HubSpot, Inc. (NYSE:HUBS) Q4 2023 Earnings Call Transcript

HubSpot, Inc. (NYSE:HUBS) Q4 2023 Earnings Call Transcript February 14, 2024

HubSpot, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending the HubSpot Q4 and Full Year 2023 Earnings Call. My name is Matt and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call. There is an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Ryan Burkart, Senior Director of Investor Relations. Ryan, please go ahead.

Ryan Burkart: Thanks, operator. Good afternoon, and welcome to HubSpot’s fourth quarter and fiscal year 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 Clearbit acquisition, expected growth, FX movement and business outlook, including our financial guidance for the first fiscal quarter and full year 2024. 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 our Form 10-Q, which will be filed with the SEC this afternoon 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 and a reconciliation of the differences between such measures can be found within our fourth quarter and fiscal year 2023 earnings press release in the Investor Relations section of our website. Now it’s my pleasure to turn the call over to HubSpot’s Chief Executive Officer, Yamini Rangan. Yamini?

Yamini Rangan: Thank you, Ryan and welcome to everyone joining us today. Let me start with our Q4 and 2023 results, share my observations on the macro environment as we step into a new year and wrap up with our strategy for balancing growth, efficiency and culture in 2024. We saw a solid finish to a good year despite the challenging macro environment. Q4 revenue grew 21% year-over-year in constant currency and full year 2023 revenue grew 25% in constant currency. We delivered a standout operating profit margin of 17% in Q4 and 15% for the full year, up over 500 basis points year-over-year. Total customers grew 23% to over 205,000 customers globally, driven by nearly 11,000 net customer additions in the quarter, a new record for us.

Our customers have high confidence in our ability to help them grow and we are becoming the clear platform of choice for scaling companies. Our momentum in Q4 and 2023 results highlight two important aspects of our strategy that are working. First, we’re focused on crafting great products and continuously innovating to solve for the customer and second, we are consistently driving go-to-market execution across digital, sales and partner channels. At the lower end of the market, we saw exceptionally strong net adds driven by Starter momentum. Our pricing optimization plays continue to work. Our value proposition of an easy-to-buy, easy-to-use platform is crystal clear and our efforts to amplify this value in-app, in-chat and across brand campaigns drove results in the quarter.

We improved our in-app, onboarding and support to help customers get value faster and our investments to drive retention are beginning to work. These efforts resulted in record net adds that we are pleased with. In upmarket the big themes in Q4 were large deal strength, sales hub and multi-hub momentum. We saw seasonally strong impact from large deals as more upmarket customers are consolidating on our platform. 60% of Pro and Enterprise customers are now on two or more hubs and more customers are starting with multi-hub. Post the relaunch at INBOUND sales hub is just cranking. Customers are getting value from AI-Powered features like call summarization and forecasting and are driving sales productivity with the new prospecting workspace. We can see from the results that doubling down here was the right choice.

Sales Hub was our fastest growing hub in the quarter in terms of new business with 18 of the top 25 wins including Sales Hub. It is becoming a sustainable front door to HubSpot and I’m thrilled with the momentum we are seeing after the relaunch. Overall, 2023 was a banner year for product innovation with over 800 product enhancements across our hubs and entire platform. We want to be the market share leader in marketing, sales and service for scaling companies and we doubled down on core hubs to deliver even more value to customers. In addition to relaunching Sales Hub, we enhanced Marketing Hub with more omni-channel features like Instagram reels and introduced more robust insights with customer journey analytics. With Service Hub, we introduced multiple knowledge bases, which was a top customer request and advanced our vision of a modern helpdesk.

And of course, the big headline in 2023 was the launch of HubSpot AI. We were early with Gen AI beta launches and have embedded AI features across our entire platform and hubs so customers can get the power of AI without needing to become AI experts. Reflecting on 2023, we moved fast with AI to drive innovation for our customers. We doubled down on core hubs to further establish ourselves as the platform of choice for scaling companies and we focused on consistent execution of our bimodal strategy. I’m thrilled with the innovation the team delivered in 2023 and look forward to driving even more value for our customers this year. Okay, I want to quickly touch on what we’re seeing in the macro environment. Throughout 2023, we saw customers tightening their budgets, deal cycles taking longer and overall scrutiny in the buying process.

Though these trends continued in Q4, we saw some buyer urgency at the end of the year, driving sequential improvement in large deals. Customers are simplifying and consolidating on fewer, more effective platforms, and this translated to stable gross retention and more multi-hub wins for HubSpot. That said, we’re not sounding the all clear just yet, as we continue to see cautious buying and multiple decision makers involved in deals. Overall, we expect this choppy environment to persist, and we will remain focused on HubSpot’s specific growth, drivers and execution in 2024. Shifting gears I want to share context on the pricing change we recently announced and the strategic rationale behind it. As we have evolved from an app to suite to customer platform, we’ve had a simple strategy, make HubSpot easy-to-use and easy-to-buy.

We’re doubling down on the strategy to make HubSpot even easier to buy. That’s why we announced a new seat space pricing model on January 30 that will go into effect for all new customers on March 5. For existing customers, pricing will remain the same at the time of the migration, but they will see a price increase of 5% or less at the time of their next renewal. Now, there are three reasons for this shift. First, we want to make it even easier for customers to get started with HubSpot, and therefore we’re removing seat minimums for Sales Hub and Service Hub. This will remove friction for customers and will help us accelerate market share gains. Second, we want to make it easier for customers to upgrade from Starter. We have heard feedback that the price jump from Starter to Pro or Enterprise is high.

This is a point of friction as customers look to upgrade. So we’re changing the Pro and Enterprise seat pricing for Sales Hub and Service Hub and we are introducing view only seats, core seats for users who want to edit, and specialized seats for users who need specific functionality like sales or service. This change will bridge the gap between Starter and Pro, and drive more Pro plus adoption and upgrades. Third, and perhaps most importantly, we’re aligning price to the value from our AI-Powered smart CRM. We’ve invested heavily in our smart CRM over the past few years to make it more customizable, extensible and easier to integrate with. The easiest way for you to think about smart CRM is it’s the unified customer record, which enables our customers to have a single view of their customers.

Now, customers can continue to view the CRM for free, but will need a core seat to edit it. This expands our ability to monetize beyond core personas to ops, admin finance personas who may need more powerful edit capabilities. In addition, we have embedded HubSpot AI across our entire platform and hubs, which means that customers at every tier can access AI features at no additional cost. This differentiated strategy should drive even more adoption of HubSpot AI and drive more upgrades as we continue to add value in higher tiers. We launched the seats pricing changes as a pilot in ANZ in April 2023 and we have fine-tuned our execution based on customer, partner and sales feedback. For the global launch in March we are hyper focused on enabling our teams and partners to communicate the value of the changes to customers.

Overall, I’m really excited about our pricing model evolution. It’s going to make HubSpot easier to buy and easier to scale as our product grows, while matching how we monetize the platform based on the value we deliver to customers. Okay, I want to wrap up by sharing our strategy for 2024 and how we are balancing growth, profitability and culture to drive durable growth. Our strategy is working and we have high conviction in our strategic choices. We remain focused on SMBs, a very large growing and underserved market, and we are well positioned to innovate and be a leader in this market. The way we differentiate is by making our products easy to buy, easy to adopt and easy to use. In 2024, we will double down on our playbook of driving the pace of product innovation, focusing on consistent execution and building a high performing, sustainable company.

On the product side, you can expect to see us take big swings in AI, build deeper and more sophisticated upmarket functionality, and focus on driving product usage across all hubs and platforms. AI in 2023 was all about speed and being fast to market. 2024 is going to be all about delivering value. We are doubling down on HubSpot AI use cases that are driving repeat usage and will innovate even more with AI agents. With our core hubs, we will continue to go deep on the key use cases our customers need across marketing, sales and service, and bring more upmarket sophistication to Sales Hub and Service Hub specifically.

Go-to-Market: As we look forward this year, we have momentum in a large market. Our pricing evolution will allow us to accelerate acquiring and serving more customers, and the pace of product innovation will enable us to become the number one AI-Powered customer platform for scaling companies. With that, I’ll hand it over to our CFO, Kate Bueker to take you through our financial and operating results.

Self: As we look forward this year, we have momentum in a large market. Our pricing evolution will allow us to accelerate acquiring and serving more customers, and the pace of product innovation will enable us to become the number one AI-Powered customer platform for scaling companies. With that, I’ll hand it over to our CFO, Kate Bueker to take you through our financial and operating results.

Service: As we look forward this year, we have momentum in a large market. Our pricing evolution will allow us to accelerate acquiring and serving more customers, and the pace of product innovation will enable us to become the number one AI-Powered customer platform for scaling companies. With that, I’ll hand it over to our CFO, Kate Bueker to take you through our financial and operating results.

Kate Bueker: Thanks Yamini. Let’s turn to our fourth quarter and full year 2023 financial results. Q4 revenue grew 21% year-over-year in constant currency and 24% on an as reported basis. Q4 subscription revenue grew 24% year-over-year, while services and other revenue increased 2% on an as reported basis. Full year 2023 revenue grew 25% year-over-year in both constant currency and as reported. Full year subscription revenue grew 26% year-over-year, while services and other revenue increased 16%, both on an as reported basis. Q4 domestic revenue grew 17% year-over-year. International revenue growth was 27% in constant currency and 32% as reported now representing 48% of total revenue. Clearbit revenue was de minimis in Q4. We added nearly 11,000 net new customers in the quarter, bringing our total customer count to over 205,000, growing 23% year over year and surpassing a notable milestone of 200,000 customers.

This strength was once again driven by a significant volume of customer additions at the low end. Average subscription revenue per customer was nearly $11,400, growing 1% on an as reported basis and declining 1% year-over-year in constant currency. Our strong growth in our lower ASP Starter customers more than offset the positive impact to ASRPC of the steady progress in our multi-hub adoption upmarket. Our customer count and ASRPC metrics exclude the impact of the Clearbit acquisition in Q4. Gross retention held steady in the high 80s in Q4 and net revenue retention was comfortably above 100 and flat sequentially. We continue to see customers actively scrutinize spending, resulting in continued pressure on net upgrades. We expect similar trends to continue in the short-term, with net revenue retention likely staying in and around the current range in 2024.

Calculated billings were $662 million in Q4, growing 21% year-over-year in constant currency, and 22% as reported, driven by our strong large deal performance in Q4. This includes roughly 0.5 point of contribution from the Clearbit acquisition. The remainder of my comments will refer to non-GAAP measures. Q4 operating margin was 17% and full year operating margin was 15%, both up significantly compared to the year ago period. Our Q4 and 2023 operating margin increase was driven by our workforce reduction in Q1, product infrastructure optimization, the impact of the changes in our partner commission structure and prudent and focused hiring throughout the year. Net income was $92 million in Q4 or $1.76 per fully diluted share. Free cash flow was $83 million in Q4 or 14% of revenue, and $292 million or 13% of revenue for the full year.

Finally, our cash and marketable securities totaled $1.7 billion at the end of December. Before we jump into guidance, I wanted to share some perspective on our expectations for the macro environment and provide some detail regarding the impact of the Clearbit acquisition and our pricing change on growth and KPIs for 2024. As Yamini shared, we continue to operate in a choppy and challenging environment. Despite some signs of stabilization in downgrades and buyer urgency in Q4, our current working assumption is that the macroeconomic environment will remain challenging in 2024. The introduction of our seats based pricing model is an important foundational change to make it easier for prospects and customers to get started and grow with HubSpot.

Our first motion will be focused on selling to new customers in this model and we expect less than a point of contribution to revenue growth in 2024 from this change. Over the longer term, we expect this to be a more material driver to the business as new customers grow in this model and we introduce the change to our existing customers. We believe that our continued success at the low end coupled with the lower barrier to entry and our new pricing model will allow us to maintain quarterly net customer additions around 10,000 in 2024. This will result in ASRPC growth that is down in the low single digits for the year. Finally, we officially closed the acquisition of Clearbit in December. In terms of 2024 contribution, we expect the acquisition to drive roughly a point of growth to revenue.

Now, let’s turn to our guidance for the first quarter and full year of 2024. For the first quarter total as reported revenue is expected to be in the range of $596 million to $598 million, up 19% year-over-year at the midpoint. Non-GAAP operating profit is expected to be between $83 million and $84 million. Non-GAAP diluted net income per share is expected to be between $1.48 and $1.50. This assumes 53.1 million fully diluted shares outstanding. And for the full year of 2024 total as reported revenue is expected to be in the range of $2.55 billion to $2.56 billion, up 18% year-over-year at the midpoint. Non-GAAP operating profit is expected to be between $408 million and $412 million. Non-GAAP diluted net income per share is expected to be between $6.86 and $6.94.

This assumes 53.6 million fully diluted shares outstanding. As you adjust your models, please keep in mind the following. We expect foreign exchange to have a neutral impact on both our Q1 and full year 2024 as reported revenue growth. The impact of our pricing change and the Clearbit acquisition is included in our guidance. We expect Non-GAAP operating profit margins to be approximately 14% in the first and second quarters and the mid to high teams in the back half of the year. We expect CapEx as a percentage of revenue to be roughly 4% and free cash flow to be about $365 million for the full year of 2024, with seasonally stronger free cash flow in Q1 and Q4. And with that, I will hand things back over to Yamini for her closing remarks.

Yamini Rangan: Thanks so much Kate. I want to close by highlighting our momentum in becoming the customer platform of choice for scaling companies. G2 recently released their annual Best Software Awards and HubSpot was recognized as the number one sales product and the number one marketing product in 2024. This recognition is a strong testament to the pace of innovation we are driving and our focus on delivering value. My huge, heartfelt thank you to our employees who work tirelessly to solve for our customers, and a big thank you to our partners, customers and shareholders for the continued support. 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 is from the line of Samad Samano with Jefferies. Your line is now open.

Samad Samano: Hi, thanks for taking my question. Congrats on a strong finish to 2023. So Yamini, you gave a lot of information about the pricing model change and it was helpful. I want to maybe dig a little deeper there. It looks like the impact to customers will be minimal and it encourages them to try more of HubSpot, but how do you expect this to impact? I know you gave the net adds number, but what about the potential doors that customers enter through? Do you see maybe a shift from marketing, maybe more towards sales or service? Is that part of the intention here? And whether it makes up more consistent with some of your enterprise competitors as far as their pricing is structured, just especially as you gain more traction with mid-market customers?

And then Kate, I know you baked into the guidance, but can you just give us timing wise, is it more back half that you expect the impact to guidance from the pricing model change? Thank you both so much and congrats on a great quarter.

Yamini Rangan: Hey Samad, thanks a lot. Maybe to address multiple questions that you asked there, we have always been easy-to-buy and easy-to-use and we are just doubling down to make HubSpot even easier to buy. This change has been probably a couple of years in the making, and we got started with these changes by talking to our customers, to hear from them in terms of where they experience points of friction in the buying journey and where they’re seeing value. That’s how we got started. And I talked about the three shifts and it’s easy to see how this all adds up. The first shift is, we want it to be super easy for customers to get started with HubSpot, so we’re removing the seat minimum. What we have seen in the pilot and what we expect in terms of this change is it will result in more customers starting with HubSpot and higher volume of Starter customers over a period of time.

The second thing we did is we reduced the price jump between Starter and Pro. And you’ve asked us this before. Our customers have consistently given us the feedback that the jump from Starter to Pro is really high and that’s a point of friction for our customers. By lowering the price per seat for Pro and Enterprise, it reduces that friction. And again, we’re seeing that in making this change, there are more customers that start with Starter and then continue to upgrade into Pro and Enterprise, which is exactly what we want in order to have a great foundation for pricing. And the third, and probably most importantly, we’re now monetizing the value of smart CRM. We’ve invested pretty heavily in smart CRM over the past few years. We’ve made it customizable, we’ve made it extensible, we’ve made it easier to integrate with, and this change allows us to monetize.

You asked specifically about how does this compare to the rest and what are we beginning to see? I think you’re going to see more volume, because we have removed the friction, both in terms of Starter and Pro, and then over a period of time the biggest opportunity is really post sales expansion and growth. When we sign more customers, then reps have the capacity to go back and sell more in terms of cross sell opportunities. When customers start with exactly what they need, then they now will buy more seats as they continue to expand and core seats is a new upgrade lever. So this is a foundational shift that removes friction and provides value and gives us the ability to continue to expand over the next multiple years. So we’re really excited about this change.

Kate Bueker: Yes. And Samad, I think the impact in the year flows very naturally from what Yamini said. We’re going to have more customers starting at lower ASP, but growing more over time and so you’d naturally see that build more into the back half of the year.

Operator: Thank you for your question. Next question is from the line of Parker Lane with Stifel. Your line is now open.

Parker Lane: Hey team, thanks for taking the question. Yamini, I wanted to just sort of stay on that theme we were talking about here with the pricing and packaging changes. And when we look at the specialized in view only seat types, have you guys done work to figure out how many of the potential seats that have not been addressed in the past can now be addressed under this package? Not just the new customer acquisition side, but actually on the expansion side in those two areas.

Yamini Rangan: Yeah, so maybe just to address the basics, so we now have three seat types. The first is just a view only seat. If anybody within the whole company wants to view it, that’s the seat view. The second type of seat, and this is probably the new change that we are introducing, is in core seat and this is really associated with the smart CRM. And then the third is the specialized seat if you need a Sales Hub specialized functionality or Service Hub specialized functionality. To take a moment and maybe talk about the biggest change, which is that core seat, we talked about smart CRM at INBOUND and the easiest way to think about smart CRM is it’s a core system of customer records. If you want contact information, you want company information, if you want information on the interactions in your customer, all of that is associated with that smart CRM layer.

And over the past few years, as we look at where customers are spending the most time and getting value, they will tell you that it is from having a single unified view of the customer. And what we have done with this pricing model change is if you want to view it, you can use the free seat, but if you want to edit anything within that core CRM, you will need to buy a core seat. So by monetizing that smart CRM, we’re aligning the value where customers are getting to our monetization strategy, and it really goes back to our core pricing philosophy. We add value, and then when we know we have added a ton of value, then we align the monetization.

Operator: Thank you for your question. Next question is from the line of Mark Murphy with JPMorgan. Your line is now open.

Mark Murphy: Thank you so much. Yamini, you stated that AI will be embedded across the entire platform and that customers can access it at no additional cost. So I’m curious, how might you handle a high octane user or a campaign which might incur a lot of LLM cost on the back end. So just in other words, should we look at this and say, well, it’s a less than 5% price increase and then it’s free AI for everyone or are you going to have other tokens or credits or SKUs, something like that for some of the higher AI usage scenarios?

Yamini Rangan: Yes, that’s a great question Mark. I want to say that our AI is embedded. It is not free, and there is a difference between those two. And maybe just step back, this is very, very consistent with what we communicated as our AI monetization strategy at Analyst Day. It’s very, very early stages on a very massive shift in the industry, and we are focused on driving value and making it super easy for scaling companies to just adopt AI. That’s why we’ve taken this strategy and we’ve embedded AI into platform and all of the hubs, and by including the AI into our platform and hubs, we’re just driving acquisition of customers. That’s number one. The second thing which is important to note is that while all of our tiers, Premium, Starter, Pro and Enterprise have AI features, we have a lot more features at the pro and enterprise tiers.

And in fact, 65% of the features that are becoming generally available in the first half of 2024 will be in the Pro Plus tier. So the way we think about it is that it’ll drive a lot of upgrades and higher ASP in terms of tier upgrades. And then longer term, when we drive even more sophisticated features like AI agents, then we may charge specifically for it. So going back to kind of your question on how do you make sure that in its scale right now we think we’re in the early stages removing friction, educating customers, driving adoption, making sure there’s repeat usage, that’s the focus. And based on what we’re seeing, we’re not quite worried about the cost impact, but if we continue to introduce very sophisticated features where it has an impact, then we will charge for it.

So that’s how we’re thinking about monetizing.

Operator: Thank you for your question. The next question is from the line of Elizabeth Elliott with Morgan Stanley. Your line is now open.

Elizabeth Elliott: Great, thank you very much. So your bimodal strategy has really enabled you to add a lot of that low end customers in 2023 and especially exiting the year. So I wanted to get a better sense of how quickly do customers typically upgrade. It sounds like the price narrowing that price jump should be a bit of an accelerator, but just curious on when we could see the big upgrade opportunity and have that start to benefit ASRPC growth. Thank you.

Kate Bueker: Yes. Thanks Elizabeth for the question. We are again pleased with the strength that we saw in our Starter customer additions in the quarter. There are both strategic and financial reasons that we want to continue to lean into low end customer acquisition. We think that the sort of significant volume of customers we have at the low end provides us with a nice competitive moat. It also makes our overall ecosystem more valuable, so both of those are strategic reasons. Starter upgrades, if you sort of look at the impact that they’ve had for us, represent probably a couple of points of net revenue retention for us. And we continue to see pretty healthy rates of upgrades from starter cohorts. About half of that happens within the first six months.

There is still friction in that motion. Yamini talked about the meaningful jump that we have in price between Starter and Professional, so the dollars of upgrade from starter and professional are relatively small. That said, we think this seats pricing model should reduce the overall friction in that motion and we’re optimistic that we can really change the game on the Starter upgrade rate with this new pricing model.

Operator: Thank you for your question. Next question is from the line of Rishi Jaluria with RBC. Your line is now open.

Rishi Jaluria: Oh wonderful. Thanks so much for taking my questions. Nice to see continued momentum in the business. I wanted to drill a little bit more into the AI strategy. Obviously you have really impressive innovation we’ve seen on AI, especially when we think about how you’re innovating compared to some of your CRM competitors. I’d love to hear maybe number one, what sort of feedback have you had from customers in terms of new use cases that maybe you hadn’t initially thought about? And second, and maybe more importantly, has this started turning up as part of initial sales conversations and maybe a consideration that new customers are having when it comes to choosing you versus others? Thank you.

Yamini Rangan: Thank you, Rishi for that question. Maybe the way I’d characterize it was 2023. 2023 was a year of experimentation and this year is going to be all about delivering customer value. And probably the most important leading indicator that we are looking for is repeat usage of AI features. So the focus for the product team, the focus for the go to market team is really one, educating customers and two, making sure that any feature that we have out is driving repeat usage. That’s the focus. You asked about, what are we learning? We’re definitely seeing a lot of adoption, but there is some signal, some noise. And as I look at our top maybe 20 customers who are leveraging AI effectively, there are a few key trends. The first one is prospecting and company research is really, really a big use case and ChatSpot is driving that.