HubSpot Inc (HUBS) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

Thank you, Charles McGlashing, Director of Investor Relations, you may begin your conference.

Good afternoon and welcome to HubSpot's third-quarter 2016 earnings conference 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'll make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the fourth fiscal quarter of 2016 and the full-year 2016. Our position to execute on our growth strategy, including development and adoption of our sales platform 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 3, 2016 for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

During the course of today's call we'll 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 third quarter ended September 30, 2016 which is located on our investor relations website at HubSpot.com.

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

Thanks, Chuck. Good afternoon to everyone joining us today as we review HubSpot's third-quarter 2016 financial results. We delivered strong quarter with revenue of $70.6 million, up 48% year-over-year. At the same time, we generated over $5 million of operating cash flow and over $1 million of free cash flow, that's the third-quarter in a row of positive operating cash flow.

All in all, Q3 provided further evidence of momentum and further proof of our commitment that we made it the IPO to grow fast while showing margin improvements. It's hard to believe that we've been a public Company for two years already. Really proud of how the team has performed since being public and I'm super excited about the road ahead for HubSpot.

Okay, let's talk about the HubClub marketing platform. This quarter we added over 1,200 customers which brings our marketing customer base to more than 21,000. Now that's just marketing customers, but keep in mind we are adding thousands of sales customers as well that we can cross sell and upsell over time. Meanwhile, our average marketing subscription revenue per customer grew 16% year over year, which means that our customers continue to spend more with us up front, continue to buy more of our software, continue to grow their contacts database and then we grow right alongside them. This powerful dynamic coupled with our steady and persistent growth in additional subscriptions and add-on product sales has allowed us to maintain a revenue retention rate in the high-90%s again in the third quarter.

As we bring the sales and marketing businesses together it doesn't make sense to talk about marketing without talking about sales, too. More and more that's just a fact of life here at HubSpot, given the significant investments we're making to grow our multi-product platform. Frankly, that's how we will be evaluating our progress going forward, especially now that we've surpassed 5,000 paid SalesPro customers.

You know, when we created HubSpot sales as a startup within a startup, we did it because there was a different buyer and a different set of competitors in the space. We wanted to see if this lighter touch business model could stand on its own. Because of that decision, we really think we've created something remarkable especially when you consider all of that new business we are bringing it with a very light touch model, and how that in turn has held down our cost to acquire new sales customers and significantly improved our LTV to CAC ratio for the sales business.

Here at HubSpot we talk a lot about the concept of smarketing. What's smarketing? It's when sales and marketing come together to provide an integrated, seamless and helpful customer experience. Our software is built on the concept of smarketing so that marketing and sales teams can work seamlessly together. So when our customers use the full HubSpot stack of marketing and sales, they tend to be much happier users and much stickier customers. It's still pretty early innings, but for the couple thousand full stack we're serving today, we are seeing a good uplift in revenue retention out of this group. We believe that this uplift in retention clearly demonstrates the value of our customers are seeing from adopting the entire HubSpot gross stack.

When you think about it, it makes perfect sense. One key cause for the customer churn in our marketing product is when there is one marketer at a company responsible for using HubSpot. Now, say that person leaves, HubSpot's left orphaned and the customer's at risk to churn. But when a company adopts the full HubSpot stack, even if that one marketer leaves, there's still a commitment to HubSpot across the sales organization and vice versa.

We're invariably creating customers who truly rely on HubSpot to help their businesses grow. And the value they are able to get from us is significantly higher when they are adapting the full HubSpot stack. So I think this is where the magic lies for 2017, 2018 and beyond.

Starting next year, you are going to see us invest heavily across the entire organization to accelerate the growth of these full-stack customers who are gaining so much value from our all-in-one products and services. We will go from a marketing software company with a sales startup inside of it to a true multi-product company next year.

We've always said that the power of HubSpot is how helpful, human-centric and holistic our platform and philosophy are, those three special ingredients have helped us grow a global inbound community and this past quarter was a big one for HubSpot. Not only did we grow our international revenue by 62%, but we opened our sixth office with the addition of Tokyo this past July. I traveled to Japan myself to help celebrate HubSpot's Tokyo's grand opening and I'm excited about the team we've begun to assemble and the opportunity for HubSpot in Japan over the long-term.

Now let's talk about our agency partner program. Our agency partner program accounts for over 40% of our revenue and continues to fuel our growth internationally. I'd like to take this moment to give an official welcome to all of our new great partners who joined the program in the last quarter, which now stands at over 3,400 marketing agencies. Each one of them committed to delivering a more inbound approach to business worldwide, and at this scale they're really helping move the inbound movement to places it's never been. Really love our program and I'm excited about the vast improvements we will be making in 2017.

For those interested, you should join us next week at our INBOUND event to hear more about those exciting enhancements. Good stuff coming. Those are all great financial results but nothing illustrates our success selling HubSpot as a platform better than a customer's story of growth.

We recently had the pleasure of catching up with Sam Brenner, VP of Marketing of BoxCast. BoxCast is a Cleveland-based startup that offers a self-service, end-to-end live streaming platform for organizations. Hundreds of colleges, high schools, enterprise business and churches utilize BoxCast to share their events with the world. It's super compelling stuff, you should check it out when you get a minute.

Sam actually started his experience with HubSpot back in 2013 when he worked at PR 2020, HubSpot's first agency partner. Sam says that it was here when I developed my close connection with HubSpot. It kind of clicked for me there. It made sense. It did not take me long to understand the value of HubSpot and the INBOUND approach. That passion for HubSpot stayed with Sam even when he moved on to work at BoxCast.

So when we asked Sam what the HubSpot platform did for BoxCast on a day-to-day basis, he said, with BoxCast, everything we do is on HubSpot, from our three full-time marketers to our entire sales team in the CRM and two salespeople beginning to use Sales Pro, we have our entire customer website built on HubSpot and everyone from top to bottom has gotten involved. Our sales team in some cases is writing right alongside our marketers. Our co-founders have begun creating amazing content. Everything that comes out of this company comes out of HubSpot. Sam continues, the HubSpot platform has become such an integral piece of our operations here at BoxCast. It finally gave this company visibility and a real alignment between marketing and sales. There's simply no longer any gray areas sitting between our sales and marketing teams. We can now have information-driven conversations around lead scoring, lead nurturing and lead conversion. That sort of capability just wasn't possible when we were relying on individual features from disparate tool sets. The growth has been so enormous because we've opened up this whole new world.

Wow, I want to thank Sam and the BoxCast team for their time and their insights and for articulating so powerfully what the HubSpot platform means to them. With that I will turn it over to John now to take us through the financials and our guidance.

Thanks, Brian. The third quarter of 2016 was another solid quarter for HubSpot. As Brian mentioned we reported strong growth while also delivering $5.3 million of operating cash flow and $1.5 million of free cash flow. As you can see from the results we continue to execute on the plan we laid out when we went public of growing rapidly while showing steady improvement in profitability. From a top-line standpoint third-quarter revenue grew 48% driven by 51% subscription revenue growth and 13% services revenue growth.

Services growth was impacted by a tough compare given that last year INBOUND was in the third quarter and we get several hundred thousand dollars of training revenue during the event. HubSpot ended the quarter with 21,658 marketing customers, up 29% year-over-year. Average subscription revenue per customer for our marketing business was up 16% year-over-year to $12,320 as customers continue to grow their subscriptions with us. Deferred revenue came in strong at $84.2 million, growing 53% year-over-year while calculated billings defined as revenue plus the change in deferred revenue came in at $77.7 million, up 48% versus the third quarter of 2015.

I was really excited about the billings growth as it is good for cash flow but it was worth pointing out that it benefited from a 1 point FX tailwind and a 4 point tailwind from an increase in months up front from a promotion we ran in the quarter. The promotion provided free onboarding to new customers as long as they pay their fully subscription fee upfront. Situations like these are why we always remind everyone that billings growth will vary from revenue growth due to changes in billing terms as well as product mix and the timing of revenue recognition versus billings.

Now let's look at our margins. Third-quarter non-GAAP gross margins came in at 78%, up 3.7 points year over year and up 1 point sequentially. Third-quarter non-GAAP subscription gross margin came in at 84%, up 3 points year over year and flat sequentially. Third-quarter non-GAAP services gross margins came in at a negative 16% which was a slight improvement versus second quarter 2016.

As I mentioned in the billings discussion, we ran a services promotion in the quarter that increased the upfront software billings but put pressure on services margins. The non-GAAP operating margin improved 2 points sequentially to a negative 2% margin and 9 points year-over-year if you normalize for 2015 inbound expenses. The sequential improvement came primarily from the leverage in G&A and sales and marketing which benefited from the expiration of our obligation to pay certain historical partner commissions. International revenue performance continued to be strong in the quarter despite a tough comparable, growing 62% year over year. International now represents 27% of our total revenue and should continue to fuel our growth given the huge opportunity globally.

At the end of the third quarter of 2016 we had a total of 1,556 employees at HubSpot, up 43% year over year. You can expect to see the pace of hiring slow through the fourth quarter given normal seasonality and the rapid pace of hiring we had at the beginning of the year. CapEx including capitalized software was $3.7 million in the quarter, down from $5.7 million in the second quarter of 2016, as we had much less office space build out in the quarter. We expect build outs to pick up early next year. For the year, CapEx will run at about 8% of revenue for the full year. Given the strong cash-flow performance we are raising our full-year 2016 operating cash flow to 5% to 6% of revenue. With that, let's dive into guidance for the fourth quarter of 2016.

Total revenue is expected to be in the range of $73.7 million to $74.7 million. Non-GAAP operating loss is expected to be in the range of a loss of $7.6 million to $6.6 million. Non-GAAP net loss per share is expected to be in the range of $0.22 to $0.20. This assumes approximately 35.7 million basic shares outstanding. And for the full-year guidance of 2016 total revenue is expected to be in the range of $268.2 million and $269.2 million. Non-GAAP operating loss is expected to be in the range of a loss of $15 million to $14 million. Non-GAAP net loss per share is expected to be in the range of $0.45 to $0.43. This assumes approximately 35.2 million basic shares outstanding.

A couple of items to keep in mind as you adjust your models. As many of you know who've already registered, our INBOUND event which historically have been held in the third quarter is in the fourth quarter this year. So keep this in mind when modeling marketing expenses and cash flow timing relative to prior years. We expect fourth-quarter free cash flow to be negative given the INBOUND expenses and operating cash flow to be slightly negative.

As you begin to model out 2017 please keep in mind the following items. From a revenue perspective keep in mind that first quarter 2016 benefited from an extra day of revenue given the leap year. This coupled with a weakening of the euro and pound in 2016 relative to the US dollar will likely drive a couple point headwind to revenue growth in 2016 if currencies remain constant. From a margin perspective the top line headwinds I just discussed coupled with the normal headwinds from early hiring and payroll resets will put pressure on operating margins in the first quarter.

Our INBOUND event will be shifting back into the third quarter in 2017 which will impact marketing expenses and cash flow timing relative to 2016. With that I will hand the call back over to Brian for his closing remarks. Brian?

Thank you John. I wanted to end with some thoughts around our incredible INBOUND event that's set to kick off here next week in Boston. What I absolutely love about INBOUND, which may come as a surprise to some of you, is that it is not just about HubSpot. Frankly of the 14,000 plus attendees last year, more than half weren't HubSpot customers, partners, or anything like that. For HubSpot, this isn't about holding a user group. This is about celebrating a community. It's about fostering a movement, the INBOUND movement.

What we try to do here at Hubspot is to recognize changes, productize those changes and democratize those changes by giving midsize businesses the platform they need to make that movement their own. That's why we love the mid market so much. That's why we're so bullish on the platform we've created, And that's why we will keep building and growing alongside this movement. That's why I hope to see you all there next week.

Want to thank our partners, our investors, our customers, and each and every HubSpot employee for helping us build the HubSpot we know and love to this day. Operator, could we please open the call for some questions?

(Operator Instructions)

Richard Davis from Canaccord.

One of the big themes we've seen coming as kind of this real-time reporter responder system. People become have spoiled by uber and they want a quick response.

If I send out a HubSpot email I can see when someone is reading and [our mesh has a bot] it so broadly speaking, to what extent do you believe HubSpot will be moving in that kind of direction? It seems real-time reporter responder seems like a big deal these days.

That's a good question and congratulations first up on the call today.

I appreciate it.

I feel like we've been doing that for a long time actually where HubSpot has been pretty close to a real-time system, where as a marketer, let's say I've been an active user for HubSub for a long time; and I post a blog article in HubSpot and within minutes I can see, is that blog article gaining traction? Are people visiting it? Should I add some ad dollars behind it? What can I do?

HubSpot is that very much of that real time very modern perspective and we built that from scratch. In terms of the bot, the way I kind of think about the bot is that it is a whole new way to interface with HubSpot. Generation one of interfaces was the traditional browser, generation two interface was sort of the swipe interface of your mobile phone and I think we are just in the top of the first inning of the third-generation where instead of typing or swiping your just talking to HubSpot and asking HubSpot questions.

That is interesting, I think, as a user, HubSpot that could be very interesting. I think that technology could be applied down the road to anyone's website. Instead of browsing through someone's website you just ask that website questions. Everyone will have a bot some day.

I think we are very well-positioned as these changes are happening in the market.

Brad Sills from Bank of America Merrill Lynch.

Thanks for taking my question. Just one on sales with the success you are seeing, is that driven at all by customers coming in that are new to the franchise for sales only and you see some pull through of marketing? Obviously, it's more often the other way around. Do you ever see examples where customers may opt for sales first and then add marketing for some [results] later?

That's a very good question. We are seeing a lot of that where so many of the leads coming in and so many of the new customers we haven't seen before. So that is one of the things getting us super excited about next year as we shift to a model where today we have a handful of sales reps selling the sales product; that sales product is hot, we hit the nail on the head with that product.

We want to give that Sales Product to our much bigger marketing sales organization and want to give it to our agency partner channel and gain a lot more leverage to it.

It will be interesting to see how it develops next year. You have a sales rep next year, you have the marketing product and sales product, you're going to be getting sales leads, you're going to be getting sales leads. It would be interesting to see how this develops, but if I were a betting man, I would bet a lot of those reps start customers off with Sales Product and upsell them as they are getting the need for more leads in the system. That's definitely a big part of the play book.

Thanks, Brian.

Eric Lemus from Raymond James.

Nice job in the quarter and thanks for taking my question. Looking at your subscription gross margin it continues to tic up pretty nicely in almost industry high prescription gross margins. Where do we see that going forward? Should we expect you to reach some new levels with AWS where we get some preferred pricing there?

Eric, it's John. We've been really happy with the improvement on the subscription gross margins. Obviously that's the lifeblood of the company so we have done a lot of good work with the AWS agreement.

There might be a little bit more room but I think you are right, we are hitting the ceiling on that. I think as we continue to grow the subscription base and services becomes a smaller and smaller piece and as we endeavor to improve the services margins a little bit we can still get some gross margins leverage but it will come more from that mix than the product gross margin itself.

And Brian, just a high-level question, we are hearing a new buzzword in the industry for artifical intelligence and you guys are talking about the bot, where do you see that down the road as far as fitting into your product set and to your customer segment? Is that more of a, nice to have tech solution, or a monetizeable tech solution down the road? Oh, no I think that's a trend we can very much capitalize on down the road. I think it can make our offerings far better in the future. The nice thing about AI is that all of the hard work that Microsoft and Amazon and Google is doing, is they're exposing that technology for example, through AWS that we can take advantage of so mere mortals can add this to their products. You are starting to see pieces of it inside of HubSpot, we're certainly leveraging that with the bot where natural language processing has gotten much better through artificial intelligence. You see it inside our lead scoring already showing up. We use some of that. So you will see more of that from us down the road. I think it's going to have a big positive impact on our products down the road and how people buy and how they expect to be served will change. Super exciting developments that we are pumped about.

Alex Zukin from Piper Jaffray.

Just first on the ARPU growth and the customer growth, 16% and 28% that is great and will continue to be great, solid metrics. I wanted to ask about the sustainability of those numbers specifically as Sales Pro comes in the fold as ARPU growth and as Sales Pro customers come into the fold on customer growth, when do you expect to actually merge, when does that customer growth number also start to encompass also the sales customers?

I think John and I should both comment.

The 16% we've said mid-teens in the near future and I think we are right in that ballpark to see customers coming in and adding contact tiers, [buying second] URLs, cross selling them, getting the revenue per customer up; and then customer growth I think you said 28%, we think we had 29% customer growth so we are happy with that.

What is interesting really, and I will push it back over to Brian, is more and more we are going to be thinking about total customers, whether they can't come in on the marketing or sales side. We think there's a great opportunity to bring these customers in and cross sell and upsell them.

I would second that. The way we are thinking about our business is changing internally -- our own method/model, Alex, is changing. As the sales business is growing up as we're turning from a single product company to a multi-product company. The way we are thinking about it changing quite a bit.

We need to evolve the way that we describe it to you that matches more closely to the way we are starting to describe it to ourselves. What I like about it and what I like about where we are going is I think we will be up to apply the lessons we learned from the sales business to lower cost to acquire a customer over time and apply that to our overall business.

The other thing I like about it is when we pick customers who use both products, gosh, they are stickier and we don't have that many of them yet so we want to really crank this up next year. But when they use both products their customer retention is better and we see the revenue retention be better. We think this will really improve over the long haul our unit economics and allow us to create a lot more value for our customers.

Brian, any update on the run rate of the sales core product? You mentioned last quarter it was around $10 million. And then, John, if I could sneak in one more, you talked about a promotion that you did that impacted billings growth in the quarter and I wanted to ask kind of what the strategy behind that was, how successful it was, and the repeatability of that kind of promotional activity.

The sales numbers up over the last time we reported the number. I don't have the number at the top of my fingers, but it is going well. I think we did in the prepared remarks, we did talk about the number of sales customers, Sales Pro customers, and that is 5,000 now. We will keep you posted on that, it's going really well.

After we ran a promo in the quarter, we came into the quarter -- we didn't have inbound in the quarter -- and we run promotions from time to time like other companies do. This quarter we decided to run a promo where if customers bought Enterprise or Pro and paid 12 months up front, that we would heavily discount their onboarding.

And it worked well. It actually drove our billings up. We got about 4 points on the billings which is good from that standpoint. You guys should think about that from a revenue standpoint given that part of that was more months up front than just the business, but we liked that and that was good.

I think as you are thinking about fourth quarter obviously, we are not going to run that promo forever, you don't want to run the same promo quarter after quarter, because salespeople and customers don't respond to the same thing and we pulled billings forward a little bit with that promo.

As we look at the fourth quarter we have INBOUND there which we are really bullish on but given the 30 day sales cycle and the fact that we have a couple of holidays I think we need to be careful on the billings growth. I think about a mid-30s billings growth for next quarter and we will see how that plays out. I know a lot of people are signed up for INBOUND but it should be a really good event.

Stan Zlotsky from Morgan Stanley.

Hey, guys. Thank you very much for taking my questions.

So first one for Brian, you mentioned last quarter that you guys will be reorganizing or thinking about reorganizing your sales division to allow reps to sell marketing as well as sales products at some point in 2017. So maybe a two-part question; how close are you to flipping the switch to allow reps to sell the full platform of marketing as well as sales; and two, whenever you have these kind of changes within a sales force's selling motion you could see some disruptions. We've seen it in some other companies in software.

How comfortable are you that you will be able to get off to a fast start once you flip the switch on your salesforce? And then I have a quick follow-up.

We are going to flip the switch on it in January and we have been in preparation mode for months, working very hard here to get ready. We got an incredibly smart and capable team here at HubSpot and one of the things I like about my smart capable team is that they have a lot of history with each other. We've been working together actually a long time, all together.

It's a really strong management team. If we have problems we are pretty good at fixing it. We may have a hiccup or two, it's hard to predict what will happen. I'm pretty confident we will be able to fix it relatively quickly and get ourselves on track.

I think it's a good move, I think it's a great move, actually. It's kind of a no-brainer, all the benefits that come with it are going to really benefit HubSpot and its customers for a long, long time; so I definitely would not do it unless I thought it was going to work and knew it was not going to work. Yes, I will give you that; there's some risk to it. I don't think it's a tremendous amount of risk but there's a lot of work to do to get it just right.

You mentioned you may be stepping up investments in 2017 to get the Sales Product rocking and rolling. Is there anything you're thinking about as we head into Q4 and people start to roll over their models, how should we be thinking about investments and leverage in 2017?

Good question, Stan. Brian mentioned we are making investments, as you can imagine this is a big bet for us and we are going to make sure that we put all the wood we can behind that arrow. We're still committed to delivering leverage year over year. We try to make investments at the beginning of the year to really make them pay off, so with payroll tax resets as I mentioned on the call, the leap year not being this year versus last year, you could see a little bit of headwind on the operating margins in the first quarter, but longer term we expect to continue to get leverage in the business and I think you've seen that.

We're been pretty committed to that and getting closer and closer to breakeven we will continue to endeavor against that.

Mark Murphy, JPMorgan.

Thank you very much. So Brian, you alluded to some changes for the agency program coming in 2017 and I'm curious at a high level, do you plan to incentivize them more on the Sales Product or perhaps add some incentives for incremental lead flow in general? Any kind of additional thoughts from that would be appreciated and then I have a quick follow-up.

Thanks, Mark. In my head what I really want is our agency partners to sell more stuff and deliver more value to our customers. They are doing well but as I benchmark ourselves compared to best in class agency partner programs, I feel like there's a gap and a lot of work to do.

Hopefully, when you are in (inaudible) you will get to go to an agency partner program presentation, one of our senior executives, [McNeil], recently took that program over, he has a bunch of awesome new enhancements he is rolling out to the program that are designed to do just that. How do we help them grow, and when they grow we grow.

You have to stay tuned and listen carefully to that presentation. I think you'll like what you hear and it should be pretty good.

Secondly, I was curious how you would characterize the competitive environment itself, during the quarter. At least a few of your partners seemed to observe a little more benign environment which is interesting to me.

I'm wondering if that squares with your view of the landscape in recent months.

I don't think there has been a big change. The way I would characterize it is we compete a little less, honestly with [Marqetto], I think that's a very good company it has moved upstream a bit and so we seem a bit less than our core market and we wish them well.

We see salesforce a bit more and they have a product called (inaudible) we compete with and we cooperate with them at the same time, so it's a bit of a wash. So it doesn't feel like any big shift that happened over the last quarter in terms of the competitive environment and glad to hear that the partners think it is more benign, I feel like it's the same.

Brent Thill, UBS.

Hello, Brian. Could you give us an update on how the add-ons are doing? I think there's a family of four in that suite with website reports, ads, and [starter ho], how the adoption of those solutions are going? And had a quick follow-up for John.

I would characterize it as going good, not great. We have lots of people buying the reporting product and lots of our existing customers buying it and they like it. There's a lot of work going into that, I hope you sit through [Pittsburg] on it's presentation there.

A lot of customers are buying the add-on for advertisements, lots of work going into that product, I think there's upside there. Then the website add-on is steady as she goes, lots of customers buying that, they get a lot of value out of it. I think it is going good, it's solid performance, lots of our customers are buying it.

I think there's more we can do. Some of the reorganization we are doing next year will set us up to do even better there and some of the product enhancements that are coming in, inbound will set us up to do even better. I feel good, I want to feel great six months from now.

We were talking, Brian and I, on the add-on side what is really exciting for us on the add-ons is when the marketing reps can sell the Sales Products.

It is not a true add-on but it's a true cross sell where we can -- they can add more value to the customers and grow their ARPU over time. In addition to what we have now, we think that's a great lever going forward.

It sounds like in Q1 if I'm a sales rep I'm going to have marketing, plus add-ons, plus sales in our bag. I'm effectively going to have a lot of different latitude to run here.

That's exactly right. It's a good time to be a sales rep at HubSpot in Q1.

Real quick for John, what was the impetus for you to run the promo and we totally recognize the industry runs promos a lot. Was there something you said -- hey look, INBOUND is late so we need to get ahead of this and keep some excitement in the field ahead of that?

What was kind of the driver that made you implement that promotion? Can you give us a quick sense of when the last time you drove a promotion similar to the one you did this quarter?

You are reading my mind. I was about to answer the question about INBOUND and you already answered it.

The summer months are always a little slower, without INBOUND we wanted to see what the trade-off was where we discounted services heavily and what we got was months up front. I don't know if we have ever done this specific promo but this one was pretty successful.

We do promos all the time but don't necessarily call them out. It was also important to call it out because it did put some pressure on the services margins.

We would have gotten more improvement on services gross margin had we not done this promo. We thought it was an overall plus for the business but a little bit of a challenge to the services margins.

Ross Macmillan, RBC Capital Markets.

Thanks so much and congrats from me as well. Brian or John, just curious, I know it's very early but as you look at the customers that you have on [pool stack], pro sales plus marketing, what do you think you are seeing in terms of that Delta and retention rate relative to a customer just on the marketing platform?

Is there any way you could help us think about that where you think it could get to relative to your low [rate of retention] today?

It's John. We are seeing an improvement there, I'm careful not to give you an exact number. I've always worried when you have a small sample size and you have early adopters to take those results and then forecast that over the base. But stay tuned on that front when we have more people on it and we are actually actively having our salespeople, but as Brian said we think this should be a net positive to retention over time.

Maybe to ask another way, if you had one or two marketing professionals and then you think about ruling it out to sales, what's the order of magnitude that, that increases by? Is it 3x, 4x? Just curious on that average number of users uplift that you are seeing for a customer that [adopts] over?

The way I would answer that, let's say there were marketing customers and they have their normal retention rates, low 80's customer and high-90s revenue and then they add the Sales Product? Something nice happens on the marketing side that I like.

They've committed to basically run their front office on HubSpot, a big reason our marketing customers churn is because they have one marketer and that darn marketer leaves the company and when the marketer leaves the company then we are vulnerable to losing that account. When they've committed to [up front] the platform and their marketer leaves, they wait and they hire a new marketer and that new marketer uses HubSpot. So there's the obvious uplift we're going to get from the additional revenue of the salespeople who are buying and using that Sales Product but there is an additional stickiness we're seeing that we really like and that's one of the reasons we are making this bet on the reorg for next year.

Bob Mensuri, William Blair.

Just want to touch on mix a little bit, last quarter you mentioned improved mix with an install base, and I know you guys are more focused on SMB but can you walk us through the customer lifecycle? How big can customers become on your platform and will they ever have a need to move up HubSpot to more enterprise? I'm try to understand as they grow scalability and how that is improved over the last 12 to 18 months?

That's a really good question. What's interesting is I think of who our competitors are. We compete with point solutions versus all in one, so when somebody met with a potential customer today, a company down in Houston, software company, they were looking at, should we buy a consulting services or social media tools, social media management tools or should we buy a website? Shall we buy Marquetto? They were looking at Marquetto and SalesForce and then buy an analytics tool -- should we buy six different applications with six different builds, six different numbers to call, six different UIs to learn, or should we buy HubSpot? The nice thing is that it is all in one. You've got one user-interface, one build, easier to use. All that kind of stuff. We build it from the ground up from mere mortal companies that are in this sweet spot mid-market space and that has really worked out well for us. What we see in the market is if you're a company that is between 20 and 200 employees, our all in one value proposition resonates insanely well. They absolutely love our value proposition, they love how easy it is to use, they love the simplicity and they love the power and they love our focus on regeneration and growth.

As you get up to be a bigger company, you've got 2,000 employees, let's say you are Uber or you're Airbnb or you're Google, a huge account, those people tend to buy point applications and we lose some of those deals but we tend to win very well in our sweet spot. We are focused on the mid-market. We build our product for the mid-market.

We have our sales motion built for the mid-market our (inaudible) for the mid-market and is very focused in there and that has served us extremely well. Big market, underserved, going really well there.

That's really helpful color, thank you so much. On the sales cycles, as you have been selling the Sales Product, are the sales cycles different from the marketing product cycles and what does that Delta look like?

They are very different. The cost to acquire a customer on the sales side is about in order of magnitude less than on the marketing side.

The price point is lower but the sales motion is much, much shorter. There's rarely more than one telephone conversation for example that happens with the buyer. The buyer on the sales side typically before they are talking to a rep have already used their CRM and are tripping over limits in that CRM, very similar to how you would do inside of something like a dropbox. So it's a much lighter, much cheaper, much shorter sale. That's what we like about, we want to take some of those lessons and apply it to our whole business.

Scott Berg, Needham & Company.

Congrats on a good quarter. Two quick ones for me.

First of all Brian, I have a chance to attend several different conferences in this market we'll call, generic marketing space this quarter, and one thing that keeps coming back as most memorable is how fast customers are trying to get in and use products in the INBOUND marketing sphere, whether it is [FDO] whether it's other items, they are trying to run there fast and really do not know how to do it very well, probably not a surprise.

How much of your business today do you think comes from Greenfield or completely new activities, customer opportunities versus individuals that may have a solution today? They all seem to not know exactly what to do in this space properly.

I think you are a very observant fellow. Most of our customers that we bring on, it depends on how you define Greenfield. I would describe Greenfield as they have a website built on WordPress, they hired their brother-in-law to design the website and do a little optimization on it. They use a premium social media tool and kind of monitor social media. They have Google analytics installed and once every three or four months they look at their traffic. They have an email system. They have mail chat for constant contact and then they have either spreadsheets or some sort of lightweight CRM system down on the bottom.

That is our typical customer. They have 20, 30, 40, 50 employees and they want to grow and they are trying to figure out how to grow and their systems are hard to manage and no one is taking care of them and we come in and we say it's easy.

It's all in one and here's the play-book and how you grow. Here's how you create content, here's how you spread it in social, here's how spread it in [search], here's how you pull in new leads and customers. It's very appealing to them. That's our typical play. It is typically not, gosh we have salesforce installed and Marquetto and this big heavy system and we've got to rip and replace it. We play that game a little bit but it's much more Greenfield.

Last question for me, I don't know which of the two of you want to answer it, but when you look at Sales Product you are getting some sales momentum there but how do you look at that product domestically versus internationally? Do you have traction with it on an international basis or is this still really trying to seize some opportunities locally before pushing it out more broadly?

I don't have those numbers at my fingertips but one of the interesting things about the sales business is that it is a true Internet business so people are coming in from everywhere to come and try our free CRM and upgrade on it. We are getting orders and customers from lots of different countries. In terms of the sales power and the marketing power we are putting behind it, we have 95% of those resources in the US so most of that revenue is from the US at this point. As we move to the model next year and we put this in the bag of our international sales organization there will be a lot more leverage there going forward.

Jesse Helsing, Goldman Sachs.

This is Janet on for Jesse. I had a quick question. When you rollout sales do you plan to roll it out internationally when you push it through broader salesforce and also in general when you think about international expansion, what are some of the additional geographies where you see some incremental opportunity?

Yes, we do plan to roll it out to the whole salesforce, including the international reps, we plan to do that in Q1.

Just did Japan and just getting ramped up there. We're still talking about other countries but lots of opportunities in the rest of Europe, there's opportunity in South America and opportunity all around the world for HubSpot. As we move to these light touch heavily Internet-based models where there are users coming in from all over the world, I think you will see us continue to invest and take advantage of that low hanging fruit as time [passes].

Thank you.

Samad Simona from Stephens Incorporated.

Good afternoon, thanks for taking my questions. I don't know if this has already been asked but on the CRM, the free solution, could you give an update on what percentage of new marketing customers are driven by that and the same for Sales Pro? And I have a quick follow-up.

This is Brian, I can answer your second question. I don't have the first one at the tip of my fingers. The second one is pretty much 100% so when someone buys Sales Pro, they come in and start using the CRM, they are tracking their stuff and loving it and it's integrated with their email they say -- I want to do more. I want to use your scheduling software as part of this. I want to use your email templates as part of this. I want to call over CRM.

They trip over limits, they talk to one of our salespeople and they buy the Sales Process so it is 100% there. In terms of marketing customers who start on CRM I don't know what that is. It's starting to get to be a significant number of people and we will lean hard on that next year.

This is Chuck. Last quarter we said it was about 20% of marketing customers -- new marketing customers began using the CRM before they purchased marketing and about one third of the customers here to date are using the CRM product. We will update that in a week.

That's helpful. When you think about the CRM offering, is there a path to monetization there or is that for now just more of a lead generation tool?

For now it is a lead generation tool. When we decided to go into the space, this space for us is very different than the marketing space. We came up with this INBOUND concept and created this INBOUND marketing software and movement, so we were the first mover.

CRM is obviously a very different landscape. You have big established CRM players so we wanted to come in with a very disruptive model. So let's give it away for free and use it as a lead gen source and take those CRM users and upsell them power tools for sales reps and enable those sales reps to sell more. All I would say there is more opportunity for monetization there, there is more functionality coming, that product's getting better fast. You'll see more of that at INBOUND. But at this point CRM is free.

At this time we have no further questions. I will turn the call back over to Brian for closing remarks.

I hope you all cancel your boat or fishing trip to the Bahamas and come to INBOUND, we look forward to seeing you next week. It's going to be great.

This concludes today's conference call, you may now disconnect.