HubSpot Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 19 speakers on the call.

Operator

Afternoon, and thank you for attending today's HubSpot Q1 Fiscal Year 2023 Earnings Conference Call. My name is Danielle, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the It is now my pleasure to hand the conference over to our host, Chuck McGlashing, Head of Investor Relations. Mr. McGlashing, you may proceed.

Speaker 1

Thanks, operator. Good afternoon, and welcome to HubSpot's first 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 Ramgan, our Chief Executive Officer Dharmesh Shah, our Co Founder and CTO and Kate Bucher, 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.

Speaker 1

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 fact are forward looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, The expected impact of the restructuring, expected growth, FX movement and business outlook, including our financial guidance for the 2nd fiscal quarter and full year 2023. Forward looking statements reflect our views only as of today. And as required by law, we undertake no obligation to update or revise these 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 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 user discussed and a reconciliation of the differences between such measures Can be found within our Q1 2023 earnings press release in the Investor Relations section of our website.

Speaker 1

Now, it's my pleasure to turn over the call to HubSpot's Chief Executive Officer, Yamini Rangan. Yamini?

Speaker 2

Thank you so much, Chuck, and welcome to everyone joining us on the call. Today, I want to focus on our start to 2023, share observations on the current macro environment and provide some perspective on what Generative AI means for HubSpot and our customers. Let's start with our Q1 results. We had a solid start to the year With revenue growing 30% in constant currency year over year, we delivered more than 4 points of margin expansion year over year, bringing operating margins to over 13%. Total customers grew by 23% to over 177,000 customers globally, fueled by net customer additions of over 9,900 in the quarter.

Speaker 2

I'm pleased with our momentum coming into the year and the focused execution by the HubSpot team. These results show that our product innovation is in high gear and that our bimodal go to market strategy is working. Our focus with our bimodal strategy remains clear. We want to drive volume at the lower end of the market while driving increased value up market. In Q1, we continued to gain momentum in both segments of the market.

Speaker 2

On the lower end, we saw a significant uptick in our net customer additions. This was driven by strength in free sign ups and pricing optimization plays we ran in our Starter Edition. In addition to that, HubSpot is powerful yet easy to use, and we are increasingly becoming the platform of choice for scaling companies. Looking up market, we continue to see our multi hub value proposition resonating. More professional and enterprise customers Are starting with multiple hubs and over 45% of our ARR installed base is now on 3 or more hubs.

Speaker 2

Off market customers are increasingly looking for 2 things, a single source of truth that provides full visibility Across our entire customer journey and clear cost savings in this environment. HubSpot Connected platform delivers both. Specifically, Sales Hub continued to gain momentum in Q1 as customers look to build tighter alignment between marketing and sales To drive more efficiency across the front office, take Liquidity Services, a B2B e commerce marketplace as an example. After adopting Sales Hub and Marketing Hub, they were able to eliminate 8 other tools, reducing their overall cost by 50%. They were able to connect their marketing and sales data to get better insights and drive an increase in their conversions and campaign effectiveness.

Speaker 2

This is a great example of our customers driving growth with Multi Hub while saving time and budget. We also saw Operations Hub come up in more deals as customers focused on consolidation. They see the clear value of a solution I can connect systems, automate processes and demonstrate value, especially in this economic environment. In fact, over 2 thirds of our top 25 deals closed in Q1 adopted OpsHub. Leveraging multiple hubs boosts efficiency and I'm excited by the value our customers are seeing from our connected platform.

Speaker 2

As you can see, our bimodal strategy is working, and we will continue to maintain our pace of product innovation. Next, I want to shift gears and share what we are seeing in the macro environment. Overall, we continue to operate in a tough environment and We're not out of the woods yet. While we see our top of funnel activity improving, sales cycles remain long and budgets Remain under scrutiny. Decisions by committee have become the norm with multiple executives involved in sales cycles.

Speaker 2

It is clear based on my conversations with customers that they're continuing to tighten their belts in terms of budgets and we can see this in optimization across seats, Contacteers and portals. Decision makers are focused on budget optimization and continue to spend cautiously. Now despite these challenges, we have a solid playbook for executing and driving sustainable growth. We remain focused on product innovation and consistent execution. On product side, we're cranking.

Speaker 2

One of our strategic objectives is to become the market share leader in marketing, sales and service for scaling companies And we remain focused on delivering depth of features in order to get there. In Q1, with Marketing Hub, We moved customer journey analytics to general availability and the strong adoption and usage we're seeing gives me confidence that we are driving Meaningful innovation that serves marketeers' needs today. With SalesHOP, we significantly enhanced the sequences tools for upmarket With selective threading and advanced permissioning. And we moved generative AI email functionality to beta. We also launched a key Service Hub enterprise feature with multiple knowledge bases.

Speaker 2

This has been a top product request from upmarket customers who need to be able to support various audiences, products or brands. And in Payments and Commerce, we introduced scheduled subscriptions And moved payable invoices to private beta. I'm thrilled with the progress we are making on our journey to become the number one CRM for scaling companies. On the go to market side, our strategy has been to focus on total cost of ownership for customers And communicating the value of HubSpot. Our quick time to value and connected platform message is clearly resonating as customers look to become more effective and efficient.

Speaker 2

We're driving enablement across both our direct and partner channels And we are keenly focused on value centric conversations. Looking ahead, we'll continue to navigate this macro environment by following our playbook Now I want to double click on innovation And share how we're thinking about generative AI and why we are well positioned to add even more value for our customers. We are in the early stages of a transformative shift. Generative in 3 fundamental ways. It helps businesses generate content, generate insights And generate code, all using natural language.

Speaker 2

This will be a massive opportunity for SMBs and scaling companies. Activities that once took them time, money and deep expertise no longer do with GenAI. And this shift will enable SMBs to reach more customers, serve them at record speed with unprecedented relevance. So what does this really mean for marketing sales and service professionals? In the simplest terms, We believe AI will guide go to market teams and make them more effective.

Speaker 2

This will fuel a new era of AI guided growth For our customers, when we bring together the power of foundational models with the deep contextual data in HubSpot CRM, We can help go to market teams drive better results. Marketers can use GenAI to guide them in creating more effective blog posts, Email campaigns and social content. Salespeople can use it to guide them to write better prospecting emails and deliver more Relevant insights for customers and service professionals can use GenAI to anticipate customer needs, Suggest resolutions and offer proactive support. We believe AI won't replace go to market teams. It will guide them To drive better outcomes, while there will be efficiency benefits, we're even more excited about effectiveness gains and the ability to drive Guided Growth for Customers.

Speaker 2

While we are in the early stages of GenAI, HubSpot has unique differentiators. First, we have unique data and broad distribution. HubSpot CRM data is unified and cohesive, making it easier for AI to ingest and drive relevance. 2nd, we're at the center of our customers' workflows. HubSpot is where work gets done, so we can bring relevance to generate content and insights Across the entire front office, we're not another AI point solution.

Speaker 2

We are an all in one CRM platform powered by AI. 3rd, we've always had a human centric approach and companies with a human feedback loop are at an advantage with AI. We made a ton of progress in Q1 with the launches of Content Assistant in public beta and ChatSpot in public alpha. Since our launch in March, we've had over 40,000 users sign up for ChatSpot and the early feedback has been very positive. Content Assistant has thousands of users to date and we are seeing customers leveraging it daily for creating marketing emails, Blog posts, landing pages and more.

Speaker 2

We're ambitiously integrating AI across our entire CRM platform, So our customers don't have to become AI experts to reap the transformational benefits. I'm incredibly excited that the opportunity AI is creating to deliver even more value for our customers. Reflecting on the quarter, I'm pleased with the progress we made on our path to becoming the CRM platform of choice for scaling companies. Our teams maintained the pace of product innovation and drove Strong execution, which was just fantastic to see. With that, I'll turn the call over to Kate to take you through Q1 results in more detail.

Speaker 3

Thanks, Yamini. Let's turn to our Q1 2023 financial results. Revenue grew 30% year over year in constant currency And 27% on an as reported basis. Subscription revenue grew 27% year over year, while services and other revenue increased 12% on an as reported basis. Domestic revenue grew 27% year over year, while international revenue growth was 33% in constant currency And 26% as reported.

Speaker 3

International revenue represented 46% of total revenue. We added over 9,900 net new customers in the quarter, bringing our total customer count to over 177,000, Up 23% year over year. Starter customer acquisition continued to fuel our strong net adds again in Q1. Average subscription revenue per customer grew 6% year over year in constant currency and 3% on an as reported basis To $11,400 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. Gross retention remained healthy in the high 80s for the quarter.

Speaker 3

Net revenue retention was 104%, down 3 points sequentially, driven by further customer optimization of HubSpot spend as well as slower expansion across seats, contact tiers And portals. While we expect pressure on net revenue retention in the near term to persist, we continue to believe We can maintain net revenue retention above 100%. Calculated billings were $533,000,000 in the quarter, Growing 28% year over year in constant currency and 26% as reported. The remainder of my comments will refer to non GAAP measures. Operating margin was 13%, up 4 points compared to the year ago period.

Speaker 3

Operating margins benefited from The restructuring actions we implemented at the end of January, which impacted our headcount and facilities costs, including a temporary pause in overall hiring in Q1. Net income was $62,000,000 or $1.20 per fully diluted share. Free cash flow was $85,000,000 or 17 percent of revenue, and our cash and marketable securities totaled $1,600,000,000 at the end of March. And with that, let's review our guidance for the Q2 and full year of 2023. As Yamini highlighted, we continue to operate in a difficult macro environment with customer behavior that is similar to what we saw in the second half of 2022.

Speaker 3

Budgets are tight, decision by committee has become the norm, and customers are spending cautiously on new products We're looking for ways to optimize existing spend. Our guidance assumes that these weak macroeconomic conditions persist throughout 2023. For the Q2, total as reported revenue is expected to in the range of $503,000,000 to $505,000,000 up 19% year over year at the midpoint. We expect foreign exchange to be about a point of headwind to as reported revenue growth in the quarter. Non GAAP operating profit is expected to be between $54,000,000 $56,000,000 Non GAAP diluted net income per share Is expected to be between $0.98 $1 This assumes 52,400,000 fully diluted shares outstanding.

Speaker 3

And for the full year of 2023, total as reported revenue is now expected to be in the range of 2.08 To $2,088,000,000 up 20% year over year at the midpoint. Non GAAP operating profit is now expected to be between $275,000,000 $279,000,000 We now expect foreign exchange to have a neutral impact to as reported revenue and operating profit margin for the full year of 2023. Non GAAP diluted net income per share is now expected to be between $4.80 $4.85 This assumes 52,300,000 fully diluted Shares outstanding. As you adjust your models, keep in mind the following. We expect CapEx as a percentage of revenue to be roughly 5% And free cash flow to be about $245,000,000 for the full year of 2023, with seasonally stronger free cash flow in Q4.

Speaker 3

And with that, I will hand things back over to Yamini for her closing remarks.

Speaker 2

Thank you so much, Kate. I want to close with our commitment to driving durable profitable growth long term. Looking ahead, We remain focused on foundational investments that will help us scale. As I shared during our last earnings call, We are doubling down on better development and high performance, better hybrid connection for our people, employees all over the world And better systems and automation internally. These initiatives will enable us to drive more efficiency long term and deliver even more value for our customers.

Speaker 2

I believe we have the right strategy and the right team to navigate this environment and emerge stronger. I want to thank our customers, our employees, our partners and our shareholders for the continued support on this journey. With that, operator, let's open up the call for questions.

Operator

Certainly. The first question comes from the line of Keith Bachman of BMO. Please proceed.

Speaker 4

Hi, many thanks and congrats on a solid quarter and guide. I wanted to focus my question On generative AI, you talked about some of the activities and certainly enjoyed Dharmesh's video some time ago. But I wanted to hear how do you plan on monetizing it as you look out over the horizon? So is it a SKU? Is it a pricing activity?

Speaker 4

How do you think about monetization? And as part of that is, when do you think some of these activities will be moved from Beta to production environments, in

Speaker 5

other words, when might

Speaker 4

investors begin to see the benefits of AI and your financial results. Many thanks.

Speaker 2

Hey, Keith. Thanks a lot for your question. This is Yamini. Very excited about generative AI. It is very transformative.

Speaker 2

And if you kind of like step back, HubSpot got Started, when there was a fairly big shift that was happening in how people buy. And that led to us coming up and helping customers on how to market and sell. And we think generative AI is as transformative and this is going to really cause Our customers to think about how they market and sell and so we think there is a lot of exciting potential. In terms of the monetization question, We have a very clear first principle when it comes to monetization. We focus on delivering customer value first and from there on monetization will follow and We think that this is pretty early days in terms of monetizing.

Speaker 2

Having said that, we're iterating fast. We are getting tons of feedback, especially with ChatSpot as well as content assistance that we just talked about and we are improving these use cases, so we can continue to innovate for our customers and Really help them get much more value with this transformative technology. As we do this, some of the features are just going to become table stakes. We'll just be part of our core product and part of how we drive customer engagement and adoption within the core product. Now if there are more specialized use cases, then maybe it goes into higher value additions like co and enterprise and will Increase our ASP longer term and that's how we're thinking about monetization.

Speaker 2

First, we want to focus on delivering value for the product. You asked the last question, which was when do we plan to get this into the hands of customers? Well, we launched pretty quickly within the market in March. It's alpha and beta. We're getting a lot of the feedback and the teams are pretty excited.

Speaker 2

We're having a lot of hackathons internally and there's a long list use cases that our teams are working on. So I think you'll see us maintain and even Accelerate our pace of innovation where we'll be introducing features in weeks, not months or quarters. So lots of exciting developments here.

Operator

Thank you. The next question comes from the line of Mark Murphy of JPMorgan. You may proceed.

Speaker 6

Thank you. Congrats on the great execution during the quarter. Yamini, I'm noticing that HubSpot just has such a huge list of free products at this point. There's free CRM, free CMS, free form builder, Free business templates. So much is free, but your margins are expanding despite that.

Speaker 6

I'm wondering if you could comment on just how large and energetic that on ramp is From free customers at the top of the funnel. And then for Kate, is it boosting kind of your multiyear visibility because It feels like you have these millions of little seeds that are there that are kind of just starting To Sprout and you could probably project forward and look at how it would turn into revenue.

Speaker 2

Hey Mark, I'll get started with the question and then Kate can answer. I love this question because it really gets to the heart of our strategy. When HubSpot got started, we had this deep conviction that we want to add as much value for our as possible and continue to get the most adoption from small, medium as well as scaling businesses. And The free tools is really part of that strategy to get the widest possible top of the funnel. And by the way, the free tools have a Ton of value.

Speaker 2

I mean, you talked about free CMS, that adds a lot of value in a company getting a digital presence and getting Started, there are a number of other growth tools and that's clearly the strategy. And tying this maybe to something that I just talked about, which The bimodal strategy, when you have a really wide funnel, which is what free tools like this creates, We work to continue to deliver value and so the number of start up customers and the conversion from Free sign ups to paid customers increases and we've been looking at this over the past few quarters. We're very happy with how That conversion continues to happen and then even from our starter customers how they continue to get value in terms of pro and enterprise. So it's really our Strategy for delivering value that's at work. And Kate, maybe you want to address the second part of the question there.

Speaker 3

Yes, sure thing. Thanks, Mark. I think there's a Lot of reasons to really love the strategy of our product led growth. I would not say that increased visibility over the long term is one of them. That said, it's a really great low cost way to get lots of customers using HubSpot really early in their business lifecycle.

Speaker 3

And we think it creates a lot of interesting dynamics over and above just the economics, which I can talk about. It creates a nice moat, A competitive moat for us against low end disruption. It also enhances pretty dramatically the value of our overall platform just based on the Scale of customers at the low end. Now some portion of those starter customers will upgrade to pro and enterprise over time. I think you already know that.

Speaker 3

Oftentimes, that happens with a bit of a faster sales cycle that we also like. But this is really just one of many motions that will Drive our growth over time.

Operator

Thank you. The next question comes from Samad Samana of Jefferies. You may proceed.

Speaker 7

Hi. Great quarter, guys. Yamini, I feel like for the last couple, you've talked a lot more about upmarket customers and how much The portfolio is attracting larger customers and I think SalesUp has been an integral part of that and the maturity of the product seems to be really unlocking this Next year of customer size. I'm just curious if you think that that's an even bigger key than Marketing Hub's maturity to unlocking

Speaker 2

Thank you so much for that question. We're really happy with Sales Hub as well as what it unlocks upmarket. And I think Marketing Hub is 1,000,000,000 plus kind of product line that's got the ability to go to Multi billion and Sales Cloud is a 500,000,000 plus business that can grow into multiple billions and both of them are kind of going as Glad we're super happy with that. Now specifically looking at Sales Hub, we've been on the steady march over the past few years To build the functionality that a true upmarket business needs to have as a system of record. And I think we've reached that point.

Speaker 2

We have hit that critical mass for an upmarket customer. We are a viable alternative To other legacy enterprise auctions within the market and Sales Hub is now a legitimate front door to HubSpot. And this is a couple of reasons, right? On the product side, we're now serving larger customers and more sophisticated use cases. The steady drumbeat of product releases that you've been hearing from us are just all aimed at expanding our Upmarket TAM and these are custom objects and CRM customization, deeper permissioning, more features for admins, All of that is working.

Speaker 2

In addition to that, over the last couple of quarters, we're also adding our ability to serve more Sophisticated use cases, right? I just talked about sequencing. That's something upmarket customers have needed much more ability to do. In addition to that sales intelligence forecasting, all of these are areas within the product. So huge kudos to the product team for keeping the pace of innovation that serves upmarket customers really well.

Speaker 2

In addition to that, our go to market side, the investments that we have made in upskilling our reps As well as the partner ecosystem is working, our sales teams live and breathe in our product every single day. So it's very easy for them to show Sales Hub demo and how that actually works with Marketing Hub and drives their own productivity and partners are very much enrolled in this journey of us Going up market. So, look, the momentum really comes down to meeting the needs of our customers in this moment. And We're very happy with what we're seeing and how we're able to deliver for our customers.

Operator

Thank you. The next question comes from the line of Elizabeth Porter of Morgan Stanley. You may proceed.

Speaker 8

Great. Thank you so much. I wanted to hit on the really impressive kind of net customer adds and get a better sense for where the incremental demand is Coming from kind of beyond that initial expectation for around 7,000 a quarter. So are you seeing HubSpot actually displace Other vendors or is there still a lot of greenfield deployments at the low end that you're landing? And second, just how durable is this trend?

Speaker 8

Thank you.

Speaker 3

Yes. Thanks, Elizabeth. I think in general, these are really small early stage companies that are in large part trying Free tools and converting from free tools into Starter. And so I would think most of them are coming from a more greenfield Place then, HubSpot is placing someone else. Now if I look at the quarter over quarter trend in net customer adds, Like we are obviously very excited about the 9,900 new adds.

Speaker 3

The vast majority of the increase quarter over quarter is coming at that starter tier. And there are a couple of things that are driving it. Yamini talked about the healthy volume we are seeing of free sign ups as a result of our strong top The funnel demand, we are also continuing to test pricing optimization levers as we do frankly on a regular basis And that is also working. That said, like Q1 always has tended to be seasonally strong. I do not We're going to stay at 9,000 customer adds, but we do feel good about net adds continuing to remain strong.

Speaker 3

I would advise 7000 to 8000 range over the next couple of quarters, with the biggest variable there being, how the starter additions behave.

Operator

Thank you. The next question comes from the line of Josh Riley of Needham and Company. Please proceed.

Speaker 7

Hey there. Thanks for taking my question. Nice job on the quarter here. Can you give us a sense of how the direct versus the partner business is performing over the last couple of quarters here? I think last year, You made the comment that the partner business was performing stronger into the downturn and what are just the dynamics or additional color there?

Speaker 7

Thank you.

Speaker 2

Hey, Josh. Thank you for the question. This is Yamini. Both Direct and partner are executing as planned. We've shared in the past that Our strategy with the partner ecosystem is we want to be able to scale both selling as well as servicing with partners.

Speaker 2

And in the last couple of years as we have gone upmarket and as we have really transitioned from being A marketing automation company to a CRM platform, we've really spent a lot of time as well as energy and efforts with our partners To bring them along that journey and that strategy is working. So as you look at like Q1, the partner ecosystem performed well. When you talk to partners, I know many of them talk to partners, you'll hear them talk about multi hub deployments and as well as Leading us a little bit up market. So they are helping us in that journey and there's just a lot more joint co selling. And if you step back and think about what do customers want as they in this environment make decisions, they want High returns and low risk and therefore jointly executing with partners and having clear migration implementation and Change management plans are really working.

Speaker 2

The direct side is going along with that. And so there's still the healthy balance of About 40% of our installed base coming from our partners and the rest is from our direct and both are Executing really well.

Operator

Thank you. The next question comes from Rishi Jaluria of RBC. Please proceed.

Speaker 9

Wonderful. Thank you so much for taking my question. And nice to see continued strong execution. I wanted to ask another generative AI question and kind of go back. Yeah, I mean, in your prepared remarks, you talked about the ability for people to businesses to use generative AI on the back end to generate code.

Speaker 9

I want to think about from your perspective, how do you see your ability to use generative AI maybe to iterate Features and functionality faster and potentially narrow the gap with some of the upmarket players that maybe customers want to move on to HubSpot, But some of those features and functionality may be missing, just how should we

Speaker 7

be thinking about that? Thanks.

Speaker 10

Yes. Thanks for the question, Rishi. This is Dharmesh. So a couple of things on generative AI with HubSpot. One is we're making the investment to make generative AI part of the HubSpot framework.

Speaker 10

And that gives us 2 things. It gives us kind of short term speed to market, because all of our product teams can now benefit from the generative AI features we're building in The core platform, but we think it has wide applicability across the entire suite of application hubs within HubSpot. So that's what gets us to be really excited. And one thing that kind of gives us an advantage in terms of versus other companies is that HubSpot grew up with a organically built For SMB platform where all the data is cohesively stored and normalized. And this becomes very, very important because in order to kind of get the value from generative AI, You need to be able to kind of use the existing data that you have.

Speaker 10

It's not about having tens of millions of records. It's about having all the data points on individual customers so you can provide context The generative AI models to say, oh, we know which web page do this customer in. We know how many times they've interacted with us. We know if they have a support ticket in Service Hub or not. We know Exactly all the sales interactions we have, we can take all of that context and use it for a generative AI model.

Speaker 10

And one of the benefits To companies like HubSpot that has this kind of very rapid iteration, get something in the hands of users, is I believe and the team believes that They who can actually get something in users' hands and get that feedback and have a very tight feedback loop are the ones that win. So what we think generative AI levels the playing field in terms of And we think HubSpot is uniquely positioned to kind of benefit from generative AI given our organic approach to building the platform and the way we

Operator

Thank you. The next question comes from the line of Gabriela Borges of Goldman Sachs. You may proceed.

Speaker 11

Good afternoon. Thank you. I will stay on the generative AI topic either for Dharmesh or for Yamini. I wanted to follow-up on Your comments on leveling the playing field. Do you think over the longer term this leads to less crowdedness or less competition in the front office stack?

Speaker 11

And then I wanted to ask directly about the trade off between efficiency and effectiveness. What are your thoughts on The potential bear case on if marketing people and salespeople become more productive and HubSpot has a seat based model, How do you think about the risk that seats go down while you're monetizing incremental functionality on the way up, if that makes sense? Thank you.

Speaker 2

Great questions, Gabriela. Thanks for that. Maybe I'll start and then Dharmesh, certainly feel free to join here. We do think of it as leveling the playing field, especially for SMBs. One of the things that we've been very consistent about is taking powerful technology, Susticated technology and democratizing that for SMBs.

Speaker 2

And that's exactly what we are trying to do with generative AI. SMBs typically don't have large teams of AI experts sitting and we want to be able to bring it in with the same power and ease of use and That will allow our customers to really compete effectively within the market. I think the second question you Ask was really around how we think about effectiveness versus efficiency. And look, I think it's very hard to predict In the long term or maybe even the next 3 to 5 years, what happens with a lot of the jobs. From our perspective, Some jobs are going to become less relevant and more automated.

Speaker 2

At the same time, AI is probably going to create more jobs and new skills. It's a little too early to predict longer term. Having said that, our belief is that AI will not replace humans. But humans who use AI will replace humans who don't use AI and we're in the business of helping humans use AI much better. And that's exactly what you're seeing in terms of our strategy.

Speaker 2

The first stage of our strategy is to help people to drive better outcomes, Lot more in terms of the effectiveness focus and you can already see this happening with Content Assistant and Chat Spot and that's empowering our customers to drive Better outcomes, not just like save time. And the next stage is really taking generative AI and really making it applicable across our platform. Dharmid just talked about how we think about it from a framework perspective. It's like one of our primary colors and Repeatable tasks can be commoditized and the real value is going to come from that last mile of human intelligence. So We are of the mindset that this is going to drive to better outcomes for everybody within the front office.

Speaker 2

Dharmesh, anything else that you'd want to add?

Speaker 10

Yes. What could I add just in terms of the kind of the long term view on generative AI overall. Right now, Kind of 95% of the attention calories are in use cases where we take natural language and convert them to something that a human is going to consume, via a blog post or an image and we'll eventually see video. And I think 95% of the opportunity for companies like HubSpot He's actually using natural language prompts and generative models to create codes meant for computers. So we can look at examples like creating a report definition in HubSpot, Creating a custom workflow action in OpsHub, all of these things where we can take things that were historically, only accessible to like a small percentage of the users within the company And we can expand that now so that a larger portion of people can generate sophisticated reports, can write custom workflow actions, can do data cleansing and all these things.

Speaker 10

So just put power tools in the hands of many more customers. So we're just very excited about that kind of ability to kind of democratize and make things easy, which is what HubSpot has always been known for.

Operator

Thank you. And on behalf of the management team, I would like to ask that you limit yourself to one question. The next question is from the line of Brent Bracelin of Piper Sandler. You may proceed.

Speaker 12

Thank you. Good afternoon. Obviously, really impressed here with the number of net adds in Deslyta, Obviously, pretty challenging backdrop. I wanted to ask maybe a longer term question around vendor consolidation, which Feels like there's a longer term tailwind here. You talked about 1 customer consolidating 8 tools down The combo of Sales Hub and Marketing Hub, where are we at in that cross hub, Cross sell opportunity relative to the installed base, we're not quite seeing any ARPU yet given the Volume increases we're seeing at the low end of the starter, but it feels like longer term there's an opportunity.

Speaker 12

So can you just address Vendor consolidation, how meaningful can that be as a POINT looking out to 24, 25, 26? Thanks.

Speaker 2

Yes, sir. It's a great question. And I do think this is a longer term trend that we are beginning to see. And maybe if you kind of like step back and think about the last couple of years that our customers have come from, Our customers took a couple of different paths. Either they had a lot of point solutions, which Become really hard to be able to manage both from a cost as well as the complexity of The overall stack perspective or they went with maybe legacy enterprise class solutions and They've coded themselves into a corner.

Speaker 2

And when I talk to customers now, they want something that is powerful, That is simple, that provides the entire visibility across their customer's journey and it's cost effective. And you look at HubSpot, we do all of that. This is why the strength in terms of customer addition even in the current MaxSold kind of like backdrop is not surprising because it is very clear that we are becoming a platform For SMBs as well as scaling companies. Now you asked the question of, how does this play out? It's very early days.

Speaker 2

When we look at our install base as well as when we talk to prospects, it's pretty early days in this type of consolidation and we want to build The best in class marketing sales service solutions that can drive value for customers. And so We're going to keep the pace of product innovation and I think that we still have long way to go in terms of I've seen this consolidation play through.

Operator

Thank you. The next question comes from the line of Brad Sills of Bank of America. You may proceed.

Speaker 13

Wonderful. Thanks for taking my question. Great start to the year here. I wanted to ask about Operations Hub. Yamini, you called it out as an area of strength.

Speaker 13

We're certainly hearing that from the channel. Would love to get your perspective. To me, this seems like the platform. You're running 2 or more hubs. You need the glue to automate workflow across different hubs using Operations Hub.

Speaker 13

Is that why you're starting to see the success now with Operations Hub? In other words, you're getting to the point where customers are running more customers are running 2 or more hubs, they need that glue. Just any color on what's driving that operations hub strength?

Speaker 2

I love this question, Brad. And you actually gave the answer. You hit it on the other hand. It is that we are seeing a macro driven front office unification. And I also think that Operations Hub is like the perfect glue that brings together marketing, sales, other hubs, but gives the value, right?

Speaker 2

I mean, if you Really think about what it does. It brings data from multiple sources. It's able to automate like workflows and Better insights from just more sophisticated datasets. And so you hit the nail on the head in terms of why operations Hub is seeing, in attraction. Maybe a couple more points of color, in terms of how our product efforts as well as go to market efforts We have expanded value for our customers, particularly around data quality.

Speaker 2

Now late last year, we launched some major updates to operations hub capability, particularly around data quality and portability. And you may remember us talking about data quality command center. That has been a pretty big hit with our pro and enterprise customers. In addition to that, we've also ramped up our own Enablement efforts around advanced capabilities. Now selling technical products like data warehouse connectors and Custom code actions is always difficult.

Speaker 2

By the way, custom code actions in workflows is like one of my absolute favorite new features in ops hub. So much value for customers. But one of the things that we have done is like continue to enable our direct teams and partners to showcase the value of these Sophisticated features. And so, it's still super early innings in terms of operations hub, but it's on an Exciting path and I'm very happy with the momentum that we saw in Q1.

Operator

Thank you. The next question is from the line of Alex Zukin of Wolfe Research. You may proceed.

Speaker 4

Hey guys, this is Ryan on for Alex. Thanks for taking the question and congrats on a great quarter. So my question is around retention. At 104% this quarter, it did decelerate faster than last quarter. And with the environment still tough, what's your level of confidence that it can stay above 100%?

Speaker 4

And if that is the expectation, how are you thinking about when it could normalize? Thanks.

Speaker 3

Yes. Thanks very much for the question. I think we've talked about this in the past. There's really 2 types of retention or 2 pieces of retention that we pay a lot of attention to internally. Gross retention that we refer to as customer dollar and net revenue retention.

Speaker 3

Customer dollar retention, we continue to see general stability in customer dollar retention in the high 80s. We expect That gross retention is going to hang in that zone for the rest of 2023. On the net revenue retention side, You are right. We did see a step down of 3 points from Q4 into Q1. And we're seeing that step down Across all the same reasons that we've been talking about for the last few quarters, right?

Speaker 3

There is a pressure that we are seeing from our Customers really optimizing their spend of HubSpot that is particularly notable in contacts and seats. We are also seeing some of Our multi portal customers now leveraging some of the upmarket features to consolidate their portals in HubSpot. In addition, we are seeing customers upgrading seats and contacts at a slower rate than we have in the past. And we think that we're going to continue to see those But where we see where we think that we're going to see some balance is a couple of other trends. We continue to see Solid trends in upgrading.

Speaker 3

You see the volumes from starter into professional at pretty consistent upgrade rates. We're seeing a bit of benefit from some of our recent pricing adjustments and that in combination with the solid gross retention really in that high 80s Is what gives us confidence that we can retain net revenue retention of above 100 for 2023. Now We still believe that 110 is the right benchmark for us in terms of net revenue retention over the long term, but that's

Operator

Thank you. The next question comes from Ken Wong of Oppenheimer. You may proceed.

Speaker 7

Great. Thanks for taking my question. This one is geared towards you, Kate. I believe last quarter you characterized the macro environment as kind of not better, but not worse. As you exit Q1, I guess what's the right thinking in terms of what's baked into the outlook?

Speaker 3

Yes. Thanks for the question. I tried to share in my prepared remarks a bit Color around just that. The external environment really does remain difficult and we assume that it remains difficult throughout 2023. As you know, we've approached guidance in a very consistent way.

Speaker 3

We did the same thing in Q1 and really tried to set guidance that contemplates A whole variety of scenarios. Our baseline assumption is that the remainder of 2023 feels like Q1, it feels like the back half Last year, it's still early in the year, and the external environment has been really volatile. FX has been very volatile. And we want to deliver against guidance with that baseline assumption or even if things get a little bit worse.

Operator

Thank you. The next question comes from the line of Michael Turrin of Wells Fargo. You may proceed.

Speaker 5

Hey there. Thanks. I appreciate you taking the question. And look, there are so many good big picture questions I'd like to ask, but I'll go into a metrics question instead because it's something we're getting some questions on. There are some moving pieces in terms of currency with respect to the results And the change in assumptions on the guide.

Speaker 5

And so if we look at the Q1 number and the change in currency for the rest of the year, it looks like The second half constant currency assumptions for revenue might actually come down a touch on a constant currency basis. So I just want to understand if that interpretation is accurate and Maybe just help us split out the currency movements versus just any fundamental change and what you're thinking through and contemplating with the rest of your guidance. Obviously, Great job across the board on the Q1 results. Just looking for some clarity there. Thanks.

Speaker 3

Yes. Thank We executed. We're happy with the execution in Q1 despite the challenging macro. And as you point out, we raised the full year by the full amount of the Q1 Which I think does speak to the confidence that we have in the business. But as you heard from both Yamini and I, the macro remains challenging.

Speaker 3

It's Very volatile, including FX. We're not out of

Speaker 2

the woods yet.

Speaker 3

And on top of that, we're still early in the year. And so we took all of this into account when we set the guidance for the year. Our philosophy on guidance remains the same. Now we're aiming to put out guidance that we have a high degree of confidence in being able to achieve across a variety of scenarios.

Operator

Thank you. The next question comes from Brian Peterson of Raymond James. You may proceed.

Speaker 14

Thanks for taking my question And congrats on the strong quarter. So I wanted to unpack what's driving the average revenue per customer hire. I know we kind of hit on that a little bit, But it's just amazing to see the net adds and that figure is still up 3% year over year. So is the cross sell Sales cycles in the enterprise, are those actually getting better or the vendor consolidation or ROI for customers? I'd love to just maybe understand what's happening Up market for that figure to be growing 3%.

Speaker 3

Yes. Thank you, again for that one. There is really 2 things happening in ASRPC. We continue to see multi hub adoption broadly across our professional and enterprise And that is offset by sort of the volume that we are seeing at the low end. If we just look at professional and enterprise, ASRPC continued to be up double digits in constant currency in Q1.

Speaker 3

It's the headwind from the volume starter customers that is moving the ASRPC from that sort of double digit level to 6% in constant currency.

Operator

Thank you. The next question comes from Arjun Bhatia of William Blair. You may proceed.

Speaker 15

Perfect. Thanks for taking the questions. Kate, maybe another one from I'm just trying to reconcile a little bit the comment about upgrades still happening, right, customers wanting more capabilities, more features Versus there are still being some headwinds around optimization, seats, contacts, etcetera. Is there any kind of Characteristics amongst those customers that you can point out that maybe we could hang on to where you're seeing A specific vertical or a specific customer size do one versus the other?

Speaker 3

Yes. I mean, it's a good question. These are not new trends for us. We've been seeing the same type of pressure and dynamics within our customer base over the last few quarters. And what we are seeing is a focused Initiative to get the most out of their spend with HubSpot, I don't believe we're alone in that.

Speaker 3

And that for us comes in the form of them cleaning up their contacts, cleaning up unused seats. It comes in the fact in consolidating when they're on multiple portals, consolidating using all the features that they have signed up for. That doesn't mean that our customers are continuing to use more of our products, but what we're seeing more and more is that as an offset. They're doing the cleanup in conjunction with the expansion.

Operator

Thank you. The next question comes from Parker Lane of Stifel. You may proceed.

Speaker 16

Yes. Hi. Thanks for taking the question. Circling back to the partner ecosystem, I mean, I know you made some changes there earlier this year around compensation levels of partners And what they need to do to continue their relationship financially with HubSpot, you want them selling and servicing partners. Do you expect there's going to Partners, do you expect there's going to be some consolidation in that channel in 2023, 2024?

Speaker 16

And then what exactly are you guys doing behind Seems to upscale those partners to get them in a position to be more effectively servicing the customer base. Thanks.

Speaker 2

Hey, Parker. Yes, thanks a lot for the question. I think maybe 2 parts there. I'll first Start with the changes that we made and then answer the second part of your question. I'm really pleased with the response from the partner channel.

Speaker 2

And since the announcement and even before the announcement, I've spent a lot of time talking to our partners, Elite Diamond In terms of the change and just to step back, we really looked at our partner commissions and we are incentivizing our Partners to have more consistent engagement with our customers, to sell and co sell more with us And to do more multi hop. And, the partners understand the why behind the change And we're also giving partners a lot of time to be able to adapt, which they appreciate. And so At the end of the day, the changes that we made are going to be a win for customers and therefore good for partners as well as HubSpot. And at the margin, we're actually seeing Some of the partners increased their engagement with our customers as a result of this. The second part of the question is, do we think it's going to lead to some level Consolidation, how do we enable the partners?

Speaker 2

I think it will. And the it's not necessarily because of the Commissions changes, but it's because we are moving up market and we are guiding our partners to be able to scale to better serve the needs of upmarket customers. And as we do that, we are definitely beginning to notice that Partners are either already consolidating or figuring out ways to scale and therefore The percentage from Elite Partners from Top Partners is probably going to increase as we continue the transition to Driving multi hub as well as serving the needs of off market customers. And our Focus on partner enablement is really high. We've been really on this journey to enroll them, to drive more Certification, there's an upcoming certification week that's coming up for partners and we're putting a lot behind that and we'll continue to drive the level of Technical capabilities within the partner ecosystem.

Speaker 2

Overall, really happy with the response and where our partner ecosystem is going.

Operator

Thank you. The next question comes from Terry Tillman of Truist. You may proceed.

Speaker 13

Great. Thanks so much for taking the question and congrats on the quarter. This is Bobby De Jong for Terry. Curious what you're seeing globally in terms of

Speaker 2

Thanks. Hey, Bobby. Thanks a lot for that. Overall, Fairly consistent in terms of what we are seeing in North America as well as our international markets. As Kate just mentioned, International is about 46% of our overall base and growing reasonably well.

Speaker 2

There is not that much of a divergence in terms of The trends, what we see in terms of the longer deal cycles and more decision makers is across North America and international. And what we see in terms of the reasons why our customers want HubSpot is also consistent. We Deliver quick time to value, which is what is important across all customers. And most of the time value is in a matter of Weeks, not months or quarters. And customers really care about their costs and they're consolidating with fewer Platforms and so we see a lot more platform consolidation and multi hub conversations both in regional as well as international markets.

Speaker 2

And There's kind of a high bar to action across all customers, but we are executing in both markets with consistency.

Operator

Thank you. The next question comes from the line of Michael Turits of KeyCorp. You may proceed.

Speaker 17

Thanks for the question. Great quarter. I wanted to ask about the move up market and how you're pushing from the direct Channel, the direct sales force perspective, this is a year in which you've been increasing margins and you've had a rift. But so what are you doing in terms of investing in the direct sales channel to try and drive more engagement and how are you managing the costs on that?

Speaker 2

Yes. Thanks a lot for the question. Maybe I'll start with upmarket and what we're doing with the sales team and Kate, feel free to add in terms of the costs there. If we step back and think about why upmarket is working and what is upmarket For HubSpot, we're still very, very focused on the 2,000 to 2,000 employee segment. And for us, Upmarket is the 200 to 2000 employee segment.

Speaker 2

And if we think about customers there, They care deeply about cost savings within this environment and they care deeply about navigating the macro While driving resilient growth and HubSpot helps with both of those. We are powerful Solution that's still very, very easy to use and easy to implement and that's what is resonating within upmarket. As we've thought about our own sales teams and internally driving the efficiency, we've talked about this, we are driving More data into the hands of our direct sales reps. We are arming them with the right kind of Total cost of ownership as well as value messaging. This is the tightest level of alignment I have seen between Product, marketing and sales in terms of the key messages that we are delivering and our teams are very, very focused.

Speaker 2

And so I think From an internal standpoint, systems, automation, messaging, alignment are all in favor of driving Consistent execution there.

Operator

Thank you. The next question comes from the line of Taylor McGinnis of UBS. You may proceed.

Speaker 2

Hi. Thanks so much for squeezing me

Speaker 18

in and congrats on a really great quarter. The 1Q margin performance was really strong, particularly sequentially. So are you able to break that down and quantify the drivers of the uplift Like how much was from the restructuring, slower hiring and efficiencies in the business, just to help us think about the future margin trajectory and the durability of the progress that we're seeing?

Speaker 3

Yes, Taylor, it was a really good question. The margin upside in Q1 versus our expectation is primarily related to the restructuring. So revenue came in a little bit better than expectations on some favorable FX rates. But we frankly underestimated the impact the structuring would have on our overall hiring plan and resulted in really a delay in returning to our regularly planned hiring cadence. That said, we're feeling really good about where we are now.

Speaker 2

What this means is we expect to

Speaker 3

sort of return to that normal seasonal Pattern in our operating margins from this point on through 2023, Q2 margins are going to decline slightly. It's a typical sequential pattern for us with annual merit increases and, a return to the investment in hiring, as well as some hybrid connection. That said, we will expect that operating margins are going to expand through the back half of the year, with low double digits in Q3 and high

Operator

Thank you. And with that, we will conclude our time of question and answer. I would now like to hand the conference back over to Yamini Rangan, CEO for any closing remarks.

Speaker 2

Thank you so much for all the engaged questions as well as the support. Look forward to connecting back again in a

Operator

And with that, we will conclude today's call. Thank you for participating. You may now disconnect your

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Earnings Conference Call
HubSpot Q1 2023
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