HubSpot Inc (HUBS) 2017 Q3 法說會逐字稿

Good afternoon.

My name is Ruth, and I will be your conference operator today.

At this time, I would like to welcome everyone to the HubSpot Q3 earnings conference call.

(Operator Instructions)

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

Thanks, operator.

Good afternoon, and welcome to HubSpot's third quarter 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 fourth fiscal quarter of 2017 and 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 our Form 10-Q, which was filed with the SEC on August 2, 2017, 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, 2017, which is located on the Investor Relations website at hubspot.com.

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

Thanks, Chuck, and good afternoon, folks.

Thanks for joining us as we review HubSpot's third quarter results.

Let's jump right in.

Third quarter revenue increased 38% and we achieved non-GAAP operating profitability again in the quarter.

Very happy with the top line growth we've seen throughout the year in achieving positive non-GAAP operating profitability even with the added expense of our INBOUND event in the quarter.

From a customer growth perspective, the third quarter was a strong one for HubSpot with a total sales and marketing customers passing 37,000, growing a whopping 47% year-over-year.

As you'll recall, our big One HubSpot goal in 2017 has been to make it as simple as possible for companies to start using a part of the HubSpot platform and over time use the entire Growth Stack.

We made nice progress here where a lot of businesses originated through our free CRM offering and 30% of our installed base is now a Growth Stack customer.

The goal is to keep our cost to acquire a customer low and our LTV, lifetime value, high while delivering a delightful customer experience.

In September, we hosted another incredibly successful INBOUND event, where we welcomed over 21,000 registered attendees.

They came from over 100 countries to see more than 250 speakers, including Michelle Obama.

In the conversation extended well outside the speaker halls were more than 250,000 online mentions related to INBOUND around the event this year.

I've said this before, it's still true, it's absolutely my favorite week of the year.

Many of you who were on the call today were also at INBOUND, so I know you know what I mean.

What I love about INBOUND is it's not just a user event, it's a global movement that gathers in Boston every year.

The overarching theme of INBOUND for me was how people can use the power of INBOUND to match the way they market, sell and service to the way modern humans live, work, shop and buy.

That's been HubSpot's mission really since day 1. This year, we talked about how social media is overtaking traditional PR and how videos gaining on text, et cetera, et cetera, but it's all just a big extension on the same idea.

INBOUND is more important today than ever before.

Today, how you sell is more important than what you say.

Today, word-of-mouth is far more important than the way you market.

Today, self-service is becoming more important than full service.

You can see these shifts reflected in a bunch of the stuff we announced at INBOUND around our core sales and marketing platform.

But you can also see it in the customer service base, too, with our big announcement of the Customer Hub coming in 2018 and the significant investments we continue to make in AI and bots.

So with HubSpot, we take a good hard look at how the world is changing and we build products to get ahead of those shifts, so our customers can get ahead of them, too.

For example, on the marketing front, you saw some very important enhancements to the platform for the introduction of Campaign Reporting, a new approach to content strategy and a much, much deeper integration with Facebook on the social media side.

We also unveiled a native e-commerce integration with Shopify.

We're thrilled because we see how these plays reinforce the strong differentiation of our core marketing product, and our customers are excited to see the product enhancements that will support their growth in the marketing space for years to come.

Now let's talk about the HubSpot CRM.

People love our CRM.

It's been a big hit for us.

But as it turns out, free is no longer the most requested feature we get, in fact, loads of businesses have grown with our free CRM over the last 3 years and with that growth, came the need for more features.

And that just make sense.

As our customers become more sophisticated, our products do, too.

Our VP of Product, Christopher O'Donnell, took the stage to talk about it at INBOUND.

He talked about a bunch of features and improvements we've made to make the HubSpot CRM easier to manage your sales teams, easier to control who has access to what and flexible enough to fit any sales process.

I'm incredibly happy with the progress we've made of the last year, and look forward to continuing our momentum into 2018.

And that's a trend we've seen in our sales products, too.

As our customers grow with HubSpot, our products grow to serve their needs.

Now remember, we started off in the sales products space by designing a sales application that was built with the sales rep in mind.

This is a radical idea at the time, an app whose sole purpose was to make the sales reps more efficient and productive, to support each rep as they grow in their role.

That's just what we've done as we've seen time and time again with the ever-growing number of people buying and using the sales product.

But as companies have grown up with our sales product, what we've found is that once they reach scale-up mode, they need a little more horsepower.

So now we're using AI and machine learning to build predictive lead scoring for our sales professional products.

Now a sales reps outreach can be based more and more on each contact likelihood of converting into a customer, pretty cool stuff.

We've also introduced some really powerful automation capabilities through our workflows tool, which allows companies to manage follow-up conversations with their customers, streamline their operations and eliminate any needless administrative busywork.

But our new HubSpot Sales professional product isn't just a bigger set of productivity tools for an individual sales rep.

It's now been designed to support the changing needs of growing sales teams, too.

We're pricing the new version of Sales Professional at $400 a month for up to 5 users.

For us, it's exciting because it's unlocking a whole new segment of the mid-market and gives us a price point in the sales side that we haven't previously had.

For our customers, this is exciting because it gives them the road they need to run on as they continue to scale their businesses.

When I take a step back and look at all the new INBOUND announcements, I'm most struck by what they mean for the future growth of our business and our customers' businesses as well.

Our front office sales and marketing platform now with the recent announcement of customer service in 2018, too, just got a lot better.

This wasn't an incremental improvement.

I mean, think about how we started more than a decade ago.

Dharmesh and I have this idea that if you create a great content, you could pull the right people in, which meant small businesses can compete against big businesses in a way that hadn't been possible in the past.

This concept of creating content to attract visitors really evened out the competitive landscape to the benefit of so many.

And HubSpot built a product to help those teams grow.

And then we went into the business in converting each of these visitors into qualified leads, which dug us deep into marketing automation.

And more recently, we've entered the business of converting that qualified lead into a customer with our sales enablement tools and CRM products.

So that was really great, had a ton of impact, but now we're talking about having a much bigger and deeper impact with our customers because it isn't just about attracting people in inbound marketing and it isn't even about converting more leads into sales.

It's about creating a remarkable end-to-end inbound experience for our customers to deliver to their customers.

And with our entry into the customer service base through our customer -- our product announcement, we'll now have the opportunity to deliver that experience in 2018.

A key piece of delivering an exceptional customer experience hinges on meeting customers on their terms, imagine that.

The past few decades, the dominant customer communication medium has been e-mail.

We started to notice a shift.

Increasingly, customers are choosing messaging apps to engage with brands whether it's live chat on a website, Facebook Messenger, SMS or through a platform like Slack.

And why wouldn't they?

Messaging platforms are often the quickest route to get an answer, which is why we think they'll be a very important, if more important than e-mail in the future.

Last year, we were the first CRM to have native live chat capabilities with our Messages product.

In Q3, we acquired Motion AI to support our work in the exciting chatbot space.

Maybe you're not familiar with Motion AI.

Here's how I think about it.

When websites first came out, 100,000 years ago, you needed someone real smart and technical to build one for you.

And through the magic of technology, content management systems arrived and mere mortals like me could build a website.

Then e-mail marketing came out, which allowed you to send an e-mail one at a time.

If you wanted to do something more advanced with workflows, once again, you needed someone really smart and to build it for you.

Then marketing automation technology arrived in the scenes and mere mortals like me could create advanced workflows and really great personalized e-mail marketing.

Now it's chatbots.

If you really want to build an awesome chatbot today, you need to know someone like Dharmesh to build technology like GrowthBot, pretty technical stuff, and that's where Motion AI comes in.

Their technology allows mere mortals like me to build a chatbot.

It puts chatbots within easy reach of regular folks.

That's why we're adding a new tool to our free CRM called Conversations that will be in beta in the coming months and then it will be incorporated as a feature across all of our products.

Conversations gives you a single unified place where everyone in your company can talk to your customers on social media, Slack, wherever they are.

So imagine a world where a chatbot deployed through our Conversations tool, manages the incoming volume of customer chats by automatically answering questions, routing people to the right department, booking meetings and qualified prospects.

You don't need an army of people or big bank account, you just need HubSpot.

Looking out over the next decade, the new unfair advantage for small and medium-sized businesses will be creating a delightful end-to-end customer experience for their customers.

HubSpot's goal is to democratize the technology that makes that possible, to take what's available, to big companies with big budgets and tailored to the mid-market companies and scale-ups we serve.

Okay.

With that, I'm going to turn it over to John to take us through the financials and our guidance.

Thanks, Brian.

I'm really pleased with the third quarter results.

We delivered strong revenue growth, $1.8 million of free cash flow and we achieved positive non-GAAP operating profitability even with the added investment from our INBOUND event.

Third quarter revenue grew 38% driven by 40% subscription revenue growth and 12% services revenue growth.

Subscription revenue continues to grow faster than services and now represents 95% of revenue, which is great for margins.

HubSpot ended the quarter with 37,450 total customers, which was up 47% year-over-year.

Average subscription revenue per customer came in at $10,332, down 4% year-over-year.

The big driver behind the decline in average subscription revenue per customer, is that we continue to see significant growth from both our $50-per-month sales starter product, that we used to call Sales Pro, and from our $50-per-month Marketing Starter product.

Deferred revenue came in at $120.2 million growing 43% year-over-year, while calculated billings defined as revenue plus the change in deferred revenue came in at $106.6 million, up 37% versus the third quarter of 2016.

Billings growth exceeded our expectations driven in part by a 2-point benefit from an FX tailwind in the quarter.

Please remember that billings growth can diverge from revenue growth in any quarter due to changes in billing terms, product mix or the timing of revenue recognition versus billing.

However, we continue to expect billings growth and revenue growth to generally track each other over the long run.

For the remainder of my commentary, I will discuss non-GAAP measures.

Let's take a look at our margins.

Third quarter gross margin came in at 81%, up 3 points year-over-year.

Subscription gross margin came in at 86%, up 2 points year-over-year while services gross margin came in at a negative 20%, down 5 points year-over-year.

Third quarter operating margin improved over 2 points year-over-year to a slight positive margin.

If you exclude the impact of our INBOUND event, operating margins would have improved over 6 points year-over-year.

The 6-point improvement, excluding INBOUND, was driven by the 3-point improvement in gross margins, 3 points from sales and marketing and a 2-point improvement in G&A expense, partially offset by increased investment in R&D.

International performance continue to be strong with revenue growing 71% year-over-year, representing 33% of revenue in the quarter.

Keep in mind that international growth also benefited from the moderate FX tailwind in the quarter, much in the same way that revenue and billings growth did in the quarter.

At the end of the third quarter, we had a total of 1,962 employees, up 26% year-over-year.

CapEx, including capitalized software, was $6 million in the quarter, up from $3.7 million last year.

We still expect CapEx as a percentage of revenue to average about 8% for the year.

With that, let's dive into guidance for the fourth quarter of 2017.

Total revenue is expected to be in the range of $101 million to $102 million.

Non-GAAP operating income is expected to be between a profit of $1.5 million to $2.5 million.

Non-GAAP diluted net income per share is expected to be between a profit of $0.06 to $0.08.

This assumes approximately 39.9 million diluted shares outstanding.

And for the full year of 2017, total revenue is expected to be in the range of $370 million to $371 million.

Non-GAAP operating profit is expected to be between $5.7 million to $6.7 million.

Non-GAAP diluted net income per share is expected to be between $0.19 to $0.21.

This assumes approximately $39.2 million fully diluted shares outstanding.

With the strong performance of third quarter free cash flow, we now expect full year free cash flow to be between $19 million to $20 million, up from our previous expectation of $15 million to $16 million.

As you adjust your models for 2017, keep in mind the following: The convertible debt will impact several of the below the line items, noncash interest expense will be about $5 million in Q4.

The expense will continue as long as the debt is outstanding, but given it is a noncash expense, it will be excluded from our non-GAAP results.

For the fourth quarter, we will see a benefit from income taxes of about $2 million related to the issuance of the bond hedge or more in conjunction with our convertible debt.

It will also be excluded from our non-GAAP results.

With that, I'll hand the call back over to Brian for his closing remarks.

Brian?

Thanks, John.

I recently came across a stat.

When Dharmesh and I started HubSpot in 2006, it took us about 3 years to generate $1 million in revenue.

And just in this last quarter, the first time in HubSpot's history, we averaged $1 million of subscription revenue per day.

Investments we made over time are starting to have a real nice financial impact.

The investments we've made over time are starting to also have a much broader impact on real people's lives and companies' growth, that's what gets us up out of bed in the morning.

We have more than 37,000 paying customers, a large growing base of free users, more than 110,000 professionals trained and certified on HubSpot, thousands of agency partners and over 100 connect partners.

That's a whole lot of teams, people and companies growing all over the world.

What I'm looking forward to most is growing a number of people impacted and having a much deeper impact on them at the same time.

That's what drives each of us here at HubSpot.

I want to thank our HubSpot team, our wonderful customers and our amazing partners for all that you do.

Thank you all very much.

With that, operator, let's open the call for questions.

(Operator Instructions) Your first question comes from Bhavanmit Suri with William Blair.

Nice job there, especially given that you had sort of positive preannounced at the conference, but congrats again.

I just want to touch on two quick questions.

One, you're obviously adding a ton of new customers, but the pricing is varied and mixed between the freemium model and the lower-priced marketing model and the sales product and everything else.

Just some sense of when you think that sort of starts to bottom especially given sort of traction you're seeing in customers in the sales side, wanting to pay for features in your introduction of the enterprise pricing.

Yes, Bhavan, it's John.

So yes, our total subscription revenue per customer has bounced around a little bit.

I think it was up a little bit quarter-over-quarter this year, still down year-over-year.

It's really a function of how quickly we're adding those lower-level customers that ultimately we can grow and upsell over time.

So I'd expect it to bump around these areas, especially when we're growing so fast.

Over time, obviously, we expect that to go up.

We showed you guys some analysis at INBOUND, that people that stay with us grow significantly year-over-year.

So it's really a mix thing, but -- so it can bounce around a bit.

Got it.

And then one more sort of fundamental question.

You didn't disclose a marketing customer count, but I'd love to just get some color and just sort of your growth rates here.

At INBOUND, it was pretty clear that sales and CRM was the focus.

The Customer Hub and things are going to be the focus next year or the year after.

But sort of penetration rates and sort of just the organic growth within the marketing business, with just some sense of how that's trended, say, over the last 12 months versus now and sort of how you think about penetration in those markets.

Yes.

So when we combined the sales and marketing products back at the beginning of this year, we talked about the focus of the company was really total customers.

We're adding a bunch of sales.

We're adding a bunch of marketing.

We're more focused on what's right for the customer, which way they want to start.

And so from that standpoint, we're not overly focused on our product mix and going forward, we're now going to have the Customer Hub as well.

So it's really figuring out what customers' need and then bringing them in and ultimately, cross-sell and upselling them and so it's not as maniacally focused on any individual product.

Your next question comes from Stan Zlotsky with Morgan Stanley.

This is Hamza Fodderwala in for Stan Zlotsky.

I just had a couple of questions.

So you had a very good user conference about a month ago.

Just wanted to see what's the early feedback been like on your product announcements and what's the pipeline looking like into Q4?

This is Brian.

Feedback's been great.

I think it was our best conference, quite frankly, we've had.

We've been doing -- I thought it was really great.

I thought speakers were great.

The announcements were great.

Feedback from the customers has been really, really positive and if I would just kind of summarize the big stuff that customers are excited about on the marketing side, marketing product got better.

We added Campaign Reporting that customers seem to love.

We added a bunch of stuff around social and ads and integrating with Facebook.

On the sales side, we added our new Sales Hub Professional product for kind of mid-market companies to use our sales products.

People are really excited about that.

We announced our upcoming Customer Hub product for services.

And then we announced our Conversations product, which will be used really throughout all 3 lines of business for us, which will enable people to do all kinds of new things.

So the reception has been really positive from our customers and partners, really pleased with it.

Okay.

And then on a related note, maybe just specifically on the sales product.

What kind of momentum do you see there?

We did see the ARPU tick up on a sequential basis, which I guess if you had -- with the sales product being lower ASP, you would expect that to continue to trend down, so just wanted to understand the puts and takes there.

Yes, so far, it's doing great.

We've got lots and lots of customer momentum on there with the existing products.

And I think the new product and the new features in that new products are going to be very well-received so feeling great about that line of business.

Okay.

And any reason for the ARPU tick up though, sequentially?

Yes.

I mean, I think it's just in a range right now that it could be up or down like I said, 100, 200 and it's really kind of in this range as long as we're adding as many customers as we are.

Your next question comes from Richard Davis with Canaccord.

So Brian, you've kind of talked about this even at INBOUND a little bit.

But good management team set, explained big visions, but some of the -- but the other thing you have to do is kind of say no to some things to reach those goals.

So kind of -- so it's always hard, but what are some of the things you're deferring this year that you had to say no to?

We're saying no to all kinds of stuff.

The big thing we consistently say no to that served us well and maybe doesn't make us -- we get pushed back on some investors, but I think it served us very well that we say no to building enterprise software for Fortune 500 companies.

It would've been very easy for us to stay in the marketing space and move up into the enterprise.

It would have been relatively low risk.

We went the other way and said well, the real opportunity is to build a mid-market platform from that entire customer journey and help customers grow from end-to-end, across our whole funnel and I think that's been one of the best calls we've made over time.

So that's the big one that jumps to mind, Richard.

Your next question comes from Jesse Hulsing with Goldman Sachs.

And the first one is probably for John.

But Brian, you may have some thoughts, too.

You're showing nice coverage particularly when you went back out the customer event, but if I kind of look forward, you've got the new Sales Professional product and a customer support product on the horizon so there seems to be some vectors where you can continue to invest pretty heavily if you want to.

So as we look forward, how are you thinking about leverage in 2018?

And how should we think about margin expansion?

Yes, good question, Jesse.

We tried to put a framework together that balances growth and leverage.

I mean, right now, we, like you said, we have a ton to invest in and we've talked a bit about that.

If anything, we'd love to see that R&D percentage go up a little bit just based on the number of engineers we want to add.

So I think that depending on the growth rate, we had said above [31 to 2 points] and then, a little bit more if we're growing slower.

And so that's a general framework.

That's kind of over time.

This year, we were able to deliver more, but it was a bit of we're crossing profitability.

We felt like that was important and we had gotten a bit of a benefit from FX as well this year.

But you should think about that framework as long as we have lots to invest in, which we really do right now.

We're going to keep investing heavily in the business.

Well, I'd pile on that and say right now, we're putting together a plan for next year.

We're looking at projects to invest in and there are just a ton of high ROI projects, lots and lots of potential interesting projects for us, so we're going to lean in, continue to invest, build out the marketing product further, build out the sales product further, build the successful products.

Lots and lots of opportunity.

We also, when we're making investment decisions within HubSpot, we're big fans of using unit economics.

What's it cost us to acquire a customer, and then how much is that customer pay us over time and unit economics data is super, super compelling so we're bullish and we're investing in growth.

Well, and I'm curious how the feedback has been from partners, customers and your salespeople, I guess, for the new Sales Professional product.

It being a higher-end SKU, it seems like there is lots of interest that can maybe move the needle on ARPU.

And then also, I think you mentioned you're building a sales-specific channel.

How is that going?

Okay.

Great questions.

I'll take them both.

Sales Professional product, it's early.

The official release of the product is actually today, Jesse, but we've been showing it and demoing it and talking about it a lot.

The customers and partners are excited about it.

When I think of our sales product, the first couple years of it, it was built for pretty small company with 2, 3, 4 sales reps, maybe 20-, 25-person company.

The new sales hub professional product's built for a mid-market company between let's say 25, 250 employees, so the real salesforce, maybe multiple product lines and so the customers are really psyched about.

We're going to be able to grow with them in a very nice way.

In particular, they're psyched about the workflows.

We're putting Workflows in there, the ability to segment teams in there, some additional reporting function, some real meat on the bone that they're really psyched about.

The sales guys are really psyched because at the end of the day, salespeople are on commission even at HubSpot they're on commission.

And they've got a meatier product there at a $400 price point that they're going to be excited to sell and makes them money on, so far, so good.

Still early but we're really excited about it.

Your next question comes from Tom Roderick with Stifel.

So Brian, I was hoping you could just dive in a little bit more here on the Customer Hub.

There's obviously a lot of directions you can go here on the customer support side.

Some areas of that market are a bit crowded, other areas are very adjacent to what you do.

So maybe you could share with us what your near-term vision is and then longer term where you think you can take this hub product, with respect to what your customers are asking you to do in that market.

And then maybe the adjunct question to that is how much do you think you need to invest in that business in 2018 to make it a meaningful component of the story?

Sure.

Great question, Tom.

The way I kind of think about HubSpot in my head is, is when we started it, the idea was quite simple.

It was how do you create remarkable content and use that content to pull visitors into your site from social media and from search.

And we got real good at that.

And there were -- it was like an arbitrage opportunity for small business to take advantage of that back then.

That still exists.

It's a little less compelling than it was and it's still there.

I think the new arbitrage opportunity for small businesses is to create a delightful inbound-y end-to-end customer experience for their customers.

And that's kind of where we're coming from.

It's quite hard to do that if you've got one marketing system, one sales system, one service system.

It's hard to blend all that together and create that delightful experience.

So that's sort of motivating us to get into this business.

It's a relatively good-sized team inside of HubSpot, it's relatively good-sized investment.

We're excited about the opportunity.

We think it's quite large.

And it's going to be a little bit like the sales product, like sales product we started a couple of years ago and there was a gap in the market there and it's grown really nicely over time.

And you've seen it developed over time.

I suspect it's going to be a very, very similar story for the Customer Hub over time.

I suspect a lot of our customers who are in the small, mid-size of the market, who are using our marketing product and our sales product, they're going to want that service product.

It's one bill to pay.

One number to call if they get stuck.

One user interface to learn.

One customer time line to get your head around.

One bot to manage, like it's all going to be together in one user interface.

So feeling great about it.

Great.

John, follow-up question for you, just with respect to the margins themselves.

You pointed out that the gross margin profile here is up 300 bps year-on-year from last year.

And it looks like the majority of that seems to becoming from the subscription side of the business.

Aside from scale, what else are you guys doing to drive that margin enhancement on the subscription gross margin side?

And then, do we top out here pretty soon?

I mean 86% is a pretty robust number.

Or do you think you can get that up to 90%?

Where do you think that tops out?

Great question, Tom.

Yes, I mean, clearly, we're really happy with where our gross margins are.

We really have focused on that subscription gross margin, like you said.

It's about 85, 86% level.

And with services being such a small portion now, 5% of our revenue, it's becoming less and less important.

And overall mix is driving the overall gross margin into the low 80s.

I think there's still a little bit of room on mix.

As for the product gross margin, I think you are right.

We're probably pretty close to being topped out.

Though to the extent, we're relying on the same data on the central database and we can maximize that and get more revenue per customer.

Potentially, there could be a little bit more room, but we've gotten the vast majority of that and you're not going to see those kind of jumps, but there's probably a little bit more room there.

Your next question comes from Brad Sills with Bank of America Merrill Lynch.

At the Analyst Day, I remember you talking about making some changes potentially next year, to kind of get the selling motion of selling marketing into the sales-only installed base.

Moving more, I think you've done a great job so far on selling sales with new marketing customers and sales into existing marketers -- marketing customer base.

But could you provide a little color on what are some of the things you might be able to do in your go-to-market or tactically to get that end of the business moving?

Yes, I'm excited about that motion, Brad.

I think it's a big opportunity for us.

We are cranking on selling sales into marketing and we're definitely doing better on selling marketing into sales.

There's been some nice momentum on there over the last few months that looks quite promising.

I think there's a lot we can do to enable our sales organization -- service organization go faster there.

Things like change of commission plan.

So the commission plan, you could imagine paying at a different rate when you're selling a marketing product into the sales installed base.

That might be something we would think about.

More training of the reps on how to get in there with the sales customers, talk to the sales customers and get that introduction to the head of marketing.

And there's in product things we can do.

For example, inside the sales professional hub product, you can create workflows and those workflows can trigger all kinds of things.

But if you want to send e-mails off of those workflows, boy, you need to use a marketing hub version of that.

And so things within the product we can do to tee that up.

So a lot more work to do there, some nice progress on it, but it's a lot more low-hanging fruit.

Great.

And just on international, obviously strength has been holding there -- some of the partners we've spoken to in that region are talking about accelerating momentum here and adoption of INBOUND and HubSpot.

What are you seeing in the region?

Are they on a late-adoption cycle here?

Do you think we're kind of in maybe a year or 2 behind the U.S.?

And potential acceleration and some of the countries over in Europe?

In terms of the way they sell and market and their use of social media and the Internet and whatnot, I don't see a big gap like you see in a lot of other industries per se.

In terms of where we are in our investment cycle, we started in international far later than we started in the United States.

And we started in Ireland and we've been in the U.S. now for 11 years.

We've really only been in the international for 4 years, John?

Like 4 years or something.

And the way I kind of look at it is we're starting to get a real nice return on some of the investments we've made over the last 4 years.

The investments are things like offices in Dublin, offices in Australia, Singapore.

We just opened Berlin and people in those offices, but also big investments in languages.

So we translated HubSpot, the product and the help in the home, selling and servicing motion into 5 languages and we've done that over the last couple of years.

We're just now starting to see a real nice return on some of those investments.

The other way we kind of look at it is we look at unit economics.

I just brought this up before.

And gosh, because we're in the early in the adoption cycle internationally, those unit economics really look good so it's a very, very attractive investment for us as we're looking to add headcount and investments over time.

So still early, nice, nice opportunity left there.

Your next question comes from Mark Murphy with JPMorgan.

This is Matt Coss on behalf of Mark Murphy.

First of all, congrats on a fantastic quarter.

I wanted to ask you about how you're preparing the agency channel for customer service.

For example, how will you equip them?

And will you be pursuing additional channels like you did for the sales product like with sales consultancy and coaches?

Yes, great question.

So if I kind of take a step back and think about our agency program and how it started and where it's evolving and kind of where it's going, it started really as a marketing agency program.

First, 8 years of HubSpot, we really just were in the marketing software business and we signed up a lot of web design consultancies, search engine optimization consultancies and PR agencies, and we turn them into software companies with recurring revenue models and that worked out great.

We came out with the sales product and 2 things are happening.

Within those marketing agencies, a decent number of them have decided we're not just going to be marketing agencies.

We're going to be sales and marketing agencies and they do both and they're doing really, really well with it.

There's another decent percentage of them that say, "I'm sort of a web development person and a design person.

I don't really want to get into the sales business." And they stick in sales -- sorry, they stick in the marketing business.

So it's split and it's going pretty well, pretty happy with the way that's going.

We're not going to push or force any of our marketing agencies to start selling or engaging on the sales product if they're not into it.

Then we say, well, there's this whole other opportunity out there of sales coaches, of CRM implementation agencies and there's tens of thousands of them in the U.S. alone so why don't we see if we can create a program for them?

So there's kind of a tiger team inside of HubSpot that is signing these CRM and sales coaching agencies out there.

There's quite a few of them now.

They're starting to get some tractions, early, but it looks quite good.

Same type of thing actually is happening where some of these sales consultancies and CRM agencies are only interested in staying in sales.

A bunch of them though, now are picking up the marketing program.

I suspect that if I were a betting man, that the same type of developments will happen on the service side.

That we'll let some of our sales and marketing agencies sell the full stack and engage with customers across our whole life cycle.

We'll push it hard, many of them will come over and do the servicing and the selling of the customer Hub product, but then we'll also offer the option of trying to sign up a new type of agency that just does that stuff.

So moving along the line here, I think there's a pattern here that you can connect the dots on.

Your next question comes from Ross MacMillan with RBC.

Maybe just a tactical one.

I know that you were promoting, as we're coming into the 1st of November, let's call it the prior pricing for the sales product.

And I just wondered if you could just reflect on sort of why you were sort of promoting that.

Was it just the way to seed more seats into the market?

Or was there anything else you were trying to do with that?

Kind of promotion prior to launch of the $400 SKU?

Yes, great question, Ross.

We had a few options of how to do that and we took what we think is the most customer prospect friendly approach here and we were aggressive grandparenters and historically, we've been aggressive grandparents at HubSpot.

And so we basically said is prior to November 1, if you were a customer of the old sales product that you would be grandfathered into the new sales product.

And we just thought that was fair.

We had people who were early adopters, who've been on our sales product.

We didn't want to penalize them.

And we had a bunch of people who were looking at our CRM and sales products during the month of September.

We certainly didn't want to drop a brand new price point on them and raise the price on them immediately, so we gave them a little buffer and we grandfathered them in.

The truth is there's a little tiny bit of pull-forward revenue in October from that, nothing huge.

But we feel really good about the long term and something for our customers and prospects and creating a brand that people can trust.

That's helpful.

And maybe just to follow up.

Just I know you haven't been specific, but as we think towards the Customer Hub and Conversation, can you give us any sense of kind of how we should think about timing in the year for when these products might arrive?

Is it first half?

Second half?

Are they going to be separate timing?

Just any color on that would be helpful.

Yes.

Our Head of Product at INBOUND said it would be first half.

I think that's probably a good estimation.

Your next question comes from Terry Tillman with SunTrust Robinson Humphrey.

Brian, just first question.

You provide a lot of transparency at the user conference, INBOUND conference, and you talked about your all-zone journey in terms of scaling up your business and you're in a scale-up mode now yourselves.

You've had a lot of learnings as you've continued to broaden the product stack.

So that's the first part of this preamble to the question.

The second part is Customer Hub actually does have a $70 per month price point.

Sales Hub is $50 per month per user.

Could you see, because a lot of your learnings and as you've gotten smarter with new products and new market, a faster ramp on Customer Hub versus Sales Hub.

Maybe, I think there's a lot of learning.

The thing that's been tricky for HubSpot, and it's gone pretty well, but it's been tricky, is we're really an apps company moving to a suite company.

We came up with a sales product.

We had a separate division selling it and building it.

Then we pulled it in and merged it with the marketing product and that really we did in Q1.

That's gone pretty well.

And so we learned a lot about how to do that, how to create a nice experience for our customers.

I think we're going to leverage that experience as we build this product and as we roll it out to our customers.

I think we learned a ton from building that sales product and selling it and marketing it.

And so will it go faster as forward than the sales product?

I can't say.

I hope and it would be great if it went faster, but it rhymes with the way we did the sales product.

Terry, it's John.

One thing to clarify.

We haven't announced any pricing yet on the Customer Hub, just don't want to -- people to get ahead of themselves on that.

Yes, I'm not sure I got that.

I actually thought I saw something on your website, okay.

But maybe that was my mistake.

So fair enough.

John, one question, as it relates to the billings comparison.

Can you just remind us.

It looks like it's going to be one of the easiest, if not easiest comparisons for the fourth quarter, 4Q '17 versus 4Q '16.

Do we have a tailwind on FX?

And/or was there any other things you did in terms of promos or things that we need to keep in mind when we think about that year-over-year compare?

Yes, good question.

First of all, on the third quarter, we were obviously really happy with the billings.

We did get a couple of point benefit on the FX side as well as months upfront were a little bit, so that was nice to see that in the 37% range.

As we think about the fourth quarter, obviously, CRM, we're bullish on that, but we always finish up strong.

We did last year as well.

So I think that in general, the way I would think about billings is think about it relative to revenue growth over time, those 2 numbers should track each other, assuming relatively consistent months upfront.

Your next question comes from Samad Samana with Stephens Inc.

John, maybe just a couple of housekeeping questions for you.

The international business, it seems to be doing really well and you just mentioned FX on the question before.

But I'm curious, how does that growth look there?

The acceleration, would it still have accelerated without FX?

And I guess maybe some additional color on what's driving that underlying strength on the international side of the business will be helpful.

Yes.

I mean, first of all, I would say I want to be -- clarify a couple of things on the growth side.

We've talked about in the last couple of quarters that when we started the Sales Pro product, we had that -- we were billing that product out of a separate billings system.

And we weren't really tracking well international versus domestic because we weren't just -- we weren't capturing that.

So for this year, all the growth is going to -- I'm sorry, prior to this year, all of that revenue was going to domestic and so when you, now that we're actually capturing that correctly, when you layer in that international Sales Pro, the prior year compare actually is deflated.

So I think I've talked about this the last couple of quarters.

So if you normalize for that and the FX, we would have been in the low 60s.

Now that's still great.

We've been really happy with that international growth.

We've done great in the nautical cities like Dublin, Sydney, Singapore as well as some of the newer cities in Berlin and Tokyo, and we just keep investing heavily in those cities because we see the demand there.

And as Brian said, the unit economics are just so compelling, so we still think there's a ton of opportunity internationally and we expect that to continue.

And just to be clear, Samad, from an international growth perspective, it did accelerate a bit quarter-over-quarter.

That's very helpful.

And then Brian, maybe a bigger-picture question for you.

As the company thinks about adding sales capacity, and in the context of having a multiproduct strategy now, do you think that as you go forward, will there be any type of change in the type of salesperson HubSpot's hiring?

Or the way that they're compensated, now that more and more additional products are being layered into the platform.

And thanks again for taking my questions.

That's a great question.

I think there will be tweaks to the way we sell the products and the profile rep.

I don't think there'll be a wholesale change.

For example, the sales motion for a freemium account is a little bit more of a help motion than a sell motion.

Hey, I'm using the CRM product.

I've got some of these calls to action, I'm clicked within the product.

I'm starting to use them, can you help me figure them out.

And so they're already a user and you're helping them so if anything, it's moving a bit towards help and a little away from the sell, but nothing major coming on that front.

Your next question comes from Koji Ikeda with Oppenheimer.

I wanted to build upon Samad's question on the selling motion.

Once the Customer Hub goes GA next year with all the different pricing options, HubSpot's going to have a really nice platform of customer engagement applications with the Marketing Hub, Sales Hub and the Customer Hub.

And I was just wondering, once that all comes online, is there going to be a greater emphasis placed on full platform sales?

Or are the sales teams really just going to be targeting the individual business units whereas I understand that you guys are doing right now?

Yes, I think that's a great question.

The way I -- it will work next year and the way we're kind of headed, Koji, is somebody starts with our free CRM product.

They're enjoying it and then they maybe they move up the stack and they purchase our Sales Professional product and then they'll move over and buy the marketing Pro product and then they'll move over and buy the whole thing.

My suspicion of the way it will work over the long haul and the way I want it to work is how do we get them using our free products, buying in one product line and then going in and selling them the full stack so how do I keep that cost to acquire low?

How do we match the way we sell, the way people really want to buy, get in the door and then how do we maximize the total lifetime value by delighting them on their first purchase?

I don't think that's going to be every time, but I think you're going to see a lot of deals next year that are full Growth Stack after that first purchase is my guess.

Your next question comes from Kirk Materne with Evercore ISI.

This is Tom Mao on for Kirk.

As you start planning for 2018, how are you thinking about investments and go-to-market, domestically versus internationally?

And internationally, are you thinking about kind of broadening the footprint at all?

Or do you want to expand some of the offices that you already have in place?

Tom, good question.

It's Brian.

I think we're going to invest heavily in both next year.

The unit economics and growth rates in international are great, we'll probably invest a little faster in international in the United States.

In terms of international, we'll continue to invest in the locations we have and we may have an eye open to one more location.

We haven't made that decision yet, but we're unlikely to be done opening new offices.

We've got a couple more in our head, either for '18 or '19.

Got it.

And on a related note, can you just talk about some of your sales hiring trends as we enter the fourth quarter into 2019?

And how should we -- or 2018, how should we think about sales productivity?

Sales hiring has been pretty good.

It's going pretty well.

Sales productivity has been pretty solid.

They're starting to figure out how to sell the whole Growth Stack, trying to figure -- they're starting to really figure out how to sell Sales Pro, so feeling solid about both.

Your next question comes from Derrick Wood with Cowen and Company.

This is [Tim Fitzgerald] standing in for Derrick.

I just had a quick one on the Kemvi acquisition.

It's been a few months since you guys acquired them.

Do you have any updates there?

Any current thoughts on how that will be utilized?

Yes, that's going great.

That's a great crew.

We've picked up there their ensconced in dev organization, now working on data plays, working on AI plays.

We're making a big investment in our artificial intelligence machine learning through the acquisitions we've made and some just for hiring of our own and training people.

So really bullish on that team and how they can make the full platform better, but specifically how they can leverage data to make that sales reps experience better and their prioritization of their time better so, so far, so good.

Your next question comes from Brian Peterson with Raymond James.

Kevin here in for Brian.

You announced the Shopify integration out at INBOUND, and I wanted to understand how sophisticated your customers are from an e-commerce perspective today and maybe to what extent does this integration really help you increase the ROI for your customer base?

Yes, I think it's going to be great for HubSpot and for Shopify.

Not all of Shopify customers are a fit.

They have lots of little customers, they have some bigger customers.

We're kind of a mid-market play.

And the Shopify customer who's a terrific fit for HubSpot is a B2C-considered purchase type of a buy.

It's looks a little bit like B2B.

And the integration is super slick.

Basically, we created a new product object inside of HubSpot, and you can basically take your catalog from within Shopify, import it into HubSpot, you have all your contacts are synched over as well.

You can segment all those contacts in very detailed ways, not just by geography or whether they purchased or not, but segmented by which product they purchased or which product they looked at, which is very powerful.

Then you can nurture them and you can do shopping cart abandonment campaign, super powerful stuff for e-commerce companies.

They can also do other content marketing, search engine optimization, blogging, all that kind of stuff with HubSpot.

So I am super, super excited about the Shopify integration.

I think there's a decent chunk of their customers probably slightly larger customers on their side that are a terrific fit for our marketing product.

That's helpful.

And then if we think about the customer service functionality and the potential ramp of that business, I'm curious how we should think about the ramp relative to what you've seen so far in your sales-oriented businesses?

Would you expect something similar, maybe faster?

How should we think about that?

We'll see.

There's a team working on it, and we have a general manager for that crew and he certainly going to get a push a from me to grow it fast, but it's hard to say.

We haven't even launched the product yet.

I think there's a big market there.

I think particularly our customers are already using the marketing product and the sales products are going to be all over, having the same user interface and the same bill, the same number to call, all together in one system.

So I think it's a nice, nice market.

We'll see how it goes.

It's too early to really forecast it, but kind of similar to the sales product is what I have in my head.

There are no further questions at this time.

I turn the call over to Brian Halligan.

Okay.

I want to thank everyone for joining the call.

Hope you're all well and happy day after the Halloween.

And this concludes today's conference call.

You may now disconnect.