HubSpot Inc (HUBS) 2016 Q4 法說會逐字稿

Good afternoon, my name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the HubSpot fourth-quarter and 2016 earnings conference call.

(Operator Instructions)

I will now turn the call over to Charles MacGlashing, Director of Investor Relations. You may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot's fourth-quarter and full-year 2016 earnings conference 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'll make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first fiscal quarter and full year 2017. And our position to execute on our gross strategy, including development and adoption of our sales platform and our ability to maintain existing and acquired 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 November 2, 2016 for discussions of 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 is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release announcing financial results for the fourth quarter ended December 31, 2016, which is located on our Investor Relations website at HubSpot.com. Now, it's my pleasure to turn over the call over to HubSpot's CEO and Chairman, Brian Halligan.

Thanks, Chuck, and good afternoon, folks. Thanks for joining us today as we review HubSpot's fourth-quarter and full-year 2016 earnings results. Let's jump in and get right to it.

HubSpot ended 2016 on a strong note. Fourth-quarter revenue increased 44%, and non-GAAP operating margins, excluding our INBOUND event, improved by 7 points year over year.

Fourth quarter closed out a great year of performance where HubSpot's full-year revenue grew 49%. Total sales and marketing customers approached 28,000, and non-GAAP operating margins grew by over 9 points. Very happy with our 2016 results.

Right from the start, Darmesh and I set out to build something special here at HubSpot, something our grandchildren could be proud of. We're really happy how things have gone.

More than 10 years in, HubSpot has had $300 million plus run rate in revenue. We're under our own steam from an operating cash flow perspective, great stuff. And it is all a result of the incredible work from everyone on our team.

But we're not even close to being done, not by a long shot. We want to build something much, much bigger. We want to have a bigger impact on more customer's lives, a bigger impact on our Partner's lives, a bigger impact on more of our employee's lives. We're an ambitious group here at HubSpot.

With that in mind, I want to tell you about the steps we have been taking towards evolving HubSpot from a single-product company to multi-product company with the goal of becoming the mid-market growth platform. Something we're calling One HubSpot internally, and I'm pretty darn excited about it.

When I personally think of One HubSpot, I think of it like this. We've got this big marketing business where things are going great, continue to go to market with the three Is, INBOUND marketing, inside sales and our indirect partnership. This approach continues to service us incredibly well in that business.

Then we also have this sales business at HubSpot that has grown up to the point where we're not only merging it with the marketing business, but we're actually adopting part of the go-to-market model that's made it so successful so far. Early on, we made an important strategic decision to keep the sales business separate from our marketing business.

The typical playbook would have called for us optimizing short-term revenue by selling the sales product right back into our marketing base. But keeping it as a standalone product has allowed us to iterate and adapt the business model and figure out some really important stuff.

So what is happening now is we're aligning it all under one unified HubSpot brand. It is great because we're taking this hot sales business where you have a couple dozen sales reps and a handful of partners selling it, and we're bringing it to the entire inside sales organization in our entire indirect Partner channel and letting them sell it. Big opportunity here, very, very excited about it.

So why are we doing this? We learned a ton from the sales business over the last year. One thing that worked for sure is the freemium model, and it works because more and more customers want to see real value out of our product before a company extracts value.

Our sales product does exactly that. And as these free sales users convert to paid, it is showing up in the numbers we care so deeply about. Because it turns out that the cost to bring on a new customer through our sales channel is an order of magnitude lower than our traditional marketing channels. You can you see why we're excited.

We're going to take everything we've learned in sales and apply that to the rest of our business. Our traditional INBOUND model has always tried to match the way we go to market with the way people actually shop and buy.

I think today, humans are getting really, really used to self-service. We here at HubSpot admire companies like Stripe, Atlassian and Shopify. When companies use their products, they're learning more and more about the value it gives as they go. They use it, they love it, they buy it, they refer it, it's great.

Humans increasingly aren't interested in a sales and service model with a heavy human touch at every turn. That's just the reality of how people want to shop and buy stuff today, so we're going to lean heavily into this lighter touch approach in a big way.

The second big driver behind our One HubSpot initiative revolves around our gross stat customers. These are customers who use both our sales and marketing platform, and whose companies have gone all in on HubSpot. Our gross stack customers get tremendous value from the alignment of our marketing, sales and CRM products, but at the end of the day what they're looking for is help just growing their business.

That is no surprise. Companies aren't interested in merely just aligning their sales and marketing divisions to make profits more efficient anymore. Improved alignment is nice to have, but ramping growth, that is a must have.

Companies demand more. Sales and marketing software can't just promise you better internal alignment, it's needs to drive fundamental business growth. And that's exactly what the HubSpot Growth Stack is here to do.

It is about a marketing team that can give their sales team a steady stream of leads, filling up each salesperson's calendar with appointments to start off their day. It is about a sales team that converts those leads more quickly thanks to contacts and automation. And it's about companies that can harness the power of an all-in-one platform to focus their entire team around driving business growth.

What is incredible is that when customers are successful with the HubSpot Growth Stack, they tend to be more valuable, happier and longer-term customers for us. It is still early days, but we're seeing a nice uplift in both customer retention and Net Promoter Score out of Growth Stack customer base. So our customers win and we win, everybody grows.

That reminds me of a conversation the team recently had with Jesse Mayhew, a customer of ours from MachineMetrics that actually came through our freemium HubSpot for start ups channel. MachineMetrics has developed a real-time manufacturing analytics platform which helps businesses make faster, better informed decisions on their manufacturing footprint. Super cool stuff.

Anyhow, we were catching up with Jesse about the benefits of an all-in-one platform when he said, quote, the ability to align our sales and marketing efforts into a single platform has been invaluable, but we've adopted HubSpot to drive growth. Growth is king for us right now, and HubSpot has honestly become our front-office platform to drive that growth. We're using the HubSpot academy to train our new sales people, we're creating more advanced content pieces in campaigns.

All of our sales calls and customer outreach including our entire website goes through HubSpot. It's a bit unoriginal, but you've become our hub. Jesse when on to tell us what was freemium meant in their decision to consider HubSpot. Quote, products like your free CRM and HubSpot for start ups made an absolutely huge difference for us. I was relatively new to the company. I didn't have a ton of budget to work with at the time. But being able to get so much value up front, frankly, as much value as we were getting out of our old paid CRM was instrumental in getting my execs to sign off on the entire HubSpot platform. It honestly made the difference.

Jesse finishes by saying, quote, we're bought in on HubSpot across our company from top to bottom. We've recently started to substantially grow our team, bringing on two inside sales hires, a couple of customer success people, and we'll likely will likely hire someone to help with integrations. This is all great, but we're most excited about being on track to grow this business into something that looks very different this time next year.

Wow, I want to thank Jesse and MachineMetrics' team for their time and insights, and for articulating so powerfully what the HubSpot platform means for their business. What I'll be personally obsessing about in 2017 and beyond is going to be running this One HubSpot play, so we can grow the number of customers who are using the entire Growth Stack and watch them grow by using it.

The team is off to a great start, but there's still a whole lot of work to be done. I think we're going to look back on this some day and say, wow, One HubSpot really was one of those defining moments in HubSpot history when we began to grow into a true multi-product company for the growth-minded mid-market. With that, I'll turn it over to John to take us through the financials and our guidance.

Thanks, Brian. The fourth quarter capped off a solid year for HubSpot. We delivered strong revenue growth, saw big improvement in margins and delivered positive operating cash flow, all while making significant investments for our future growth.

Fourth-quarter revenue grew 44%, driven by 46% subscription revenue growth and 15% service revenue growth. Services growth was impacted by the promotion we ran last quarter where we heavily discounted on boarding in exchange for up front annual payments. HubSpot ended the quarter with 23,226 marketing customers, up 28% year over year.

Average subscription revenue per customer was up 13% year over year to $12,592, as marketing customers continue to grow their subscriptions. It is worth noting, the marketing customer count now includes the recently introduced $50 per month marketing starter product, which drove a slight improvement in our marketing customer growth, but also weighed a bit on our average subscription revenue per customer. We're happy with the short-term trade off of adding incremental customers at a lower price point given the future upgrade opportunity we get with those customers.

As Brian mentioned, there a couple of initiatives that you will hear more and more from us. First, we are embracing the freemium model, which helped us to get to nearly 28,000 sales and marketing customers this year, and will allow us to scale the business going forward. To clarify, the 28,000 excludes customers who only have the legacy $10 per month Sidekick product.

Second, we are actively selling customers on the Growth Stack. This is a key focus for us given the increased value these customers get, coupled with the early results we've seen in retention. Both of these tie into our One HubSpot initiative.

We will be aligning our reporting with that initiative by providing new metrics in 2017. Our new reporting structure will include total sales and marketing customers, total average subscription revenue per customer, and milestones as we hit Growth Stack achievements. We'll still communicate some of our old metrics for a couple of quarters, but our focus will be on these new metrics that are best aligned with the way we will judge our success going forward.

Deferred revenue came in at $96.6 million, growing 48% year over year, while calculated billings, defined as revenue plus the change in deferred revenue, came in at $88.8 million, up 40% versus the fourth quarter of 2015. The billings growth exceeded our expectations due to a strong December which benefited from a successful INBOUND event.

Please remember 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 billing. For the remainder of my commentary, I will discuss non-GAAP results.

Now, let's take a look at our margins. Fourth-quarter gross margin came in at 79%, up 4 points year over year and up slightly versus the prior quarter. Fourth-quarter subscription gross margin came in at 84%, up 3 points year over year and flat sequentially.

Fourth-quarter services gross margins came the in at a negative 21%, down 5 points sequentially. The promo we ran in third quarter, which I mentioned with revenue impacted services margins as well. With that said, we expect services margins to improve in 2017.

Fourth-quarter operating margins improved 7 points to a negative 2% margin when you exclude the impact of the INBOUND event. In the quarter, we recorded approximately $1 million of compliance costs for doing businesses in certain jurisdictions. Absent this one-time catch up, G&A as a percentage of revenue would have been flat sequentially.

International revenue performance continued to be strong, growing 67% year over year, representing 29% of our total revenue in the quarter. The international growth rate was helped by the migration of our Sales Pro business onto our new billing system.

Historically, we weren't able to capture a Sales Pro customer's country of record. So all Sales Pro revenue defaulted to domestic revenue. Excluding this benefit, international revenue growth would have grown 59%. At the end of the fourth quarter we had a total of 1,597 employees at HubSpot, up 38% year over year.

CapEx, including capitalized software, was $4 million in the quarter, down from $7.4 million last year. The decrease was the result of less office space build out in the quarter. As build outs pick back up in early 2017, we expect CapEx to increase in the first half of the year and average 8% of revenue for the full year.

With that, let's dive into guidance for the first quarter of 2017. Total revenue is expected to be in the range of $78.5 million to $79.5 million. Non-GAAP operating income is expected to be between a loss of $3.5 million to $2.5 million.

Non-GAAP net income per share is expected to be between a loss of $0.10 to $0.08. This assumes approximately 36.2 million basic shares outstanding. For the full year of 2017, total revenue is expected to be in the range of $349 million to $353 million.

Non-GAAP operating income is expected to be between a loss of $11.5 million to $7.5 million. Non-GAAP net income per share is expected between a loss of $0.30 to $0.22. This assumes approximately 36.7 million basic shares outstanding.

As you adjust your models for 2017, keep in mind the following. From a revenue perspective, 1Q 2016 benefited from an extra day of revenue given the leap year. Also, a stronger US dollar will drive a couple of point headwind to revenue growth for the full year of 2017.

On the margin front, we expect the normal seasonal headwinds from early hiring, payroll resets and annual compensation adjustments to put pressure on margin expansion in the first half of 2017. But we continue to expect margin expansion for the full year.

Our INBOUND event will be shifting back to the third quarter in 2017, which will impact the timing of marketing expenses. We expect to be free cash flow positive for the year.

As you think about the quarters, we anticipate strong free cash flow in the first and fourth quarter and free cash flow to be negative in the second and third quarter given a material vendor payment and the INBOUND event. With that, I'll hand the call over to Brian for his closing remarks. Brian?

Thanks, John. In the spirit of kicking off another new year, I wanted to share a personal goal I have for HubSpot in 2017.

I obviously think the One HubSpot initiative will be a big win for our investors, our customers, our Partners and employees. But it goes deeper than that because I think it has the potential to drive the whole Company to focus more than ever on our ultimate purpose, which is helping our customers and our Partners grow their own businesses.

We're in this to change people's lives. I said we were ambitious, and we are. We want to be the fuel in our customers' engines that helps them grow to give them real value and with an amazing customer experience.

In that respect, I believe our bold bets in delivering that value through our full Growth Stack have a real shot at creating a defining moment in HubSpot's history. I want to thank our customers, our Partners, our investors and each and every HubSpotter 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)

Mark Murphy, JPMorgan.

Yes, thank you, and congratulations on a strong finish to the year. So I wanted to ask you about the linearity during Q4.

I think you commented that business was strong in the month of December. Were there any subtle changes, perhaps a bit slower during the election, or during the INBOUND conference itself and then picking up in December any more than usual?

Yes, Mark, it's John. Yes, we definitely saw a little different linearity in December. It definitely was a bit back-end loaded.

I think that could have a little to do with INBOUND, but also we had a lot of reps and accelerators trying to make club. So they really pushed hard in December. And I think that led to the strong billings performance for the quarter.

Okay. As well, John, I was wondering if you could clarify, were there any special incentives during the quarter? Anything designed to benefit the payment terms or the contract duration, or other types of incentives? Or were you strictly referring back to those types of incentives that were in place in Q3?

That language was around Q3 where we did that services promotion. Yes, nothing special in the fourth quarter.

Okay. The next question I wanted to ask you is, you mentioned that -- I believe you said a material vendor payment that will impact cash flow in either Q3 or Q4. Could you just remind me what that is, what it relates to, and is that a recurring payment or is that one time?

Yes, so we had one of our biggest vendors that we paid quarterly in the past, and now that is going to be in the second quarter in 2017 and that will be annual going forward in the second quarter.

Ross MacMillan, RBC Capital Markets.

Thanks a lot, and congrats from me as well. Just two questions from me.

First, obviously INBOUND was later this year, and you had talked about the fact that, that may have had some impact in terms of time to close business given that's often an event that drives a lot of leads. I just wondered, given what you saw close in December, is there anything that spilled over to Q1 or do you think actually you got through most of that lead gen and closed most of it in the quarter?

Yes, we did see a lot of that close right at the end of the year, so if anything, we might have pulled a little forward from January. Nothing really spilled forward in the first quarter.

Okay. And then a followup, just curious, given that you're moving to this One HubSpot initiative, I wonder if you had any estimate today on what percentage of your marketing customers are full stack? In other words, they're using both Marketing and the Sales Pro product? Thanks.

Yes, Ross, this is John. I don't have that exact number for you. Of our Growth Stack customers, clearly the easier motion so far has been selling the marketing customers the sales product.

The one we need to work on and the one that we think really drives the big value going forward is selling the sales customers the marketing product, obviously given the big increase in ARPU. And that is one of the things we'll be working on, and could be some upside later in the year.

Samad Samana, Stephens.

Hello, congrats on a great quarter and thanks for taking my questions. I was wondering if you could comment a little bit on the partner channel, and maybe what the contribution there was this quarter, and how you're rolling out selling HubSpot sales into the partner channel and what the uptick there has been?

Hey, Samad, it's Brian. Thanks for your question. Partner channel is cranking along, doing pretty well. We added a bunch of partners this quarter, put a new leader in place, he's really making some positive changes there. So feeling pretty good about it.

There is two things going on with regard to the sales products and the Partners. One thing is really just over the last month or two, we have been enabling those agencies we have, the over 3,000 marketing agencies, if they want to sell the sales product, training them on how to do that.

We're doing that now, and allowing them to sell it and commissioning them on that. So we think this is a nice opportunity there.

We started a brand new initiative where we want to sign up sales agencies, people who do sales training, sales enablement services like that and get them started on our sales products right out of the gate. So just getting started on it, looking very promising so far.

And, John, if I could ask one followup. If you were to exclude the $50 starter marketing solution from the marketing cloud net ads number in the quarter, can you give us an apples-to-apples number of what that would have looked like in terms of year-over-year growth?

So that added about 1 point growth in the customer number, but it actually had just under 1 point headwind on the revenue per customer number just given the interplay between those numbers.

Stan Zlotsky, Morgan Stanley.

Hey, guys. Good afternoon. Two questions, if I may. One for Brian, as you look for -- as you look into 2017, what are your top investment focus areas? And then a quick followup afterwards.

I think most of the focus is on -- I think of it in my head as transitioning HubSpot from an application point solution and marketing software company to more of this really platform front office system of record for business, a real partner that helps them grow. And all our investments are really are around making that transition. It's a big, big area of focus for me and the whole Company.

So we're off in the races there. It's going pretty well. Sales business is really cranking.

So that's really the focus. We're pretty laser focused on that one big, big initiative. And I think we're going to pull it off, and I think it is going to make us very sustainable, high growth, very profitable company over the long, long haul.

Okay. And then for John, I'm not sure I caught the retention rate that you guys saw in the quarter, or maybe I'm a little -- if you can share with us what it was for the full year as well. And just as you're thinking through 2017, where do you see that retention ratio going, especially with the sales product ramping nicely? So that's it. Thank you.

Yes, so that retention rate was in the high 90%s, still at that level we have been seeing recently. And I think it averaged for the full year high 90%s, obviously that is what we delivered pretty much every quarter. As we think about next year, it really depends.

The business should sustain high 90%s. I guess you would want to know what could take us up above 100%. It would be getting a lot of people on the Growth Stack.

That is where we have seen some retention benefits early. It is early, but we have seen some benefits there. So if we can get more people on that, they're getting the value of that, the combination of the two products, that could be a vector that could take it higher.

Richard Davis, Canaccord Genuity.

Hey, thanks very much. So one tactical for John is, any thoughts on the impact of the consistency of the numbers as you roll out the new accounting rules in 2018?

And then I guess for Brian, you guys are doing I think a very good job of expanding the product line in concentric circles and I know you don't want to tip your hats on stuff. But at least broadly speaking, is there direction where you might have new features and functionality I would say in the new couple years or something directionally, or is there just so much stuff you're going to mine in the current area that, that will keep you busy? Thanks.

Yes, Richard, the new rules are really going to impact the old perpetual software models much more than the SaaS model. So we don't expect to have a meaningful impact there.

There's some other things around commissions, but we're already amortizing commissions. Some people recognize them up front, but now you'll have to recognize those over time. There is also something on leases, but should be immaterial to us too. So no big impact on the accounting side for us.

Cool.

Richard, it is Brian, thanks for your question. We are -- we came out with the marketing product, we're building a nice business there, it is growing fast over the sales products going well. Still in the early cycle there, really happy with the way that's going.

As we make progress, I wouldn't be shocked, if I were you, to see us roll out additional functionality. I'm not going to tip my hand as to when or what at this point, but certainly we want to take advantage of opportunities to add more value to our customers and build a bigger business as they come up.

Got it. Thank you.

Alex Zukin, Piper Jaffray.

Hey, guys, thanks for taking my questions. So with some of the focus on 1 HubSpot, can you maybe, Brian, talk about the impacts, if any, on sales productivity in the quarter or any disruption that you observed? Or in general, maybe comment on how that combining of the sales teams is going? And then I have a followup.

That's a great question, Alex. So far, so good. The roll out this year of 1 HubSpot has gone pretty much as expected so far, is the way I would categorize it.

There is some stuff that has gone really, really well, and stuff where we have more work to do. The stuff in that's in my head that is just super exciting is that sales business is growing like a weed. It's a super hot product that we took from maybe a little over a dozen reps selling it to giving it to our wholesale force and our whole channel.

The lighter touch freemium models are really starting to work for us. It's just exciting that will lower our cost to acquire customers. I like that touchless model because you just look at our overall customer count, that is really growing quite fast.

If you count up all our customers, it's really -- the install base is really getting quite big and growing nicely. The total customer count is quite interesting.

The Growth Stack, and John hinted at this, like we're getting -- I think we're getting pretty good at the motion of selling our sales product to our marketing customers, and there is a lot of marketing customers to sell to. We made some progress on that so far this quarter, more work to do there. A lot more work to do, I would say, on figuring out how to sell our marketing product to our sales customers.

And those sales customers, that's really growing quite nicely. Because that is a big opportunity in front of us that there is a lot more work to do.

Just in general, we're five, six weeks into the year. There is a new motion, there is more learning to do. There is more baking a repeatability of the new motion to do, there's more work to do on systems.

But so far so good. It's gone as I've expected so far. I think we're going to have a good year, and this 1 HubSpot thing is going to really going to work us and for all you guys.

Perfect. Then, John, maybe one for you. Any numbers around the Sales Pro growth for the year, or any customer counts that you can share?

And then maybe as we think about this One HubSpot and more of the Sales Pro customers, or combined customers, are there any headwinds we should think about in terms of billings growth in 1Q? I realize you're not guiding for billings, but anything we should think about as we model?

Yes, so in the Sales Pro count we're now over 7,000 which is a nice step up on that side. Like Brian said, it's really working well.

Yes, as you think about the billings side, those are more monthly customers. So a bit of a headwind there. As we thought about fourth quarter, we were really happy with that 40% billings growth. As we said, we had a really good December.

So as you think about the first quarter and billings on that side, a couple of things to keep in mind. Is just the fact that what happened in the fourth quarter, also just with the headwind on FX. So I'd think about a low 30%s billings growth in the first quarter, and then we'll see how the rest of the year plays out. But if some of these other motions get working, we'll take it from there.

Jesse Hulsing, Goldman Sachs.

Thank you. This is Deanna on for Jess. I have one for maybe John and one for Brian.

The guidance implied a nice year-on-year margin improvement. I was just curious as where you expect most leverage to come from.

And my other question that I had was on the add-ons. I'm just wondering how they're trending in terms of adoption? I know at the INBOUND you announced a bunch of new enhancements, and just wanted to see if you've seen any early signs of improvement in adoption because of that?

So on the margin expansion, it's old fashioned, but we're going to get a big portion of that in G&A as we leverage those investments we made to become a public company. And then you'll see some leverage as well on the sales and marketing side. This new sales motion, this freemium try before you can buy, we think it is going to work well and we think that it will allow us to scale our sales and marketing costs even farther.

We're going to continue to invest heavily in R&D. If anything, you're going to hear more and more from us on the automation side, investing and letting the product help us sell and really match the way people want to buy these days.

And then on the gross margin side, maybe a little bit of leverage there. But we're getting product gross margins up to best-in-class levels. So if anything, on the gross margin it's going to be more to the extent we can make some improvement on the services side and just the mix, the product mix, as it becomes a bigger piece.

It's Brian. The add-ons are going well. We did make a bunch of enhancements to them at INBOUND, and actually have big plans for all three of them this year.

The website add-on is going well, steady. A bunch of cool new stuff coming on the website add-on this year that I'm super excited about. Reporting on add-on, steady, going well.

Bunch of new stuff in the pipeline that we're going to do there that is going to be really hot for our customers. And the [ads] add-on also getting better. We started off with enabling our customers to buy LinkedIn ads and then added Google ads and now we're adding Facebook ads.

So they're going well, and I think they're going to get even better over time. The products are really coming together.

Thank you.

Brad Sills, Bank of America.

Hey, guys, thanks for taking my question. Just one on the customer profile with the net adds numbers that you're seeing, still very strong. Has the profile of the customer changed in terms of customer size this quarter versus say a year ago or two years ago? Are you starting to see larger customers sign with HubSpot given scalability, or has it pretty much remained within that average of 20 to -- employees with 20 to 2,000 customers?

The short answer is it hasn't really changed. One of the things I personally like about HubSpot is we're above the fray of that very small business customer that churn like crazy, go out of business like crazy, that some marketing software companies live down there. We're above that, but we're not up into that enterprise area where it is a red ocean of competition and a really, really competitive space.

I feel like there is this really nice space in between there of mid-market companies that are real businesses that are growing that have a small marketing team, have a sales organization, and we have a really nice platform for them now to help them grow their business. And it's the platform we have, the software, it's the training and the education and the methodology. It is the support when they get stuck, it is all that together.

I think there's room here to build a big, big platform company akin to the way SalesForce is above us in the enterprise, Oracle, Microsoft SAP has built these huge platform businesses. I think there is room for one here in the mid market, and we're right in a nice slice of the market.

Thanks, Brian. Then one more if I may on ASP growth. If you could compare what's driving that today versus say a year ago? Mostly a year ago I think it was tier contact, volume adds and pricing versus add-on, how portion of the business and the mix of what's driving that ASP growth versus add-on space, this quarter versus say a year ago?

Yes, Brad, not a huge change. Obviously the add-ons weren't really -- I guess they just had been launched in 2015 fourth quarter. But the mix between obviously CTU -- or contact tiers are still the biggest, URLs second and then add-ons next.

I think as you think about this number going forward, I think that more and more it's going to be the cross sell of the sales and of marketing and marketing into sales is going to be that important lever going forward. Obviously we'll have the other ones, but that is really exciting.

And for that, we're really tapping into a new budget. If we add the sales budget and now we're getting the marketing budget, if we have the marketing budget we're tapping into the sales budget. It just opens up another budget, so from that standpoint we think that can allow us to keep growing our revenue per customer.

The one thing to keep in mind is, we've talked about we're going to be start talking about total customers which really aligns with how we're thinking about the business. We want to acquire customers the way they want to start.

If they have more of a sales initiative, great, start as sales. If you want to become a marketing customer first, that's great. But once they get in, inevitably they're going to have the challenge that the other faces, and so we would like to sell them the other thing.

Now what that's going to do to revenue per customer is going to be interesting. Is if we're adding lots of these small customers, when you blend that in, we will -- first of all, the revenue per customer when you blend the two obviously is going to be lower. But over time depending on how many sales customer we add, we could actually see revenue per customer slow in aggregate.

Now the same customers themselves are going to grow, it is just when you put that mix together. So it is going to be a dynamic where we're going to see really strong customer growth, and revenue per customer will probably be flat or slightly down.

Bhavan Suri, William Blair.

Hey, guys, nice job and let me add my congratulations there. Just a first question on the sales channel. You've talked about adding these sales enablement, sales consulting type companies.

Any color on what the pipeline of adding those partners looks like? And then what does the time to ramp for those partners look like in the absolute days, weeks, quarters, whatever, or compared to what it took to ramp agencies relative to the marketing suites?

It is a great question. It's super early on this. We really kicked off this initiative, boy, six weeks ago and just put the team together, and so we just don't have a whole lot of data on it.

Early signs seem good. There is a lot -- just like the marketing agency sign, there's tens of thousands of these agencies out there that do website design, website development, (multiple speakers) consulting, and all of this stuff and we turn them into software companies.

Boy, it looks awfully similar to us on the sales side. We have all these companies that do CRM implementation, sales enablement services, sales training, not quite as many on the marketing side, but there is a lot. And we've put out there that we have this free platform, and we want to build a channel.

They're starting to come in and it's starting to happen. But, gosh, that's real early. We're five, six weeks into that initiative, so stay tuned.

Got it. Then just wanted to pick back a little bit on Richard Davis' question just as you think it about strategically. You've said a lot about platform, HubSpot 1 and adding more functionality, obviously INBOUND and I've got the sales channel now.

Does commerce come into play? Is that something at some point where you say okay, we're going to become the [solution] of record, a term I think you used, Brian, just to complete the transaction? Is that the way we think this could in five years-plus, I'm not giving you a timeline, but could potentially evolve, or am I stretching there?

I don't know, I just don't think we want to tip our hands at this point as to where the platform could go. Right now, we have a nice opportunity with sales and marketing and stay tuned. I think there will be more products over the next five years, and it is going to be an exciting ride.

Terry Tillman, Raymond James.

Hey, good afternoon. I'm assuming you're saving the best questions for last here. Thanks you for -- (laughter). By the way, nice job on the quarter.

I guess want to tempt fate here, Brian, and try to pigeon hole you here in the vision and about where you're going. So my question, and I'm going to phrase it differently.

You guys have software that's great at helping companies better brand themselves, drive the demand gen and lead flow, then now you can help the sales reps really in a much quicker way close deals. But what about -- what do you do when a customer says, hey, you are my front office solution of record, but I need to engage with existing customers on an ongoing basis. Do you just see that revenue opportunity go to others, or do you have partners that you bring to the table or around ongoing engagement with an existing customer?

I'll give you a couple of comments on it. Nice to hear from you, Terry, as always.

One thing we're seeing in the market is that your customers -- your marketing of course is really important. Your sales is really important. But, gosh, in 2017, your customers are your best channel to market.

The word of mouth is just the way to sell. That is the way we sell. It's a very strong channel for us, very important in the decision-making process especially as we get bigger.

In marketing and sales and services do blur more and more. So I suspect, and I do hear from customers that use our marketing apps to segment their existing customers and nurture their customers in smart ways, and they use our sales products with their services people to engage with them in new and more productive ways. But in terms of building, let's say, a ticketing system or more traditional services app, we haven't gone into that business yet, as you know, and we have a pretty good partnership with another company that we really like a lot called Zendesk.

Boy, is that integration slick. They built it on our API, and the way it works is absolutely fabulous.

So the heart of HubSpot is this timeline of activities that your prospect or customer is thinking. Every time they visit your website, fill out a form, there's a press release that anything goes in this timeline. And what Zendesk enables you to do is every time that customer has a ticket or call support, that is an event on that timeline. And the rep can see that, the support person can see it, the marketer can segment on it and do smart things.

So that's our attitude at this point toward services. It is a dynamic space. I wouldn't tip my hand as to where we're going, but I would say we have a nice partnership with those guys at Zendesk. And we have, I don't have the exact number, I don't know if you know it, John, but well over 1,000 of our customers using it, and it's pretty good.

Awesome, thank you. And I guess, John, as it relates to -- you were kind enough to give us the impact, both positive on new customers. I think it was 1 point of growth added because of the sales products, and then 1 point dilutive to ARPU.

But now you have got a full quarter here where you're really in motion here in the first quarter in terms of this Growth Stack initiative. Could we see those deltas or those impacts, both good and bad, maybe grow as we start moving through the year? Thank you.

Terry, just to be clear, the numbers I gave you were the impacts on the marketing customers, and that impact was from the marketing starter edition. So there was no impact up from a sales standpoint on those customers.

Though we talked about the total customers at 28,000, we'll start giving more precision on that total customer number over the next couple quarters. And clearly that will benefit from the sales product.

Brent Bracelin, Pacific Crest Securities.

Thanks for taking the question. Two quick followup, Brian, I know we're early but I wanted to go back to the 1 HubSpot. 45 days in, what is the sales motion like?

Are you leading with sales, are you leading with marketing still? Are you leading with the full new customers, buying the full 1 HubSpot, any more color? I know 45 days in is early, but on how you are selling the 1 HubSpot internally?

Great question, Brent. John led into this in a bit.

But we sell them where they come in. So we have all these leads coming in for our marketing products and we have all these leads coming in from our sales product, and they land in the hands of a sales rep essentially. And that sales rep starts where the customer wants to start.

So if they're already using the CRM product and they've started using the sales product and tripped over a limit, they will talk to them about that. If they're dealing with the marketing product, they will talk to them about that.

That has been the motion is they try to sell one product in, and a lot of times it turns into a more of a platform discussion and a full Growth Stack discussion. But they tend, at least six weeks in and this very well may change, they tend to buy one first and say let's get started on sales and see how it goes. And then later if we need more leads, which I think almost everyone is going to, they will have the conversation about the marketing product and vice versa.

So it typically starts with one, and then we'll move to the other. But stay tuned, that is new.

Exactly. Very helpful color there. Then just one followup for John. I know you're talking and quite excited about the HubSpot Growth Stack.

What is the baseline we should think about? The starting point, 28,000 total customers, is the Growth Stack 5% of that customer installed base where you consider Growth Stack customers 10%? What is the starting point for your Growth Stack customer count?

So it's just over 10%, around 3,000.

Ian Strgar, UBS.

Hey, guys. Thanks for taking my question. I apologize if I missed this. Can you guys disclose what you're at now from a run rate or a revenue size for the sales product?

Yes, we didn't give that. It was definitely up nicely from where we were before, but we're going to lean into total customers and total revenue per customer going forward. Once again, we're not sure if people are going to start with sales or marketing, but it is really when we get those customers and then we grow them over time.

Okay, understood. And as a followup, some of our conversations with your Partners just they're suggested, they're very excited about being able to sell the HubSpot sales. Can you just update us on how the early reception from them has gone, and also whether you're -- historically, I believe the metric was around 40% of new bookings came from your partner channel. Is that something that should apply for the sales products as well?

Okay, good questions. The Partners -- my discussions with the Partners float with yours, they do seem real excited about it. Their customers are asking them to come further down the funnel, they're asking about sales enablement, creating content down there.

And we're just now training them on the product, we've just enabled the ability to commission them on the product. So that feels good.

They sold a bunch of the sales product in Q1 -- sorry, in January. So that is off to a good start. I feel really good about that, it's still early but I feel good about it.

In terms of the percentage and will it be 40% of sales? I doubt -- personally -- I don't know, do you want to answer this?

I doubt it. I think it will be more direct. There's more people just buying it as an eCommerce transaction off of our website.

So I think it is largely a touchless sale. I do think they will go in and sell services to a lot of those people who bought it directly from us, but I suspect that ratio will be, and this may change, but I suspect it will be lower than 40% (multiple speakers).

Yes, I think that is right. I think that makes sense.

Tom Roderick, Stifel.

Gentlemen, good afternoon. Thanks for taking my questions. So, Brian, I wanted to ask just a little bit about international, I haven't heard too many questions on that.

And it looks like 60% growth is the number again here. Can you talk a little bit more about the anticipation for continued growth, particularly within the context of what you guys are doing to build out the channel partner community internationally? Thanks.

Thanks for your question, Tom. Yes, it's going well, we're happy with it. Still early.

I feel like in terms of a growth vector for us, we started in Europe and now spreading to Asia and both have a lot of growth ahead of them on the marketing side. And, boy, a ton of growth ahead of them on the sales side. Because the sales business was primarily here in the US. So we're very bullish on it.

I think you're going to see growth on the direct side and the partner side. We have lots of international partners, lots of them are getting into our top tiers of gold and platinum. Partners, I hear from them all the time, they're doing really well. So I think you'll see a nice balanced growth over time internationally, and it will happen on the direct side and the partner side.

Great. One quick followup for me. Guess I didn't hear too much on the call today about the impact and demands for the CRM product, and it does seem like that is driving some attention out there.

Can you talk a little bit more about what you're seeing, what you saw in the fourth quarter with that CRM product? And then how that product itself will wrap into the reorganized sales efforts as you make it a 1 HubSpot type of approach with the sales product going into 2017?

Sure. Here's how I think about the CRM product. I think of a dart board, and the CRM is in the middle and people use the CRM and they're getting value. And then they'll start to use our sales application that's the HubSpot Sales Pro and/or they'll start to use our marketing application.

So it will be the freemium engine that really can drive over time both of our funnels. So it is exciting. The demand has been solid. If you look at the usage numbers, the weekly active users and the weekly active teams using it, it has been going up across Q4 and across Q1.

I just looked at the numbers a few minutes ago. And I think we nailed it on the product there, and there's a big demand in the market and a soft spot in the market for people who are growth businesses in this mid market who don't want something real heavy, real expensive, real complicated. I think we hit the nail on the head there, so feeling good about that.

Derrick Wood, Cowen and Company.

Great, thanks. So it sounds like you're taking more of a freemium approach on the Sales Pro product?

Yes.

Be curious to hear what your expectations are and the average timeframe from freemium to paid conversion? And also be curious to hear as you move more on the sales side, what types of vendors you're competing against?

Sure. You're exactly right, we're leaning into the freemium model here. My thesis for the last 10 years of my life has really been for HubSpot and for our customers that buyers are changing the way they shop for products and buy products, and vendors need to transform the way they market and sell and match that.

HubSpot is going through that same experience. I feel like people buying sales products and marketing products today, they want to try it before they buy it. They want to sink their teeth into it.

So we're really leaning hard into the freemium model there, and it is working, it is starting to scale. The unit economic is really working it.

And we're going to apply that same thinking on the marketing product. So John talked about marketing starter, that is super early, we're just getting started with that, but that is promising over the long term as well.

In terms of the competition for the sales product, it is typically, Derrick, the first grown up CRM they buy. There is other alternatives out there. There is higher-end ones that are more expensive and complicated, and then there is some lower end toyish stuff.

I feel like we nailed the usability. We built it for the sales rep, not for the VP of sales. We really just want to optimize to help that sales rep sell more stuff versus we focusing on the VP of sales to track stuff. So I think we really nailed it.

There is competition down there, but I feel our positioning is really good. The sales cycle is short. They get in there, if they try the CRM, they figure it out, they trip over a limit on the sales product, they buy very quickly. Oftentimes, they buy right there online just like you would buy anything online without talking to a human.

Great. And just on the promotions, I guess you ran a promotion in Q3. Should we expect any of that behavior going forward or is that really a one-off?

It really was a one-off. I can't say won't say we won't ever do it, but it was just a unique quarter given that INBOUND wasn't in the quarter and we wanted to do something to stimulate demand. We do small things here and there, but this one just stuck out given that it affected the services line and really drove the billings to get more months up front for the customers that paid up front.

Jonathan Kees, Summit Redstone.

Great, thanks for taking my questions. I wanted to ask I guess a couple follow-ups. One, continuing on the competitive picture, for that -- this is more for you, Brian.

You were talking about that nice in mid-tier space, if you have that CRM that is just right, the first grown-up product, if you have the Sales Pro that is really taking off, and you don't see a lot of the big guys down there and the small guys not competing as much. What keeps you up at night? Is it more that someone will pay attention, or that some of the small guys will start pricing competitive or do you just sleep well at night?

I don't think the sales part of the business is not keeping me up at night at all. If anything, it is keeping me up at night because I'm so excited about it. It is how do I take what I've learned from the sales business, the freemium model, the really nice lightweight easy to use consumer style app, how do I apply that to all of HubSpot and really grow HubSpot from a marketing software company that is an apps point app company into -- how do I turn it into someday a Microsoft or a Salesforce or a SAP or an Oracle in that mid-market space.

There is no one who's done it, and I feel like we've got the app for it. There is a market for it. We got to execute, execution is what keeps me up at night. We got to do our jobs, as Bill Belichick would say.

Okay. I guess we know who you routed for during the Superbowl. You probably took the day off too on that Monday, or at least came in later.

The second question is regarding the rollout of 1 HubSpot. You talked about it with international. There is a lot of Sales Pro potential there, there's a lot more underrepresented there versus it sounds like it was the US.

Are you rolling out 1 HubSpot equally, both domestically and internationally? Are you looking -- training more of the Partners here domestically first? Are you looking for more of the sales consultants here in the US first, or is it -- you're doing it across the board, it doesn't matter what region?

Yes, we're doing it across the board. We started rolling it out all in the first week in January. Same US, same international.

Koji Ikeda, Oppenheimer.

Great, thanks for taking my question and congrats on the quarter. Just one real quick one for me.

When we were at your conference last year, the INBOUND conference, one of the interesting takeaways from our conversations that we had with customers is that we think there is a really good upsell opportunity out there with customers upgrading from Pro to Enterprise. And given the pretty good monetization opportunity there, I was wondering if you could talk about what is really driving that push up to Enterprise? And is this up-sell happening most often at the renewal time, or are you actually finding customers wanting to upgrade to Pro at a much earlier pace -- I'm sorry, upgrade into enterprise at a much earlier pace?

Thanks, Koji. Yes, I think there is an opportunity there. If I ranked all the opportunities in HubSpot, that wouldn't be at the top of my list but there is an opportunity there.

There is feature differences between the products, so a more sophisticated larger company, maybe a couple hundred employees with a good sized marketing team. There are some features in there that they would really enjoy and like.

And, yes, they're upgrading and we're seeing it happening, and they typically upgrade at that one-year renewal period or at the second-year renewal period as they're growing and needing those additional features. So, yes, there is definitely an opportunity there. Something we can probably harvest even better over time.

Now I'll turn the call back over to Brian for closing remarks.

Yes, I want to thank everyone for joining in the call today. Really appreciate it. Happy Valentine's Day.

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