HubSpot Inc (HUBS) 2015 Q2 法說會逐字稿

Good afternoon. My name is Conner, and I will be your conference operator today. At this time I would like to welcome everyone to the HubSpot second quarter 2015 earnings conference call.

(Operator Instructions)

Lisa Mullan, Director of Investor Relations at HubSpot, you may begin your conference.

Thanks, Conner. Good afternoon, and welcome to the HubSpot's second 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 the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman, and John Kinzer, our Chief Financial Officer. Before we start, I'd like to draw your attention to the Safe Harbor statement included in today's press release.

During this call we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the third fiscal quarter of 2015 and the full-year 2015, our positions to execute on our growth strategy and our ability to maintain existing and acquire new customers and partners. 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 and to our Form 10-Q which was filed with the SEC on May 7, 2015 for a discussion of the risks and uncertainties that could be 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 in our press release announcing financial results for the second quarter ended June 30, 2015 which is located on our investor relations website at www.HubSpot.com. Now it's my pleasure to turn the call over to HubSpot's CEO and Chairman, Brian Halligan

Thanks, Lisa. Hi, everyone, and welcome to our second quarter 2015 call. Before we dig into the Q2 results, I'd be remiss if I didn't mention the press release we issued last week. You may have seen we recently announced a CMO transition with Kipp Bodnar taking over as HubSpot's Chief Marketing Officer from Mike Volpe. My cofounder, Dharmesh, and I personally played a big role in helping bring Kipp into HubSpot five years ago. He's been leading our demand gen and funnel operations as VP of marketing and been doing an outstanding job. He's an industry recognized author and speaker on B2B and inbound marketing, and he's got an amazing team working for him. I'm really confident that we will have a great transition with Kipp and keep our momentum as a business. HubSpot's on a roll. We've got 1000 great employees that will keep us rolling. Although I'm not proud of the way our CMO transition played out, I am proud of the transparent culture of HubSpot which brought the matter to light. Now, on to Q2 results.

When we went public last fall, we laid out a plan to grow revenues rapidly while gaining nice leverage on the bottom line. Today I'm happy to report that in Q2 we continued to deliver on those commitments. Revenue increased 58% year-over-year in Q2. Coupled with this powerful growth we achieved non-GAAP operating margin expansion of 13 points compared to last year and margin expansion of 3 percentage points compared to last quarter.

What I'm really excited about is cash flow from operations turned positive for the first time. As we said on the road show, we wanted to operate under our own steam, and with this accomplishment, we are well on our way. Let's unpack that 58% growth. There are two drivers, first we're adding lots of new customers, 36% year-over-year growth in the number of HubSpot customers.

Second, our customers are gaining more value and paying us more for our products. Our average subscription revenue per customer grew 15% year-over-year. What I love, love, love about our model is that when we grow our customers gain value and grow themselves. Our incentives are really nicely aligned with our customers. When our customers grow, they add contact to our database, they add second URLs, they upgrade from basic to pro to enterprise and they use our CRM and Sidekick tools. That's what's leading to that big increase in average revenue per customer.

I think our 36% year-over-year customer growth is because we were solving for a fundamental problem that pretty much every mid-market company faces today. Companies have to change the way they market and sell their product to perfectly match the way humans actually buy stuff today. So, how are we doing this for them? Well, if you'll indulge me, I'd like to take a bit of a walk down HubSpot's history road. The first four years of HubSpot were really about opening up the top of the funnel, turning complete strangers into visitors on our customers' websites. We got really, really good at helping companies pull visitors in through search engines, social media sites and through their blogs.

The next four years at HubSpot were about turning those visitors into qualified leads for our customers' sales reps. We did this by building marketing automation software that solved the middle of the funnel puzzle for our customers, extreme segmentation and nurturing executed through your website, email and social. We got really, really good at that, too. Over the next four years you can expect us to continue making investments in the bottom of the funnel. This chapter is going to be about turning those qualified leads into totally delighted customers. We feel like the B2B selling process needs to change as radically, if not more than the B2B marketing process did in order to really match the sales process the way humans actually buy stuff in 2015. This is where our CRM and Sidekick products come into play. Our customers are able to grow with HubSpot from the top of the funnel all the way to the bottom.

To illustrate how this works, I'd like to introduce you to a great HubSpot customer, IDS. IDS is the transportation service company that helps businesses move their products across the country. IDS has 200 employees right in our sweet spot. Recently I caught up with Alicia Dale, IDS's marketing coordinator. When Alicia decided to buy HubSpot for IDS in 2012, she got signed up with one URL and paid us $8,400 year. Fast-forward to today, and she's now hosting two URLs with HubSpot. Her contacts in the system have grown over six-fold. She's an active user of our new CRM product, and she's using the heck out of all our tools across the top, middle, and bottom of the funnel. In three short years, IDS's spend with HubSpot has more than tripled to over $31,000 a year. Thanks, Alicia. That's what we do.

We are in the business of helping our customers grow, and I love seeing customers like IBS grow alongside HubSpot. In my mind HubSpot isn't just selling a marketing and sales platform, we are selling a growth platform. We're helping companies do the nitty-gritty of getting visitors to their websites, turning them into leads and then turning them into happy, loyal customers. And that's just another way of saying we're helping these customers grow. And launching new products like our sales product is a logical next step in building this powerful growth platform that is matching the way humans shop and buy today.

So let's talk about our CRM and Sidekick products. Why are our products different from the other CRM and sales tools out there that people use today? What makes our sales products different is they are built for today, they are built to work in the modern world. So, how do these products work? Well, let's say you're a sales rep, and you want to sell into a certain company, call it ABC Corporation. You put that company name into the saw HubSpot system. Our software then goes out and finds pretty much everything relevant there is to know about the company, a bio of the company, number of employees, location, social media links, telephone numbers.

It also find out who inside your Company is connected to whom inside of ABC Corp. It does all this for you in the background automatically versus forcing the rep to go through tons of research on her own. HubSpot's sales products literally work for the sales rep. It's a different animal than a traditional CRM system. It doesn't stop there. Because then we built a timeline of what's going on with the targeted customers. Anything that happens to the targeted customer, news articles about them, press releases that mention them, interesting tweets about them, visits to your sites by their employees all end up in this timeline, again, automatically. And that just keeps growing over time.

So, we built this living, breathing body of information for the sales rep to rely as they lean into the sale. HubSpot's sales products don't force the sales reps to do tons of work researching information and adding it to the system. Our sales products price literally work for the sales rep. Then when the sales rep picks up the phone and has an awesome conversation, let's say with the CTO of ABC Company. When you use the HubSpot sales products, all your calls with customers are automatically recorded and placed right on that timeline.

Any emails you send to the customer go back and forth and again, automatically show up on the timeline. It's all there in one place, and you really never have to lift a finger. This timeline because a very rich resource for the sales person, and it's just the resource they need to match the way the world works today. When the sales rep gets on the phone with the CTO from ABC Co, they are already up-to-date about the customer's business.

If the sales rep's manager wants to know what's going on, they can just listen in to the recorded call. If the salesperson leaves the Company, your new sales rep has the whole timeline right there in front of them. As we launch new products like the CRM and Sidekick products, a nifty little side effect is we are creating a vast new customer ecosystem that we can cross our other products into. Take, for example, Spire Wireless, a HubSpot CRM user. Spire wireless installs and monitors remote wireless sensors across multiple work site locations. These sensors use wireless networks to send data from different networks back to Spire's customers, making their work sites safer and more efficient.

After trying the usual CRM suspects, Spire was struggling to find a product that would fit the bill. Jae Reichel, Spire Wireless' CEO, said it best. With every CRM we tried the same issues came up again and again. The tension between CRM being useful versus all the time we would need to spend manually entering the data. The way HubSpot's CRM integrates with our email and automatically populates all sorts of data solves the fundamental tension for us. Today, Spire is growing like gang busters. This year Spire has grown from 3 to10 people and will be at 20 people by the end of 2015. The best part about Spire's growth story is that by June, Spire had upgraded from our CRM product to become a HubSpot marketing customer, too. As Jae explained it, Spire's first business software plan looked like a spider web, a dozen different companies handling a small portion of our business profit. We knew that we wanted to do marketing automation, but we weren't ready to make that decision.

Starting with a CRM made that decision for us. Using it turned the conversation from if we would use a marketing platform to when. It gave us function without complexity. Now when we look at our chart for sales and marketing software, there's just one sticky note, and it says HubSpot. I love customer upgrade stories like Spire and look forward to sharing many more stories like it as time goes on.

Now let's take a look at how HubSpot's growth is showing up in our partner channel. We love our partners. In fact, over 40% of new revenue comes to HubSpot through our 2,500-plus strong partner channel. We love it even more when our agency partners grow, so we do everything we can to help them succeed. As a new partner joins HubSpot, we give them access to tons of tools to help them grow. We give them white-label lead books for lead generation, campaign kits for lead nurturing and personalized coaching on making the sale. We given them a main channel account manager, inbound training for all their employees, client services workshop and partner [bank part] so they can measure their results. Soup to nuts, our partners get it all, whatever they need to grow their businesses with HubSpot.

A couple of years ago we rolled out a program that rewards partners when they hit certain milestones. Initially we had silver and gold partner tiers, but so many people grew beyond those tiers that we expanded the program into platinum and diamond partner level. Who knows, we might have to roll out titanium and plutonium levels at some rate at the rate we're going with some of these partners. After starting the program just two years ago, we already have four partners that are each managing over $40,000 in monthly recurring revenue at the diamond level, Square2 Marketing, RPM, Kuno Creative and New Breed -- we love these guys.

Each one of them has an amazing story of growth and success that we're terribly proud to be associated with. And when partners grow with HubSpot, HubSpot's business scales. Just think, the real ramp happens when a partner at that second, third, and 10th and 20th customer to our platform. This does wonderful things to the long-term return. As you might imagine, the cost to acquire that 20th customer is way lower than the cost to acquire their first customer. So our partners are growing with HubSpot and helping their customers grow with HubSpot every step of the way. We love watching our partners succeed and we will keep sharing their stories with you.

Finally, I'll conclude with a couple of housekeeping items. In May we announced we renewed and extended our agreement with salesforce.com. This is a five-year agreement. It ensures that 17% of our marketing customers who integrate with salesforce.com CRM products can continue to do so. On the international front, we told you that we would expand our international efforts. We're full steam ahead on delivering on this objective, and in June we announced that we'll have our office up and running in Singapore in the fourth quarter of 2015.

That's it for my remarks. I'll turn the call over to John who will walk us through the financial highlights and guidance. John?

Thanks, Brian. Our second quarter showed both strong operational and financial performance. HubSpot's business is scaling, and you can see it as we achieved a significant milestone in the second quarter as we reached positive cash flow from operations. This was several quarters earlier than our goal and just as revenue and profitability and have exceeded expectations, operating cash flow did as well.

From here on we generally expect to be cash flow positive from operations. However, in certain quarters, like next quarter we have our inbound conference, we will swing back to a loss. So, let's take a closer look at our second-quarter performance. Second quarter revenue came in at $42.9 million, which was above the high-end of our guidance. Revenue grew 58% year-over-year, a 10 percentage point improvement compared to second-quarter 2014 and consistent with our reported first-quarter growth of 58%.

Subscription revenue was $39.3 million, also growing 58% year-over-year and represented 91% of our total revenue. Subscription growth was driven by healthy customer additions, strong revenue retention and continued increase in average subscription revenue per customer. Services revenue was $3.7 million in the quarter. Services benefited from the impact of consulting deals that were unique and not likely to repeat in the near term. Given this, you are likely to see a sequential decline next quarter for services revenue. The focus of our services team continues to be the successful onboarding of our customers and encouraging further adoption of our various inbound applications, which is shown to be highly correlated with long-term retention. The strong services revenue performance resulted in positive non-GAAP gross margins in the quarter.

We expect services margins to vary from breakeven to slightly negative margins in the near future as we onboard new customers and migrate our remaining customers from our old content management system to our new content management system. Headcount grew to 1000 employees, up 39% from the prior year. We continue to hire rapidly to meet the growth in our business, while gaining leverage is the business scales.

Non-GAAP gross margins came in at 75% for the second quarter, a 1 point improvement quarter-over-quarter and a 5 point improvement year-over-year. Non-GAAP operating margin was a negative 13% in the second quarter, a 3 percentage point sequential improvement in a 13 percentage point improvement year-over-year. Foreign exchange rates negatively impacted our revenue growth by 5 points. Like the first quarter, this top line headwind was substantially offset by foreign exchange benefits to our expense line items. International revenue was another bright spot in the second quarter, growing 70% year-over-year and representing 23% of our total revenue. We are working hard to expand our international presence, and in June we announced we would have an office in Singapore up and running in the fourth quarter of 2015.

Our newly aligned Sydney office, which we launched in the third quarter of 2014, is showing impressive growth. Year-to-date Sydney has overachieved relative to our expectations, and two of our top salespeople hail from our Sydney, Australia office. International and domestic operation results were strong in the second quarter. HubSpot ended the second quarter with 15,839 customers, up 36% year-over-year. This growth is being driven by continued strength in both our direct and partner channels. Average subscription revenue per customer increased 15% compared to the second quarter of 2014 to $10,127. This growth was largely driven by customers adding contacts to their databases, customers buying second URLs and customers upgrading from basic to professional and professional to enterprise editions of our product.

As we have previously said, revenue from our sales products to customers who are not marketing customers represents a small percentage of our total revenue and is not included in the calculation of our average subscription revenue per customer. Revenue retention again came in the high 90s. We currently expect to be able to maintain strong revenue retention in the coming quarters.

Moving on to our balance sheet and cash flow, we ended the second quarter with $152 million of cash and marketable securities, and we had no outstanding debt. CapEx, including capitalized software, was $1.2 million in the second quarter, which was very low as we incurred minimal facilities build out. In the second half of 2015 we will see CapEx increase as we move forward with expansion plans in our Cambridge, Dublin and Sydney offices. This increase will be weighted more heavily in the fourth quarter. All in, we anticipate full-year capital spending to come in at 6% to 7% of our full-year revenue. Calculated billings defined as revenue plus the change in deferred revenue for the second quarter of 2015 came in at $46.2 million, up 55% versus the second quarter of 2014. Billings growth will vary from revenue growth due to factors such as change in billing terms and the timing of revenue recognition versus billing. Second quarter billing terms were generally in line with prior quarters.

Let's move onto guidance. For the third quarter of 2015 total revenue is expected to be in the range of $44 million to $45 million, representing year-over-year growth of 46% when using the midpoint of the forecasted range. Third-quarter non-GAAP operating loss is expected to be in the range of a loss of $11.3 million to $10.3 million. Third-quarter non-GAAP net loss per share is expected to be in the range of a loss of $0.34 to a loss of $0.32. This assumes approximately 33.9 million basic shares outstanding.

Given the strong fundamental and operational performance of our business in the second quarter, we are raising our full-year 2015 guidance for revenue, non-GAAP operating loss and non-GAAP operating loss per share. For the full-year 2015 total revenue is expected to be in the range of $171.7 million to $173.7 million. This new guidance represents year-over-year growth of 49% 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 $30.9 million to $28.9 million. And full-year non-GAAP net that loss per share is expected to be in the range of $0.92 to $0.88. This assumes approximately 33.3 million basic shares outstanding.

As you adjust your models, please keep in mind that in the third quarter of 2015 we will have higher marketing expenses associated with our annual inbound conference. In 2016 our inbound conference will be held in the quarter fourth quarter of 2016 and not the third quarter. We plan to return to hosting our conference in the third quarter in subsequent years. Also, as you look at your models, please keep in mind the higher CapEx in the second half I referenced earlier in my prepared remarks. To wrap up, we're executing against the business plan we outlined for you when we went public last fall. Our business is strong, and our products are in high demand. I am proud of our results and look forward to seeing many of you at the upcoming investor conferences and at Inbound in September. Now, I'll turn it back to Brian for closing remarks.

Thanks, John. Before we take your questions, I'd like to highlight a couple of awards that we're real proud of. First, I'm excited to announce that in June we were ranked the number one place to work in Boston by the Boston Business Journal. That's important because that's the kind of award that makes HubSpot a talent magnet which matters to great candidates who can pick and choose where they go to.

Second, we were named the 15th best small to medium sized company to work for in the United States by Glassdoor. This is great because the ranking is based on ratings made by our 1,000 amazing employees. Glassdoor is to company ratings as Yelp is to restaurant ratings. I'd also like to take a moment to talk about my favorite week of the year, the week of our inbound conference which will be held September 8 through 11 in Boston. We hope you all come to Inbound which is an awesome conference, and it's also where we talk about the great new stuff our engineers have been up to all year. I thought one of our attendees hit the nail on the head when she described the conference as a cross between an Apple product launch and a Grateful Dead concert. Last year we had over 10,000 people at Inbound with 75% of them at Inbound for the first time. This year we expect even more than that.

We've got a great lineup of speakers including Daniel Pink, Brene Brown, Seth Godin, Jonah Peretti, Sophia Amoruso, Amy Schumer, and Aziz Ansari. We will run a special investor track on September 9 in conjunction with our mesh in minds afternoon keynote. Please reach out to Lisa if you need more information or help to sign up. I hope to see you all there. Lastly, I'd like to thank our awesome employees, awesome customers and awesome partners. It's a pleasure working with you everyday. With that, I'll turn the call over to the operator for your questions. Operator?

(Operator instructions)

Brent Thill with UBS, your line is open. Brent Thill, your line is open.

Terry Tillman, Raymond James.

I guess there are some good things going on in Cambridge. Nice job.

First question -- Brian, it's more of a bigger picture question. I thought it was symbolic that you all were in a Gartner report this year on lead management. The reason why think it's interesting is usually it seems like Gartner has enterprise customers that are looking at the magic quarter and that sort of thing.

Is there anything to read into your inclusion as maybe something that could be a broader strategy for you guys over time to drift higher into the enterprise market? Because I know the product is geared to be able to scale into larger businesses, but I'm just curious any change in terms of maybe an appetite to move upmarket our drift upmarket, if you will?

(technical difficulties) -- the Internet kind of disproportionately benefits small businesses relative to large. I think it's a great time to be a small medium business it's a great time to be a growth company, and we've always wanted to position that. We are really sticking with small and medium size companies. It's going great for us the market is wide open.

We're competitively positioned in there very well. Our brand is strong in there, and our go to market really matches it. So, no big change. I wouldn't read too much into the Gartner inclusion.

Please repeat -- please repeat the first comment.

I guess, Terry, I wouldn't think too much about it -- wouldn't read too much into it. From day one Dharmesh and I have been focused on building a Company really focused on helping small and medium-sized companies grow -- really grow. And I kind of feel like the Internet disproportionately benefits small relative than large companies and helps us building that platform to help them do it.

It's a pretty wide open market. There's not a lot of competition in there. It's not a rip and replace market. It's relatively green field still haven't seen much change there.

Our competitive positioning is very strong in that market. Our branding is very strong in that market. Our go to market strategy is handcrafted, kind of to match the way those companies buy and to penetrate deep into that market. I guess I would read too much into the Gartner inclusion.

Got it. Thanks. John, maybe a quick financial question or questions.

So, you're stating now that you could be operating cash flow positive each quarter I guess other than the user conference quarter, but is there anything to think about seasonality of the cash flow? And then I would like to either repeat the service gross margin expectation, because I missed that on the call. Thank you.

No worries, Terry. On the operating cash flow side, not a lot of seasonality in our cash flows. A little bit more in the first quarter just because we get so many billings at the end of the year that are collected to the beginning of the next year, but it should be fairly consistent across the quarters offset and inbound as you mentioned.

On the services gross margin side we had a couple one-time deals in the quarter which drove services revenue up. Absent those deals, we think service will come down a little bit in the third quarter, and the margins will go back to break even our slight loss on the services margin side. We are really focused on the services side, getting our customers up and running, getting them successful so that they really stay with us on the long-term and really drive long-term subscription revenue.

Brad Sills, Bank of America.

Congratulations on a very nice quarter. I wanted to ask about CRM and sidekick now that these two offerings have been in the market for a couple of quarters now.

Could you provide a little color, please, on how they're impacting the business. I know CRM is free, sidekick you just started charging for but separately how each of those is impacting both pull through of the suite and then direct revenue contribution to the extent you can, please.

It's Brian. Really good question.

I'm feeling really good about it. We've got 60,000 companies where there are users of our sales products so really getting nice, nice spread of it. It's going well.

We're really focused on weekly active users of the product. Tried to get lots and lots of reach with it. Next year were going to really focus much more on monetization and really starting to move your spreadsheets next year.

What I think is very exciting about it is what you'll see over time is that our marketing customers will start using our sales products. And you heard about that in my opening remarks from IDS where they're using the marketing products and maybe start using CRM product and maybe start using the Sidekick product so they are paying us more. When they've got all that product together our solution gets very sticky, so I think it'll improve retention rates as well.

Then on the other side of that the CRM products designed not only to be used by our existing customers but by net new customers. It's designed to be value in and of itself so I talked to on my opening remarks about Inpire the wireless company. And they started using our free CRM product and their natural inclination is to buy a marketing products of a bottom marketing product. I think you're going to see some really nice action on that over time.

Frankly, right now were focused -- it's an early stage start startup -- it's like a series eight start up inside of HubSpot going well really focused on weekly active users. I would look to -- we will make more comments about it later on how it will move your spreadsheet but feeling good about the early days of it.

That's great. Thanks very much.

And just one a new customer growth -- seems to be accelerating nicely over the last -- it has accelerated nicely over the last several quarters. Would you attribute that to productivity in both the channel and then the direct sales force and awareness -- do you think you're hitting critical mass now in terms of awareness on inbound marketing and HubSpot in the SMB segment? That's it for me.

Yes, I think it's a combination of a lot of good stuff coming together, Brad. I think the marketplace in general is waking up to the idea that boy, the way people shop and buy stuff today, it's changing. And if we keep marketing and selling the same old way, we're going to hit some roadblocks, so this idea of inbound marketing is kind of crossing the chasm, if you will.

Secondly I think our products are really well-suited for this new type of buyer. And our products are really solid now. Our engineering team has done an unbelievable job, and the products are good. They work, and I think word-of-mouth is spreading.

I think the team's executions been good. We've brought some new leaders in, actually from salesforce.com.

A little over year ago they've done a great job our sales teams done a great job. So I think it's a combination of the market coming together and products really good and pretty good execution. I think the team's done a great job.

That's great. Thanks, Brian.

Richard Davis, Canaccord.

Thanks. Most customer -- the way you describe where you are going is being a customer experience platform. So when I look at companies like that that allow a company to get customer feedback and understand it in real time. Take action to improve the customer experience and then access the social graph within your company so you know who should interact with the customer.

So, where are we in that evolution? Could you use a baseball analogy? Preferably not the Red Sox, but something like that. Where are we?

I would avoid Red Sox analogies. I actually -- Richard, I haven't called it the customer experience platform yet. I think -- I like that expression it's not one I've used.

I think of HubSpot more in that we're a growth platform. We help you get more visitors and turn them into leads and then turn those leads into happy customers as much as possible.

We're probably in that second inning of that game it. There's a lot more stuff in our collective heads that we can build to use to delight our customers and to help them grow more. We by no means feel like were out of ideas or at our wits end. It's still very early in our ideas of how to do that.

There's probably an opportunity -- you are sort of hinting at this around customer feedback and dealing with customer feedback. That's not an area we've invested in. It's something that's an interesting space that others are doing relatively well that we look at from time to time.

But we're really focused on more of that front-end -- how do you acquire that customer? How do you acquire more customers? How do you do that faster? How do you do that in a way that really matches the way people buy today?

Got it. That's helpful. Thanks.

Brent Thill, UBS.

I figured out how to use my phone.

(laughter) Nice job.

Just on the ARPU up 15% you guys have had consistent ARPU growth, and it seems like there's a tremendous opportunity to take your base from basic to Pro and then Pro to enterprise. And then I'm just curious if you have any more detail in terms of how to think about where that progression is going in terms of that move and anything that's -- that you're seeing that is prompting customers to realize they're probably on too low of a level, and they need to move up.

It's John. If you think about the ARPU, the biggest driver we're seeing right now is the contact tiers. When people are successful with inbound marketing they add more leads to their database and they're growing their customers and their subscription grows, so we get that. We also get customers that have multiple lines of business that add a second URL to their subscription which drives it as well.

Than what you mentioned, basic to Pro and Pro to enterprise. And there's a bit of a functionality differences but also as you add more contacts to your database at some point you would just upgrade automatically based on the pricing.

So we're seeing all of those different things driving the ARPU. As we think about it going forward, recently we've seen customers grow 35%, 36%. Our ARPU's grow 14% or 15% I think you'll see that same relationship on the growth between customers and ARPU.

There's still a ton of opportunity that gaining a lot more customer relationships both domestically internationally. We just launched our Sydney office last year. We just talked about Singapore. Lots of opportunity internationally, but domestically it's pretty wide open, pretty green field as well. You'll continue to see us grow on both of those levers, but there's still a lot of room on the ARPU side.

Just as it relates to that on the enterprise side, is there a sense of what percent of the customer base is on enterprise today?

Yes, I don't know if I have the exact number, but it's been about 15%, I think it might be slightly above that right now. That's from a customer standpoint. Revenue is a lot higher just given the price point, it's about one third of the revenue.

Just as a last follow-up just on the agency side, it's been obviously a unique differentiator for you. And I'm curious if you've seen any changes on what's happening there and maybe if you could also talk about the international expansion on that side to give you more distribution help.

It's Brian. Thanks for the question.

Agency side is going well -- happy with the progress there. We're adding a lot of agencies and agencies that have been around for a while are starting to really grow and gain leverage with us. So we're very happy with that.

It's a bigger piece of our international business so if you think about our international business it's kind of a two-step process. Step number one is we can sell direct and through resellers into English speaking countries so we're direct in northern Europe, and we're direct in Australia now. As we -- while that's going on we let resellers sell in non-English speaking countries. Over time we will be able to go direct on both sides.

So, as you might imagine the percent of revenue coming through agencies is a bit higher internationally than it is in the United States. But very healthy on both sides and we're really pleased with the progress there.

Thank you.

(Operator instructions)

Stan Zlotsky, Morgan Stanley.

Thanks for taking my question. A couple questions for you.

First one, on sustainability of your dollar retention rates, certainly very impressive the high 90%s that you have that you've been putting up. How do you see that continuing, especially as your lapping tougher comps of dollar renewal rates in the back half of 2014?

Stan, it's John. So, we think we can sustain the high 90%s in the coming quarters.

As you think about going forward what levers it might take to move it up from there, it would be launching new products that we can sell back into the base. Most of -- almost all of our upsell that's been driving our revenue retention is really coming from volume-based things, people adding contact tiers, people adding second URLs and things like that.

We really haven't had a product to sell back into the base, so that's something that's top of mind for us, and so stay with us. Stay tuned for some announcements there. But from that standpoint we think it's sustainable and this will be the levers that would take it up from there.

And just qualitatively if you could help us, how has unit retention trended while your dollar retention has been in the high 90%s range?

Yes, our renewal rate of the customers is in the low 80%s. So, we maintained -- it's up obviously -- when you look back into the 2013 timeframe it was in the low 70%s. And we're up now in the low 80%s, and then the upsell rate is getting is up to the high 90%s.

And that's been for the last couple quarters it's been pretty steady in the low 80%s number?

Yes.

Then, last question for me, a customer acquisition costs, how was that been trending? From the numbers looks like it should be fairly steady but just wanted to double check.

It is, it is. As we look at our lifetime value to customer acquisition cost it's been very strong and steady at those levels. That's why we're adding a lot of sales reps and keep going really fast. It's because we've had the unit economics that still a great, and the returns will come over time.

Okay. Great.

Mark Murphy, JPMorgan.

Good afternoon this is [Matt Casa] on for Mark Murphy. On the subscription gross margin you are enjoying a nice march up in expansion I think it's expanded in just about every quarter for the last 10 quarters or so. What would you say is sort of an upper limit or how would you characterize the expansion going forward maybe to help set realistic expectations?

And then on the service side, the gross margin you said should be breakeven to a slight loss. How should we think about that maybe for the next I don't know four or six quarters?

On the subscription gross margins like you said we have seen nice improvement on that side. We're really doing a great job of -- as we get bigger we are taking advantage of pricing.

The market is treating as well on that side, but not only that our team has done a great job in optimizing software to actually have a smaller footprint. And so it's been able to let us scale our hosting costs, so that's been a good lever for our subscription gross margins. I think it can stay high -- stay in these levels to the extent we can continue to do those things there's some opportunity to lift it from here.

On the services side, like I said, we'll dip down to negative gross margins now that we don't have that one-time benefit in the second quarter. And then I would think in the next four to six quarters you're going to see slight negative to breakeven on the services gross margin, not really a focus to maximize those -- just do everything we can to make this customer successful so that we can improve the subscription renewal rates.

Got it. Thank you very much.

Thanks, everyone for joining. I really appreciate it.

I hope to see you all at Inbound in a few weeks. That you very much.

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