HubSpot, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the HubSpot Q3 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chuck McGlashan, Head of Investor Relations Thank you. Please go ahead.

Thanks, Operator. Good afternoon and welcome to HubSpot's third quarter 2020 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 Kate Bucher, 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 historical fact are forward-looking statements. including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2020. 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 in our Form 10-Q, which will be filed with the SEC this afternoon for 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 third quarter 2020 earnings press release in the Investor Relations section of our website. Now, it's my pleasure to turn over the call to HubSpot CEO and Chairman, Brian Halligan.

Thanks, Chuck. Good afternoon, folks. Thank you for joining us today. Well, none of us could have foreseen the difficult path this year would take as we enter the final quarter of 2020. I'm grateful for our customers, partners, and employees who have grown through it with us. Now, despite this challenging environment, HubSpot has grown very nicely. Demand trends have continued to strengthen in the third quarter as more companies digitize their end-to-end customer experience and build modern flywheels. Revenue growth was 32% in Q3 and non-GAAP operating margin was 7%. We had a record total customer growth at 39% year-over-year, surpassing 95,000, while multi-product adoption has also continued to grow nicely, representing over 45,000 customers. These customers have also become more embedded in the HubSpot ecosystem as we've reached nearly 2 million cumulative platform integrations. The year is not over, but I believe the growth we've seen in the third quarter is both a story of digital transformation tailwind combined with excellent execution by our team to build and deliver a terrific product for our customers. A big focus for 2020 has been on building a CRM platform that couples an increasingly powerful enterprise backend with an intuitive consumer-grade frontend. This is a rare combination in the software industry and is unique to us in the CRM industry. That rare combination is a result of a few things. First, We handcrafted HubSpot on a set of internal primary colors, reporting, content, messaging, data, and automation. These primary colors are combined to create our hubs, which all work the same intuitive way. This is in contrast to traditional CRMs, which are cobbled together through acquisition. Second, we have a large multi-year investment in user research and design that gives HubSpot that consumer-like feel. Third, our entire company is laser focused on delighting our customers. Culturally, over the last few years, we've moved from a funnel mindset to a flywheel mindset where our growth rate is heavily influenced by the values our customers are getting from our offerings. Now, the really exciting thing that happened since we spoke last was the release of Sales Hub Enterprise, which leverages these primary colors as custom objects, as proposal, as advanced sales automation, and as accounting integrations like NetSuite, QuickBooks, and Xero to our CRM. This was a huge release for our customers and partners. In particular, the addition of custom objects changes the game for a lot of our customers. Custom objects was the very large investment for us that took well over a year to develop. Prior to this release, our customers had to fit their business model into our relatively rigid object model. Now our customers can fit our object model around their business model. This was a big blocker for us with scale businesses that we've knocked down. One customer, LegalZoom, an early Sales Hub Enterprise adopter, praised this intersection of power and ease we provide by saying, we have had 100% user adoption and couldn't be happier. Now, it's still early days, but we've had a strong start with Sales Hub Enterprise net new ARR hitting a record high in October. There's still a lot of uncertainty in the world today, so it's hard to predict the future. But one thing I'm certain of is our approach to building products that delight customers is going to keep paying off. I want to thank you for your time so far today. We're proud of the momentum we saw in Q3 and remain optimistic and focused on closing out the year strong. Now I'll hand things over to Kate to take you through our Q3 financial and operating results in more detail.

Thanks, Brian. Let's turn to our third quarter financial results and our guidance for the fourth quarter and full year 2020. Third quarter revenue growth re-accelerated to 30% year over year in constant currency and 32% as reported. Q3 subscription revenue grew 32% year over year, while services revenue increased 12% year over year on an as-reported basis. Domestic revenue grew 24% in Q3, while international revenue growth was 39% year-over-year in constant currency and 42% as reported. International revenue represented 44% of total revenue in Q3, up three points year-over-year. Deferred revenue as of the end of September was $259 million, a 27% increase year-over-year. Calculated billings was $246 million in Q3, up 33% in constant currency and 38% year-over-year on an as-reported basis. Earlier in the year, we introduced proactive measures to provide customers and partners with flexibility needed to remain productive and engaged parts of the HubSpot ecosystem. As I shared at the analyst day, we saw the vast majority of these COVID customer relief requests in the first half of the year. Overall, we continue to see a small number of new requests, and the retention of our customers at the end of these short-term plays remains strong. We continue to watch these trends carefully, particularly given the recent uptick in global COVID cases. We also saw continued strength of demand from new customers during the quarter, We ended Q3 with over 95,000 total customers, up 39% year over year. Net customer additions were nearly 9,000 and set another company record, driven by broad strengths across the business, although we continued to see notable growth in our starter growth suite customers. Average subscription revenue per customer of roughly $9,700 was up a few points sequentially, but down year over year, as a result of the strength that we've seen at the low end of the portfolio. Total revenue retention was greater than 100% in Q3. While retention benefited from the performance of customers upgrading at the end of short-term discounts, revenue retention would have remained above 100% without this benefit. The remainder of my comments will refer to non-GAAP measures. Third quarter gross margin was 82%, flat year over year. Subscription growth margin was 86%, while services growth margin was negative 20%. Third quarter operating margin was 7%, up one point compared to the same period last year. Operating margin in the quarter exceeded our expectations, primarily as a result of strong revenue performance. At the end of the third quarter, we had nearly 4,000 employees, up 24% year over year. Net income in the third quarter was $14 million or $0.28 per diluted share. CapEx, including capitalized software development costs, was $13 million or 6% of revenue in the quarter. We expect CapEx as a percentage of revenue to be 6% to 7% in 2020. Free cash flow in the third quarter was $25 million, driven by strong business performance. As a result, We're increasing our expectations for full year 2020 free cash flow to approximately $60 million. HubSpot ended the quarter with $1.2 billion of cash and marketable securities. We remain confident that our strong balance sheet will provide us with the financial flexibility to invest for the long term. And with that, let's dive into guidance for the fourth quarter and full year of 2020. For the fourth quarter, Total revenue is expected to be in the range of $235 to $237 million, up 27% year over year at the midpoint. Non-GAAP operating income is expected to be between $13 and $15 million. Non-GAAP diluted net income per share is expected to be between 21 and 23 cents. This assumes 49.6 million fully diluted shares outstanding. And for the full year of 2020, Total revenue is expected to be in the range of $866 to $868 million of 28% year over year. Non-GAAP operating income is expected to be in the range of $63.5 and $65.5 million. Non-GAAP diluted net income per share is expected to be between $1.13 and $1.15. This assumes 48.7 million fully diluted shares outstanding. As you adjust your models, keep in mind the following. At current spot rates, we expect a two-point FX tailwind to Q4 reported revenue and now expect neutral FX impact to reported revenue for the full year of 2020. We have delivered modest operating margin leverage in 2020 as a result of our strong business performance, coupled with some cost savings from our shift to remote work. At our analyst day, I reiterated our commitment to investing for the long term and indicated that we expect to increase our R&D spending as a percentage of revenue. As a result of this increase, coupled with a return to a more normal level of employee spend over the next year, we do not expect to deliver operating margin leverage in 2021. We are still early in our planning process. so we will share a more detailed outlook for profitability when we report our Q4 results. The investments we're making in both our product and go-to-market teams are paying off and will position us well to grow in 2021 and beyond. And with that, I'll hand the call back over to Brian for his closing remarks.

I'd like to close by thanking my leadership team and all the HubSpotters out there who are listening tonight. It's been an exceptionally challenging year. You all have stepped up during these tough times with great execution and terrific resilience. I feel lucky to be on your team. Okay, operator, let's open it up to some questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Mark Murphy from J.P. Morgan. Please go ahead.

Yes, thank you very much, and congrats on a very special performance. Brian, I was thinking back to Inbound. You had commented that this is the year that you started adding legitimate power to the platform, and now we're hearing so much discussion of custom objects Are you surprised at how quickly the enterprise functionality has resonated in this kind of environment? And do you see more activity at the upper bound of your target market in terms of company size?

Hey, Mark. Thanks for the question. I read your report. Your report that came out. That was great. I'm not that surprised. There's been a lot of hard work that's gone in kind of on the platform level, on our custom objects, other things. It's been really going on for a long period of time. And this was the year we really wanted to strengthen that enterprise tier of our product, the product that we sell into like 200 to 2000 level customers. And we knew for customers of that size, a major objection from existing customers who were graduating and new potential customers was, gosh, we've got this evolving business model, but we have to kind of jam our business model into your relatively fixed object model, into your contact company field that's sort of rigid the way we structured it. And what custom objects gives them the ability to do is wrap HubSpot in our object model around an evolving or more complicated business model. And so this makes this a better fit, for example, for a university. There can be a student object. For a SaaS company, there can be a subscription object. There can be, for a manufacturing company, inventory could be an object. So it just gives you a ton more flexibility if you're a scaling company. And so I'm not shocked that we're getting good adoption on it. It's been a loud noise from that tier of customer reports for a number of years. And so we undertook that project as part of last year, and it came out great. The nice thing about Sales Hub Enterprise and about those custom objects is they're part and parcel of HubSpot. So they inherit all the great automation and all the other great reporting. They're not kind of bolted in there. It's sort of like an Apple-like feel to them. They're really powerful and really easy to use. So I guess I'm not shocked.

Okay, great. Now, Kate, I had a mathematical question for you. I was trying to run the math at the analyst. I think it said Marketing Hub was over $600 million, growing at least 20%. And Sales Hub, I think over $160 million, growing 60%. And so, yeah, so I ran the math on that. It looks like you're almost booking as much new business with Sales Hub now. as you are with Marketing Hub, or it's getting close, kind of this twin engine situation. Is it fair to start thinking of it that way already, you know, this soon? Or, you know, is it possible we'd see crossover there in the next couple years? Because I was also considering, I think Brian just said that October, actually, I thought he said October, not September, what was the... the highest level you've hit for, you know, sales hub enterprise, net new ARR. So I'm trying to kind of tie all that together and see what you think.

Yeah. Yeah. Look, I think you're going to see and have seen ebbs and flows across the marketing hub and the sales hub over time. I think they're both great engines for the company, and I think they're both going to be big growth drivers to come.

Thank you.

Your next question comes from Alex Zukin from RBC. Please go ahead.

Hey, guys. Thanks for taking the question. Maybe just the first one on just what you're seeing with respect to sales cycles, the demand environment, the pipeline. How is that different from, call it, 90 days ago and even since inbound, what you saw come out of inbound? Because it does feel like some of the results you're posting, the billings numbers, it it does feel like there's a bit of a acceleration in terms of the priority set that you're solving for customers. So just any high-level comments there, and then I've got a quick follow-up on everybody's favorite topic of Billings.

Hi, Alex. I'll take this, Brian. It's been an interesting year. Like, if I think about this year, the year started really strong, January and February. We were very bullish about this year internally. We had done a lot of hard work last year to kind of get ready. So it started with kind of a tailwind feel, you know, end of March to early June, huge headwind. And starting at the end of June, that headwind turned into a tailwind, and that tailwind blew all through 2-3. It blew through October, too. And so I'm pretty happy with where we're sitting at the moment. Things are going really well. And I give – I think we're very well positioned to help our customers through that, and I give some credit to that. I also give some credit to just a lot of hard work from the team and execution over the last couple of years to put us in this position, so it's a little bit of both. It's hard to say with the election and the shutdowns, like, I'm not sure what's going to happen over the next six months. I'm pretty optimistic. Like, the pipeline looks good. Customers are quite happy. Our value prop's quite strong. Our products are getting better. Customers need to move from an outbound model to an inbound model, from outside selling to inside selling, from offline to online. Our product is a really, really, really good fit for that type of thing. And so I'm feeling quite positive these days, actually.

And, Brian, I guess when you think about as you look to next year, you're clearly going to invest to take advantage of the growth. A lot of investors and companies start thinking about comps for, you know, some comps are easing, some comps are getting tougher depending on what kind of software you're selling. But for you guys, it feels like because of the way you're coming out of it and the sales cycles are working and, you know, everything's resonating, is it possible that if we do get stimulus, you can actually accelerate as we look at next year? What's the right way for us to think about that? And any tie-in with the puts and takes around billings that we should keep in mind both next quarter and just in general from here?

I don't know is the honest answer. I don't know if the stimulus is coming and I don't know what the impact will be on HubSpot. I can say I try to really think a lot about what I can control and and what i can influence and i can influence our employees and our customers and our partners and i think we're in very very good shape like you've been tracking our company for a long time just feeling really very solid about where we sit and i think uh you know i just think it's really what think way back like when we first went public years seems like 100 years ago uh We were just making the transition from a marketing app to a CRM platform, and we're making great progress on that. It's a multi-year arc, and we've made huge investments. It's still pretty early in that arc, like our vision for what a modern CRM value prop is to companies relative to what we've built. We've made a lot of progress on it, but there's a lot more progress to come. So in general, I'm feeling quite good these days.

That's awesome. And then just Kate, anything on billing? So we should be aware of given the, you know, different terms for some of your products now in the market?

Yeah, I guess, you know, last time we talked about a compression in the upfront duration of billings. I think we have a different conversation to have this quarter. I would just start, frankly, with a reminder that the FX is different on billings than it is on revenue. And so there was a five-point benefit to billings in Q3. So the number I would really focus on is that constant currency billings growth of 33%. And there's a couple things I would point out. One is just strong business performance is going to drive strong revenue growth and strong billing growth. But quarter over quarter, we did see an improvement to the billing duration. And some of that is a mix where we saw some strength in marketing hub and enterprise skews. But we also saw a bit of a tailwind, just like we saw with retention, to the return to normal billing for some of the customers that were under these short-term COVID discounts as they came out the other side. So, you know, I would advise just long-term the right anchor point really still is constant currency revenue and constant currency billings tracking one another.

Alex, we were getting some feedback there, so we had to mute the line. Thanks for the question. Operator, if we could take the next one.

Your next question comes from Samad Samad from Jeffries. Please go ahead.

Hi, good evening. Thanks for taking my question. Let me echo, the very strong results were great to see. Kate, maybe first a question for you. It was a really impressive performance in that NetAds was up quite a bit quarter-over-quarter, but ASRPC also increased quarter-over-quarter. Is it fair to assume that the company either had more pro and enterprise signings as a percentage of the mix in 3Q, or was that a function of something else?

Yeah, thanks for the question. You know, we are obviously really happy with the new customer ads for the quarter. I would say starter growth suite was another quarter of really strong ads. So that was a big driver of the customer count growth in Q3. But one of the things that I liked about the quarter was that we also had really strong ads in the professional and enterprise areas. Additions and, frankly, both in marketing and in sales. So, you know, I would caution us not to expect 8,000 or 9,000 new customers every quarter. But it was, you know, it was a great quarter for new customer ads. As far as ASRPC, some of the sequential uptick is going to be attributed exactly as you expected to a bit more in the professional and enterprise customer ads. I think there's also a little bit of help there from the customers coming off of the short-term discounts and going back to more normal pricing.

Great. Very helpful. And then Brian, sorry.

Oh, go ahead.

No, no, no. Please, sorry. Finish your thought.

I would just finish, you know, we talked about having, expecting the ASRPC was going to be under pressure for the next few quarters, at least as, you know, the customer mix shifts to that starter tier. I think that still holds true.

Okay, great. That's helpful for modeling. And then, Brian, maybe just a follow-up for you. If we maybe zoom out, we've now been kind of all stuck at home for almost seven, eight months. But what we've seen for you guys is even X the upgrades off of discounted pricing, a pretty strong net retention. So it seems like existing customers are buying again and adding additional products. Could you maybe help us just stepping back? What are customers prioritizing as they adjust to kind of our new reality, particularly heading into 2021 and how that's translating into selling back into the base?

Yeah. I think that everybody now, you know, so many companies, Samad, had on their to-do list to really digitize their go-to-market. You know, there's very few people in the world today that are like, that's a bad idea. Whereas, you know, 10 years ago, we were really starting HubSpot. People thought we were crazy with all of this inbound digitalization. But, you know, it's become pretty mainstream. And I think COVID might have, you know, sped up some of the plans on this. And people are – they're at home and their prospects are at home and their customers at home. And it sort of, it was kind of a compelling event to see people up to really digitize their go-to-market. And HubSpot was very well positioned for that. And we built a platform to help people digitize their entire go-to-market to create a modern flywheel to create a really terrific customer experience. So, I don't think it should be that surprising that we've done really well. I do think we were very well positioned. I think we're very well positioned going forward, too. Like, the advances we've made on the product and the improvements we've made on the go-to-market have been substantial over the last year, and I think we're getting nice returns on those.

Great. Thanks for that, and it's good to see all the investments paying off. Have a great night, guys.

Your next question comes from the line of Stan Slotsky from Morgan Stanley. Please go ahead.

Perfect. Thank you so much, guys. When I was reading the press release, one thing that really kind of stuck out at me was that some of the benefits that you're seeing right now is, the way you guys put it, was from the ongoing digital transformation of the mid-market. um i mean that that particular you know mid-market is a statement right it's is that the way that you guys are viewing yourselves now as in you know yes you definitely have a very strong solution for the mid mark i mean for the for the smb and that's you know your your roots are certainly in in that But, you know, the mid-market, is that really where you guys have been focusing and that's where you're seeing the most traction these days as far as, you know, the incremental bookings, billings that are coming into the company?

That's a good question, Stan. We roughly break our segments out, Stan, of two to 20 employee companies per We call that small, 20 to 200 employees. That's mid 200 to 2,000. You know, we call that enterprise. We have perfect product market fit and perfect product go-to-market fit in that middle, that 20 to 200. We do extremely well in there. I think what you've seen this year is nice improvement on product market fit and go-to-market fit. in the small and the enterprise. On the small side, we did that. We repackaged basically that starter suite, so it's $50 per month. And, boy, that's gone really well. We're very happy with what's going on there. Customers are signing up. They're being retained nicely. They're upgrading. And at the same time, we've seen a lot of improvements to our product line up in that $200 to $2,000. And so ICS is kind of this, You know, we're for startups and scale-ups. And what I don't like to describe HubSpot as for its small business. I don't think that's really us. It's not for, like, little tiny companies, you know, little shops. Maybe I have a flower shop near my house, and they make smoothies, and it's, like, two people. It's not for them. It's for a real business that's going to grow. We want to be the number one CRM for scaling companies. And so that's kind of where we sit in the market. It's a little bit similar, and Chuck sees when I use this analogy, but it's a little bit similar to where NetSuite used to sit in the market. I think NetSuite's PAM is a lot smaller in the grand scheme of things than our PAM, but it's for that startup and scale-up company between 2,000 and 2,000 employees.

Perfect. Thank you. And if I could sneak in a quick follow-up. So help us kind of better understand how you guys are thinking about Q4 guidance because, you know, on one hand, we're very clearly seeing extremely strong results in Q3. And, Brian, you talked about, you know, the tailwinds that you've been seeing. uh through this through the summer and then into you know all the way through october but at the same time you know we are seeing uh covid cases are spiking and you guys you mentioned in your prepared remarks that is a consideration so you know how did you guys reflect that um in your q4 guide maybe that's a question for uh kate yeah i mean i think we've been trying to take a very consistent approach for many years in terms of how we think about guidance um

You know, in the short term, our model is pretty predictable. And, you know, we're providing guidance now just for the next three months. And so we, well, I mean, we're a month in, so the next two months. And so to us, it's a bit of a balance, just, you know, looking at business performance and then looking at, you know, potential outcomes. And we're, you know, confident in the numbers that we put forward.

Got it. Thank you so much. Your next question comes from the line of Walter Pritchard from Citigroup. Please go ahead.

Hi, this is Drew Foster. Thanks for taking the questions. I have two. During your analyst study, you highlighted some customers where a key factor in deciding to go with HubSpot was that they were able to consolidate systems with you. So to what extent is the desire to consolidate front office technologies going to reliably be a growth driver for you, Brian? And I'm wondering if you've noticed that trend in any specific demographics of customers as a common theme and whether you've drawn up any specific plays around addressing that opportunity across different combinations of your hubs. And I have a follow-up.

That's a really good question. Drew, there's a great – There's a great tweet and there's been a bunch of articles about it, but there's an ad cut out of like a 1998 newspaper. It's an ad for Radio Shack. And in the ad, there's like 50 different devices in there from an alarm clock to a compass to you name it in there. And then next to it is an iPhone. And the iPhone does all that stuff now. And I think that really, that ad is really good. And that's sort of like HubSpot. People have all this stuff that they've kind of cobbled together over time. It doesn't weave together very well. And so we're seeing people just kind of consolidating their whole tech stack on HubSpot and then plugging. Our integrations are very elegant. They're kind of like Apple's integrations. They're much tighter. And so it's a little bit similar to that. We're seeing a fair amount of that out there. particularly as we move from marketing to full CRM platform. The CRM platform, that's a very broad thing for managing from a total stranger that's never heard of you all the way to a delighted customer. People can have hundreds of applications dealing with that, and then they come to HubSpot. It's like, all right, you're the hub. We'll manage this experience through HubSpot. We'll plug a few applications into it and get it to really roll. So that's kind of how I think about that, that old Radio Shack ad.

Okay, got it. And as I'm thinking about ARR growth for your newer hubs, Brian, and compare that to the growth curve of where marketing was at this time, obviously to the newer hubs have had the benefit of the cross-sell vector that marketing didn't have for some period of time. So if we kind of do a qualitative exercise and back out the benefit of cross-sells for those newer hubs and observe the success of those hubs on their own merits. So what evidence or trends give you confidence that you're sort of shaking things up in those markets the same way that you did with marketing?

That's a good question. I think back when we released our sales hub product, you know, several years ago now, it started with a product called Signal. And man, it's just been getting better and better and sort of got a lot better a month ago with the Sales Hub Enterprise release. And if I look at that product, like most of the early sales were really cross-sell sales, but if I look at that product now, It's as much a front door to HubSpot as it is a side door from Marketing Hub. So it's a lot. People come in on Sales Hub, and then they buy Marketing Hub, or there's the existing Marketing Hub customer, and then they buy Sales Hub. That took a while to develop, but that's humming right now. It's a good side business. It's growing fast. I think we're going to see the same thing on Service Hub and the same thing on CMS Hub, where a lot of it now is you're selling it to your existing customers, but those products, for us over time as well.

Really helpful.

Thank you.

Your next question comes from the line of Tom Roderick from Steeple. Please go ahead.

Hi, it's actually Parker Landon for Tom. Thanks for taking my question. So, Brian, you guys launched marketing contacts during the quarter. I'm just wondering how much of that was in response to sort of feedback, I guess, from your customers, and what do you think that means for retention going forward if customers really don't have that upper bound on how many contacts they can store on the platform? What does that mean for retention and engagement with the platform? Thanks.

Hey, Parker, that's a great question. We have a terrific board member, Parker, named Jay Simons, and he was president for a long, long time of a company called Atlassian that we admire a lot. In Atlassian, they track bugs in their product and they try to fix bugs. They also track bugs in their entire go-to-market and entire buying and using experience, including their pricing model. Whenever they find a bug that creates some friction or creates a cringe in that process, they file it and they try to fix it. We have completely borrowed that idea here at HubSpot. And one of the bugs in the buying experience for HubSpot that's been going on for a fairly long period of time that's caused customers to cringe is marketing contacts. And you can imagine how this might happen. When we first started HubSpot, we priced it like a lot of other marketing vendors, where you buy the SKU, and then the larger your database of contacts, the more you pay. Of course, that works great. But then you add Sales Hub, and all of a sudden, salespeople are adding thousands and tens of thousands of contacts into that hub in the bill for the marketers going through the roof. There is a lot of complaints about this over many years. This was something we wanted to fix for a long time. It was actually a large project that took, you know, probably took a year to do it. And we bid it off and we did it over the summer. And it's come out really well. Very happy with the way we've implemented it. We're getting terrific feedback from it. And I think that change will increase customer happiness, and I think will also make it easier for people to buy HubSpot. It will also make it easier and more predictable to scale your pricing of HubSpot. So that's a big, big win for our customers and for HubSpot itself, and I think for investors over the long haul, that will be a driver of growth.

Yeah, it's great feedback. And then on the Sales Hub front, one of the things you announced inbound was the addition of some new tools there, including CPQ. I was wondering if you could talk about the initial interest in the CPQ tools you have out there, and if that's mostly an enterprise play, you think, or if that's really broad-based to the customer set. Thanks again.

Yes, we announced some early CPQ products with Sales Hub Enterprise. We're getting a nice uptick on them, and You know, this is just sort of, I think of HubSpot as we want to be a very legit CRM company. We want to be the number one CRM for scaling companies. And that means you kind of go all the way to the edges of the problem. And so part of the edge is when people want to do a proposal and they want to do a quote and they want to connect it to their accounting system and have all that stuff closed off and close the loop. And we came out with an early version of that. We felt the enterprise getting really, really good adoption. And keep your eye on that channel. There's more to come on that front. Customers really like that area that we're investing in. We're going to invest more.

Your next question comes from the line of Arjun Bhatia from William Blair.

Hey, guys. Thanks. And I'll echo my congrats on the quarter. Kate, if I can start off, I know we touched on this a little bit last quarter, but is there anything, any update that you can give us on this COVID cohort of customers that are coming in on Starter in terms of Upgrade rates, churn, landing point, anything on that front would be helpful now that we're 90 days removed from when we last had this conversation.

Yeah, and I think the trends are very much the same as the ones that we talked about at NLSA and, frankly, on the last earnings call. We continue to see those big starter cohorts. They are the vast majority of those starter cohorts are new to HubSpot versus customers that are downgrading or moving from another SKU. They are on balance. similar in size to the customers that we saw signing up for our other starter skews before this package was introduced. And they are upgrading at a rate that's similar. I would say maybe a little bit lower than what we had seen historically, but at a rate that's healthy enough that we're excited about the opportunity there.

Great. That's very helpful. And Brian, maybe one for you, not to beat a dead horse on 2021, but Just curious, you know, obviously this has been an odd year. Curious on what you're hearing from your customers in terms of how they're thinking about marketing budgets and how those might change next year. Do you think, you know, this elevated focus on digitizing marketing strategies go to market continues, or do you think, you know, we see that moderate a little bit going into next year?

It's hard, and predicting the future is a very hard thing these days. I would just say in connecting with my sales leaders and service leaders just over the last couple of days, people are feeling pretty good. Demand is strong. Customers are happy and buying more, and new accounts are coming in. I feel like our products are more and more competitive. So feeling pretty good. Yeah, it's going pretty good. It's hard to know, you know, what happens if there's a giant lockdown or, God forbid, something really bad happens with this election. But it's going pretty good. I think that right here.

All right. Thank you.

Your next question comes from the line of Ryan McDonald from Needham.

Hi, thanks for taking my question and congrats on an excellent quarter. I guess, Brian, first one for you, you know, given that CMS Hub sort of fully launched sort of in the midst of the pandemic, you know, it feels like inbound was a bit of a coming out party for the new product. Just curious to see sort of as you're processing and going through sort of, you know, the responses and feedback from inbound, what you're hearing in terms of interest and adoption for CMS Hub and And what's sort of the mix you're seeing in terms of, you know, existing customers that may have been using the add-on functionality to Marketing Hub initially wanting to upgrade versus net new customers into the platform?

Great, Brian. You're hearing great things about CMS Hub. It's an interesting industry, the content management system industry. And people probably talk a lot about, you know, Wix and GoDaddy and, and Squarespace, you know, they advertise a lot, but really the dominant players in our part of the market and even up from us are open source projects. And they're not as well known to investors because there's no public company comp and they don't really advertise much, but that's where we compete. We kind of compete in the mid-market with a large open source product called WordPress. I think where we really win over the long arc of this thing is is there's tremendous power when you combine a content management system with a customer relationship management system. That's a one plus one equals three experience builder for your business. And those things are combined and really cool with HubSpot. But if you watch the arc of how those things will come together over time, the development environment for the content management system, the development environment for the CRM system, come in together, it's going to be fantastic. It's going to be really, really cool. So reception on CMS has been really solid. Business is going nicely. Our partners in particular are really psyched about it. But over the long haul, there's a kaleidoscope of opportunities that will be created for our customers by really combining those two applications.

Thanks. And as a follow-up, obviously the environment we're in, you know, things evolving pretty quickly. But Any sense or are you hearing anything recently internationally with sort of over the past few weeks with Europe seemingly going back into lockdown or any impact to the business at all?

Yeah, Brian, we're asking the same thing. I just checked in with my European leaders. It seems all right. You know, it's hard to say what happened two, three, over there. The execution has been really solid. Again, I just think our value prop is super strong. And so, you know, it's hard to predict what will happen in the future, but it's feeling pretty good right now.

Your next question comes from Ken Wong from Guggenheim Securities.

Hi, this is Nancy. We're on for Ken. Thanks for taking the question. Just two questions. First, on retention, do you see risk for that to track back down after if lockdown start again? Or have your customers been able to figure out how to kind of work through the new normal? Or I guess on the flip side, is there more headroom for this number to improve as we get further out from the short-term discounts?

Yeah, I mean, Q3 was a very strong retention quarter for us. I said in the prepared remarks that revenue retention was comfortably north of 100. I also said that absent the tailwinds that we see from customers coming off of those short-term discounts, we still would have been comfortably above 100. We are through the majority of those. And so, you know, I think that – The retention that we're seeing, we're excited about that. And I would particularly note that one point that we're excited about is actually the really strong retention that we're seeing on a customer dollar retention basis. So this is sort of that gross retention number. More of our customers are sticking around with HubSpot.

Great. That's helpful. And just adding on to that, so have the customers that previously might have contracted seats or maybe downgraded views, have they expanded back up yet?

It's hard to say. I think, you know, when you look at the overall net upgrade rate that we're seeing in Q3, it is dramatically larger than what we saw in Q2, which would lead you to believe that as a whole population, our customers are net upgrading more.

Your next question comes from the line of Kirk Maturin from Evercore ISI.

Thanks very much. Brian, when you think about sort of just the opportunity with the enterprise sales hub, I would expect that the easier land is to sort of continue to grow with your customers that might have historically grown sort of out of your technology versus going after sort of new customers. But that might be wrong. So just kind of thinking about when you talk to your sales leaders, is it about trying to go and rip and replace? Is it about, you know, expanding with existing customers already with you? I guess how are you thinking about that balance? Because I imagine the sales cycles are very different with those two conversations.

Yeah. There's a few layers to it. I think the lowest layer on the cake is, you know, retaining those customers longer. We have customers that outgrow us. There's reasons they outgrow us. Things like custom objects is a big reason why someone would outgrow us. And so retaining them as they go from 200 to 2,000 is a good one. Then just winning more deals. People hesitate to buy HubSpot if they think they're going to really scale up. They're wearing, you know, HubSpot for scaling companies. And I think the answer is yes now between what we're doing on the functionality side and what we're doing in the business model side with custom objects, which is much, much more attractive. And then maybe the third layer on that cake is gripping and replacing. uh that's a harder thing to do it's certainly happening and i hear about them when they happen it's exciting when that happens but it's probably the third layer on the uh on the tape um but they're going really well people are really excited about our customers our partners and sales reps uh it's getting us in a lot more conversations That's helpful.

And then one sort of more maybe higher level question for you. When you talk to others in the sort of broader CRM space and maybe at the enterprise level, this concept of a customer data platform continues to come up and we've seen M&A around this. Does sort of CMS plus your marketing technology sort of solve the customer data sort of centricity discussion for you all? Meaning, I don't know why a small company wouldn't want to know their customers just as well as a big company. So, you know, is that conversation coming up? And do you guys, are you able to kind of get at that with your existing technology now? Or is that something that you're willing to partner with others on?

People do think of HubSpot as their, you know, that's where they, the central repository for all their data. And over time, you want to make it as attractive as possible. To integrate all your systems into HubSpot, think them back and forth. That's one of the reasons we acquired PyTink a while back. and then you will have them report on all of that. So, yeah, I see HubSpot over the long haul. If you want to use the term CDP, it's a CDP for their customers, and I want HubSpot to be their center of gravity to enable them to really create awesome experiences, whether it's through our tools or other tools that they use that they're plugging in, anything from Zoom to Google AdWords to little startups building stuff on top of HubSpot.

That's helpful. Thanks, and congrats on the quarter. Thank you.

Your next question comes from the line of Koji Akita from Oppenheimer. Please go ahead.

Great. Thanks for taking my questions. Congratulations on a really great quarter. First off, I wanted to thank Brian for bringing up that RadioShack ad. I can picture that ad in my head right now. So that was definitely nostalgic. So thank you for bringing that up. I wanted to ask you about the sales enterprise version, especially more specifically on the custom objects. It sounds like it's a real game changer for that version. I guess, could you talk a little bit about what custom objects means from a customer lens? Does it enable them to maybe replace any existing applications, or does it enable the customer to maybe stay within the HubSpot ecosystem longer as the business scales before they have to maybe look outside the HubSpot box for additional features?

The way I would describe it is let's just say you were a university of coaching and you're using HubSpot. You're just kind of shoehorning your student. You call your prospective student leads inside the system, and then you call your students that are paying you, you call them customers. Right. It just is unnatural. You're kind of jamming your business model into HubSpot's pretty rigid object model. What you want to do at Sochi University is to match the way your whole front office system works, your CRM system works, with the way your business works. And that means you've got a student. And a student is an unusual model. It's different than a typical customer because the student comes in and lasts for four years. So it's a custom object inside HubSpot. You want to report on that in certain ways. You want to create workflows around that in certain ways. So it just enables you to do a whole heck of a lot more. And what we've noticed is when a company comes in, let's say there's a 20-person company comes in, They buy HubSpot sales product, marketing product, and they're super happy with it because it's like, all right, it's perfect. It's out of the box. I'm just going to use everything they got here and just plug it in and run. But as that company moves and it's 500 employees now or 600 employees, their business model gets complicated and they get irritated because they have to kind of jam it in the HubSpot. And so as their business model evolves, HubSpot will evolve with them and scale with them. That's sort of the way it works. Does that make sense?

Yep, yep, no, totally makes sense. Thank you for that. And I wanted to just ask you one more follow-up here. On the CMS Hub, you mentioned open source and WordPress, but what about Drupal? Can you compete with Drupal right now, or is maybe the longer-term vision for the CMS Hub to be competitive against Drupal deployments? Thanks for taking my questions.

No problem. you know wordpress and drupal are both like big open source projects uh they've been around a while and they're powerful products uh but they kind of rhyme with each other we took a very different approach where it was pure sound uh out of the box a very modern approach to building it i kind of in my head position drupal pretty far up market like the white house runs on drupal and You know, huge enterprises run on Drupal. More where we live in kind of the mid-market is more WordPress. And, you know, we integrate really nicely with WordPress. If somebody loves WordPress, they can keep it. But I do think that power of having the CRM and having the CMS together is going to enable developers and ops people to do amazing stuff over the next couple years. So I think that's where our core competitive advantage is going to come from.

Got it. Thanks for taking my questions.

Your next question comes from City of Penang. Hey, from Missoula. Please go ahead.

Hey, this is Michael Berg on the City of Penang. Congrats on a great quarter once again. I wanted to dive in quickly on international. You saw a nice acceleration in the quarter. Can you point to anything in particular that is driving success abroad and moving forward when you expect international to maintain this type of strength, even with the ongoing shutdowns?

Yeah, thanks so much for the question. You know, it's interesting that you called that out. I actually think that the performance is pretty broad-based. And so, yes, we saw some acceleration or reacceleration in the international growth. We also saw reacceleration in domestic growth. So I think it's across hubs, across geographies, we saw really strong performance.

Your next question comes from the line of Brent Braceland from Piper Sandler. Please go ahead.

Hi, this is Clark Jeffries on for Brent. I was wondering, in terms of the traction in the enterprise and professional customers this quarter, you know, on that higher end sort of customer, how long were they in the funnel? Wondering whether these customers were looking at a digital engagement product for, you know, even since the early pandemic and they, you know, they kind of finally converted in Q3. or these new customers that you're engaging with in quarter and converting in Q3 alone? Just trying to understand if there are customers out there that are kind of enduring the pain of a traditional go-to-market, and then they have to make the change now, kind of entering the back half of the year.

Honestly, it's a little bit of both. There's a lot of people who have been, you know, looking at people, you know, a lot of people have been looking at Hubsup for a long time, and they finally bought, and there's some, we call it short cycle MRR in there. The short cycle MRR is up. By short cycle, I mean it came into our funnel within the month and then purchased within the month. It's not up a lot. I think it's a little bit more broad-based. And like I kind of said earlier, I think part of our momentum is certainly – You know, all the stuff's going on in the world is really, you know, people are thinking about digitizing their sort of market. I also just think even with all the, if this was a normal year, the night with nothing happening in the world, I think we'd be having a really good year. We were really set up well. So I think it's a little bit of both. That would be my take on it.

And that was our last question at this time. I will turn the call over to Brian Halligan, CEO and Chairman, for closing comments.

Thanks to all of you for joining today. I look forward to talking to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.