HubSpot, Inc. (NYSE:HUBS) Q3 2023 Earnings Call Transcript

HubSpot, Inc. (NYSE:HUBS) Q3 2023 Earnings Call Transcript November 8, 2023

HubSpot, Inc. beats earnings expectations. Reported EPS is $1.59, expectations were $1.23.

Operator: Good afternoon, ladies and gentlemen. Thank you for joining today’s HubSpot Q3 ’23 Earnings Call. My name is Tia, and I will be your moderator for today’s call. [Operator Instructions]. I would now like to pass the conference over to your host, Chuck MacGlashing. Please proceed.

Charles MacGlashing: Thanks, operator. Good afternoon, and welcome to HubSpot’s Third Quarter 2023 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 Yamini Rangan, our Chief Executive Officer; Dharmesh Shah, our co-Founder and CTO; 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 the historical fact are forward-looking statements, including those regarding management’s expectations of future financial and operational performance and operational expenditures. The expected timing and benefits of the proposed Clearbit acquisition, expected growth, FX movement and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2023. Forward-looking statements reflect our views on the 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 a discussion of 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 third quarter 2023 earnings press release in the Investor Relations section of our website. Now it’s my pleasure to turn over the call to HubSpot’s Chief Executive Officer, Yamini Rangan. Yamini?

Yamini Rangan: Thank you, Chuck, and welcome to everyone joining us on the call. Let me start with our performance in the quarter, share my observations on the macro environment and wrap up with our vision for our customer platform powered by AI and data. Let’s jump into our Q3 results. We had another quarter of solid execution with revenue growing 24% year-over-year in constant currency. We delivered another exceptional quarter of operating margin growth with 700 basis points of margin expansion year-over-year, driving our operating margin to 16%. Total customers grew by 22% year-over-year to over 194,000 customers globally, driven by over 9,100 net customer additions in the quarter. I’m pleased with our team’s focused execution and the progress we are making to become the #1 customer platform for scaling companies.

Our Q3 results highlight two consistent themes this year. Our bimodal go-to-market strategy is working, and our product innovation is in high gear, especially coming out of inbound in September. In the lower end of our segments, we saw strength in net customer additions driven by free sign-ups and growth optimization plays in our starter addition. Our value proposition of an easy-to-use, easy-to-scale customer platform resonates within the segment. In upmarket, we continue to see multi-hub adoption as customers consolidate on fewer platforms and drive better visibility across marketing, sales and service. A great example of a multi-hub customer who’s seeing results from consolidating on HubSpot is Knowledge Academy. They are the largest provider of online instructor-led training globally.

They started with Sales Hub to get better visibility into their pipeline and then added Marketing Hub to optimize their marketing budget and also added Service Hub to get a complete view of their customers. Since implementing HubSpot, Knowledge Academy has grown leads by 4x, boosted sales by nearly 2x and increased their average order value by 25%. As you’ve heard me say before, our hubs are powerful on their own, but the real value for our customers comes from using them together. And we can see this in our results with over 50% of our installed base now on three or more hubs. Turning to product innovation. We continue to be in high gear, and our launches at INBOUND are driving momentum. While we have launched over 200 new product enhancements this year, the two big moments at inbound, where the Sales Hub relaunched and HubSpot AI launch.

So why did we relaunch Sales Hub and we are already seeing momentum within this hub this year? Simple. We want to deliver the best prospecting and deal management solutions that are deeply connected especially for our upmarket customers. The new prospecting workspace, which is now generally available, gives reps one place to organize their leads and pass so that they can spend less time looking for information and more time connecting with customers. In deal management, we introduced AI-powered forecasting to help sales leaders improve accuracy in revenue projections, very important in any environment. We have a compelling vision to drive sales productivity, and we are hearing positive feedback from our customers, particularly in upmarket about the new found power and sophistication of Sales Hub.

Another highlight that inbound was the launch of HubSpot AI. We believe that every scaling organization deserves an AI-powered customer platform. And that is why we are deeply embedding AI across all of our hubs and our entire platform. We announced a number of features across AI assistance, AI agents, AI insights and ChatSpot. While I’m certainly excited about our pace of innovation, what we are really focused on is driving usage and value for customers. 40% of enterprise customers have already used HubSpot AI features, along with 20% of pro customers. About 2/3 of AI users are leveraging AI assistance to craft marketing e-mails and blogs. Social publishing is proving out to be a sticky use case, drawing in engaged users. In short, when we embed AI into the flow of work it works.

I’m pleased to see usage beginning to grow, and we know we’re still in the early stages of a major technology shift. Looking ahead, we’re focused on driving discoverability of and differentiation with AI features. We will drive adoption both in product and via customer education. We will drive differentiation by bringing more sophisticated use cases that are more deeply connected with HubSpot data. To summarize, I like the early adoption trends. and our well-defined AI road map to bring innovation to our customers. Okay. Let’s shift gears and talk about what we’re seeing in the macro environment. Overall, we continue to operate in a choppy and challenging environment. Sales cycles remain lumpy, budgets are still under scrutiny and buying urgency remains low.

It is clear based on my conversations with customers that they still need approvals from multiple decision makers and are continuing to optimize spend. Despite these headwinds, HubSpot’s connected value proposition continues to resonate with customers looking to optimize spend and boost productivity. As we look ahead, we will continue to navigate this macro environment by following our playbook to drive product innovation and consistent strong execution. Now I want to dive deep into our vision for our customer platform and talk about how our recently signed agreement to acquire Clearbit accelerates that vision. Our vision is to give millions of companies the best possible data about their customers in HubSpot. Today, we pull in data from website visits, marketing e-mails, sales calls, support tickets and more.

And we unify all of that data on a beautiful, simple customer record. This is arguably the biggest advantage with HubSpot. With Clearbit, we will be able to bring in even more external data that can help our customers connect better with their end customers. So what can we solve for our customers with more unified data. While we can help our customers identify great fit customers and provide clear signals on buying intent, both keys to increasing their go-to-market effectiveness. Our customers want company data, not just the name of the company and employee count, but they want rich attributes about companies including demographic data, like who is the CIO and techno-graphic data like which automation products are they using? In addition, they want a real-time way to monitor buying intent.

Not just based on direct engagements within HubSpot platform but also based on customers’ activities outside of HubSpot and around the web. This is exactly what Clearbit is good at. They have 100-plus attributes for more than 20 million companies from more than 250-plus public and private data sources. We can take all of those data from HubSpot and Clearbit to power generative AI tools to create even more personal messages and insights for customers. Our differentiation will be to bring together a unified customer data with powerful AI tools that can consume that data and our market-leading engagement hub to supercharge our customers’ go-to-market efforts. Finally, why Clearbit? And what are our plans going forward? Clearbit has world-class data, and they share our commitment to helping customers grow.

They also have a deep bench of B2B data experts with a bold mission to leverage AI to power insight. In all our conversations with Clearbit, it was clear that the team would be a great addition to our culture. And most importantly, this does not take away from our approach to building great products with cohesive user experiences. We use Clearbit data on our product today, and we have a very clear vision for how we can integrate their data to provide immediate value for our customers. In addition, we can leverage our product-led partner-led and sales-led distribution engines to get this into the hands of our customers post close. I’m thrilled by the prospect of acquiring Clearbit and our shared vision of solving for the customer. We will share more about our future plans after the deal has closed.

So reflecting on the quarter, we doubled down on product innovation in our core hubs and we established leadership in AI with our customers. Our teams are focused on consistent execution, and we have a clear vision for taking our customer platform to the next level with AI and data to deliver even more value to our customers. With that, I’ll turn the call over to Kate to take you through Q3 results in more detail. Kate?

Kathryn Bueker: Thanks, Yamini. Let’s turn to our third quarter 2023 financial results. Revenue grew 24% year-over-year in constant currency and 26% on an as-reported basis. Subscription revenue grew 25% year-over-year while services and other revenue increased 31% on an as-reported basis. Domestic revenue grew 22% year-over-year, international revenue growth was 26% in constant currency and 30% as reported, now representing 47% of total revenue. We added 9,100 net new customers in the quarter, bringing our total customer count to over 194,000, up 22% year-over-year. Average subscription revenue per customer grew 1% year-over-year in constant currency and 3% on an as-reported basis to $11,500. Our ASRPC growth was driven by continued multi-hub adoption by our professional and enterprise customers, offset by the large volume of starter customers we added at the low end of our bimodal strategy over the last few quarters.

Gross retention remained healthy in the high 80s for the quarter, and net revenue retention was up slightly quarter-over-quarter. We continue to see pressure on net upgrade motions, including seats, contact tiers, additions and portals and expect this to persist in the short term. Nevertheless, we remain confident that we can maintain net revenue retention above 100%. Calculated billings were $550 million, growing 20% year-over-year in constant currency and 24% as reported. The remainder of my comments will refer to non-GAAP measures. Operating margin was 16%, up 7 points compared to the year ago period. Operating margin in the quarter benefited from lower T&E and other discretionary spend, continued infrastructure optimization and more concentrated hiring in Q3 and Q4 in key areas such as product innovation, AI and internal systems and data.

Net income was $83 million or $1.59 per fully diluted share. Free cash flow was $65 million or 12% of revenue, and our cash and marketable securities totaled $1.7 billion at the end of September. On October 31, we entered into a definitive agreement to acquire Clearbit for approximately $150 million in cash. The acquisition is subject to customary closing conditions, including regulatory approval and we expect the transaction to close before the end of the year. Like Yamini, I am excited about the value we can create for our customers with the combination of Clearbit’s world-class data and HubSpot’s AI-powered customer platform, and I look forward to welcoming the Clearbit team to HubSpot. Okay. Before we dive into guidance, I wanted to touch quickly on the macro environment.

As Yamini indicated, we continue to operate in a challenging environment. Q3 felt similar to what we saw in the first half of the year. Budgets are still under scrutiny deals are taking longer to close, buying urgency is low and customers are continuing to look for ways to optimize their spend. Our guidance assumes that these weak conditions persist in Q4. Now let’s review our guidance for the fourth quarter and full year of 2023. For the fourth quarter, total as reported revenue is expected to be in the range of $556 million to $558 million, up 19% year-over-year at the midpoint. We expect foreign exchange to be a 2-point tailwind to as reported revenue growth in the quarter. Non-GAAP operating profit is expected to be between $85 million and $86 million.

Non-GAAP diluted net income per share is expected to be between $1.53 and $1.55. This assumes 52.7 million fully diluted shares outstanding. And for the full year of 2023, total as reported revenue is now expected to be in the range of $2.144 billion to $2.146 billion, up 24% year-over-year at the midpoint. We now expect foreign exchange to have no material impact on as reported revenue growth for the full year. Non-GAAP operating profit is now expected to be between $317 million and $318 million. Non-GAAP diluted net income per share is now expected to be between $5.66 and $5.68. This assumes 52.2 million fully diluted shares outstanding. As you adjust your models, keep in mind the following: we continue to expect CapEx as a percentage of revenue to be roughly 5% and now expect free cash flow to be about $275 million for the full year of 2023.

Looking forward to 2024, we expect foreign exchange to be a 1- to 2-point headwind to as reported revenue growth. And with that, I will hand things back over to Yamini for her closing remarks.

Yamini Rangan: Thank you so much, Kate. I want to close by reiterating our commitment to balancing growth, profitability and a great culture to build an enduring company. We’re driving rapid innovation with our customer platform and HubSpot AI to drive growth. We’re focused on improving sales and marketing efficiency and scaling distribution. And on culture, we remain committed to building a high-performing, sustainable and diverse culture. This quarter, we hosted our first-ever Global Leadership Summit, which brought together our top leaders across the globe for workshops, trainings on performance, leadership and strategy. It was just a fantastic week and left me energized about HubSpot’s future. A huge thank you to all our employees and partners for their dedication to driving results and to our customers and shareholders for their continued support on this journey. With that, operator, let’s please open up the call for questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from the line of Arjun Bhatia with William Blair.

Arjun Bhatia: Yamini, you called out macro headwinds. I know that’s similar to what you called out in prior quarters, but it seems like despite the challenging environment, we’re not really seeing the slowdown take hold in the fundamentals, the net new revs are strong, the new customers are strong. Is this something that you’re seeing get worse, get better? Or is this something that you’re kind of anticipating in Q4 that there are signals that maybe things are a little bit tougher heading into the holiday season. And if we do kind of continue down this path, how are you thinking about adjusting your bimodal go-to-market strategy between the new and the mid-market upsell existing do you mean heavily — more heavily one way or another as a result of that?

Yamini Rangan: Arjun, yes, thanks for that question. Look, as both I said and Kate said, the environment continues to be choppy and challenging and customer urgency remains low. More broadly speaking, what we are seeing in second half as customer trends is very similar to what we saw in the first half of 2023. It’s not gotten better and it’s not gotten worse. And when we are looking at our pipeline and we have conversations with customers, we see more decision-makers involved in the process, more budget scrutiny, continued optimization of spend. Deals are definitely closing, but it takes more conversations, more demos and more time. Now having said that, I think we’ve consistently executed in this type of a choppy and challenging environment.

And when I look at the pipeline going into Q4, when I have conversations with customers, couple of things stand out. One is customers are focused on consolidating on fewer platforms to eliminate spend, this is exactly where HubSpot’s value proposition really resonates, and we are helping consolidate point solutions for customers. And the second is they are focused on increasing productivity, especially because they’re not increasing head count. And again, our quick time to value and the ease with which they can scale with our products is really helping. So we are going to remain very laser-focused on executing in this environment, and we are assuming that this environment will continue into Q4 I don’t think that changes our bimodal strategy.

In fact, what has been good is that we have been consistently executing on a bimodal strategy to increase volume at the bottom and continue to deliver value at the top and we’ll continue to drive product innovation to be able to win within this environment.

Operator: The next question comes from the line of Samad Samana with Jefferies.

Samad Samana: Great. Kate, maybe for you. I think the increase in NRR quarter-over-quarter is really encouraging. I guess if you think about the slide at the Analyst Day, where you broke the pieces by what things were changing, consumption versus value. Can you maybe help us understand what you saw quarter-over-quarter and just maybe what the trend line looks like through the first few weeks of the fourth quarter and what you may be assuming for those two trends?

Kathryn Bueker: Yes. Sure thing. Thanks, Samad. You rightly indicated, Net New ARR was up slightly in Q3. The drivers of net revenue retention were very much the same ones that we talked about at Analyst Day and frankly, that we’ve been talking about for the last sort of 4 to 6 quarters here. The highlight continues to be customer dollar retention. Customer dollar retention is holding nicely in the high 80s. We typically see a little seasonal step-up in customer dollar retention in Q3. We did see that again this year. The downside here is that we continue to see a challenge in this net upgrade motion, and it’s both on more downgrades. So more customers continuing to optimize their spend with HubSpot and also less volume of customers upgrading.

And it’s all the same motion that we talked about at Analyst Day. On the downgrade side, it is the consumption-based motions of seats and contact as well as additions. And it is fewer customers adding seats and contact tiers. Nothing to report in terms of a change in the net revenue retention trajectory in Q4. As I said at Analyst Day and I’d reiterate here, in order for us to really see that in flex we would really want to see the external environment improve, which we think is first going to show up in downgrade pressure lessening and then we would see a follow-on effect of more customers starting to add the — starting to add contact tiers. So it’s largely a function of the external environment turning around.

Dharmesh Shah: Yes. And I just want to clarify, we talked about net revenue retention being up slightly sequentially, not Net New ARR. So I just want to make sure that we’re clear on that. Thank you.

Operator: [Operator Instructions]. The next question comes from the line of Mark Murphy with JPMorgan.

Mark Murphy: Yamini, we continue to hear that the decoupling of Sales Hub from the Smart CRM is a big positive development and a major unlock for some future opportunities. Can you walk us through the strategic rationale that we’re decoupling is how partners we’re referring to it, by the way. Just what was the rationale and how that might open up some new opportunities for companies to engage with HubSpot?

Yamini Rangan: Thank you, Mark. And I just love that you picked it up that you’re clearly calling out that separation of the Smart CRM from Sales Hub, in particular, but just the hubs. And maybe explaining the strategy. So when we went into this year, we said that, one, we want to become absolute product and thought leaders in terms of our marketing hub, sales hub and service hub. And I credit this to Andy Pitre, our Head of Product, but he came in and he said, we’re going to focus on two or three big use cases per hub. And specifically for Sales Hub, we picked prospecting and deal management. And these two are really important because prospecting obviously increases the productivity of sales reps and deal management with AI and forecasting improves the effectiveness of sales management and leaders.

And so those were the two things. And at INBOUND, we relaunched Sales Hub we reinvented what prospecting and deal management look like, and that’s gotten pretty significant traction. So the other thing that we did is we separated out smart CRM from each of our engagement hubs. The reason is this, Smart CRM now, we’ve been investing in it for multiple quarters and it’s now become a clear unified customer record that can be customized, that can be extended and where people can kind of bring information and continue to expand the use of HubSpot, and it’s clearly different in value from the engagement hubs. And so we separated it out and I think partners love it. Customers now have even more clarity, and it’s going to drive the overall adoption of the customer platform.

Operator: The next question comes from the line of Brian C. Peterson with Raymond James.

Brian Peterson: I’ll echo my congrats. Maybe a product question for me. Can you discuss some of the AI announcements coming out of INBOUND earlier this year? How is that influencing your 2024 road map? And anything interesting that came out of the OpenAI event this week as it relates to HubSpot.