HubSpot Inc (HUBS) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thanks, Operator. Good afternoon and welcome to HubSpot's third-quarter 2015 earnings call.

Today we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is 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 fourth fiscal quarter of 2015 and the full year 2015, our position 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 August 6, 2015, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

Finally during the course of today's call, we refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release announcing financial results for the third quarter ended September 30, 2015, which is located on our Investor Relations website at HubSpot.com.

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

Thanks, Lisa. Hi, everyone, and welcome to our third-quarter 2015 call. Let's get right to it.

HubSpot's business is going great. We had a strong third quarter with total revenue increasing 57% and subscription revenue accelerating to 59% growth year-over-year. We also had tremendous customer, growth adding 1,015 net new customers to our platform and increasing our average subscription revenue by 16% year-over-year to $10,607. Good stuff.

In September, we hosted our hugely successful INBOUND conference and as usual, it was my favorite week of the year. Many of you who are on the call today will also at INBOUND so I know you know what I mean. What I love most about INBOUND is that it's not just a user conference, it's a global movement. Let's look at some of the numbers.

We had over 14,000 registered attendees in INBOUND. More than half of those attendees weren't even HubSpot customers or partners.

We had over 250 speakers. We had over 250 sales meetings. We even had one wedding proposal on stage and we have the video to prove it. There were over 120,000 mentions of the INBOUND 15 hash tag that week alone.

And of course, we announced a ton of exciting new products at INBOUND that extend our marketing product platform in some pretty exciting new wins. We announced a new website app, a new reporting app and a new app-management app. Let's dig into that website app.

Over a quarter of HubSpot customers host their website on HubSpot today. Customers hosting with us get much, much more out of their HubSpot experience. We want to see that number of customers hosting on HubSpot's website platform go way up, so spent the last year building a beefed-up, expanded and new version of our website app. There are two versions of our website app that you can choose from, depending on your needs, one for $100 a month and one for $300 a month.

Now, there are lots of benefits to hosting your website with HubSpot, but when you add our new updated website product to your existing marketing and sales platform, that combined effect is way more than the sum of its parts. Let's say you're a customer using our website and marketing and sales software. You don't just have a website, a marketing database and a sales database, you've got a website with one integrated consistent record of all your contacts from the first time they ever crossed your path to the most recent time they visited your pricing page.

Let's say you've got 10,000 contacts; and you know what you're doing, so you've got those contacts segmented by countries. You segmented whether they're customer or a prospect, you can tell if they've asked for a quote from you before, or any information about these people. All that segment information is captured in your database.

With HubSpot's website add on, you will be able to use all that information to personalize your website. So if I visit your website, I get one experience. If a loyal customer visits your website, she gets a completely different experience. If a fresh new prospect visits your website, he gets a completely different website experience. So your website becomes very personalized and matches the specific needs and interest of the different people who visit and that's some seriously powerful stuff.

Creating that website experience also got a whole lot easier. With the new website app, you can create and edit content directly on the page. No more fumbling with formatting or talking to IT or editing your website.

On top of it all, both versions of our website app come with SSL included, which creates a more secure website for our customers. SSL not only provides you security but Google has described as a real factor in achieving stronger search ranking results. That's a serious advantage we build in for every HubSpot customer.

Secondly, let's talk about our Ads product. It's still in beta. It's priced at $100 a month. Over 50% of our customers already buy ads online and a lot of that ad buying is on Google and LinkedIn. Some of the is on other social networks.

It would be one thing to say, now you can manage your ads through HubSpot. That alone would be cool. It's another thing to say that you can track the revenue from each ad and service what happens after a lead clicks on your ad, since these ads can be seamlessly integrated with your website, your contacts, your email, your drift campaigns, your social media. That's pretty cool.

So how does HubSpot Ads product work? Before you had HubSpot Ads, you first had to buy your ads outside of HubSpot. You went to Google Ad Words and create an ad and then bid on your ad and noodle around with your ad and do all this work inside of Google Ad Works. This involves a whole lot of complicated steps.

And then you come back into HubSpot and build your landing page and build your form and build your workflow, all those supporting systems for your Ad. It's a lot of work and lot of toggling back and forth between two pretty different systems.

With HubSpot Ads, you just create your whole campaign right inside of HubSpot. You create your ad inside of HubSpot, you buy your ad inventory inside of HubSpot, you create your supporting assets inside of HubSpot, you track all your activities and results right inside of HubSpot. The whole process is perfectly interwoven and seamlessly connected in one closed loop.

The other big hairy problem with paid ads is that before, you knew were getting a 50% return on your paid advertising expense, but you couldn't tell which 50% of your paid ads were generated the return. With HubSpot paid advertising, on top of the HubSpot platform, you know exactly which ads get clicked, which ones turned into leads, which ones turned to customers and which ones were up sold. You can point the ROI from a specific paid ad in a very granular and meaningful way.

That's the Holy Grail for ads. That's our Ads product. It's still in beta. Very exciting new functionality. That's our Ads product.

The third product we announced at INBOUND is our new reporting add-on. The HubSpot reporting add-on is priced at $200 a month and we're selling it today to both our marketing customers and coming very soon for our sales customers. It is a product we're super excited about.

People today seem to have a voracious appetite for reporting. It's in our nature. Human beings lover to report on everything every which way they can. We love it.

With the new reporting add-on, you can create pretty much any kind of marketing report that crosses your mind. For example, you create a report that says many qualified leads have generated in Latin America per month over the last three years? And how much revenue has resulted from those leads per month for the last three years? No matter how granular the report you make up, the HubSpot reporting add-on is there for you.

So how does the reporting add-on work? Once again, it's a huge improvement over the old play book. The way most people do reporting is that they'll export a bunch of stuff to Excel and run some data tables and try to analyze the data that way. They'll use whatever reporting lives inside of their CRM system or they'll hack together some stuff inside of Google Analytics. It's a lot of work and it's a lot of toggling between some very different types of systems.

With the new HubSpot reporting add-on, our customers get a reporting module that a mere mortal can use to get real closed-loop report and to get reporting by segment, to get whatever marketing report helps them to measure their success. Because we're human beings, we want to see our data every which way to Sunday and that's what the new reporting app lets you do.

Our customers have been clamoring for this for a long time and they are psyched to get started with it. The reporting add-on comes with more than 20 precooked and customizable report templates based on the most common marketing and sales reports our customers need.

It also lets you easily build a report from scratch should you need anything quite unique. As your company grows, the reporting add-on scales with you. When you add more teams and offices, each member of your company can get their own custom reporting dashboard so they can see what matters to them and only what matters to them.

So you've got your website add-on, you've got your ads add-on, you've got your reporting add-on. Each one of these new products is very powerful in its own right, but put them all together and now you're really cranking. You know which of your contacts has clicked on your ads. You know which of your contacts has visited your website. You know which of your contacts have hung out in your webinars or downloaded an e-book. You know which of our contacts bought something you sell, and you know how much you spent to acquire each customer at the end of the day. That's some pretty powerful stuff.

HubSpot gives you that one powerful platform you need to do everything you do to grow your business right inside of HubSpot. It's greater than the sum of parts. It's one plus one equals three. It is awesome.

So what this all mean for HubSpot's revenue? When I think of HubSpot pricing model, I think of three axis.

The first axis is customers moving from basic to pro to enterprise. Then we have our second pricing axis where customers to add more contacts to their database. The third, new pricing axis is our add-on axis, which is really exciting because for the first time every, we have all these great new products that we can not only sell to our new customers but also sell back into our installed customer base.

When people buy additional products from our add-on axis, we get a double win. We not only get additional revenue from those add-on products, we also get increased customer stickiness when customers use more and more of our products. Average subscription revenue per customer goes up, subscription dollar retention goes up, and everybody wins.

Let's move onto another exciting product we announced at INBOUND, HubSpot Connect. Our new connect product opens up HubSpot in some ways beyond the sales and marketing products. HubSpot Connect lets great companies like Zendesk, Zopim, FreshBooks, Eventbrite, UberConference, Teamwork, Unbound, SmartLink, Blogma, PandaDoc, Workflow Max integrate with our platform. So customers can get a much more complete view of their customers all in one place.

The sales side of HubSpot platform is also expanding in exciting ways. At INBOUND, we announced a number of exciting product enhancements that help solve many of the challenges that our core customer sales teams face. For example, one of those features is called Sequences.

Sequences is really interesting because it allows the sales rep to schedule really personalize targeted follow-ups to their prospect. It eliminates the need for a sales rep to do that manually and lets them schedule their follow-ups when the details of conversation are very fresh on their minds. It's a better experience for the sales rep, a better experience for the buyer, and it's been really well received by our early customers.

On the international front, we announced that HubSpot's product and services are now available in French, German, Japanese, Portuguese and Spanish. We now sell into more countries, spanning our total addressable market beyond the $30 billion market talked about before.

Speaking of HubSpot's international expansions, one of the ways we've been expanding internationally is through our 2,700-plus strong partner channel. What we do is instead of opening an office and then adding customers, we first enter a new market locally by using our preexisting on the ground partner channel. That way we get a head start on building our business before we spend a dime on opening any new offices. When we do open those offices, we already have the pluming built in to support them. It's our incredible partner network that makes all this possible and we're doing more and more to support our partners in all kinds of cool ways.

One thing we did with our partners this year is to launch the first-ever HubSpot Impact Awards at INBOUND, where we recognised the agency partners who are generating strong ROI for their customers using the HubSpot platform. This was one real highlights of INBOUND for me and I heard some incredible partner stories, including some of the following here. Full Funnel, a HubSpot partner who helped their customers Zirtual grew new revenue by more than 500% after implementing HubSpot.

SmartBug Media, who helped their customer [converse in file] realize a 3,558% ROI with Inbound marketing. Stargazer Digital, a HubSpot partner who helped their clients super warm sales rocket 187% with Inbound marketing. I love the stories. This really makes my heart pound.

INBOUND is truly the best part of the year because I get to hear all these great success stories from agencies and marketers and customers that use HubSpot's product. I heard a ton of great, HubSpot changed my life types of stories in that one week. That's what really gets me excited.

One of the HubSpot customers I caught up with this year was Aaron Mazze, Vice President of Marketing Merge eClinical. Merge eClinical sells a cloud-based software platform for managing clinical study data. Their business is headquartered in Research Triangle Park down in North Carolina.

Aaron attended INBOUND this year in told all of us all about how he used HubSpot to transfer Merge eClinical's marketing and to drive ROI for his team. In fact, Aaron, one our Best Marketing ROI Performance Award at INBOUND this year. So instead me telling you about Aaron's experience with HubSpot, I decided to invite Aaron to join our call today so you can hear his HubSpot success story first hand. Aaron, are you there?

I'm here. Hello, Brian.

Hey. Thanks for joining the investor call. We talked Merge eClinical's experience with HubSpot.

I'd love for you to just tell everybody about Merge eClinical. What business are you guys in? How big is your company and basically, what's your role there?

Absolutely. I'm excited to be here, so thanks for inviting me.

First off, yes, I'm working for the eClinical division of Merge Healthcare. We were started around 2009. In our division, in the eClinical division, there is about 120, 130 folks internationally and on the marketing team we have about 8 folks. We cover everything from the traditional marketing communications all the way through inside sales and even user experience design.

The eClinical division has produced a platform called eClinicalOS. It's a data-management platform for clinical research. You can think of it like a central hub that manages many of the daily activities involved running a clinical trial.

Got it. Awesome. And you run marketing for that division, it sounds like.

Yes. I'm Head of Marketing for this division, correct.

Awesome. Tell us a little bit, how did you initially find HubSpot, or how did HubSpot find you?

I was introduced to the term, I would say, in 2010, 2011. I've been a part of numerous agencies, run my own agencies for a couple of years as well. Been in PR and worked with a lot of folks in area in media.

I have a colleague and a friend of mine here who is an absolute pro and an excellent writer and he started to share with me all the eGuides and articles that you guys were publishing back in that 2010, 2011 period. In around 2012, I began following the HubSpot blog myself and became a fan immediately.

Got it. Tell us about your experience with the HubSpot marketing software. When did you start with it, what parts of it do you use, what's the value you've gotten out of it?

Gosh, that's a really loaded question. There's a ton of things that I can talk about.

I would say right out of the gate, we use everything. We use everything with the HubSpot platform. That's the website, the blog, email systems, digital campaigns we run through HubSpot social media. We even use SideKick for all of our prospecting.

My favorite tool amongst all of the different things that we use in HubSpot right now, of course, are the dashboards and reports because they make me look good, because we hit our numbers. So we are certainly a huge fan. We use it in everything that we do every single day and it's really become part of our clinical. That's not just in the marketing team.

Sales folks, engineers, everybody talks about the different efforts that we were working on inside the marketing team and we certainly talk about INBOUND quite a bit. Always looking ways to now -- well actually, I should say we're looking for ways to thread Inbound into our platform outside of just marketing efforts but inside of our actual eClinical system as well.

Nice. Inbound is not a new term to the two of us but can you just try to describe in layman's terms to our investors, what's Inbound? What did you do before and how would you contrast the difference?

Excellent question. For us, first off I'll say Inbound to me is really about building trust, and we are always looking for ways to connect with our community. So instinctually, we're always looking for that element of our business where we can really we find ways to connect with our audience.

And specifically with this platform, it's given us a process around doing that very pragmatically. We transformed our organization from what was typically considered a sales organization, we were doing a lot of one-to-one phone calls, into now today will the call marketing organization where we are doing a one-to-many.

We had that traditional team when I first got here in 2013 that they were sitting in rooms and they were making a lot of phone calls and the results were not keeping up with what they wanted us to do at the business. Organically, the system was growing but the leadership at Merge eClinical really wanted to see things take off and they felt like the word needed to get out and the sales organization wasn't doing it fast enough.

So in comes Inbound and I really started off instinctual thinking more about how I can build a leadership platform around some of the various smart folks that are here at Merge. We have folks that are clinicians or historically they came from being a clinical research associate, so they had a lot of experience working in clinical trials. And they had a voice that they wanted to share and a lot of opinions about how to run a clinical trial more efficiently and effectively and potentially save a lot of money. But that wasn't really going to get out through this one-to-one kind of sales approach.

Though we talked about building a thought leadership platform and putting our president on a tour, but again, that's really hard to scale. So we looked again at the strategies that were in place and I said, what we revisited this idea of building more of a thought leadership platform through our website, through our social channel, through webinars, things of that nature. It really did sort of take off for us very quickly.

Aaron, when you say take off, do you have -- are there metrics that you measure? Is there an ROI that you calculated on Inbound/the HubSpot product?

Yes. Here's my caveat when share this information. A year ago, I never could have said any of this stuff, the insight, the statistics, didn't have any of these things last year because we didn't have a system like this in place at the level we have. Year-over-year, first off, the revenue has grown 43% and that's insane. For our business, it is absolutely insane and I think a lot of it's attributed to our Inbound marketing.

We have -- we are currently -- we have over 330,000 people following our organization online. That's a really large number in our industry. Last year it was 65,000. We are tracking, every day, 58,000 leads. Again, a huge number for a group like ours when we were such a niche industry within life sciences.

My team brings in around 50 or -- I think the actual average today is around 54 NQLs a week, so marketing qualified leads every week. And those have transferred into over 80 opportunities this year that have really added to the bottom line and boosted the business.

These are incredible numbers for us. I mean, the growth is ridiculous.

Actually, today when I looked at some of the numbers at our last campaign, we are still growing, so some of the numbers are really skewed, but our last email campaign had 6,800% engagement. That's a very large engagement number. We run webinars every week and people are surprised that they're free.

We just love to share what we're doing and we're very passionate about. I think it comes through in our marketing and in a lot of, of course, the things that we do in our system and people have become a big fan of what we do. We are really excited about it, yes.

Awesome. Aaron, that was great. Really appreciate you hopping on the call today. Thanks a lot.

Absolutely. One last note I'd like to share, if you don't mind.

No problem.

Okay. The one thing I feel like is special about HubSpot is that you guys have this special sauce, this specials mojo. And it really, it bleeds through everybody that I speak to, from the support desk, the trainers, the folks that run engineering that I ran into at INBOUND, the executives, of courses, as well. Everybody is really passionately about what they do there and their smart and their fun and like me, they're extremely passionate about what they do.

I'm very excited to be a part of it. It's something you built that I feel takes the business well beyond just the platform and truly becomes something we can all attach ourselves to and it's a methodology that I know oozes through the business there.

We use it as a part of how we build our business. We look at the methodologies, the techniques you guys use and we're really excited to be member of that community, so thank you.

Awesome. Thanks, Aaron. I love, love, love your story.

Thank you for sharing it with our investors today. Thank you very much.

Absolutely. No problem. Anytime.

It's time for me to wrap up. There is a movement going on here in customer stories like Aaron's at Emerge Clinical are fueling that movement. Partner success stories like Full Funnel, SmartBug Media and Stargazer Digital are fueling that movement and HubSpot's third-quarter results are fueling that movement. It's all a reflection of the growing global adoption of Inbound marketing methods and the growing global adoption of the HubSpot product.

What you just heard from Aaron is exactly what we're doing at HubSpot day in and day out. We practice what we preach.

We pull our customers in through an Inbound approach, not the old traditional way of doing outbound marketing. We have an inside sales force, not an old-fashioned traditional outside sales force. We indirectly attract customers through a lot of partner agencies, helping our business model to scale, not through one big, expensive, outdated direct sales force.

We're doing it all on one closed-loop platform that's built to fuel the movement that's taking over the world. HubSpot's results this quarter show that our model works. It works like a charm.

Now going to turn the call over to John who is going to walk us through the financial highlights and guidance. John?

Thanks, Brian. Our third-quarter continued to show good strong operational and financial performance. Let's take a closer look at our third-quarter performance.

Third-quarter revenue came in at $47.7 million, which was above the high end of our guidance. Revenue grew 57% year-over-year, a six percentage point improvement compared to the third quarter of 2014.

Subscription revenue was $44.1 million, accelerating to 59% year-over-year growth from the 58% year-over-year growth we reported in the second quarter of 2015. Subscription revenue represented 92% of total revenue and was driven by healthy customers additions, strong revenue retention, and continued growth in our average subscription revenue per customer.

Average subscription revenue per customer for the third quarter was $10,607, up 16% year-over-year. This growth with by customers adding contacts through the database, customers buying second URLs, customers upgrading from basic to professional and professional to enterprise editions of our product and from customers purchasing our sales product.

As we've said previously, revenue from our sales products to customers who aren't marketing customers represent a small percentage of our total revenue and is not included in the calculation of our average subscription revenue per customer. Revenue retention again was strong, as it came in the high 90%s.

Given the success our customers are having with Inbound marketing, we currently expect to be able to maintain strong revenue retention in the coming quarters. Services revenue was $3.6 million in the quarter. Our services non-GAAP margin was slightly negative at 2%.

In the near future, we expect our services margins to vary from breakeven to slightly negative. The focus of our services team continues to be the successful on-boarding of our customers and encouraging further adoption of our various Inbound applications, which is has been shown to be highly correlated with long-term retention and growth.

Non-GAAP gross margins came in at 75% for the third quarter, which was flat sequentially and a five point improvement year-over-year. Headcount grew to 1,091 employees, up 42% from the prior year. We continue to hire rapidly to meet the growth in our business while gaining leverage as the business scales.

Non-GAAP operating margin was negative18.3% in the third quarter, a 13 percentage point improvement year-over-year. Our annual INBOUND conference impacted non-GAAP operating margin by eight percentage points in the third quarter of 2015. Next year, our INBOUND conference will take place in the fourth quarter of 2016. We will see a corresponding impact margins in that quarter. In 2017 and beyond, our INBOUND conference will return to be held in the third quarter.

Cash flow from operations came in at a loss of $3.8 million. Cash flow can be impacted by items such as international launches, our INBOUND conference or other large vendor payments. Absent a one-time large payment, from here on we should achieve positive cash flow from operations.

Foreign-exchange rates negatively impacted our revenue growth by five points this quarter. Like the first half of 2015, this top-line headwind was substantially offset by foreign exchange benefits to our expense line items.

International revenue was another bright spot in the third quarter, growing 78% year-over-year and represented 25% of our total revenue. We are working hard to expand our international presence and we announced at our INBOUND conference that we can now sell our products in five additional languages. HubSpot ended the third quarter with 16,854 customers, up 35% year-over-year. The growth in our customer count was driven by continued strength selling through both our direct and partner channels.

Moving on to our balance sheet and cash flow. We ended the third quarter with $148 million of cash and marketable securities and we had no outstanding debt. CapEx, including capitalized software, was $2.3 million in the third quarter, which was low as most of the facilities build out will occur in the coming quarters.

In the fourth quarter of 2015 and early in 2016, we will see CapEx increase as move forward with expansion plans in our Cambridge, Dublin and Sydney offices. All in we anticipate full-year capital spending to come in around 7% of our full-year revenue for 2015.

Calculated billings, defined as revenue plus the change in deferred revenue, for the third quarter of 2015 came in at $52.5 million, up 60% versus the third quarter 2014. The INBOUND conference is a great opportunity to sell to prospects and to install base. You can see some of the momentum from our INBOUND conference reflected in our third-quarter 2015 billings.

Billings growth will vary from revenue growth due to factors such as change in billing terms and the timing of revenue recognition versus billing. Third-quarter billing terms were generally in line with prior quarters.

Overall, our business is strong and this reflected in our fourth-quarter guidance and in our increased full-year 2015 guidance. For the fourth quarter of 2015, total revenue is expected to be the range of $49.7 million to $50.7 million, representing year-over-year growth of 47% when using the midpoint of the forecasted range. Fourth-quarter non-GAAP operating loss is expected to be in the range of a loss of $6.4 million to $5.4 million. Fourth-quarter non-GAAP net loss per share is expected to be the range of loss of $0.19 to a loss of $0.17. This assumes approximately 34.2 million basic shares outstanding.

Given the strong fundamental and operational performance of our business in the third 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 the range of $178.5 million to $179.5 million. This new guidance represents year-over-year growth of 54% when using the midpoint of the forecasted range.

Full-year 2015 non-GAAP operating loss is expected be in the range of loss of $27 million to $26 million. And full-year non-GAAP net loss per share is expected be the range of $0.80 to $0.78. This assumes approximately 33.3 million basic shares outstanding.

A couple of items to keep in mind as you're modeling 2016. You should generally expect flat to slightly worse margins in the first quarter of each year as we get a jump on hiring for the year and experience payroll tax resets. In 2016, we will also experience the impact the additional space taking on to provide for our increasing headcount. As we move past the first quarter, the business should resume delivering margin expansion.

Also, CapEx should range from 6% to 7% next year and then should trend down slightly in the future years. Finally, if you recall, we had a very strong fourth-quarter 2014 billings number post our IPO, which will result in a slightly separate comparison from the fourth quarter of 2015.

Overall, I'm pleased with the strong growth in the quarter and the continued margin expansion, normalizing for our INBOUND conference. Now I'll turn it back to Brian for closing remarks. Brian?

Thanks, John. Before we take your questions, I'd like to highlight two cool awards we just won. We won the 2015 Best Places for Women to Work by Fortune, which we're really excited about. Fortune also named us the 10th Best Small and Medium Team to work for in the entire United States, so we're really proud of that.

HubSpot's dedicated to creating a supportive, diverse, awesome workplace environment and living up to it with our culture crew to create a company that we love to work at. We firmly believe that culture is to recruiting as products are the marketing. You've got a great product, it's like a magnet to pulling customers; you got a great culture, it's like a magnet to pull in great employees. So we invest a lot in our culture and gets paid back to us in spades.

We're grateful to our employees, we are grateful to our partners, and we are grateful to our investors who have helped us to create what we've achieved so far. We're also grateful to our customers who remain committed to helping our customers grow in a human-friendly, Inbound way, with our Inbound marketing and sales products.

With that, I'll turn it over to the operator and take your questions. Operator?

(Operator Instructions)

Stan Zlotsky, Morgan Stanley.

Hey, guys, thank you so much for taking my question. Want to start off, first of all, by looking at the revenue retention dynamics, once again in the high 90%s. If you were to compare it versus what you put up in Q1 and Q2, is it just about the same from a magnitude standpoint? A follow-up question to that would be what would it take for us to see that metric move up to greater than 100%? Is it a 2016 kind of initiative or is it -- could it be a little bit further on the horizon? Thank you so much.

Stan, it's John. So yes the mix, the relative number is pretty close between the three quarters, in the high 90%s. As we think about going forward, we've done a lot of things to get the retention where it is. It's clearly not serendipity. We've spent a lot of money on the product. We've done a lot of things to improve the support and the on-boarding. At the same time, we've really improved that up-sell rate. We've gotten customers increasing their contact here, buying second URLs and as well as have a little bit of benefit, like I said, from the sales products, but not a whole lot. Now the new vector is what would it take to get us higher than this? It would be a combination of improvement in the underlying renewal rate, or really see huge demand for those add-on products. The exciting part is, we still think we can grow really fast at these high 90%s rates, but obviously we're striving for something bigger longer-term

Okay, great. And then just one more quick question on FX, a 5% headwind to revenue. Help us characterize the impact on billings. Was it -- I know you guys bill a lot in USD. Was it more than 5%, less than 5%? That's it for me. Thank you.

It was about the same, probably about six points, Stan, so a little bit more on the billing side, but pretty close

Okay, perfect. Thanks, guys.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much. Brian, you mentioned the success you were having with Sidekick and with the CRM products. Any more color you can give us on that in terms of where we might see that generating a more material amount of revenue, or maybe able to get more of a breakout from that product that's been around a little bit longer?

Sure. It's going well. We're signing up lots of users of our CRM product and our Sidekick product and we'll start hit the gas a bit on monetizing that next year. We're likely to talk about that next year. I'm particularly excited about the CRM product. I feel like we can monetize that in multiple ways. We have our Sidekick for business product we can sell to those CRM users. We have our new reporting add-on that we're about to be able to sell to our CRM users. Ultimately, I think those CRM users will buy our marketing products and that will become a whole new channel for marketing leads for us. I'm very bullish on it. I think it will -- we'll start talking about how that moves your spreadsheet next year.

Great. John, ASPs took another nice uptick again this quarter, you mentioned that. Is there any -- as you move further along with that, can we start to break out what part of that is related to upsell versus additional products sell and get any more granularity on the movements there?

Right now, we just launched the ad and reporting in the relaunch of the website product, so there's almost no impact on that. Definitely going forward we will give some color on that. We've been able to grow revenue per customer in the 15% to 16% range over the last few quarters and as we think about that number going forward, we have now the ads, the add-on products to sell into that base. But on the other side, you have a bit of law of large numbers and you have -- we've been getting a benefit from the fact that more and more of our customers are on contact tier pricing, which is diminishing. We have a uplift. We have some -- a little bit of challenge so we think we can continue to grow that revenue per customer in the future.

Great. Thanks, John.

Brent Thill, UBS.

Just as it relates to the subscription revenue per customer, it's been seven quarters of roughly mid-teen growth and it sounds, to your comment about websites and ads and reporting of these new products coming in and incremental add on that -- I don't want to pin you to a number, but it seems like the sustainability of double-digit growth that we've been seeing over the last year and a half is probably adding confidence at least from a lot of us that, that growth can continue. Is there any additional color you could add that would suggest anything different in terms of how we're thinking about building our models?

Yes, Brett, it's John. Clearly, we don't guide to this number. We guide to the revenue and earnings and things like that. As you think about that, like I said, I think in the near-term, given the different factors going on, we continue to grow that number rapidly. Longer term, I can't speculate on that, but I think that, that number can continue to grow at a high rate in the near future. There's just a lot of factors going into it and we just started adding new products to sell back into those customers. Hopefully that helps out.

Okay. Brian, when you look at 78% international growth it would make you believe that you'd want to go a little more aggressive in expanding given the success you're having. Can you give us a sense of how you're staying focused? Where you're seeing particularly the most uptake internationally and how you think about laying the foundation so that maybe you don't get too distracted, given how big that opportunity is?

Sure, Brent. We're really excited about what's going on in international. We have sort of a phased approach. Phase one is we go in with partners and they get the machine rolling for us. And so we did that, for example, in the UK and Europe, we did it in a bit of Asia. And then we come in with phase two when we build our direct machine and our own support engine, and we sell direct and we support directly. We do that now in English-speaking countries. We do that in the UK; we do that in Australia. What you'll see is us move to that second phase in more places.

We just announced that the product's now available in Japanese and French and Spanish and German and Portuguese. We're likely to continue to invest and take advantage of that hard work we did to translate the product. We feeling really good about it. We're at the early, early, early, early innings of international expansion. I think it's a big opportunity for us.

Great, thank you.

Terry Tillman, Raymond James.

Wow. Wow. Just like that customer testimonial, I'm feeling your mojo. First question is, Brian, you articulated well in terms of a lot of the new innovation that you can now monetize in that third axis, or third metric for growth going forward. The one thing I'm curious about, though, mid-market customers can only handle so much capability or functionality and also there is a limited how much they will pay. As you all look to monetize these add-on products, is the sweet spot that you're currently going after, is that applicable for these products or could you see a drifting up market or larger mid-market businesses that would be more adept at leveraging these add-on tools?

Were pretty committed to the mid-market. I think that the reason we're going to be successful here is everything sort of lined up nicely for this market. In particular, our go-to-market strategy is custom fit for this market. We use inbound selling, not outbound selling, so we pull them in and our cost required doesn't blow up. We have an inside sales force that's easy to hire and train versus an outside sales force, really hard to recruit and train.

We use an indirect reseller model instead of the outdated sort of heavy direct model. We've got a good go-to-market model that we really matches them and I think will scale really nicely. I don't think we have to drift up market to continue to add customers. I think we can sell more products to our customers. We just started with two new additional add-ons and we're in the early innings but that looks pretty good and we're just starting with our sales business and that's looking pretty good too. I feel like there's lots of room to do lots of business with customers that we deliver lots of value to over the long haul.

Okay, thanks for that. John, you gave us a reminder in terms of a tougher comp for your billings compared to 4Q 2014, but also, though, there's one difference, though. You have a much larger user conference that you just -- customer conference/prospect conference that you just concluded. Much bigger attendance with a lot of prospects. Couldn't that offset the tough compare in terms of just a lot of prospects at that and hence we could still see a strong surge in new customers at the end of year here in 4Q?

Yes, no, obviously we're encouraged by the INBOUND conference and with the 60% billings you saw in the third quarter, we got some of that benefit, deals closing right away. That's the one great thing about being focused on the mid-market and having an inside sales model as we have a 30-dayish sales cycle and some of these deals close even faster than that. We saw some of that in the third quarter. Obviously, we're still bullish about the business so I just want to make sure people understand if they just look at that fourth quarter of last year to keep that in mind as they think about billings for the fourth quarter.

We had a pretty successful INBOUND last year, too.

That's true, too.

Okay, thank you.

Alex Zukin, Stevens.

Congratulations on a great quarter. I wanted to take Terry's question a bit differently, because our checks did pick up that this year you saw maybe more large enterprise companies attending INBOUND. So while you're clearly not looking to go after the higher-end of the market, to use your words, it almost starts to feel like you're getting pulled up as the inbound methodology gets more attention. I wanted to ask you about that first.

There may be a little tiny bit of it. It's not a focused effort of ours. Yes, certainly, some bigger customers are being signed up and bigger customers are showing up at INBOUND but there's lots and lots of mid-market. I feel like our competitive advantage is in the mid-market where our methodology around inbound really is well-suited to the mid-market. Our product all-in-one feature set really works for the mid-market. Our hand-holding support model works very well for the mid-market. I just talked to Brent about the go-to-market model really fits in the mid-market.

Pretty competitive up in the enterprise. It's sort of a [red ocean] in our mind and we really like where we are. We feel like we are competitively well advantaged in there. We're very early stages of market penetration for the marketing [software] there. We think we have lots of room run and we want to build an iconic company in this market. We think we can pull it off.

Got it, thanks. Last quarter you mentioned a stat on the CRM product having 60,000 freemium users. I was wondering if you could maybe update that statistic and comment on any conversion rates from those freemium users. I realize that's next year issue, but anything that you're seeing to-date?

I don't have those numbers -- I was just talking to John. I don't have those numbers at hand. I can tell you it's going pretty well. When you come out with a new product -- we've got a few new products. I would say that CRM product, we nailed it. If you look online at what people are saying about our CRM product and you're looking at the usage and the feedback we're getting, I feel like we hit the nail right on the head with it. We're going to continue to invest in it and use that as a tool for marketing effectively.

So on a marketing side, we create lots of content. That content pulls people in. On the sales side, we're building this free -- sort of like content, but it's free CRM software. We want to pull in lots of new customers. We want to sell it to our marketing customers and we want to use it as the lead gen source to sell our sales product. It's going real well so far.

Got it. Maybe if I could sneak one more about your partner channel. How do you expect the percentage of revenue coming from partners to increase over the next few years? Do you foresee a scenario where partner revenue eclipses direct as a percentage?

Yes, Alex, it's John. We're getting about 40% of our new business from the partner channel, and so that revenue mix is tweaking up. It's in the low 30%s now. It's getting closer to that 40%. Longer term, obviously it's a little bit more up to the customers. Certain customers want to do it direct. They want to do it themselves and other customers, they want to do it through a partner.

Both models work really well for us and it really has to do with the demand. International, for example, we get more and more like 60% of our business coming from a partner channel and that's a great way for us to go to new markets. Eventually, we will have a little bit more direct on the international side once we establish that on the partner side. I don't think we're going to force a percentage, by any stretch of the imagination, but we love both channels and love the leverage we get out of the partner channel.

Thank you, guys.

Richard Davis, Canaccord.

If you do inbound marketing right, prospects will have done a lot of more research on your good or service before they engage. So it seems to me that at a minimum, this implies that the prospect comes into the sales cycle readier to buy and then in theory then shorten your sales cycle and also, frankly, puts a premium on quick responsiveness by the salesperson. I think you're working on some tools in that area. Really, the question that I have is obviously, it's changing the definition of the salesperson but have you seen, in your firm, evidence of this dynamic in terms of time to close and those kinds of things and/or have you it in any of your customers that you think have executed particularly well with inbound marketing? Thanks.

Yes, we've certainly seen it. I feel like when I was a sales guy back in the 90s, the sales rep had all the power in the relationship. If that prospect wanted anything, they had to ask the sales rep. Introduction to your founder, pricing information, packaging information, product specs, that sales rep had control of the process. Really, times have changed. All of that information is available either on your website or on social media sites or whatnot. It's really shifted. The power, frankly, has shifted from the rep to the buyer. One of the points of inbound and one of the practices we really embody is how do we lean into that? How do we sell in a way that really matches the way people want to buy?

So more and more I see it, Richard, when people show up in our funnel, they have a pretty good idea of what HubSpot is. They know how our pricing model works. They now what the value prop is, they've done a ton research on us. The sales rep's job today versus what the sales rep's job at HubSpot was five years ago, or my job as a sales guy years and years ago, is pretty different. It's more guiding them towards the finish line. It's less about pushing them towards the finish line.

And we've seen our sales cycles be pretty consistent. They may be a little shorter, not a lot shorter but a little shorter over time and I think that's a reflection of a lot of things, including the fact that the way people buy things but also including the fact that I think inbound marketing and HubSpot in general, the marketplace and the idea, I think it's crossing the chasm and people have their head around it this idea of that they have to change the way they market. Our product's quite good. We've got a lot of successful customers. Word-of-mouth is quite good, too. For a lot of reasons, it's gotten a hair shorter and yes, things are going well from that perspective.

Thank you.

Mark Murphy, JPMorgan.

Brian, I'm interested if you had any thoughts or observations on the acquisition of Constant Contact. Just as a company with a pretty well-known brand in online marketing, did that revenue multiple feel low to you at about two times revenues? I'm just wondering, we know that, that's a different business, but does that affect or augment your opportunity set in any way at all?

Okay. Interesting question. I don't think it will impact us a bit. Both Endurance and Constant Contact sell to much smaller companies. One-, two-person, three-person companies. Our customers are much bigger than theirs. They're not big enterprises, but they're sort of in between. I wouldn't consider either a competitor. In terms of the multiple, I don't really know but I can say I know the CEOs of both those companies quite well and the deal to me makes perfect sense. It feels like there's real synergy there and there's a one plus one equals three there, so I like the deal a lot. I think it will benefit both companies and both their customer bases. I like the deal a lot.

John, as a follow-up the topic of the Q4 billing, you do have this tough comparison approaching and you did comment on it in the prepared remarks. I'm just wondering, is there anything further that you want to try to guide us to? Do we think that the billings growth would decelerate a little bit relative to where it was this quarter? Any other high-level thoughts on how to navigate that in our models?

Yes. We don't guide specifically to billings but I think if you look over the last four quarters, you had some quarters that were in the 50%s, low 50%s to mid-50%s and then you had a couple of quarters that were 60%-plus. Obviously, we pointed out the 60%-plus quarters as being really great quarters, something really magical happened. The other quarters, obviously when you're growing 50% it's still pretty strong. It's more I was just pointing out the 60% versus what we've been doing in the other quarters that were more in the 50%s and then obviously we give the guidance on the revenue side and that's really where our focus is.

Thank you.

(Operator Instructions)

Brad Sills, Bank of America Merrill Lynch.

Just another one on ASP, please, if you could. Contact tiers been a nice driver for some time. Can you comment a little bit about what's driving customers to load more contacts into HubSpot? Where are you if you look at the average customer? Would say you've got 25% of their contacts, you can get to 50%, 75% or just maybe a little bit of color on what inning we are in with that driver?

I think contacts is the gift that keeps on giving. What I love about that pricing axis is the better our customers do, the better we do, the better our shareholders do. We espouse inbound marketing and we're really incented to teach them how to do it. We build the software product called HubSpot. We're really incented to make it as good as possible. If they embrace inbound and they use the product well, like Aaron on the call today did, gosh, it just works. We see it. Thousands of companies do really well and it doesn't all of a sudden stop. You just keep contacts and new leads just keep rolling in. That should keep going. That's my favorite axis of all of them.

Great, thanks. I know its early on the new product, but can you comment a little bit just on early reception on reports and websites? I know Ads is still in beta, but have you been surprised in any segment of the business where you're seeing uptake in the pipeline build, et cetera?

Still super early. We're only about a month and a half in but been really good reception to it. Lots of new accounts are buying it, lots of existing accounts are buying it so feeling good about our foray into this new territory. I think it's going to go really well.

Great. Thanks, guys.

Spencer Bogart, Needham & Company.

Congratulations on the great quarter. Like some other people on the call, I've got some questions around the new products. [We heard] some of the announcements you made this quarter and just wonder what has you guys most excited about internally? We go our own sense at INBOUND, but what were customers really talking about out there? And then, probably to early to start giving color around how many customers are using multiple products or anything like that, but if you have any additional color there, that would be great.

I think there's a lot of excitement around the add-ons. We've had a lot of people buy the new, improved website product. A lot of people buy that reporting product. That's been, I think it's okay for me to say, probably the best of the three. The Ads product's still in beta. I expect that to be a nice driver next year. Really, really nice reception to the three new products. I think people are excited about it. I'm personally very excited about our foray into to the sales business. I like where we're going with the CRM product. I feel like we nailed that product and as we start to monetize that business, I think it will be a really healthy next act for HubSpot. I'm feeling good about that personally. I like the sales business a lot.

Thanks, guys.

Great. Well, thanks, everyone, for joining our call. We'll be at a couple of events this quarter, in particular the UBS conference in a couple of weeks with our Founder and Chief Technology Officer, Dharmesh Shah. Hope to see many of you there and please reach out if you have any questions.

Thanks, everybody.

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