpot. It's always been an add on product. It's always done okay. It's had investment. About a year ago, we said, let's turn this add-on into a full baked awesome hubs. So we really ramped up our investment over the last year. And so what we did was turn this add-on and sort of lightly funded into a full hub. The existing add-on now is CMS Hub Pro, really much better than that add-on was, and then we added a CMS Hub Enterprise product that's really good, we're very excited about this. Now when I think about the CMS industry, it's actually a funny industry. You've got a choice. You can either buy a very light, very to easy to use, SaaS content management systems. There's a few of those on the market, 1 or 2 of them are public, so you probably know about them. Or you can buy a very heavy, pretty hard to use, oftentimes open source content management system where you're managing a lot of plug-ins, you've got a lot of security wares, you need a lot of developers. And it's been like the tiering of 4. You can have 1 or the other historically. And we just don't like that trade-off. We felt like it's a false trade-off. So what we've created is a content management system that has the ease of use with the rest of HubSpot's products but layers in that real power and capabilities of some of the heavier products. And so far it's so good. We're getting really good reception on the product. Our partners and customers are buying it. And I think it's going to be a big, big business for us down the road.

Great. And maybe just one follow-up for Kate. Just as it relates to that second half implied guidance. Anything you can say about some of the more specific assumptions you're making, I guess, maybe in particular, as it relates to gross revenue retention? I think you called out what that might be in or what it was in 1Q, but just thinking through what that might look like in the context of your guidance for the second half of the year.

Sure. So we obviously talked about March as being in the low 90s. We talked about Q2 as going down from there. I think we would assume that our retention statistics remain under pressure for a good part of the year, probably with Q2 being the low point and some modest improvement from there.

Your next question comes from Siti Panigrahi from Mizuho.

You got Michael Berg here on for Siti. Just a quick question also on the growth starter suite. You noted that was 5x what it was previously. What can we think of as a general rule of thumb for how much of the general starter population is on the full suite now?

Kate?

Yes. It's a good question. Historically, what we have seen is that the strength of starter ads has really been in that marketing starter product. And I think what you saw with the new price for the growth suite that we introduced in mid-month is like a material shift toward the new customer adoption of the growth suite. And I'm sure I'm going to hit the numbers exactly wrong, but it edge sort of closer over the last months to being more of a 50-50 ad across the suite and the marketing starter.

So customers -- so just for clarification, customers don't typically adjust the starter of sales or service, they do either marketing or the full suite of this juncture?

The marketing starter product has been a particularly popular product with a lot of real strong value, and that's where we've seen the -- like highest volume of ads over the recent history.

Okay. And then a quick follow-up on a similar note. When you're talking about the downgrades, obviously, there's a significant price reduction right now for the growth suite. Do you see people who are downgrading I mean, I guess, for any hub flow through the full suite? Or do they typically downgrade to the singular product?

So the downgrade can take a bunch of forms. I think the one that you're thinking about is, right, where you can have somebody who is on enterprise or professional addition, downgrade their addition to -- from enterprise to professional or professional to starter, you can also have people reduce the sort of volume of seats or contacts. There are other ways of downgrading as well like we've been helping with some customers with sort of near-term price point release. So there is a variety of things that end up hitting that downgrade number.

Okay. And then one last one on the same note. I think you've put some time frame on the reduced price for the gross suite. Are you thinking about that as for the next 12 months or so or until that retention rate? Or how should we think about how long the reduced price will be and then for both modeling purposes and for general, just a sense of how you will be pricing?

I can take that. We're talking about that now. It's gone really well. We're kind of finding a new piece of the supply and demand curve. We haven't made decisions on it. So we'll keep you posted.

Your next question comes from Mark Murphy from JPMorgan.

JD, I just want to say thanks for everything, all the best, and I hope you get in some great bonus fishing here over the summer. Brian, I wanted to ask you the comment about the headwind turning into a combo of a headwind and a tailwind in recent weeks. Are you kind of interpreting that as the worst is behind us? And also, if you could just clarify, are you conveying that bookings are getting all the way back to the original plan? Or does it kind of feel like more of a partial step on the way to recovery?

Yes. More like a partial step, Mark. I kind of break it out in my head into new business coming in and then what's going on with the installed base. Tailwinds -- there's definitely a tailwind on the new business coming in now. We were super worried there for a few weeks, but it's coming back. The thing that's interesting about it is our marketing departments on fire, like our content marketing and inbound marketing strategy and the premium strategy are really paying off, where the lead flow has been great. And the leads we get out of the free CRM have been great and the academy has been on fire. So it's been good, and new deal creation has been good. It's been good. It's -- that's kind of bounced back pretty well. The -- on the other side, on the customer side, the numbers are going to be a little funny to look at because as we made it pretty attractive, the downgrades here. But the amount of downgrades and the attractiveness of those downgrades and the pace of it was really high there for 3 weeks. It's still higher than in a steady state pre-COVID, but it's come down off the highs. So I guess that's how I describe it.

Okay. And then as a follow-up for Kate, I'm just curious when do you see the trough in revenue growth? For instance, is it -- should we be looking at this kind of mid-teens growth in Q3, Q4 as a decent guess as of now?

Look, I think the true trough will reveal itself as the economy turns around. But I would say you should estimate that you would see declines over the next couple of quarters.

Your next question comes from Ken Wong from Guggenheim Securities.

Brian, can you maybe talk about the appetite of your customers to attach new hubs in this particular environment? Is that something that you guys are still able to move forward? Or is that something we have to wait maybe until we kind of clear this COVID fog?

I haven't noticed anything particularly strange there. I would say that based on what I'm seeing, the CMS Hub attach has been pretty good. That new CMS Hub Enterprise products people are buying it. And so there's a desire to do it. I think companies are -- there's several things going on. One, they're coming to the conclusion that they knew they needed to do inbound marketing, they knew they needed to do inside sales, they knew they needed to do online marketing, and they knew that they needed to get great at it. And they are planning on doing it sometime in the next x years, they're having to do it now. So there's just some urgency around that. Combined with -- a couple of these industries are really growing and their budgets are increasing and they're moving a little more reducing. So that's kind of how what we're seeing out in the market, Ken.

Got it. And Kate, maybe quickly, I know you guys look at subscription as a better reflection of your business, but any thoughts on how the billings growth rate might look like in this type of an environment?

Yes. A couple of thoughts there. So we've always talked about billings -- growth of -- billings growth and revenue growth in constant currency should kind of track each other. And you saw that happen in Q1. I think one of the things that drives the wedge between the growth in billings and the growth in revenue in constant currency is either expansion or contraction of billing terms, of payment terms. And we are definitely seeing a reduction in billing term. And so I would expect that in the next couple of quarters, you would see billings growth lag revenue growth in constant currency.

Your next question comes from Terry Tillman from SunTrust.

This is actually Nick on for Terry. I was just hoping you guys could dig a little deeper on the net customer add in the quarter. I know you said it was primarily driven by the starter suite. But just any other color you provide there would be helpful.

Kate, you want to take that?

Yes. Sure. So Q1 was a record quarter for us for new customer additions. It was almost 5,300. It's a high watermark for us. And it was really driven by that starter products. So we saw very strong additions in the marketing starter. We saw strong additions in the starter suite. We're continuing to see that happen through April. And so we're anticipating that we'll see another strong quarter of customer new adds in Q2. I think with that, I'd just caution us to look at the ASRPC and think about what's going to happen there. Given the strong growth at that low end, we would expect to see that be under pressure in the next quarter.

Your next question comes from Tom Roderick from Stifel.

So Kate, can we just talk for a second about contract duration? And maybe what the mix of your customers look like? I noticed on your website, you've put a formal offer out there for, I think, what was a 20% discount for paying annually upfront. Could you give us a sense as to how many of your customers pay quarterly versus annually versus monthly? And then as we break that apart, for those customers that are downticking, I guess the thought behind the question is how soon do you sales reps get a chance to kind of get back in front of them and try to uptick them again once things get better?

So why don't I take the first part and then Brian can handle the sort of sales aspect of it. The -- you're asking a contract duration question. The reality is that most of our contracts are annual contracts outside of that starter tier. The difference is the billing terms. So we have customers that pay us for the full annual contract upfront. We have some that pay us quarterly. We have some that pay us monthly, those are, typically, those starter customers. And what we saw was that marketing billing has been this annual upfront payment. As we have gotten into the sales and service hub, those were typically more quarterly payment term products. And as our mix has shifted from marketing into sales and service, we've seen that payment duration come down. That's why you've seen the billings growth in constant currency kind of lags our revenue growth in constant currency over the last, I don't know, year to 18 months. We are seeing -- we are proactively being more flexible with payment terms during this period of economic pressure. And so you're going to see that on not just the Sales and Service Hub, but also in the Marketing Hub in the near term.

Yes. And I would just add that it's the same theory on payment terms as we're doing on discounting, where if a customer comes to us who's impacted by COVID and saying, "Gosh, we're just going to have a heck of a time with cash flows in the next 3 months." We will give them a discount. We want to keep them in our system, and we want to help them through it. And I suspect that will be going on for the next 3 to 6 months that, that we'll try to be generous there. And then down the road, we'll revisit it as their business improves and as the economy improves.

Yes. And Brian, just on the thought of sort of not knowing if this is going to be a 3, 6, 9-month type of deal in terms of how everybody is impacted. There is a real opportunity here for obviously, for HubSpot to put a good level of distance between some smaller competitors and really kind of step on the pedal. You grew headcount, I think, 30% this quarter. How are you thinking about your goals to continue to really invest aggressively? I don't know if you want to sort of lay out headcount goals for the year? Or anything you're thinking about with kind of a pause on headcount in the near term. But just take us through your thinking on when to put your foot back on the pedal for investments in the business, particularly sort of sales and marketing and go-to-market headcount?

Sure. It's like Kate is saying earlier, no one knows what's going to happen with the economy. We're planning for U-shape recovery. And as part of that, we're continuing to hire. We want to hire. So really good shape on the other side of this thing. Most of our decisions have been made with that in mind. Maybe, if our foot is all the way down on the gas pedal, on the sales and marketing and G&A side, we got a little bit, think about the gas, a little on hiring. But the foot is all the way down on the gas pedal on the R&D side. That R&D organization made great progress last year and coming into this year, in really good shape. We feel like our vision of the value we can deliver for our customers is still early in the flight cycle. There's a lot more wood to chop there. So we're going to continue to invest. And hopefully, we're in great shape when we're on the other side of this thing.

Your next question comes from Ryan MacDonald from Needham.

I don't want to get too far ahead of myself here. But in terms of the downgrades and sort of the favorable terms to help customers proactively downgrade and help them out, is there anything built into that -- into those terms that offers more favorable terms for them to -- when they're ready to upgrade again?

Not really. The way we're structuring those is if you come to us and say, "Hey, we're having a hard time." We'd say, "Okay, let's structure a deal for you where we can discount you down x percent." And most them are structured that, that lasts for 90 days, and some are structured that it's more like 180 days. And then at the end of that, you come back to your price. If it's 90 days and someone comes back to it, so we get into 90 days and they say, "Hey, we're really still struggling. Give us another 90 days, and we'll be in good shape." I'm quite sure we'll be flexible on that type of environment.

Excellent. And then just a follow-up. In terms of as you're looking -- look through April and starting to see, I don't know, the impact, whether it's worsening or improving. Are there any pockets or surprising pockets of strength or weakness that has sort of either improved quicker than expected or have remained worse than expected for longer?

Yes. The way I would -- like if I think of the different segments of that 2 to 20 versus the 20 to 200, 200 to 2,000. The 2 to 20, I find it was very fast to react to all this stuff in mid-March. And they really froze their spending and a lot of them wanted to downgrade and cancel. The mid-market in corporate, just kind of -- they kind of froze. They didn't buy a lot more and they didn't downgrade or cancel at much rate. And the way I would describe it over the last 3 weeks, the small segment, the 2 to 20, they're starting to buy again and move faster and trying to react, they're still canceling at a higher rate than they were prior to COVID, but that has certainly slowed down. And that mid-market and corporate for us, that 20 to 200 or 200 to 2,000, they kind of be thought or unthought a little bit and they're starting to move and starting to buy. There's some downgrading, some cancellation going on there, but it's not as heavy as it was in the small business side. And I would just remind everyone that like if I look at those 3 segments, 2 to 20, 20 to 200, 200 to 2,000, the 20 to 200 is the heaviest segment for us. That's kind of our sweet spot and the largest chunk of our ARR.

Your next question comes from Brian Peterson from Raymond James.

Kevin here on for Brian. I'm curious what the uptake has been for some of the free tools you made available to customers over the past several weeks. And should we view that more as a bridge here in the near-term to help customers? Or do you think that could also serve as a potential expansion opportunity to you on the other side?

That's a really good question. We were just talking about that the other day. It's been well received. People are using some of those new features, the box, the videos, collaboration features. So stay tuned. We'll make some decisions over the coming weeks as to whether we leave those down there or we put them back into the starter. It's a good question.

Your next question comes from Brent Bracelin from Piper Sandler.

This is Parker on for Brent. We've now seen several companies discuss material changes to marketing budgets as a result of COVID. Relative to the Marketing Hub, are there any features that you guys are kind of paving to? Can you help -- that can help offset some of the weaker marketing spends. And any color on how customers needs are kind of changing and impacts the land expand model for the small business customers?

Yes. People are definitely buying our Marketing Hub now. They definitely slowed down for a few weeks, but they started buying again. Our marketing product really fits the times where we netted this idea of doing inbound marketing versus outbound marketing. Inbound marketing, we upgraded content, getting found in Google and social media and pulling people in, in a very low cost way. And so they're spending tons of money on advertising on TV or billboards or wherever you're advertising. Your success in inbound is much more about the width of your brain than the width of your wallet. So our value prop, I think, is very strongly based and fits the times. I mean, is it the same as it was before? Probably not. But I think people are going to be buying our marketing product as a cure for what's going on, not the other way around.

Your next question comes from Kirk Materne from Evercore ISI.

Brian, I guess, are you seeing any differences with your customer base in terms of how they've reacted internationally versus the U.S.? Or even when you're looking at it on sort of a size range, it's pretty similar across different geographies. And maybe just how are you thinking about that going forward, if at all, if it's at all different.

Yes, I think I'd kind of address the size. On international, it kind of hit the U.S. -- it kind of hit everywhere. Asia maybe a little bit before, but it hit everywhere. And it's sort of -- it all kind of wash through like 2 waves like I've been talking about. The one place where it hit particularly hard, and I think it will take longer to recover is in emerging markets, Lat Am and some of the smaller emerging markets. Those are markets we don't have a whole lot of exposure to. And so it's particularly painful for us, but it does look like those were hit harder and aren't rebounding as quickly as some of the other bigger markets.

And your next question comes from Jennifer Lowe from UBS.

Great. First, I wanted to ask, so you mentioned that you were working to expediate commissions in the quarter to partners and giving them a 6 months advance if they ask for it. And just the natural question on that, can you just comment on sort of the health of your partner channel? I know HubSpot is a relatively small mix of their revenue overall. So is this something they're asking for? Are they concerned about their businesses? Or is this just a gesture of goodwill? Can you just talk a little bit about that?

Yes. I think it was more -- it's a very good question, Jennifer. Proactive on our part in mid-March. We thought partners in small businesses. Most of our partners are relatively small firms. We've got some bigger ones, but the vast majority are relatively small. And we just wanted to make sure they have the cash flow, so they felt confident and could plow through what's going on here. We want them to continue to hire at least not lay off and continue to invest in their business. And we felt like that was very good for them. And over the long haul, I think that will be good for us. It's -- you lose us to have a healthy, cooperative, growing partner channel. So Kate, do you have anything to add to that?

Yes. No, I think it was highly -- it was very well received by our partners. We offered the commission's prepayment to our platinum and above, and the vast majority took us up on it.

I can imagine they did. And maybe just one more for me. It sounds -- I mean we talked about sort of the downdraft and how it affected all the hubs similarly or at least that was my interpretation of what you said earlier. But as you look at -- there's been a discussion around the interest in marketing, and it makes a lot of sense. Everyone's got to market digitally in the new world. But can you comment on Sales and Service Hubs and whether that has potentially seen a similar kind of uptick in interest? Or if there's differences in how those products are being received in the current environment?

Yes. Initially, when I looked at this, I thought we'd see a big surge in marketing and the others would stay flat. But it's kind of been across the board where they all kind of went down at the same time, and they're all kind of coming up at the same time. The one that's coming up nicely that you would hope would come up nicely, is the CMS up the new hub getting nice reception. But it's been get [Indiscernible] consistent across all of them, there was an outlier in one direction or the other.

Your next question comes from Koji Ikeda from Oppenheimer.

Just one quick one here on the guidance. I was wondering if you could dig into a little bit more on the full year on what you commented on the wider range of outcomes. I guess, how should we be thinking about the outcomes on the book ends of that guidance range? I mean, more specifically on the low end. Does the low end assume the macro bottoms in the second quarter and begins to recover from there? Or is the low end of the full year guide more like the macro bottom somewhere beyond the second quarter?

Yes. I think Brian talked a bit about the scenarios that we are running internally, bridging from this V-shape scenario that had a really sharp recovery. The U-shape scenario, which is our current operating assumption that says it takes just a bit longer to have the economy to get on back on track. And also this sort of L-shape, which envisions a longer period of economic recession. And we looked at all of those when we were thinking through and setting our guidance to make sure that we felt comfortable across sort of a variety of outcomes.

And I will now turn the call back over to Brian Halligan for closing remarks.

I hope all of you stay safe and stay healthy, and thanks for joining us on the call, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.