HubSpot Inc (HUBS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the HubSpot third-quarter financial results conference call. (Operator Instructions) Please note that this call is being recorded today, Wednesday, November 12, 2014, at 5:00 Eastern Time.

I would now like to turn the meeting over to your host for today's call, Lisa Mullan, Director of Investor Relations for HubSpot. Please go ahead, Ms. Mullan.

Thank you; and good afternoon and welcome to HubSpot's third-quarter 2014 earnings call. Today we'll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is Brian Halligan, HubSpot's Chief Executive Officer and Chairman; John Kinzer, HubSpot's Chief Financial Officer; and JD Sherman, our President and Chief Operating Officer.

During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the fourth fiscal quarter of 2014 and the full year of 2014, our position to execute on our growth strategy, and our ability to maintain existing and acquire new customers. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date.

These statements are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectation. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our final prospectus filed pursuant to Rule 424(b) on October 9, 2014, as updated by our other SEC filings.

Finally, during the course of today's call we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release issued after the close of market today, which is located on our website at HubSpot.com.

With that, it's my pleasure to turn the call over to HubSpot's CEO and Chairman, Brian Halligan.

Thanks, Lisa. Thank you all for joining us today, our first call as a public company. The IPO is an exciting milestone for our employees, customers, investors, and partners. I want to thank all of them for their confidence in us over the years, and I want to welcome our new investors.

Today I'm going to focus on three things that I am particularly excited about: our recent INBOUND conference, the launch of our sales products, and our strong Q3 business results. Before digging into each of these areas, I want to say a brief word about what HubSpot is, as some of you may be new to our story.

HubSpot is an inbound marketing and sales software-as-a-service company based in Cambridge, Massachusetts. We started HubSpot because we noticed that the traditional marketing playbook was broken: email blasts were blocked by spam protection; cold calls were blocked by caller ID; TV ads were blocked by DVRs; etc., etc. Humans had radically changed the way they shopped and bought products, and HubSpot's vision was to help companies transform the way they go to market to match the way humans actually behave.

In order to transform your marketing without using HubSpot, a company would have to buy blogging software, a new website, search engine optimization software, social media management software, and marketing automation software, and then have a team of IT people try to glue it all together. We call this a Frankensystem.

What HubSpot does is not only teach companies how to transform their marketing but gives them an all-in-one system to enable mere mortals to pull this type of marketing off: one platform to learn, one phone number to call, one payment to make, and one password to remember.

Our target market is companies between 10 and 2,000 employees. It's a large and underpenetrated market.

There are 2.9 million companies with between 10 and 2,000 employees in North America and Europe with a web presence. Multiply this by our average revenue per customer, and we are looking at a $25 billion TAM.

And, based on a study of US B2B companies, only about 3% of these businesses have implemented a marketing platform. As you can see, we believe the market for HubSpot's marketing platform is virtually untapped.

Ironically, what I love about the mid-market is it's hard to penetrate. Most companies take ye olde enterprise sales playbook and attack the mid-market with it. It almost never works.

At HubSpot, we have tailored our go-to-market playbook to perfectly fit the mid-market with three specific plays. First, we go to market through inbound as opposed to outbound marketing. We pull in tens of thousands of organic leads a month by drinking our own Champagne.

Second, we are a software company, but we're also the spiritual leaders of a large inbound movement that helps propel us forward.

Third, we go to market through agency partners, of which we have over 2,000, who resell and promote our products for us. One of these resellers is Pyxl, a digital marketing agency with offices in Knoxville, Boulder, and Scottsdale.

Last week I met with Brian Winter, the CEO of Pyxl, when he and his team came to visit us here at HubSpot. Since signing on with HubSpot in 2012, Brian told me about their tremendous growth and how they were named to Inc. Magazine's list of America's fastest-growing private companies last year and this year. Very exciting.

Today, Pyxl is a Gold HubSpot Partner, having signed up many customers for us. HubSpot has hundreds of awesome partners like this that go to market hand-in-hand with us.

Our vision on how to market in the modern world, our unique product, and our go-to-market model has translated into nearly 12,500 customers worldwide using our marketing platform to grow their businesses. One of these customers is a young man named AJ Driscoll, from PSMJ, a 50-person architecture and engineering firm. I spoke with AJ a few weeks ago, and he told me about the firm's transformation with HubSpot.

AJ was an intern at the firm and was put in charge of marketing. Before digging into HubSpot, his website had generated a grand total of zero customers all time. A year after, AJ has their marketing singing: in the last year he's generated 2,833 leads through his website, and 124 of those have converted into paying customers.

I love this story, because it's one I hear over and over and over and over again. This is a very typical HubSpot story. It really helps customers grow.

Now that I've talked to you a bit about HubSpot, I'll talk briefly about INBOUND. INBOUND, for those of you who haven't been before, is an annual conference here in Boston that we organize for the INBOUND movement.

This year's event brought over 10,000 registered attendees to Boston, up from 5,500 last year and 2,800 the year before. INBOUND is a key part of our go-to-market strategy, as it serves as a routing point rallying point for the INBOUND community. It's a great event; and I hope those of you who couldn't attend this year will consider joining us for next year's conference, September 8 through 11 in Boston.

Now, earlier in the call I mentioned the shift we saw in the marketing space when we first started HubSpot. Now we're seeing a similar shift in the world of sales.

When I was a sales rep back in the day, it was a buyer-beware world. If a prospect wanted a discount, she had to come through me. If a prospect wanted to speak to my founder, she had to come through me. If a prospect wanted detailed product specs, she had to come through me.

The asymmetric information put all of the power in the sales rep's hands.

Today, if a prospect wants more information about your discounting policy, she can check it out on G2 Crowd or Quora. If she wants to talk to the company's founder, she can use LinkedIn or Twitter. If she wants detailed product specs, she can visit the company's website.

The information symmetry that exists today creates a power shift from the sales rep to the buyer. We've moved from a buyer-beware world to a seller-beware world, and I believe this will create massive changes in how companies sell their products in the future and opens up a big opportunity for innovation in the space.

The sales system most companies use today is CRM. The problem is that CRM systems don't help the sales rep deal with this new reality. CRM systems are built to help the VP track sales, but don't help the sales rep make sales.

So we've come out with two new products to help companies lean into the new buying process and make their sales reps' lives more productive. The first product, called Sidekick, is for the sales rep only and is designed to enable that sales rep to match the way they sell with the way the buyer buys today. It lives in the sales rep's email system and gives them huge context around the prospect's website activities, social activities, and email activities.

I'd encourage all of you to check out Sidekick at www.Sidekick.com. It's a premium model; product's awesome. I think you will like it, as well as salespeople.

The second product is the CRM system. We here at HubSpot use and really like salesforce.com's CRM system, and we use it in conjunction with Sidekick. But many of our prospects are not sophisticated enough for salesforce.com, so we've built them their own CRM system.

This system is unique in that it self-populates from the rep's email and browsing activities. The reps don't have to spend hours per week doing data entry.

It's the early innings for our sales product line. In fact, it's probably the top of the first inning, but we are really excited about the possibilities here for our new offerings.

Last but not least, we delivered really strong business results in Q3, featuring accelerated annual revenue growth of 51%, an increase of 854 customers compared to the second quarter of 2014, and solid traction in international and agency partner growth.

Now I'll turn it over to John Kinzer, HubSpot's CFO, to drill into the financial results for the quarter.

Thanks, Brian. This is an exciting time for HubSpot for several reasons. Our business is growing fast; we are seeing improvements in margins; and as Brian said, there is lots of runway for future growth.

First let's talk about the top line. Third-quarter 2014 revenue grew 51% year-over-year compared to 48% year-over-year growth in the second quarter of 2014. Growth was driven by adding new customers, growing revenue per customer through upsells, and improvement in revenue retention.

HubSpot ended the quarter with 12,478 customers, up 31% year-over-year. Average subscription revenue per customer increased to $9,183, up 15% from the third quarter of last year.

Revenue retention continued to improve and is now trending in the low 90%s. Although we will not be providing a specific revenue-retention figure each quarter, you can expect us to continue to give you color on how our revenue retention is trending.

Both revenue retention and average subscription revenue per customer are benefiting from upsells. Upsells are driven by increasing the number of contacts in a customer account; customers adding second URLs to their subscription; and, to a lesser extent, customers upgrading the edition of the product they are on.

Billings for the third quarter came in at $32.7 million, up 49% versus the third-quarter 2013. Similar to others, we define billings as the change in total deferred revenue from the prior quarter plus total revenue for the current quarter.

We have stated previously that we would give you color on billing terms. And, consistent with recent quarters, in the third quarter we received between six to seven months of payment upfront from our new customers.

International represented 22% of our revenue in the quarter and grew 86% year-over-year. With lots of greenfield opportunity, we expect international to continue to be an important driver of HubSpot's future growth.

Our partner channel is another important part of the growth story, both on the domestic and international fronts. Our partner channel is experiencing terrific growth.

Moving on to the expense side, given the huge opportunity in front of us, we have been investing heavily. This has included investments to grow our customer base, to improve on our existing products and add new products, and to expand internationally, most recently opening an office in Australia.

We also increased headcount to 139 people year-over-year, and we currently have 767 employees. We are disciplined in how we invest in the business; and even with heavy investments, our business is scaling. This can be seen in the third-quarter margins.

Year-over-year we saw an operating leverage on a non-GAAP basis across most expense line items. The subscription margin improved 3 points to 76%; R&D as a percentage of revenue improved 5 points to 15%; sales and marketing as a percentage of revenue improved 3 points to 69%; while G&A as a percentage of revenue was up slightly, as we incurred the increased costs of preparing for our public offering in the fourth quarter of 2014.

I would like to point out that the third-quarter results are seasonally impacted by our INBOUND conference. As Brian mentioned, we attracted unprecedented attendance at this year's conference. This is an annual event, and we experience an increase in marketing spend each year from this event.

This year the cost of INBOUND drove up our sales and marketing expense as a percentage of revenue by 9 points. Our operating margin calculated by removing the INBOUND expense would be a loss of 23%, a 3 point improvement in operating margin quarter-over-quarter.

Thinking ahead, investors should also note that, like other companies, we experience a seasonal increase in cost during our first quarter from higher FICA expenses and employee wage resets. These costs could distort underlying improvements in margin expansion.

Another item I would like to discuss is taxes -- or the lack of taxes, in our case. As of the end of 2013, we had a tax-effected net operating loss balance of $35 million. We should be able to use this to offset future tax burdens once we turn profitable.

Lastly, one housekeeping item. Our cash balance as of the end of third-quarter 2014 was $12.4 million, while we had $18 million drawn on our line of credit.

We closed our IPO early in the fourth quarter, as we raised just under $134 million, net of the underwriters' discount. We used a portion of the IPO proceeds to pay off our line of credit.

Now, on to guidance. Today we will be giving you fourth-quarter and full-year guidance for 2014.

For the fourth quarter of 2014, total revenue is expected to be in the range of $31 million to $32 million. Non-GAAP operating loss is expected to be in the range of a loss of $7.8 million to $6.8 million.

Non-GAAP loss per share is expected to be in the range of $0.28 to $0.25. This assumes 29.2 million basic shares outstanding, which includes the impact of the partial quarter of the pre-IPO shares since we closed our public offering early in the fourth quarter.

For the full-year 2014, total revenue is expected to be in the range of $112.7 million to $113.7 million. Non-GAAP operating loss is expected to be in the range of $32.8 million to $31.8 million.

Non-GAAP loss per share is expected to be in the range of $2.80 to $2.90. This assumes 11.6 million basic shares outstanding. Now the number of shares may seem low, but it is a result of the preferred shares that had not been converted to common prior to us going public.

In closing, thank you to our newest investors for taking time to learn more about HubSpot and for supporting us in our IPO. We are excited about the fundamentals of our business today and what the future has in store for HubSpot. With that I'd like to turn it back to Brian for a few closing remarks.

Thanks, John. For those interested in hearing more about HubSpot, John and our COO, JD Sherman, will be presenting at the UBS conference in November. We will have the recording of that presentation up on our IR site for those who want to watch it remotely.

Most importantly, I'd like to thank our customers, our employees, and our partners for making the third quarter such a success. One of my favorite elements of our S-1 was a quote on the back cover from Dharmesh Shah, my cofounder, that said: "Success is making those who believed in you look brilliant." It's always been our aim since we started HubSpot to deliver upon that promise, and both our initial public offering and strong third quarter reflect our commitment to making good on that hope for many years to come.

At this point I'd like to turn the call back over to the operator to give instructions for the Q&A portion of our call.

(Operator Instructions) Terry Tillman, Raymond James.

Great start here as a public company. Congratulations.

Thank you.

Thanks, Terry.

What I was wondering, Brian, is: this year I think you said attendance was up 80% year-over-year. I mean, it was a huge crowd there and I was impressed with all the noncustomers there. I know you have a lot of folks come just from the thought leadership standpoint every year that aren't customers.

But anything you did differently this year to try to more immediately monetize all those noncustomers that are in attendance, and hearing about all the new products, and how we can think about that potentially positively impacting net adds over the next couple quarters? Or am I thinking about that the wrong way?

No, I think you're thinking about it the right way. The back story there is a couple of months before the INBOUND conference, we hired a new VP of Sales from salesforce.com, Hunter Madeley, and one of his big initiatives is he wanted to get more prospects there.

And I think on the margin as a percentage we probably had more prospects than we had in previous years. I think it was something about 40% of the attendees were noncustomer, non-partners; but I don't think it was materially different than years before.

I suspect in years going forward we will do a better job of using it as an event to drive business. But pretty similar to previous years, Terry. Really good question.

Thanks, Brian. I guess, John, in terms of -- how do we think about seasonality, though? Because folks will -- investors will look at each quarter, the progression in net adds. Is there something we should think about in terms of seasonality, in terms of adding customers in the fourth quarter, versus the cadence of earlier quarters in the year?

No. I mean, Terry, one of the great things about the business is we really run it as a monthly business, and we really drive to those adds throughout the year. You see a little bit of seasonality in the fourth quarter, but really it's pretty even throughout the year.

Some of the seasonality we do see is just on the expense side. As you saw in the third quarter, we actually -- you brought up INBOUND; we had that higher cost in the third quarter just from INBOUND, which drove down our margins. But other than that, the business comes pretty evenly throughout the year.

Jennifer Lowe, Morgan Stanley.

Great, thank you. I wanted to touch a little bit on the rate of new customer adds. In particular, it looks like the rate of your customer growth on a year-over-year basis has been accelerating over the last couple quarters. So just curious to get your thoughts there on what might be benefiting you in terms of the logo acquisition?

Hi, Jen. Thanks for the question. It's Brian.

I think things have just been going well for the market. I think you are seeing very early days in the markets.

There's millions of potential customers, and we're just scratching the surface. I think something like 3% of the target market has implemented a marketing platform.

Frankly, two, three, four years ago, it was a very evangelical sale, and the market's sort of maturing. People are waking up to the fact that they need a marketing platform, and they are turning to HubSpot. I think that's one big reason.

I think the sales execution's been solid. We brought in some new sales leadership; they are doing a nice job. And the retention has improved as well.

So across the board, it's just been pretty solid. There is not one big, unusual thing that's going on.

Great. Since you filing to go public and then going public in fact, how has that been received by your customers? Has that translated to more brand awareness? Any benefits that you've seen as a result at this point?

That's a very good question. We're actually working on a blog article about the impact of an IPO on brand and that kind of thing.

It turns out there wasn't a big bump for us in particular. There was a little bit of tiny increase in traffic and leads, but it was pretty minimal.

I would say it's had a nice positive impact on our employees and our investors. Those guys are really excited. But I haven't seen a material change in customer behavior or customer attitude.

Then just one last one for John. It looked like the revenue came in about $3 million better than we in the Street had been forecasting. But the operating income was about $2 million better, which would suggest maybe there was $1 million of extra spend relative to what we had been expecting.

Was there anything that -- either hiring that happened sooner than expected, or expenses related to INBOUND, or anything that came in higher than you would have expected from the expense perspective?

No, I mean INBOUND basically came in as we expected. Given the performance we saw, we have been investing heavily in sales and marketing and hired more salespeople. So we see a huge opportunity out there, and we are capturing it.

Great, thank you.

Richard Davis, Canaccord.

Hey, thanks very much. One operational question and then one strategic one. On the operational one, when we think about strategy which lever, ARPU or churn, do you think you have the most leverage to improve on over the next couple years?

Then the second question is -- and I got this question actually from an investor; so I wish I could tell you it was my idea, but it's not. But anyway we were musing over the fact that the CRM system makes tremendous sense.

But the question I got was, he said: Well, does that implicitly -- if you do CRM does that -- are you implicitly saying that inbound marketing is more effective when it is part of a broader marketing suite, or not? That was really the follow-on question. Thanks.

You want to answer the first question, John?

Yes, sure; sounds good. Richard, I would say we have probably equal opportunity to move both of those levers. They both benefit from upsell. As we go back and sell more to our customers that increases the average revenue per customer as well as can improve the upsell rate, which goes into revenue retention.

But we also have been improving the underlying renewal rates from a customer standpoint as we continue to improve the product itself, how we service our customers, and how we onboard those customers. So we feel like we have opportunity across those lines.

Yes. On your second question regarding CRM, a really good question. About 40% of our customers have a CRM system in place, whether it's from salesforce or Microsoft; there is a bunch out there.

60% effectively use HubSpot's contact management system as their CRM system, and by far that was their number-one enhancement request. They wanted us to build basically a CRM system just for them.

So that's our offering there. We built our customers a CRM system.

It's a really good fit for them. It's very lightweight. It's not two different apps: it's one app with a marketing system.

It's in beta right now. It's only being beta-ed by our existing customers, not noncustomers. We've got thousands of people on the beta, and they are really enjoying it, so we're really excited about that.

The other product, Sidekick, that goes alongside the CRM products, really exciting. It's a sales acceleration product. You can use that with our CRM system or any other CRM system.

We have over 100,000 active users of that product. It's a premium model. We think that's a very, very exciting opportunity for us.

Both of them are really exciting. It's early days; we're not giving guidance on them, but we are super excited about the potential.

Got it. Thanks, guys.

Brent Thill, UBS.

Brian, nice to hear Jerry Garcia open up the conference call on the hold music.

(laughter) I knew you'd like that, Brent.

Just to follow on, on the sales solution. Clearly a lot of interest at the conference, and I know you're -- it's still beta.

But when you think about -- as you are rolling out the new functionality, you have three primary sleeves of how you can pay. Do you see this as being embedded in one of those sleeves going forward? Is this going to be a separate breakout? I don't know if it's too early to call yet, but I've been getting a lot of questions about how you think about monetizing this.

Do you want to answer that, JD?

Yes, sure. Brent, it's JD. I think because we're in really early days here, we're really focused on growing that user base really rapidly right now. Kind of like coiling the spring, so that as we start to monetize this we have a big user base that's adopting it with a product-driven freemium funnel.

What you've seen on the Sidekick side already is that we introduced it initially as a free product in beta a year ago, then we introduced a $10 version of it, and now we have a $50 version of it. What we are seeing is the product adoption -- the upgrades happening in a real touchless freemium way. And I think that's the way we will continue to build, particularly on the Sidekick side.

The CRM, it's a little early to tell. Again, we want adoption. We want our customers to be able to adopt and use the CRM system.

But I think over time as we add functionality to that, we'll have -- very similar to what we're doing with Sidekick, we will have versions that are more functionality, have some higher limits, and we'll get customers to upgrade to those. But another thing that's exciting about this business in addition to how quickly it's growing in its early stages is I think it's going to be a really efficient product-driven freemium model.

Okay, thanks. John, you've had nice growth in terms of the acceleration of total revenue the last couple quarters. And yet your guidance in Q4 I think at the midpoint implies a fairly sizable deceleration. Just beyond being conservative in your view, is there anything else we should all keep in account as you head into Q4, as you look at that number?

Yes, Brent. Our philosophy on guidance is to give numbers that we feel really comfortable to hit, and we feel like our guidance range accomplishes that. The only small thing in the third quarter was we got about $200,000 of services revenues that came from the INBOUND conference.

So if you look at the services revenue growth, it was a little higher than we've experienced. But other than that, everything was coming through subscription, and the business is performing really well.

Great, thank you.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much. John, I wanted to follow up on Richard's question, because we are seeing this nice uptick in ASPs, and we're in fact closing in on what the standard price is for Pro Edition. As we think about it, can we move beyond that Pro Edition as a standard ASP? And what are the things that would get us up above that level?

Yes. In the near term, as people add more context to their tiers, that price just goes above those standard prices in the price list. At the same time, as people add second URLs, that's another subscription; so that's that whole 'nother price that -- as customers add other product lines, other geographies.

All of those things can take it up above the standard prices. And then ultimately, once we start cross-selling the sales product, that's a whole 'nother vector that could improve the average subscription revenue per customer.

Terrific. Then with the increase that you've see on the international side, can you remind us again how you do your pricing? Do we need to at some point start to watch FX for you guys and the impact that that might have?

Yes, right now almost all of our pricing is in US dollars. We have less than 10% of our pricing in local currency. So, yes, longer-term that could shift, but right now it's a really small portion of our revenue.

Great. Thanks, guys.

(Operator Instructions) Sterling Auty, JPMorgan.

Hi, thanks, guys. A couple of questions. First, can you give us a little bit of color on how the partner channel contributed to the quarter, as well as what kind of additional uptake you might be seeing within the partner channel in terms of interest and willingness to become more reseller?

Hey, Sterling; it's Brian. Good question.

Partner channel is doing great. We are up to 2,122 partners; up 194 in the quarter, so nice growth quarter-over-quarter there.

There is a lot of leverage there over the long haul. The cost to acquire an initial customer is sort of X; but you think, if we can get a partner successful, their 10th, 11th, 12th customer they are bringing on, that cost to acquire gets lower. So we're really excited about the leverage we get with the partner channel.

The mix in terms of direct and partner was pretty similar to previous quarters. In fact, the partner channel and the direct channel are both performing really well, so happy really with both sides of it.

Okay. The other topic I wanted to get into is in terms of the size of your customer. I'm not talking about going up into the enterprise against Oracle or anything like that. But just within your core target market, are you seeing any shift in the size of the customers that you are signing up or seeing interest in?

Especially coming out of INBOUND and the interest level you got there, you have the marketing effect, which used the IPO process. Just wondering if it's starting to have an effect in may be seeing a slightly larger customer profile.

You want to take that, JD?

Yes, sure. Sterling; it's JD. What we are seeing actually, if you look at the average selling price of customers that we are signing up, it's been pretty steady for a while, and I think there's two things going on there.

One is we have been increasing our pricing over the long haul for the higher-end product, like the Professional and Enterprise Edition. But we actually slightly tweaked down our pricing on the base product about a year ago.

So what you get is that sort of where we are getting more dollars per customer on the high end, but we're adding more smaller customers at the Basic Edition on the low end that we think we will be able to upgrade and upsell over time. So when John talked about that ARPU growing over time, the real driver of that is getting our installed base, our existing customers, to upgrade with us, to add contacts, and to grow with us.

So that's the dynamics that I like, actually. I like adding a lot of customers that we can upsell over time, particularly as we start to add more and more products that we can sell to those customers.

I think he asked about the size of the account. Sterling, this is Brian. The size of the account has been pretty similar; it's gone up a hair over the years, but really in the last three, four years, it hasn't changed among the size of the account. There's not this big push into the enterprise.

We made a big decision a couple years ago to go broad versus to go into the enterprise. And we are starting to see that decision really pay off these days. Really excited about it.

Okay, great. Thank you, guys.

We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Great. Well, thanks, everyone, for joining the earnings call today. Just so you know, our fourth-quarter call will be held next February 2015. And until then, please feel free to reach out with questions to investors at HubSpot.com.

Thanks, everybody.