HubSpot, Inc. (NYSE:HUBS) Q1 2024 Earnings Call Transcript May 8, 2024
HubSpot, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the HubSpot First Quarter 2024 Earnings Conference Call. My name is Harry, and I’ll be your operator today. [Operator Instructions] And, I’ll now hand over to, Ryan Burkart, Senior Director of Investor Relations, to begin. Please go ahead.
Ryan Burkart: Thanks, operator. Good afternoon, and welcome to HubSpot’s first quarter 2024 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 Yamini Rangan, our Chief Executive Officer; Dharmesh Shah, our Co-Founder and CTO; and Kate Bueker, 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 within the meaning of Section 27A of the Securities Exchange Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.
All statements other than statements of the historical fact are forward-looking statements, including those regarding management’s expectations of future financial and operational performance and operational expenditures, the ability to realize the anticipated benefits of the Clearbit acquisition, expected growth, FX movement and business outlook, including our financial guidance for the second fiscal quarter and full-year 2024. Forward-looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today’s press release and our Form 10-Q, which we expect to file with the SEC on Friday, May 10, 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 as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between such measures can be found within our first quarter and fiscal year 2024 earnings press release in the Investor Relations section of our website. Now, it’s my pleasure to turn the call over to HubSpot’s Chief Executive Officer, Yamini Rangan. Yamini?
Yamini Rangan: Thank you, Ryan, and welcome to everyone joining us on the call. I’ll begin by sharing our Q1 2024 results, update you on what we are seeing from a demand perspective, and wrap up by highlighting our recent product launches from the Spring Spotlight and our ongoing efforts to accelerate innovation for our customers. We kicked off the year with solid revenue growth of 23% year-over-year in constant currency. We delivered another good quarter of operating margin growth with 120 basis points of margin expansion year-over-year, driving our operating margin to 15%. Total customers grew by 22% year-over-year to over 215,000 customers globally, driven by over 11,700 net customer additions in the quarter. I am thrilled to see more customers consolidating on HubSpot as their preferred customer platform for growth.
Our Q1 results highlight consistency in why we win. Customers across all segments are consolidating on HubSpot because it is easy to use, easy to scale, and delivers fast time to value. In the lower end of our segment, we saw continued strength in net customer addition driven by free users upgrading to starter and pricing optimization plays, including our seats model change driving starter and pro-customer growth. In upmarket, the big themes of the quarter were continued strength in Sales Hub and Multi-Hub as customers consolidate on HubSpot as their platform of choice. Sales Hub is emerging as a clear winner driven by the innovative features we launched at inbound. Our customers are adopting the new prospecting workspace and advanced sequences as a way to drive better alignment between marketing and sales.
In addition, we have opened up our smart CRM to support UI customizations, deliver broader governance and permission capability, and deeper integrations like the sync with LinkedIn Sales Navigator, which is driving upmarket momentum. Our land and expense strategy is working, and we have three main front doors for customers. Marketing Hub, our original hub where we continue to innovate, Sales Hub where we see huge momentum, and Multi-Hub as customers consolidate on HubSpot. Over 35% of Pro+ customers are now on three or more hubs, and we have more room for growth as we drive innovation. We’re thrilled to see the continued momentum in Sales Hub and Multi-Hub, and it’s a clear validation that our strategy of going from app to suite to customer platform is working.
Switching gears to macro. After a strong finish in Q4, we saw a return to weaker demand conditions in the first quarter, similar to what we experienced in 2023. The buyer urgency that we saw in December did not carry over into Q1. Instead, we saw a return to higher scrutiny of budgets, more decision makers getting involved, and a need for more demos and proof-of-concepts before signing-off on purchase decisions. At the top of the funnel, we saw lead flow shift away from higher quality inbound and partner source leads to lower quality rep source leads. This shift, plus the lower buyer urgency slowed down deal progression and in some cases pushed deals out of Q1 and into Q2. While deal close and upgrade rates remain under pressure, we continue to see strong customer dollar retention in the high-80s which underscores the value that our unified customer platform delivers for our customers.
Now, for an update on seats. In early March, we introduced a pricing change based on seats to lower the price point to get started with HubSpot and remove the pricing friction for customers to upgrade from starter to professional edition. While we continue to be very excited about the model change for our customers on HubSpot, the timing and speed of the change caused a negative impact on our business in March that will likely persist for a couple of months. As a reminder, we expected this change to lead to lower initial ASP, higher volume of customers, and higher rates of upgrades over time. In March, we saw faster adoption of the seats model by customers, which led to a more immediate impact of lower ASPs but a slower pickup in the volume of new customers.
We’re seeing more positive trends in April, but it’s going to take a few months for the higher volume of additions to offset the initial lower price. Having said that, I want to be clear that we have high-conviction that seat pricing change is the right decision for our customers as it will allow them to get started and scale more easily with HubSpot. And, it is the right decision for HubSpot as it will allow us to bring many more customers onto our platform, grow our net revenue retention rates as customers add more seats over time, and align pricing with the value we are creating from our AI-powered smart CRM. Okay. Let’s talk about product innovation, which has been a consistent team over the past few years and gives me high-confidence in our ability to drive durable growth.
The pace of innovation has accelerated in our industry with AI, and we are setting that pace for scaling companies. Innovation is happening in days weeks, not months or years. Marketing sales and service teams are going through a major technology shift, but keeping up with that innovation can be a full-time job in and of itself. So, to make it easy for customers to stay ahead, we’ve decided to have not one, but two big launches each year, Inbound and Spring Spotlight. You all have seen Inbound and our customers love the innovation that comes out each year. In April, we launched our first Spring Spotlight that featured over 100 new product releases with over 70 AI features. And, we saw over 200 million earned media impressions and nearly doubled the engagement rate on social channels compared to Inbound 2023.
Super exciting. I want to highlight three big areas of innovation from our Spring Spotlight for you, Content Hub, Service Hub and HubSpot AI. HubSpot gave marketeers a better way to grow with inbound marketing, and we are now doing it again by reinventing content marketing. We’re taking CMS Hub, which used to be about website and digital presence, and transforming it into Content Hub powered by AI to create and manage content across the entire customer journey. As part of Content Hub, we launched AI Content Creation to make it easy to create multilingual content, Content Remix to make it easy to create full pipeline of content-based on a single asset and Brand Voice, to make it easy to generate content that has consistent brand voice. Our goal is simple.
We want AI to power every content use case and light the way into the future of content marketing. Let’s talk about Service Hub. I’m really excited about the innovation here. We believe that delighting current customers is even more important than acquiring new customers. So, we’re re-launching Service Hub to bring customer support and customer success teams together. To help scale customer support, Service Hub now includes advanced SLAs, more robust routing, and support management tools. To help customer success teams drive retention, we launched a new customer success workspace that can help CSM handle their tasks, track their pipeline, and see customer health scores with clear next steps. Service Hub now includes more than a dozen AI-powered tools, like GPT powered chatbot, real-time recommendations, and call summaries to speed up resolution.
We’re embedding AI to make Service Hub even more valuable and delivering a unified customer platform. As one of our customers, Kaplan, said, by bringing marketing sales and service teams together on HubSpot, we’re removing the guesswork for our leaders and giving them the confidence that customers are getting what they need. As we set the pace of innovation with AI embedded across all hubs and our customer platform, we are keenly focused on driving adoption and usage. Adoption has continued to increase with over 50% of enterprise portals using AI features along with over 25% of pro-portals. Customers are leveraging AI for personalized content generation, call summarization, and are automating their go-to-market motions to drive productivity and growth.
There is a lot more room to drive repeat usage, and we are laser focused on helping our customers grow with HubSpot AI. Overall, we’re still in the early innings of transforming from a suite to a customer platform. We’re becoming the de-facto standard for scaling companies, and we are setting the pace of innovation with AI. This gives me confidence in our ability to drive long-term durable growth. With that, I’ll hand it over to our CFO, Kate Bueker, to take you through our financial and operating results.
Kate Bueker: Thanks, Yamini. Let’s turn to our first quarter 2024 financial results. Q1 revenue grew 23% year-over-year in both constant currency and on an as reported basis. Q1 subscription revenue grew 23% year-over-year, while services and other revenue increased 15% on an as reported basis. Q1 domestic revenue grew 21% year-over-year. International revenue growth was 24% in constant currency and 25% as reported, now representing 47% of total revenue. We added over 11,700 net new customers in the quarter, including the one-time addition of nearly 800 customers from the acquisition of Clearbit. This brings our total customer count to over 215,000, growing 22% year-over-year, fueled by our continued strong starter customer additions.
Average subscription revenue per customer was $11,400 flat in constant currency and up 1% year-over-year on an as reported basis. We continue to see a positive impact on ASPs from Multi-Hub adoption of our professional and enterprise customers, offsetting the impact of large new cohorts of low ASP starter customers in recent periods. In addition, Clearbit added approximately a one point benefit to ASP in Q1. As I shared in February, we expect to maintain net customer additions around 10,000 per quarter throughout 2024, with ASRPC down low-single-digits in constant currency. Gross retention held in the high-80s in Q1, and net revenue retention was 101% or 102% if you remove the impact of Clearbit in the quarter. While we have seen a stabilization in downgrade rates over the last couple of quarters, customer upgrade rates were more challenged in Q1.
We expect similar trends to continue in the near-term with net revenue retention holding around current levels throughout 2024. Calculated billings were $641 million in Q1, growing 22% year-over-year in constant currency and 20% as reported. The remainder of my comments will refer to non-GAAP measures. Q1 operating margin was 15%, up one point compared to the year ago period. We continued to see solid progress towards our intermediate operating margin targets across the business. Net income was $89 million in Q1 or $1.68 per fully diluted share. Free cash flow was $104 million in Q1 or 17% of revenue. Finally, our cash and marketable securities totaled $1.8 billion at the end of March. In connection with the quarter close, we discovered an error in our calculation of cost of goods sold related to how we calculate a credit in our hosting agreement with AWS.
As a result, we overstated our subscription cost of goods sold by a total of $14 million since Q4 of 2021. Calculating this credit correctly resulted in a $2 million pickup to operating income in each of Q1 2024 and Q1 2023. As you update your models, you should assume a positive $6 million contribution to operating income for the remainder of the year, which is included in our guidance. This had no impact on revenue, ARR, operating cash flow and free cash flow in the current or prior periods. We have concluded it was not material to prior periods, and we will be correcting the relevant financial statements for comparative purposes in our upcoming 10-Q, which we expect to file on Friday, May 10th. Before we dive into guidance, I wanted to touch quickly on the macro environment.
As Yamini shared, we continue to operate in a challenging external environment and the buyer urgency we saw in December did not carry over into Q1. Customer decision making is measured and budgets remain tight. Our guidance assumes that these weak conditions persist through 2024. Now, let’s review our guidance for the second quarter and full-year of 2024. For the second quarter, total as reported revenue is expected to be in the range of $617 million to $619 million up 17% year-over-year at the midpoint. We expect foreign exchange to be a one point headwind to as reported revenue growth in the quarter. Non-GAAP operating profit is expected to be between $92 million and $93 million. Non-GAAP diluted net income per share is expected to be between $1.62 and $1.64.
This assumes 53.3 million fully diluted shares outstanding. And, for the full-year of 2024, total as reported revenue is expected to be in the range of $2.55 billion to $2.56 billion up 18% year-over-year at the midpoint and consistent with our prior guidance. We now expect foreign exchange to be roughly a one point headwind to as reported revenue growth for the full-year. Non-GAAP operating profit is now expected to be between $426 million and $430 million. Non-GAAP diluted net income per share is now expected to be between $7.30 and $7.38. This assumes 53.5 million fully diluted shares outstanding. As you adjust your model, please keep in mind the following. We still expect CapEx as a percentage of revenue to be roughly 4% and free cash flow to be about $365 million for the full-year of 2024, with seasonally stronger free cash flow in Q4.
And with that, I will hand things back over to, Yamini for her closing remarks.
Yamini Rangan: Thank you so much, Kate. I want to close by sharing what keeps us grounded and excited about the future. We ground ourselves on not what is changing today, but what will not change for our customers. Our customers will need easy-to-use solutions that can help them grow. Our customers will need us to drive innovation so that they can compete with bigger companies in the age of AI. This is exactly what we are focused on. Our customer platform is gaining momentum with more front doors like Sales Hub and Multi-Hub, and we remain focused on a massive opportunity to help millions of organizations grow. Okay. I want to thank our customers, partners, and investors for the continued support. And, a huge thank you to all HubSpotters around the world for staying focused on solving for our customers every single day. With that, operator, let’s please open up the call for questions.
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