HubSpot Inc (HUBS) 2015 Q1 法說會逐字稿

Good afternoon, my name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the HubSpot first quarter earnings call.

(Operator Instructions)

I will now turn the call over to Lisa Mullan, Director of Investor Relations at HubSpot. You may begin your conference.

Thanks, Mike, and good afternoon, everyone. Welcome to HubSpot's first quarter 2015 earnings call. Today we will be discussing the results announced in the press release that was issued after the market closed. With me on this call today is Brian Halligan, our Chief Executive Officer and Chairman, John Kinzer, our Chief Financial Officer, and JD Sherman, our President and Chief Operating Officer.

Before we start, I would like to draw your attention to the Safe Harbor statement included in today's press release. During this call we will make statements related to our business that may be considered forward-looking including statements concerning our financial guidance for the second fiscal quarter of 2015 and the full-year of 2015, our position to execute on our growth strategy and our ability to maintain existing and acquire new customers. These statements reflect our views only as of today and should not be considered our views as of any later date. Please refer to the cautionary language in today's press release into our Form 10-K which was filed with the SEC on March 5, 2015, for a discussion on the risks and uncertainties that could cause actual results to differ materially from expectations.

Finally, during the course of today's call we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release announcing financial results for the first quarter ended March 31, 2015 which is located on our investor relations website at www.hubspot.com.

And now it is my pleasure to turn the call over to HubSpot CEO and Chairman, Brian Halligan.

Thanks Lisa. Hi everyone and welcome to our first quarter 2015 call. I'm happy for two reasons. First, the snow's finally melted here in Boston. Second, we had a really, really good quarter. Revenue grew 58% year-over-year in Q1. What's nice about that, it's our fourth consecutive quarter revenue acceleration. Q1 of last year we reported 4%, then 48%, 51%, 53% and now 58%. That's really good growth and I'm very pleased with the results.

Now you might say -- why are you getting so much growth in the business? What has changed? Those are very good questions. My answer is pretty straightforward. Nothing. Nothing has changed. We are just executing really well in the plan we've talked about when we went public back in October 2014.

There are really two simple drivers of all this growth. First, we're adding lots of customers. We grew our customers 35% year-over-year in Q1. By the end of Q1 we were up to 14,746 HubSpot customers. The combination of our inbound methodology and our software platform enables our customers to grow in these customer add numbers indicate that the word is spreading about that.

The second growth driver is that the customers we have are getting more value from us, they're getting more valuable to us. Our average revenue per customer is up 15% year-over-year as customer are paying us an average of $9,740 annually. Revenue retention has moved up from the high 80s a year go to the high 90s this quarter. In addition to the nice growth we've had on the top line, we have got 18 points of leverage on the bottom line as well year-over-year.

Now, let us talk about these customers who are driving this growth. As much as we love attracting new customers and selling more stuff to them, what we really love is helping our customers unleash the power of Inbound marketing and grow their own companies. We host a lot of marketing courses for our customers online and in-person. In fact, not that long ago I was chatting with one of our customers, Jeff Valentine, the Chief Marketing Officer of Fonality. Jeff was in our Cambridge headquarters to attend one these hugely popular marketing seminars, just one of the many ongoing training classes we offer our customers around the world.

Fonality is the Dallas-based company that sells web-based phone systems, which is a super competitive industry. Before HubSpot they used Google AdWords, they used to do cold calling, and they did a lot of list buying until they came to the conclusion that that just didn't work anymore. Today they've completely embraced inbound marketing. Since starting with HubSpot in January of 2012, Fonality has had spectacular results. They have brought on almost 6,000 new customers, that's a 135% increase in their new accounts. They've also increased the average customer size by over 40%, tripled traffic to their website -- mostly thanks to organic search and social share -- and just like HubSpot, Fonality measures their marketing efficiency in terms of lifetime value and cost to acquire a customer. Since adopting HubSpot, Fonality has seen their LTV:CAC ratio shoot up over 40%.

Fonality has completely changed their business with inbound marketing. As customers like Fonality grow by using HubSpot, they're using more of our products and they are becoming increasingly less likely to leave. In other words, our customers are becoming more valuable to us because we are becoming more valuable to them and that is exactly the way it should work. And we've seen this kind of customer success over and over and over and over and over again.

Finally, we like customers like Fonality because they have two hundred or so employees in a small marketing department that was trying to pull together five or six different applications which is way too complicated for them to manage and to integrate. HubSpot's really good at helping mid-market companies like Fonality with our all-in-one simple solution. Word of mouth around our customers' success stories like Fonality's fueling our growth.

But it's not just word of mouth that makes HubSpot successful. The other reason why we are successful is that we have a unique go-to-market model that really matches our target market. In HubSpot's case, I think how we attract customers is almost as important as why we attract customers.

We wrote the book on inbound marketing, literally wrote the book and you can rest assured that at HubSpot we drink our own champagne. We practice what we preach and for a very good reason -- it works. Inbound marketing works, plain and simple, and our recent momentum is a reflection of that fact.

So knowing this, it will come as no great shock to you that our go-to-market model is to rely on inbound marketing to attack the mid-market. Inbound marketing works. We are quite good at pulling customers in and acquiring warm and educated leads. And that is really hard to do with old-school marketing techniques.

Of course, improvement is in the pudding. We generate over 40,000 leads a month just from our blogging and content creation. You might be familiar with Alexa, it's a sub-subsidiary of Amazon and records the frequency of visits to various websites. Bank the amount of marketing, as of April 30 HubSpot is the 445th most visited website in the United States and the 637th most visited website in the whole world. Remarkable.

Now when a customer buys our software, they're not just signing up as a HubSpot customer, they're joining a movement. And we have a whole methodology and educational ecosystem including a 2,300 strong partner network to support them and grow in that movement in making it their own. Our goal is to help these mid-market businesses grow by teaching them how to do sales and marketing better. It's a great line of work to be in because we love, love, love helping our customers succeed.

A bit more about that ecosystem at HubSpot. We've got insanely active customer forums and in-person HubSpot user groups, also known as HUGs, that bring people together to learn about our products, share best practices and spread the inbound word.

In 2014 alone the HUGs program grew by 60%. Last year, our happiest and most engaged customers were showing up to their local HUGs and rubbing shoulders and learning more about what inbound can do for them. In our first quarter of 2015 alone, we hosted 106 HUGs worldwide, and all time record for a single quarter. In addition, we host 130 HUG locations and our newest locations include places like Tel Aviv, Milan and Costa Rica. We love HUGs, they do so much to help support our global HubSpot community.

We're not just seeing success from our direct business. The roughly 40% of revenue coming from our partner channel continues to grow like Gang Busters. This is where that amazing HubSpot ecosystem kicks in again to support our customers that come in through our various agency partners. We have partners summits where we bring together our many and varied partner teams so they can listen to them, learn from their successes and help them to leverage HubSpot even better for themselves and their clients own growth and success.

In a recent partner summit, I met up with one of our partners from Austin, Texas, Chris Heiler, the CEO of Landscape Leadership. One thing I love about Chris' story is that his marketing agency can focus on one vertical, the landscaping industry. When Chris signed up with us as a HubSpot partner in June of 2012 he had just one customer and less than $100,000 in annual revenue. In just one week after going live with HubSpot, one week, Chris landed his second customer. Fast-forward three years to today, and Chris has increased his business fivefold.

He's now grown so much that he has four full-time people on the staff and is on track to generate over $0.5 million in annual revenue. Way to go, Chris. In fact, I love this story so much I invited Chris to speak at our last Company meeting, since customer and partner success like this is what HubSpot's all about. Inbound just works.

One of our favorite things to see is when HubSpot customers use HubSpot for all their marketing activities. And what I also love about Chris at Landscape Leadership is that he and his team are using every part of our software. Our top of the funnel products, our middle of the funnel products, he's hosting his website with HubSpot, he's using the heck out of Sidekick and he loves our CRM.

He's also getting his clients to use many parts of the HubSpot product suite. In fact, 80% of his clients use the HubSpot Content Optimization System, which means customers can design and host their website using HubSpot's technology. He plans to have 80% of his clients on the HubSpot CRM by the end of year and is having no trouble evangelizing Sidekick, it's catching on like wildfire.

I'm going to say it again -- inbound works. HubSpot works and our customers love inbound marketing HubSpot and use it to grow their businesses. We love being our customers' growth partner.

Before I finish up, I have to mention one more thing that made me very happy in the last few months. HubSpot was recently ranked #1as the best all-around Marketing Automation System in VentureBeat's March 27 Marketing Automation Index. This is particularly meaningful because this actually comes from folks who matter the most to us, more than 1,000 marketing professionals that participated in VentureBeat's survey.

What's particularly cool about winning that award is that we offer our customers much, much more than marketing automation, which I consider middle of the funnel functionality, helping companies manage their leads. In addition to marketing automation, HubSpot really excels in helping companies generate leads, at the top of their funnel, through their website, search and social.

They also help companies convert those leads into customers, at the bottom of our funnel, with our new Sidekick and CRM software. We put all that together in one easy to use system for mere mortal mid-market businesses.

As (inaudible) star at HubSpot, we've never been more excited about the future than we are today. We haven't even really begun to reap the financial rewards from our sales products we launched last fall. We've only just begun to expand internationally. We've only scratched the surface on what innovative products we can bring to the mid-market. We had our Board meeting the other day, and I told the Board that HubSpot still in very early innings of the baseball game. There's much more to come. You want to glimpse into HubSpot, I hope you'll join us at the Inbound Conference in Boston from September 9 to 11 this year.

With that, I'll hand the call over to John Kinzer to talk about financial performance in the quarter. John?

Thanks Brian. As Brian mentioned, we're off to a great start in 2015, both on our financial and operational performance. We continue to see positive demand for our products and we are confident in our ability to drive meaningful growth and profitability in the future. Today, I'll kick off my prepared remarks with the financial results and I'll wrap it up by giving you guidance for the second quarter and updated guidance for the full year 2015. Let's start with the income statement.

First-quarter revenue came in at $38.2 million, which was above the high end of our guidance. For the fourth quarter in a row our business experience accelerated growth as revenue grew 58% year-over-year. Subscription revenue was $34.9 million growing 57% year-over-year and represented 92% of our total revenue. Both subscription and services growth were driven by healthy customer additions and strong revenue retention in the quarter.

Moving on to gross margins. This quarter we adjusted where we classified credit card expenses. Taking that adjustment into account, non-GAAP gross margins came in at 73% for the first quarter, a 3 point improvement quarter-over-quarter, and a 5 point improvement year-over-year. Both of these improvements assumed that the credit card adjustment had been made in the prior period.

The adjustment resulted in credit card fees being moved from the cost of sales to the G&A line item and this consolidates where billing operation expenses are recorded and it's now consistent with many of our peers. The change resulted in a 2 point positive impact in gross margin and a corresponding 2 point increase in G&A costs as a percentage of revenue and does not have any impact on our operating margins.

Non-GAAP operating margin was a negative16% in the quarter, a 4 percentage point sequential improvement and an 18 percentage point improvement year-over-year. Foreign exchange rates negatively impacted our revenue growth by 3 percentage points. This headwind was substantially offset by the foreign exchange benefits to our expense lineups.

Our international business continues to perform well. In January, 2013, HubSpot launched its first international office in Dublin and added an office in Sydney in August of 2014. Our international business has come to represent 22% of our revenue and is growing 70% year-over-year. And we're just getting started with our international efforts. The vast majority of our effort is currently limited to English-speaking audiences so there's lots of room to grow.

Our strong financial performance was accompanied by healthy operational results in the quarter. As Brian mentioned, we have robust customer growth in the quarter. HubSpot ended the quarter with 14,746 customers, a 35% year-over-year.

Strong customer growth continues to come from both our direct and our partner channels. Average subscription revenue per customer increased to $9,740, up 15% from the first quarter of last year. Subscription revenue growth is largely driven by continued adoption of our core marketing products.

Standalone sales products still represent a small amount of total revenue and are not included in the calculation of our average subscription revenue per customer. Revenue retention remains strong, in the high 90s, in the first quarter of 2015. As you might recall, we reported high-90s revenue retention in the fourth quarter as well, up from high-80 in the first quarter of 2014.

Now, let's review our balance sheet and cash flow. We ended the first quarter of 2015 with $129 million of cash and cash equivalents and we had no outstanding debt. Our cash and cash equivalents balance was up $5.7 million sequentially, primarily due to the $34 million net proceeds from our following offering, partially offset by moving $26 million into short-term and long-term marketable securities.

The follow-on offering consisted of $4.7 million primary shares at a price of $37. And 79% of those shares sold were secondary shares from existing shareholders.

Our cash flow used in operations of $815,000 was a sequential improvement from the fourth quarter and shows that we're achieving scale in our business. As we mentioned on our last earnings call, we had a seasonally strong fourth quarter, especially for our billings and revenue retention. So the first quarter was correspondingly a seasonally strong cash flow quarter.

Calculated billings, defined as revenue plus change in deferred revenue for the first quarter of 2015, came in at $43.9 million, up 52% versus the first quarter 2014. Keep in mind, the billings growth will vary from revenue growth due to factors such as changes in billing terms and based on the timing of revenue recognition versus billing. First-quarter trends were in line with our expectations in seasonal trends.

And now, onto guidance. For the second quarter of 2015, total revenue is expected to be in the range of $39.4 million to $40.4 million, representing year-over-year growth of 47% when using the midpoint as forecasted range. Second quarter non-GAAP operating loss is expected to be in the range of a loss of $7.2 million to $6.2 million. Second quarter non-GAAP net loss per share is expected to be in the range of a loss of $0.23 to a loss of $0.21. This assumes that approximately 33.4 million basic shares outstanding.

For the full year 2015, total revenue is expected to be in the range of $165 million to $168 million. This new represents year-over-year growth of 44% when using the midpoint of the forecasted range. Full-year 2015 non-GAAP operating loss is expected to be in the range of a loss of $33.2 million to $30.2 million and full-year non-GAAP net loss per share is expected to be in the range of $1 to $0.94. This assumes approximately 33.2 million basic shares outstanding.

As you adjust your models, please keep in mind that in the third quarter of 2015 we will have had higher marketing expenses associated with our annual inbound conference, which seasonally impacts our sales and marketing expense line our operating margins. That said, outside the seasonally higher spending in our third quarter, you can expect operating margin improvement throughout 2015 as reflected in our 2015 guidance.

Finally, on CapEx, you can expect a modest increase in quarterly spend from our first quarter 2015 level, in the second half of 2015, reflecting the build-out of additional facilities to accommodate our growing employee base.

As you can see, we've got a lot of good things happening in our financial results. We're seeing great topline growth and we're seeing leverage in our financial model. Our customer economics, the lifetime value of our customers compared with the cost of acquiring those customers, are better than ever. Given this, we're going to keep investing heavily for growth, but with the leverage in our model we still plan on achieving positive operating cash flow in early 2016.

With that, it's my pleasure to turn the call over to Brian for his closing remarks.

Thanks, John. Before we finish up, I would like to thank each of HubSpot's 887 employees for their hard work, enthusiasm and extraordinarily good judgment. We work hard to recruit the best of the best at HubSpot and then we give them the freedom to do their jobs well. We believe that today's workers thrive when they have autonomy not autocracy.

HubSpotters are maniacal about pursuing our mission and hitting our metrics. It's all for the customer and constantly questions the status quo. It's an honor to get to work with them everyday.

If our results today are remarkable, and we think they are, it's thanks to HubSpot's talented employee base. They're the ones building HubSpot's impressive product offering, supporting HubSpot's robust ecosystem and relentlessly pursuing our customers' success. I love them. And if you spent as much time with them as I do, you'd love them, too.

Thank you for joining our call today and thank you for taking the time to learn more about HubSpot. With that, I'll turn the call back over to our operator for your questions.

(Operator instructions)

Brent Thill, UBS.

-- strong annualized subscriber revenue and I'm just curious if you could maybe walk through what you are seeing in terms of what is contributing to discontinuation of that trend? And maybe also talk though a little bit of how you are seeing conversion between pro and enterprise. Are you seeing enterprise as a feature set that more and more customers are taking from the start? Thank you.

Hey Brent, this is John. How are you?

I like the warm-up band.

(laughter) I know you do, we will keep it going.

Yes, on the strong subscriber growth, I think we've said in the past, it really feels like we've hit a tipping point in the industry and the market. Brian and Dharmesh have done a great job educating the market on what inbound marketing is. And really, we're seeing the fruits of those labors now.

A lot of the conversations now are, really, I need a system like this versus what is inbound marketing. And so, from topline standpoint that's been great. I mean we're seeing a great growth internationally, we're seen in our partner channel, as well as our direct channel, really across the board. You know, really strong all the way across.

On the product side, we are seeing a little bit of a movement from the basic to professional, to professional enterprise. I think as customers, once again, understand inbound marketing more they need the products with more features and functionality. The basic customers tend to turn at the higher rate so we're getting a little bit of a movement from there.

But we're also continuing to get improvement, customers coming, putting contacts in their database, getting more and more successful, adding more contacts to their database. And that's been driving our upseller rate as well. So strong customer additions and strong revenue per customer, both leading to strong revenue growth.

Okay, great. And one quick follow, just on international. I know that you've got so much opportunity here that you haven't had to push as hard international. What is your approach in terms of on the build-out this year, how do you think about prioritizing different geos as we look forward?

Hey Brent, this is JD, and I'll take a shot at that. So, as we talked about in the call, we sort of rolled out the locations and the effort in the international somewhat incrementally. We've made a big bet in Dublin a few years ago now, and that's gone really well. Last year we launched Australia.

The great thing about HubSpot and the way we get our leads through inbound marketing is a lot of the marketing we do actually pulls us into those markets because we're getting inbound leads from markets that we're not in today. And also we have a great partner network that pulls us into those markets as well, so it's not like we have to make a start from scratch bet on a bunch of new markets and sort of re-seed the market.

The big bet that we have to make, and we'll be rolling out -- over time, and I think pretty aggressively, is we obviously need to have the infrastructure to deal in multiple languages and we're starting to make some of those bets now. So I think the international opportunity is huge for us and we're going to keep investing there and I think you'll see more than going forward.

Great, thank you.

Richard Davis, Canaccord.

Thanks, two quick questions. One, when you guys start an inbound campaign, even though some guys like rocket out of the gates, it seems like a majority of people would take a little bit of time to build up customer momentum. So could you just talk a little bit about how you keep the customer happy during those early, early days before the gyroscope spools up?

And then, the second question I had was, I was talking to a handful of people, and obviously it's anecdotal, but is there too big of a gap in pricing between professional and enterprise inasmuch as it's three times more? Should there be a, I don't know, medium-- better professional or sub-enterprise or something like that? Have you faced any pushback on that front? So, thanks very much.

Richard, maybe I'll take that one as well. And maybe I'll-- take the first one first, which is on the how we sort of onboard customers. So the way it think about that. You're right that inbound marketing builds up over time because basically as a marketer you are building an asset that is going to continue to generate leads over time rather than you're renting space with advertising on somebody else's space.

What we do with our client is we basically spend the first couple of months with them, helping them start to run their first campaign, sort of walk through their first campaign. And we have a really good scale of a way to tailor that campaign to what they're trying to accomplish. And that's a really great engagement for us and the customer and it gets them adopting the product and using the product and really proficient with it so that at the end of that onboarding they tend to be very successful. Of course, that's on the direct side.

On the partner side, these partners get it, they know how this works and they've been through-- they've gotten their own business started on this. So we built our methodology to get our customers up and running during that process.

On the second question, which is like the pricing. I won't say that we are the superstar pricing -- that we have absolutely nailed the pricing, and we keep always looking at that. But what it seems like is we're getting folks to upgrade there. And what happens is, over time as you maybe start with a professional and you grow your contacts, your spend moves up where the actual increase from professional to enterprise is not that dramatic.

So if you just look at it on the pricing page and you're comparing professional with 1,000 contacts to enterprise with, say, 10,000 contacts, a big part of that gap is eaten up by the contacts growth. And, not surprisingly, the more sophisticated customers tend to have a larger database. And so the pricing does make sense from that perspective. Does that answer your question?

Yes, perfect. That's what I thought. I appreciate it. Thank you.

Terry Tillman, Raymond James.

Hey guys, good afternoon and nice job on the quarter.

I guess Brian or John or JD, first question comes with the impressive new customer growth. It was 35% growth year-over-year. I'm curious, when you sign up these customers if you survey them to see, were they using something before? Or were they using really nothing before?

And if they were using something before, are you seeing any change in terms of the types of point solutions you are replacing? Is it an email marketing replacement cycle? Is it a content management or analytics replacement cycle? Anything stand out about potentially changes in the types of solutions you are replacing or greenfield?

Hey, Terry, it's Brian, I'll take that one. Really good question.

It hasn't dramatically changed. In the suite of tools we compete with, I sort of break it out into HubSpot helps people turn strangers into visitors at the top of the funnel, and then visitors into qualified leads in the middle of the funnel, qualified leads into customers at the bottom. Just stick with that top of the funnel.

Our customers, they need a blog, they need a website, they need social media monitoring and they need search engine optimization. And typically that'll be four different vendors they will have to deal with in order to get that right. And that's pretty painful if you're, let's say, 100 person company with 4 person marketing department.

In the middle of the funnel, folks are either using email marketing, let's say constant contact milled ship stuff. If it's, let's say, a 20 person company. If it's a 200 person company, we might compete a little bit more with, let's say, a Marketo in there or another marketing automation vendor. And those haven't changed dramatically, it's a pretty similar set of competitors.

It's not a rip and replace game where we are in there was another thing that looks just like HubSpot, it's more competing with those point solutions versus our all-in-one solution. And that's part of our S&B strategy. A company, let's say with 100 employees really, really, really likes that all-in-one, one telephone number to call, they've got one user interface to learn, one bill to pay. It makes their life a lot easier and it works very well for them. But to answer your question, no major shift their.

Okay, thanks Brian. And I guess as it relates to the bottom of the funnel, I mean, there was obviously a lot of excitement at the last Inbound Conference in terms of the CRM platform there at the bottom of the funnel. You all had several more months now of your partners leveraging it. Maybe some sort of update on how ready you think the product is and remind us again of when we could start seeing this revenue impact in the model? Thank you.

Terry, I will take that one. So I think we're making really good progress there, just to step back again, I think what we did is we sort of took a team, carved it out of HubSpot, sent them off on a mission to help, to go after helping salespeople be more successful at the bottom of the funnel there. And I think it's going really well.

What we're really focused on this year for that team's drive a ton of users, get a lot of user growth. And then learn from those users and keep, sort of, iterating on the software to make sure that we are driving the right level of value for the users.

Specifically on the CRM, as you said, we launched that, we talked about it at Inbound Conference last year. We've started to open up the beta in Q1.

So we're really still in the very early days of that, but early reports are very positive, I think particularly to customers that were going after that sort of 60% of our install base that never used CRM before, really used HubSpot's contact database almost as their CRM. The tool is really powerful and it's really -- they're getting a ton of value out of that, so, I'm really optimistic about that.

On top of that, if you remember, where we've built is a series of solution that sort of is more focused on sales acceleration, to help a sales person, our Sidekick product. And that's going very well as well.

Again, our 2015 I think is about user growth and then I think it has an opportunity to be impactful to our topline growth in 2016. So that's the way we're thinking about it. Still kind of like-- almost a start up within a start up.

And happy, it's a little early to sort of pull out the cake box and start celebrating. But I feel like there is a big opportunity there to make this really take off.

Thank you.

Jennifer Lowe, Morgan Stanley.

Hey guys, good afternoon, this Is actually Stan Zlotsky sitting in for Jennifer. And thank you for taking my questions. So 2.5 questions for you-- Did you like that? It's very precise. (multiple speakers)

So maybe just some qualitative commentary on how your customer acquisition costs trended in the quarter. And versus 2014, and how you think about your cap cost as we head through 2015?

Stan, this is John, I'll take a shot at that one. On the customer acquisition costs, they trended pretty much in line with what we saw toward end of last year. Obviously they ramp-up in the third quarter when you add in our inbound marketing.

As we've seen the improvement in our customer economics, it's come more on the lifetime value side, as our retention has improved and also as our software margins have improved as well. So we are pretty comfortable in this customer acquisition cost where it is right now. And we're leaning into it given the economics are so great. They could go up as we enter in new international markets but we're just getting better natural leverage on those, so, if anything we expect them to stay in a narrow range of where we are now.

Okay, great, that's helpful. And second part is, on revenue retention. So, you guys mentioned that, high 90s revenue retention again. But perhaps if we were to slice and dice that a little bit -- how has unit retention trended and how much is upsell helping to get up into that high 90s range?

Yes, I will take that one again. So as we got from the mid- to low-90s to high-90s, it was a combination of the underlying renewal rate as well as the upsell rate. A little bit more on the upsell rate.

We feel like being in the S&B market, where our renewal rates are, we're getting about to probably, we could have a couple more points, but we're about where we can there. On the upsell rate, though, we have done all of this without really having another product to sell into the base. We are encouraged as we think about longer-term on the road map as we develop more products to sell into that base that there is another lever ultimately to improve the revenue retention rates.

Okay. And then actually you hit on my 0.5. How much do you -- when you think about your model and the guidance that you give us for 2015, what are your assumptions around retention rates going forward?

You know, we don't give specific guidance on metrics or anything like that. We feel, like I said, I think that retention can stay at this high-90s level. Taking it higher will require new products and that is something we have in front of us.

We give a range of guidance to take into account different outcomes in the business. But we are really, we're really encouraged with how the business has performed and we expect to continue to perform well.

Okay. Perfect. Thank you so much.

Mark Murphy, JPMorgan.

Brian, when you look at the core marketing platform and you think about the various components, you have SEO, landing pages, blogging, content management, et cetera. How is that evolving?

If you look at it in terms of usage patterns and adoption rates, is it the case that every module is equally important? Or is there some evolution in how that core platform is being used?

It's a really good question. Sometimes people will start with -- gee, I have a problem I want to get more visitors to our site. And they start kind of on the content marketing side with creating great blog and having it be optimized for social, and really cranking it up in the search engines. And they'll start there and then we will move them on to landing pages and we'll move them on to the contact database and email later.

Sometimes they come to us where they've got their website set up and they've got their blog set up. And they need help with the middle of the funnel where they have got leads and they want to segment those leads and they want to nurture their leads, and then they'll spread to the top.

There's no one pattern. We're sort of looking for that pattern and it's not there, they come in in different places and tend to spread. The way it's working.

The usage overall is up. One of the things we work on at HubSpot is trying to get our customers to enjoy as much of the product as they possibly can because we see that correlated with their success. So that's one of our big pushes is, how do we get our customers enjoying as much of our product as we possibly can.

Okay, so it happens in different sessions, but there is no real trend.

One way, they come in through all different ways. One of the things I like about HubSpot is we do a lot of different things, we solve a lot of problems.

In our implementation process, referred to this earlier, it's about a three month implementation process and what we try to do is say-- Let's pick a campaign, and let's run that campaign. Maybe it is a new product offering you have or a new service you're offering.

And in that implementation what we try to do is get them using as much of the product as they can. Let's blog about your new campaign, let's make sure you're ranking for your new campaign in Google, let's tweet and put LinkedIn messages and Facebook messages out there. Let's convert those visitors onto landing pages and collect email addresses, and then let's nurture them by email and social and the websites. So we try to hit as much of it as we can and try to get them enjoying as much as possible, but they come in through different angles.

And then as a follow-up John. I'm curious why are you excluding the standalone sales products from the average revenue per customer metric? If I understood what you said earlier then that is what you're doing.

The reason that I ask is that, when we're engaging with your partner firms, at the field level, there are signs of tangible traction with those products. And sometimes a pretty dramatic increase in ASP, sometimes 50% type of a thing, according to your partners, so.-- I guess I'm wondering how is it not material and why are you excluding it from that disclosure?

Yes Mark, JD, maybe I'll answer that. One reason is sort of a philosophical reason, the way we were attacking this market space, and the other is sort of a statistical reason.

The philosophical one is, we really are focused on we want to run that business almost like a standalone business. So we want them to build a disruptive business with a much different and much more efficient, hopefully, customer acquisition model that the premium model. Start with the product whether you're a HubSpot customer or not a HubSpot customer, start to get value from the product and adopt its features and then upgrades to $10 version per seed and a $50 version per seed.

And in fact, what we have seen is the users and the customers coming into that product, through that funnel, we're seeing about 80% of those first time ever to HubSpot, they are not HubSpot customers. So that's all good news.

From a statistical standpoint, as you can imagine, you have individual customers who are paying $10. And so that will really, even though it's a relatively small part of our overall revenue for the business, when you have lots of customers paying -- $10 and comparing that to customers who are paying $10,000, it really throws off the numbers. And so I think that would actually be harder to sort of understand what's going on in the business if we were blending those two things together.

We do internally look at, one of the things that we look at, is the traction of those products within our install base and that's getting pretty exciting. But the easy thing-- the straightforward thing to do from a statistical standpoint is to keep them separate. And then also we're really driving that business to think about themselves as a standalone business and build a different type of model.

Yes, okay. So JD, that's a very good explanation. I understand what you're saying.

Is there a point at which you would reach a critical mass, where you would disclose it, so rather than blending it in, as you said, with the other customers, where you would disclose that on its own? Is there like a threshold of materiality?

I think there is certainly a point. I would not be surprised if that point were next year.

(laughter) Thank you.

Sure.

Michael Rode, Needham.

Thanks very much, good quarter guys. Just a couple questions for you.

I guess as I look at the really strong customer acquisition in the quarter, I guess I would have thought there had been some fall off after a record number in Q4. And so, drilling into it a little bit, is it right to function of pipeline or length of sales cycle or conversion rate? Is there anything that you guys are doing better from an execution standpoint that is helping to drive that.

And I know you don't guide specifically to customer account. Are we at a new trendline for, kind of, what customer adds could be? Or is there any reason why that might be down sequentially?

That's a good question Michael, it's Brian. I think they're up and that they consistently up here for two simple reasons.

One is just the market is really coming together for us. Dharmesh and I've been at this for 8.5 years and when we first started we were talking about this inbound marketing thing and people looked at us like we had seven heads. And, more and more, we're looking quite sane on our inbound marketing thesis and people are buying the thesis and buying our product and are happy with the product. And then they move to a different company, and they buy it and tell their friends about it, so the word of mouth is really spreading.

The thing I like about HubSpot in this market is it is not traditional marketing. If you look the other marketing vendors out there, our story is quite unique. We're talking about a big transformation in the way you market to really match the new ways that people shop and buy. So it's quite unique from other folks and I think that the market is just crossing the chasm.

Now, I think that's all well and good. One of the reasons it's crossing the chasm is I think that HubSpot team, the exec team and whole organization, is executing quite well. The product team is building a great product, our customers love it, our service team is delighting our customers, the marketing team generating leads well. We're kind of firing on all cylinders today.

I just think it's a combination of those two things that are really coming together and the business is really cooking for us. So we couldn't be happier.

Got you, and I imagine that we're a bit early to be talking about specifics around the upcoming Inbound Conference, but maybe I'll ask one anyway. I imagine we're going to so see strong attendance up notably year-on-year. But what else could be different this year about this conference versus last year, for example?

I think the conference will be even more awesome this year, that's where we'll be different, and I hope you all come. The speakers will be different and hopefully really good.

I think it's likely you'll see like you do every year some very interesting new technology coming out of HubSpot and new announcements. I'm not going to tip my hand at this point, but there'll be good stuff like there usually is. And there'll be a large tribal of people.

Somebody described to me what Inbound was like last year, and I really like the description, they said -- the Inbound Conference is like a cross between an Apple product launch and a Grateful Dead concert. I love that analogy. And so, from that perspective, hopefully that analogy holds going forward.

Great, thanks guys appreciate it.

(Operator Instructions)

Owen Hyde, Pacific Crest.

Hey guys, it is Owen on for Brendan. Just wanted to ask quick on free cash flow.

It seems like you guys are tracking better than we previously anticipated. Is there any update as far as timing of break-even? Or how you guys thinking about that?

Yes, so this is John. So on the operating cash flow, the quarter obviously was really strong.

The first quarter is usually our strongest seasonal quarter. We have more renewals around that period, and we talked about how strong the fourth quarter was. Obviously, those receivables were collected in the first quarter.

As we look out through the year, obviously that's going to be the strongest receipts quarter. And then you get into the third quarter, which obviously has inbound in it, which obviously is a bigger use of cash. So we feel like the business will continue to perform and we will get leverage in the business. And we're really still striving toward that early 2016 operating cash flow goal.

Sounds perfect. That's only one I had, I think everyone else has covered the other ones, so, thanks.

Last question, Kirk Adams, Rosenblatt Securities.

Hi, guys, my question kind of centers around sales force hiring and your growth on your sales force. And if you can remind us how long it takes for those guys to become productive.

Sure, Kirk. So we're growing on our sales force pretty rapidly. I think we talked about how there's still a huge open-market in the United States where we just started to get into.

We've got 15,000 customers, maybe there are 3 million of these customers in the United States. So I think there's still an opportunity just to simply execute really well and keep adding salespeople. And we're growing really fast.

And then, to think about outside the US in the international market, I mean that's a really green field. It's got moist, moist turf. And we can go after that space for a long time.

We're starting to think about where our next locations are in building out even larger footprint outside the United States. And that's going to be really driven by, you know, we've got productivity from being able to sell directly into those markets as well with sales that count.

So I still think we've about talked a lot of the exciting stuff driving our growth, like the future of new products with the sales products, with the retention gains that we've got and selling into our install base. I still think we have a huge lever with just plain executing and adding a lot of sales growth. We haven't talked about the number or the range, we're not going to disclose those numbers externally, but that's still our, and at least in the near-term, our biggest lever for growth.

And then to your question about how rapidly people come up and ramp up to their full quotas. I think we're probably along the lines of what you see with a lot of companies, maybe five to seven months to get a salesperson sure fully up to their quota. We've done some work to sort of accelerate that a little bit, but I feel pretty good about where we are on that.

Great. And lastly, you guys are growing big time here, 58% in the quarter. As it slows down, the way your guidance goes right now in the back half of the year to high-30s, is that user growth? Is that ARPU? How should we think about that?

Kirk, I said before obviously in our guidance, we have a range of outcomes that we provide. Obviously if we were going to slow down I think it would be a combination of those things. But, as JD said, we're investing heavily in the sales force. We feel really good about where the business is going, so we're going to continue to grow as fast as we can while continuing to deliver margin expansion.

All right, great. Thanks guys, appreciate it.

I want to thank -- couple things, I want to thank everyone for joining. This is Brian, and I'm going to be in New York meeting investors with Lisa next week and so hopefully we will be able to get together. And then I will be at the JPMorgan Conference. So hopefully we will see you there, thank you all for joining and talk to you soon.

This concludes today's conference call. You may now disconnect.