HubSpot, Inc.

Good afternoon, and thank you for standing by. Welcome to the HubSpot Q3 2022 earnings 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. At this time, if you wish to ask a question, please press star then one on your telephone keypad. Today's conference is being recorded. At this time, I'd like to hand The conference is over to Chuck McGatting, Head of Investor Relations.

So, please go ahead, Chuck.

Thanks, operator. Good afternoon, and welcome to HubSpot's third quarter 2022 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 Bufor, 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 are the statements of historical fact or forward-looking statements. including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, FX movement, and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2022 and 2023. Forward-looking statements reflect our views only as of today and, as accepted 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 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, 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 reconciliation of the differences between such measures can be found within our third quarter 2022 earnings press release in the investor relations section of our website. Now, it's my pleasure to turn over the call to HubSpot's Chief Executive Officer, Yamini Rangan. Yamini?

Thank you so much, Chuck, and welcome to everyone joining us on the call today. Q3 was another solid quarter for HubSpot with revenue growing 38% year-over-year in constant currency. We added over 8,000 net new customers in the quarter, growing our customer base to nearly 160,000 globally, representing 24% growth year-over-year. These strong results reflect our focus on innovation and execution. Our connected platform is clearly driving value for customers, especially as they look to increase efficiencies while lowering the total cost of ownership during this period of uncertainty. HubSpot continues to be a mission-critical platform for our customers as they depend on us to stay connected with their customers. On the last call, I spoke about the launch of CMS Free and moving marketing automation down into our starter tier. These plays, combined with our focused go-to-market initiatives, drove strong customer adoption and multi-hub momentum in the quarter. Before I get into some of the trends we're seeing in the business more broadly, I want to reflect on a recent milestone for HubSpot, which was our annual inbound event in September. This year, as you know, we hosted inbound in person in Boston. as well as online, and had tens of thousands of attendees from all over the world join us. It was truly a week to remember with incredible speakers and fantastic opportunities to connect with our customers, partners, and community. I know many of you attended as well, so thank you again for joining us. I left inbound feeling more energized than ever about HubSpot's future. Through my conversations with customers and partners, It's become even more clear that we are well positioned to drive long-term, durable growth. And there are three key reasons for this. First, we have a unique opportunity to help our customers with solving the crisis of disconnection. I spoke at Inbound about the crisis our customers are facing as a result of disconnected systems, disconnected customers, and disconnection from their peers. To solve this crisis, our customers need to be able to seamlessly connect their data, connect with their customers, and with each other, all in one place. That's exactly what we've been building at HubSpot with our connected customer platform. We can already see the value customers are getting from being able to connect their entire front office. For example, take Growth Lab Financial, a financial services company. Their growth was limited by disconnected tools and a legacy CRM platform. Without a central platform, their team spent hours manually tracking prospects and didn't have the insights they needed to optimize their growth. They consolidated onto the HubSpot CRM platform with Marketing Hub, Sales Hub, and Service Hub. Growth Lab now uses automation to boost conversions and shorten deal cycles and leverages CRM data to get insights on revenue attribution so they can make more data-driven decisions. Since implementing HubSpot, Growth Lab Financial doubled their revenue and saved a significant amount of time eliminating manual tasks. This is just one great example of how scaling companies can grow better with HubSpot's connected CRM. The second reason we're well positioned is that our market opportunity is large, expanding and underserved. We operate in massive underserved markets that are forecasted to grow to over 70 billion by 2027. Within this market, we have multiple levers to drive durable long-term growth. Our land and expand motion is working with majority of our customers trying a free product before purchasing And our pathways for expansion have diversified with the breadth and depth we've added in our product. We're also launching into new product categories like payments and commerce, which will continue to open up new avenues for future growth at HubSpot. Even in the weeks since inbound, we have a number of new exciting features in private beta, including payment schedules and native invoicing. were encouraged by the long-term opportunity to help B2B companies transform their buying processes and sell easily online. Finally, our product innovation is cranking. We announced over 18 new product enhancements at inbound to meet our customers' evolving needs and help them optimize for connection. Two product highlights were our new Campaigns 2.0 tool and Customer Journey Analytics. Both are crafted to give businesses a more unified view of their customers' experience and bring data together for deeper insights. We are thrilled to see the positive feedback from the data so far. As we look ahead, we are focused on maintaining the pace of innovation so we can drive even more value for customers and emerge stronger as the connected platform of choice for the mid-market. I'm energized by the opportunity we have to solve the crisis of disconnection for our customers, serve mega-markets, and continue to drive the pace of product innovation in order to set ourselves apart. I want to talk about the demand environment we see today and reiterate our playbook for managing through it. Last quarter, I talked about the demand trends we were seeing in the business through the end of July, including a lengthening of deal cycles and more decision makers involved in deals. Since then, the macro environment has become incrementally more challenging. We see two clear trends in this environment based on our customer and prospect conversations. On one hand, deals are taking longer to close. There are more decision makers involved, more approval layers, and budgets are tighter. We continue to see this across the geographies and segments we serve. On the other hand, HubSpot is emerging as a platform of choice to help customers get through these uncertain times. Our customers need more leads, better conversions, and better customer experience. but they need to do it all with less. Our value proposition of easy to buy, easy to use, and easy to build resonates even more now as customers are looking to consolidate their tech stacks. Despite the softer macro environment, I'm confident in HubSpot's playbook for resilient growth through the cycle. Our playbook is based on three core principles that served us well during the pandemic And again, through the macro volatility this year. We talked about these principles last quarter, but they're worth repeating. The first is solve for the customer. Even during uncertain times, one thing we're certain of is that solving for the customer is good business. What this means right now is that we're helping customers understand the value of consolidating onto a connected platform and the impact it can have on their total cost of ownership. We're also providing even more functionality at the lower end. We moved high value features like marketing automation down to starter and helping early stage businesses get online with free CRM and CMS. These plays are resonating with our customers and you can see it in our results. we will continue to invest in innovation to emerge stronger. We are being more prudent with our hiring as well as discretionary spend, but remain committed to investing in innovation. In fact, we are so thrilled to see that our product investments resulted in HubSpot being recognized as a leader in the magic quadrant for B2B marketing automation platforms by Gartner this past quarter. Moving forward, we'll continue to invest in innovation and functionality to help scaling companies optimize for customer connection. Lastly, we execute with focus. For us, it is all about controlling the controllables. We're focused on driving expansion through cross-sell and up-sell motions, and the percentage of ARR from customers with three plus hubs grew nicely within this quarter. We're executing on our bimodal strategy with strengths in both net customer additions at the lower end and momentum among larger customers driving double-digit ASRPC growth. And we're continuing to balance growth and profitability through more measured hiring and tighter control of discretionary strengths. Heading into the end of the year, I feel energized. We have a clear opportunity ahead to drive value for our customers. Our teams are focused on execution, and we have the right playbook in place to drive growth in this uncertain environment. With that, I'll hand it over to Kate.

Thanks, Yamini. Let's turn to our Q3 2022 financial results. Third quarter revenue grew 38% year-over-year in constant currency and 31% on an as-reported basis. Q3 subscription revenue grew 32% year over year, while services and other revenues decreased 13% on an as-reported basis. Domestic revenue grew 33% year over year in Q3, while international revenue growth was 44% in constant currency and 29% as-reported. International revenue represented 46% of total revenue in Q3. We added over 8,000 net new customers in the quarter, bringing our total customer count to nearly 160,000, up 24% year over year. A big driver of the strength this quarter was customers adopting the starter CRM suite as HubSpot continues to emerge as a platform of choice in times of certainty and uncertainty. Average subscription revenue per customer grew 12% year over year in constant currency, and 7% on an as-reported basis to $11,200. The primary driver of this strength continues to be professional and enterprise customers adopting multiple products. Despite the more challenging macro environment, we maintained a healthy growth retention rate in the high 80s as customers looked to HubSpot's platform to drive increased efficiencies. Net revenue retention was 109% in Q3, down quarter over quarter as a result of slower net upgrades, particularly in the marketing contact and seat expansion motions. Deferred revenue as of the end of September was $474 million, a 26% increase year over year. Calculated billings were $444 million in Q3, growing 34% year over year in constant currency and 26% as reported. The remainder of my comments will refer to non-GAAP measures. Third quarter gross margin was 82% up two points year over year. Subscription gross margin was 85% in Q3, while services and other gross margin was negative 49%. Third quarter operating margin was 9%, including a one point margin headwind from the impact of foreign exchange. Net income in the third quarter was $35 million or 69 cents per fully diluted share. At the end of the third quarter, we had over 7,400 employees up 35% year over year and down six points sequentially. We expect our hiring to moderate further in Q4 and to exit the year with headcount growth in the mid to high 20s. As we discussed last quarter, hiring for the remainder of the year will be focused in R&D, and revenue-generating sales headcount. CapEx, including capitalized software development cost, was $25 million, or 6% of revenue, in Q3, and free cash flow in the quarter was $36 million, or 8% of revenue. Finally, our cash and marketable securities totaled $1.4 billion at the end of September. And with that, let's review our guidance for the fourth quarter and full year of 2022. As Yamini described in her remarks, the macro environment has become incrementally more difficult through October. It's taking customers longer to make decisions, causing deal cycles to elongate. There are more people involved in the approval process and budgets have tightened. Our guidance assumes that these weaker macro economic conditions persist through the remainder of the year. For the fourth quarter, Total as reported revenue is expected to be in the range of $444 to $446 million, up 20% year over year at the midpoint. We expect foreign exchange to be a nine-point headwind to as reported revenue growth in the fourth quarter, representing an incremental $4 million headwind relative to our previous forecast. Non-GAAP operating income is expected to be between $47 and $49 million. We expect foreign exchange to be a two-point headwind to operating profit margin in the fourth quarter. Non-GAAP diluted net income per share is expected to be between 82 and 84 cents. This assumes 51.2 million fully diluted shares outstanding. And for the full year of 2022, total as reported revenue is now expected to be in the range of 1.705 to 1.707 billion dollars. 31% year-over-year at the midpoint. We expect foreign exchange to be a six-point headwind to as-reported revenue growth for the full year of 2022. Non-GAAP operating income is now expected to be between 152 and $154 million. We expect foreign exchange to be a one-point headwind to as-reported operating profit margin for the full year of 2022. Non-GAAP diluted net income per share is now expected to be between $2.48 and $2.50. This assumes 51.1 million fully diluted shares outstanding. As you adjust your model, keep in mind the following. We continue to expect CapEx as a percentage of revenue to be roughly 5% and now expect free cash flow to be about $195 million for the full year of 2022. reflective of the incremental headwind from the strengthening of the U.S. dollar relative to our prior forecast. While it's too early to provide formal guidance for 2023, given the material moves in foreign exchange rates this year, we thought it would be helpful to quantify the impact of foreign exchange on 2023 revenue. At current spot rates, we expect a 4 point or $70 million headwind to as reported revenue growth for the full year of 2023. And with that, I will hand things back over to Yamini for her closing remarks.

Thank you so much, Kate. I want to close by emphasizing that HubSpot is operating from a position of strength. We've built a robust connected customer platform that is meeting the evolving needs of our customers. We have a strong balance sheet and an incredible team and company culture that allows us to attract and retain top talent We're thrilled for HubSpot to be ranked number one in employee happiness among top-rated large companies by comparably just last month. Our culture and people continue to be a competitive advantage for HubSpot. Looking ahead, we will continue to adapt to the realities of the environment without losing sight of our mission to become the number one CRM platform for scaling companies. Thank you so much to our customers our partners, our employees, and shareholders. With that, operator, let's open up the call for questions.

Thank you. If you would like to ask a question at this time, please press star then one on your touch-frame keypad. Please could I ask you to limit yourself to one question and one follow-up to allow all investors to speak on today's line. The first question we have comes from Brian Peterson of Raymond James. Your line is now open, Brian.

Thanks for taking the question, and congrats on the really strong quarter. So maybe taking a step back here, Yamini, we've heard from a number of companies that the macro got incrementally worse over the course of the quarter. It sounds like that was the case for HubSpot as well. I would appreciate any color maybe on what changed. and how you're thinking about the macro impacting fourth quarter guidance.

Yep. Thanks a lot, Brian, for the question. Yes, we're seeing many of the same trends in our customer base that we saw in Q2. It was just a bit more intensified in Q3. We saw the longer deal cycles that we talked about in Q2. We saw more decision makers getting involved in deals and more approvals needed. Typically, we would talk to the VPs of marketing sales for approval. Now we're talking to the CFOs, CEOs, and sometimes even the board. Product evaluations are taking longer as buyers are generally much more risk averse, and the budgets are tight now. So look, I think we're seeing a lot of things that are very much in line with what you've heard from other companies this quarter. The overall environment is just incrementally more challenging than it was in Q2. Now, having said that, Brian, we continue to win, and our value proposition resonates really well in this environment. Customers want a clear value case, and they want a clear business case for driving efficiency. So we're working with our champions. We're working with our point of contact within customers to be able to articulate the business case, and then we're able to present to the C-suite and board. Our customers want ease of use. and ease of implementation because the combination of those two lead to time to value, and that's what matters in this environment. Now, both of those, ease of use and ease of implementation, they've both historically been core differentiators for HubSpot and continues to be a differentiator now, and it's really important in this environment. And then finally, I'd say that customers are looking to standardize on a platform. They're looking to eliminate foreign solutions. They are looking to reduce their budgets, and they are looking to us to be able to bring more data and have a single platform. We are now no longer nice to have solutions. We are just becoming a must-have, mission-critical solution for our customers. So all of those are resonating within our customer base, and you can see that within our results. Now look, looking forward, We don't have a crystal ball, but we expect these conditions to persist in Q4 and possibly even into 2023. We're navigating through all of these choppy waters from a position of strength and will remain exceptionally focused on executing the playbook that I just walked through.

Great. I appreciate the color. Maybe to follow up, you talked about the value of the platform. Were there certain products kind of on top of marketing that you saw a particular strength in the quarter, whether that's sales hub or service hub? I'd love to understand maybe where that cross-sell was really successful this quarter. Thanks, guys.

Yeah, Brian, I think the combination of marketing and sales is becoming exceptionally more important right now. When I talk to customers, they are expecting much more from their marketing and sales organizations. They are expecting more leads, better lead quality, better conversion, better visibility into the pipeline, and they want all of this for less. And that means we are definitely seeing the value of having a connected marketing and sales hub solution. That's what is really key within our customer base. And so when we talk about multi-hubs, most of our multi-hubs have sales hub and marketing hub involved. And we are helping our customers navigate through this environment as well.

Thank you. The next question we have from the phone line comes from Mark Murphy of JPMorgan Chase. Your line is now open, Mark.

Yes, thank you very much. I'll add my congrats on the execution in a tough environment. So I wanted to ask you, as you're building out these more sophisticated enterprise features, which started with custom objects, could you share perhaps how some of the upper thresholds are changing for HubSpot if we think about kind of the upper bands for MRR or even just the speed counts for Sales Hub as you gravitate into the enterprise? Mostly what I'm wondering is do those continue to increase even despite the macro that you're encountering?

Yeah, Mark, thanks a lot for your question. Look, from a segmentation strategy, we're very much focused on the 2 to 2,000 segment. So for us, the upper bounds of the segment continue to be 200 to 2,000 person employee company. The only thing is we're winning our fair share within that market. And as you rightly pointed out, over the past couple of years, we have invested going up market with features like custom objects at inbounds, we announced more than 80 new enhancements and features across the entire platform. And a number of these enhancements and features are really driving better UI customization, better data management, advanced permissioning, granular ability for admins to control the environment. So a lot of the features have enabled us to win our fair share going upmarket. And in this environment, one of the things that we see is customers, as I just talked about, care about better disability, but they also care about better time to value and cost-effective solutions. So going back to really the fundamental value proposition of HubSpot, we're easy to use, but we have very powerful features, and that makes us exceptionally competitive in that up market. So we're remaining true to the segmentation and winning our fair share of that market.

I understand. Thank you, Yamini. And just as a quick follow-up, I was wondering if you or Kate could just clarify, because I think we're trying to maybe understand somewhere in the results where we would see some of the signs of incremental strain. But just based on what you saw, Are you trying to convey that the months of September and October did in fact feel a bit tougher, say, than July and August in terms of the friction and the selling cycles? Because I think that's generally what we're hearing elsewhere.

Yes. To be very clear, what we saw in Q3 was just an incrementally more challenging environment than what we saw in Q2. And specifically, budgets are tight and every approval is being carefully considered. And because of that, the approval processes are longer. Customers are spending a little bit more time getting a value case delivered to their C-level for approval and sometimes even going to the board. So we're continuing to see that pressure. We're also seeing the need for a crystal clear plan to deliver value, which means more time to understand implementation plans, user adoption plans, more time to understand the training plans. And all of this means that there's just a lot more rigor, more demos, and more conversation. So we definitely are seeing incrementally more challenging environments from a macro perspective. Having said that, like we talked about, we've put in some plays from being focused on the customer, and those plays continue to work at the bottom end, which is where you see the strength in NetAds, and our multi-hub value proposition is decimating. And so we'll continue to work through the Shopee environment.

Excellent. Thank you very much.

Thank you. We now have Salah Tamina from Jefferies. Please go ahead if you're ready.

Hi, great. Thank you. And I'll just echo great work and focus by the whole organization. That's all the Ops Spotters. Great job. Yamini, maybe the first one for you. I know you talked about the macro getting incrementally worse, longer cycles, more approval. But what you didn't mention is a change in the top of the funnel or maybe inbound interest. So just could you shed some light on, are you seeing any changes in terms of the customers that are reaching out or coming in through the top of the funnel? and just interest levels? Maybe is that even uptick because you had inbound in this quarter? Just maybe help us understand what you're seeing at the top of the funnel versus just in terms of the deal closings or the cycles.

Samad, thanks a lot. And I will double down and emphasize, I think, congratulations to the entire company, both in the product and flywheel and the entire company for executing in a very tough macro environment. Look, on the demand side, If you consider a year ago, it was primarily all inbound. So it was a lot of people raising hands and coming to us mostly qualified, and so it was fairly quick to take that kind of a qualified lead and convert it into a customer win. What we are beginning to see is that that level of inbound has changed, and right now it's a combination of that and our customer success team, sales organization going to customers and going to prospects and having conversations about HubSpot. So it's a combination of people raising their hands and coming to us, and that part of it has slowed down a little bit. So it's us going back to our install base and having conversations on how we can add more value. So certainly, from a demand perspective, we see a pretty big shift from last year and somewhat of a shift from the first half of the year. Having said that, what I'd say is there's just a higher bar to action within the pipeline. There's more conversations, more approvals, and more demos that are needed to get to action. And so the way I would characterize it is demand has slowed. We've compensated it by going out and proactively having conversations to the customer base, and it takes much longer for us to close and we continue to be very, very focused on executing in this environment.

Very helpful. And then maybe, Kate, if I could just ask a quick follow-up. I wanted to make sure, I think you said a four-point FX headwind where things stand today for 2023 revenue. One, did I hear that correctly? And two, is that the level that you had assumed when you gave the flat margin guidance at the analyst day, or should we rethink that as well?

Yeah, thanks for asking. I do think it's a really important point for us to communicate. As you know, foreign exchange has been one of those things that has moved pretty dramatically throughout 2022, but frankly, like even within the back half of Q3. And so you are right, given sort of current foreign exchange rates, We would have a four-point headwind to 2023 revenue growth, and that's about a $70 million nominal headwind. Foreign exchange did get harder in the last couple of months. You heard us talk about our Q4 guidance as having an incremental $4 million of headwind relative to the last time we guided. You should assume that 2023 saw similar trends to that.

Great. Thank you, Sandy.

Samad, as far as we did, as far as the 8% margin that we talked about at the end of the day, it did incorporate where rates stand for that.

Okay, perfect. Thank you for clarifying. Have a great day.

Thank you so much. We now have Arjun Bhatia of William Blair.

Yes, perfect. Thank you for taking my questions and all of my congrats on the quarter. I mean, understandably, you know, as more buyers and more approval levels get involved in the process, it creates a tougher selling environment. But you did mention that you're getting you know, a little bit more exposure, higher end organization to the C-suite, to the board. What does this do for HubSpot in, you know, your ability to pay yourself as a more strategic partner to make a broader platform sale to maybe buyers that you didn't have access to as much in prior years? And how equipped do you think the sales team is to make that pitch to those higher level buyers at this point?

Yep, really good question. Certainly more CEOs, CFOs, CTOs than we have dealt with in the past. And while the conversations take longer, they are really good conversations. And the way I characterize it is that when we talk to the C-suite within our customer organizations, there are a few things that matter to them. First is time to value. They really care about how quickly they are going to get to value and how their teams are going to see the impact. And so part of it is us having a clear articulation of value as well as cost savings to the C-suite. The second is really talking about the value of a consolidated platform. Over the past couple of years, A lot of these companies have ended up buying disconnected point solutions and that's costing them. And so when we have conversations with CEOs and CFOs, we talk about how we can help them with eliminating some of these point solutions and consolidating and seeing the value of a consolidated platform. And that certainly resonates. Now on the second part of your question, this has meant that we've doubled down on enablement uh for our sales team for our customer success teams as well as the partner organization we've rolled out tco playbooks as well as value playbooks so that they can bring these conversations earlier in the sales process they can proactively talk about how we can help them get to time to value as well as cost savings. And that part of the enablement is something that we're doubling down and we're doubling down in terms of execution as well. So absolutely see all of those within the pipeline.

Okay, perfect. Very helpful. And then the other part, your new customer ads actually picked up and this is something that we're not seeing, I think, with your peers where new customers have seen greater headwinds. I'm curious, as you look at a new customer cohort that's coming in, are you seeing more replacement opportunities even in that starter CRM suite where customers are wanting to rip out existing solutions versus more of a greenfield opportunity that you may have seen in the past?

Yeah, thanks for the question. Maybe I'll dive in. You are right, the net ads for the quarter came in a little better than we had even expected. And where we saw the strength was really at that starter tier, particularly in the starter CRM suite. These are not customers that typically are ripping and replacing. These are customers where HubSpot is the first tool. that they are largely using. And there are a couple things that we think really contributed to the strength this quarter. Yamini talked a little bit about them, but you may remember we took a bunch of action last quarter that were really customer first in nature that leaned into the value proposition at the starter tier. One is that we added automation to Marketing Hub Starter. We launched CMS free at inbound. And we continue to experiment on pricing and packaging in that starter tier. And it's really the combination of these three actions that we believe drove the increase in net customer additions quarter over quarter. It's not something we solve for. It's an output. Our goal is really to drive both long-term and short-term growth in the business. But this quarter, the plays that worked really drove customer additions and really focused customer additions at the low end. The one thing that I was just – add about that is there's two pieces of the KPI equation. One is the net customer additions, the other is ASRPC. And so when you see really strong quarters like this one in terms of net customer as particularly a starter, what you're going to see on the other side is a little less strength in the ASRPC growth. And as a result, What I would encourage you to see in like a Q4 is that ASRPC will likely be more like 10% in constant currency.

And one thing I'd like to add just on that starter tier is that obviously it's nice to have the revenue from those 8,000 new customer ads. But the other way it helps is that kind of part of our bimodal strategy, which is as we get more and more customers, it kind of helps with our brand and word of mouth, which has been a strong driver of growth for HubSpot. And the second piece is that we're looking to build a CRM platform that's a de facto standard in SMB. And the more customers we have, the more attractive the platform is for third-party applications to build on, for solutions partners to kind of partner up with our customers. So it's a net positive all around, but that starter tier has been a really strong driver for us.

Thank you. The next question comes from .

from RBC. Please go ahead, Rishi. Your line is now open.

Wonderful. Thanks so much for taking my questions. Nice to see continued execution in spite of the macro. I want to go back to the commentary about the opportunity to consolidate point solutions. I think that makes a lot of sense in theory. I was wondering if you could point to any examples of that sort of behavior that you've already seen and if there are particular areas within RBC the MarTech stack or within CRM that you're already seeing that sort of interest from existing customers? And then I've got a quick follow-up.

Yeah, Rishi, you know, the elimination of point solutions is a place where customers look to as their budgets get super constrained, right? Again, an example in the prepared remarks of one of our customers kind of consolidating. There are many more like that that we're having conversations. We have an ERP software solution organization in North America. They were using multiple tools for marketing as well as their sales efforts and All of that was extremely manual siloed and so they looked to us and over a period of time we had multiple conversations and initially started with Marketing Hub and then extended to marketing and sales and eliminating six tools as we were looking to help them consolidate their go-to-market stack. And so that led to not only just improved marketing efforts, but also reducing their overall spend. So a number of customers. Now, I'm not saying that these are easy. I'm not saying that these are quick, because that's not happening within this environment. But when we start with either marketing or sales, we do have the opportunity to engage with our customers strategically and talk about their entire

uh stack and how we can help them uh consolidate their stack thank you we now have alex second full free search please go ahead when you're ready hey guys um so just maybe two numbers questions for me i i guess i want to understand given the commentary uh on the incremental macro and demand environment, which doesn't seem to be denting gross retention today. I guess, how do we think about your assumptions for gross retention for Q4 and also net revenue retention, that 109? Does it kind of go down and then stabilize at some notional level when we think about Q4 and beyond? And then on the margin side, I guess to the Is it fair to assume you're reiterating kind of the margin guide you gave for 23 at the analyst day? And is that just remind us how you think about that balance of growth and profitability? Again, in the context of the first question, if you do continue to see the macro deterioration, what are the levers that you have for next year?

Yes. Why don't I start and then Yamini, to the extent that you have comments to add, please. don't hesitate to dive in. You're right, Alex. I shared in the prepared remarks data points for both growth and net retention this quarter. It remained in the high 80s. Net revenue retention fell to 109, and that was a result of really lower net upgrade motions from that growth retention. We've talked about this. We talked about it on the last earnings call. We talked again about it at analyst day that we thought we would see pressure on that net revenue retention in the near term, really as a result of the macro environment factors, sort of the difficulty that we're seeing there. And so I would expect that you would see Q4 net revenue retention continue to be pressured for all the same reasons that we are seeing in Q3. I think the good news in all this is that we have seen the customer dollar retention really stick in the high 80s. Into Q3 and again into October, our customers are staying with HubSpot. They are doing things to optimize, like cleaning up contacts and eliminating unused seats. They're upgrading seats at potentially a lower rate. But we think that it puts us in a really nice position as we start to see the economy turn to really lean into that growth with the recovery. Over the long term, we still feel good about 110 plus. But to your question in Q4, we think it will continue, net revenue retention will continue to be pressured. Margin question, you know, as it relates to the 2023 margin that we talked about the analyst day. If I just take a step back, I think that about 2023 as having a few things that are really driving the margin profile for the year. The first is, you know, we hired pretty aggressively in 2021. We hired pretty aggressively into the first half of 2022. And we want to realize the productivity efficiency from these hires. But when you think about 2023, you're going to see a full year of the cost associated with that hiring. The second thing that I would say is we have actually pulled back pretty significantly and taken a number of steps to reduce hiring in the back half of this year and reduce overall discretionary spending in things like T&E, And we're going to continue to do that as we move into 2023. And then finally, we talked a little bit about foreign exchange and the impact on 2023. There is real FX headwind to operating margin. It's about a point in this year, 2022. It's an incremental point in 2023. And so, you know, if I just sort of step back and think about all of those things, you know, we're doing a bunch of or taking a bunch of actions to be really prudent in our spending, and we're going to continue to do that into 2023. But we, you know, we will retain investment in certain areas like R&D and revenue generating headcount to preserve growth, both in the near term and long term. All that said, we said 8%, we're committed to delivering 8%, and we will share very specific guidance with you when we announce our Q4 results.

Thank you. As a reminder, if we could ask all questioners to limit yourself to one question moving forward. We have the next question from Gabriella Borges of Goldman Sachs. Please go ahead when you're ready.

Good afternoon.

Thank you. One clarification on the earlier demand comments. Is the rate of change still getting worse in 4Q, or is it stable at the new lower demand level? And then for my question, I wanted to ask about the earlier comments on the shift in demand from more of an inbound motion to a HubSpot-catalyzed motion. What are the implications for customer acquisition costs longer term? Do you think that this dynamic is more temporary or structural in nature? And I'm looking to understand as well, is it cheaper for HubSpot to sell or to acquire $1 in the installed base or in the new customer land? So a couple of things on that, but I appreciate the call. Thank you.

Thank you, Gabriela. Multiple questions there. I'll try to answer those, and I'm sure Kate can jump in there as well. In terms of the demand – You know, we did see an incrementally more challenging environment from a demand perspective in Q3 than we saw in Q4. It's a new level. It's not, you know, getting worse. It is an incrementally more challenging demand environment than Q2. And all of the things that we talked about, more conversations, more discussions, more time to get approval, more demos, all of that adds to the incrementally challenging environment. And when I talked about last year, almost everything that we did was just inbound where we had customers coming in, raising their hands, coming to us, wanting digital transformation. Right now, that is not the kind of tailwind that you can hear from all of the macro commentary at HubSpot, you know, other peers within the industry. It's a combination of, you know, some of the inbound demand, the digital trend is continuing, but it is kind of metered by the cyclical macro trends. And so partly our teams have to go engage with our customers and identify opportunities for them to save costs or consolidate on a platform or continue on the digital journey. And yeah, I think it's, you know, cyclical in nature. I think it's based on what is currently happening from a macro environment perspective and the overall structural need for digital and the belief that our customers have in digital transformation has not changed. Kate, do you want to add anything on the latter part of the chat question?

Yeah, why don't I do that? I think, Gabrielle, what I at least tried to communicate during the analyst day is that we have a number of different motions to acquire new customers, and we are continuing to make investments in all of those motions that we think are over the long term going to drive real leverage on the sales and marketing side. So we talked about a number of them at the Analyst Day. We're investing in data and systems that are really designed to improve rep efficiency. That helps a lot of this all-bound motion that Yamini is talking about. We're continuing to invest in our product-led freemium motion. We've been doing that for a number of years and we still think there's a lot of runway there. And we're investing in non-linear growth opportunities like commerce, right? And so all of those are long-term bets for us that will take time to impact the P&L, but will ultimately drive nice leverage in our go-to-market. In the more near term, we do have a number of plays that are focused on driving increased productivity in the sales organization. Again, Yamini talked about a number of these. We have invested pretty aggressively in sales enablement. We're arming both sales teams and also our customer success teams with TCO playbooks that really help them engage customers in a relevant way at the moment. We're leaning into the partner channel that's always been a successful channel, and it's even more important when we see sort of upmarket, more complicated, multi-product deals. And we're really looking at our own... marketing organization to drive efficiencies and top of funnel demand investment. So all of those things we believe can translate into higher sales productivity even in this more difficult environment.

Thank you.

The next question comes from the line of Keith Meade from Morgan Stanley. Please go ahead when you're ready, Keith.

Excellent. Thank you guys, and thank you for taking the question. Really nice quarter in an environment that everyone on our side of the fence were definitely quite worried about, given the macro trends that we're seeing. In particular, where we're most worried has been Europe. And so I was wondering one if we kind of get your guys perspective on trends in Europe versus the US I know you guys talked about Europe a little bit last quarter has that incremental weakness has that spread into the US more so on because your European numbers were for your International growth was was strong this quarter on a cost of currency basis and then to when when you're talking about these these macro impacts and It sounds a lot like it's new customers coming in the door, but the new customer count was good. Am I misunderstanding that? Is the elongation of sales cycles, is that on upsells as well as bringing new customers in the door? Where did that really rear its head? Thank you.

Yeah, let me answer the first one, and then maybe Kate can answer the second part. So, international revenue grew 44% in constant currency in Q3. That's pretty good in a macro environment like this. As we mentioned before, even starting in Q1 and certainly in Q2, the trends for longer deal cycles started in MEF. However, what we're seeing now is the macro environment is just broad-based. We're now seeing the trends that started across all segments and all geos. Really not a notable difference in EMEA versus North America for now.

That's helpful.

Thank you. Keith, you cut out a little bit, and I think you were asking whether or not elongated deal cycles were seen across both new customers and existing customers. The answer is we are seeing elongated deal cycles everywhere, and so there isn't anything that I would necessarily call out other than what Yamini has already talked about, which is the bar to action is just higher across the board.

Got it. So when we see your new customer count actually improving nicely in this quarter despite those elongated deal cycles, is it a difference in kind of the starter edition and sort of the The experimentation you're doing there enabled better new customer additions at the low end, but the higher end stuff is where you saw the longer deal cycles?

I mean, you are exactly right. The investments and experiments we're doing at the low end with our freemium motion and product-led growth are the key drivers for our quarter-over-quarter uptick in new customer additions.

Thank you. We now have a question from Brad Fields of Bank of America Merrill Lynch.

Oh, great. Thank you. I wanted to ask a question around Service Hub. It's a big category and one where you've made a big step forward with the new release earlier this year. I'm just curious, is there a different sales audience here versus sales and marketing versus support? Particularly as you go up market, or is it that platform sale here where if you're already in sales and marketing, you've got that warm lead? Just curious to get your thoughts on just the adoption curve for Service Hub versus sales and marketing at your end of the market. Thank you.

Yeah, thanks for the question. So as you noted, last quarter we kind of did a relaunch of Service Hub Pro with a bunch of really pivotal features, including SLAs and mobile help desk and inbound calling. And what that's really done is kind of opened the door for kind of more sophisticated service teams to be able to implement Service Hub. And to kind of get to your question, what's happening now with Service Hub is, you know, we kind of ask ourselves, you know, post-launch, are more people buying Service Hub? Are they adopting the feature set more readily? Are they happy with the product? And the answer to all those questions is yes. So we're overall kind of happy with where Service Hub is headed. But right now, we're still seeing a lot of interest in kind of multi-hub deals, a lot of cross-sell between marketing and sales. And going to what Yamini spoke of earlier, people just want visibility into the entire marketing and sales pipeline going all the way to customer service and success. So Service Hub right now is a kind of strong participant in that multi-hub cross-sell opportunity. Over the midterm, we think it will become an increasingly – increasing large opportunity for being a kind of front door where people come in as a result of service hub, and then we sell marketing and sales up to those customers. But right now, very strong on the kind of cross-sell motion and multi-hub deals, but we're kind of pleased with the progress.

Thank you. We now have Michael Tarrin of West Fargo.

Please go ahead when you're ready.

Hey there. Thanks. Obviously, a lot to talk about. I mean, I just wanted to take a step back, and the two key metrics that we tend to focus on, just based on this closure, are the net new customers and the ASRPC number. With 8,000 net new added and 14% constant currency growth on that number in a Q3, I'm not sure we've seen those metrics work as well and balance this quarter as what we're generally used to seeing. I can appreciate the commentary around the starter. I think that's useful, but can you just talk more about the interplay? I know you don't necessarily manage the business to these two inputs, but the reasons that they're both coming through so well, particularly given a tough macro backdrop, I think is just useful for us all to hear a bit more about. Thank you.

Yeah. Thank you, Michael. In truth, the trends that we're seeing this quarter and the KPIs are a continuation of some of the trends that we've been seeing for a while, particularly on the ASRPC. Our strength in install-based selling is very much aligned with the platform value that you are hearing from Yamini at that professional and enterprise, and that is what is enabling us to continue to grow ASRPC even with the larger customer ads at the low end. Thank you.

We now have Ken Wong from Oppenheimer. Please go ahead and be ready.

We now have the next question from Parker Lane of Stiefel.

Your line is open.

Yeah, thanks for taking the question. Wondering if you could comment on the general health of the partner channel. You know, a lot of your agency partners are small businesses themselves, so wondering if they're seeing any added pressure here. And just overall, what does the performance of the agency partner channel look like relative to your own direct sales efforts and inbound demand?

Yeah, Parker, really good question. I think, look, no one's immune to the macro effects headwinds that we are overall seeing. So I think if we see it, partners will also see it. Now having said that, we have about 6,000 partners within our overall ecosystem, and they contribute about 40% of our revenue. Over the last couple of years, we have invested pretty heavily in the partners in terms of enabling the partners, in terms of helping them kind of really transformed from being a marketing agency to a full-fledged CRM implementer, and being able to take our upmarket customers and drive all this for our upmarket customers. And I'd say that is working really well. Partner contribution to total rep-driven MRR, both what they're sourcing as well as what they're co-selling with HubSpot, is doing well. It was pretty high in Q2, and it continues to be pretty high in Q3. And that's a sign that partners are very engaged, and they're moving on the journey with us as we really provide a platform for scaling companies. So we're happy with how our partners are executing, and they're executing in a tough environment. So huge thanks and shout out to them.

Thank you.

We now have Sarah Hillion from Macquarie.

Please go ahead when you're ready.

Great. Thank you so much for speaking, Leanne. I really appreciate it. Maybe I want to ask a little bit more of an esoteric question. When you're in your meetings and you're speaking with a C-suite, I would be curious to know what you're seeing about their desire to move marketing away from some of the really predominant social platforms that seem to be stumbling a little bit right now, perhaps where strength is moving to TikTok, and how that's helping drive more conversations around inbound marketing.

Hey Sarah, thanks for that. I'm going to maybe get started, and then Dharmesh feel free to jump in here as well. Look, the conversations right now are all around driving efficiency, driving time to value, and getting results that can impact the outcomes in the near term. And as we think about that, omnichannel marketing is really important. When I have conversations with CMOs and CEOs within customers, they clearly understand that it cannot be just one channel. And so a lot of it is omnichannel marketing. And this is why what we announced and launched at Inbound, which our teams worked really hard on, customer journey analytics and campaigns, 2.0 functionality, both of those really meet the needs of where the marketing organization is expected to step up and deliver right now. And that's the kind of conversations that we are having. In general, A lot of marketing spend is around driving direct impact to revenue and pipeline in the short term and away from things like ad spend or event spend or brand spend. That is what we are hearing based on talking to customers.

One quick thing I would add is that it's a combination of there's these new channels emerging and it has to be omni-channel. Part of HubSpot's differentiated value proposition is that because everything's on one data platform, in one database, in one unified experience, we have the data to be able to draw the insight, not just how many people visit the website or how many engage through social or how many through ads. Who were those customers? What was the revenue associated with that? We can do kind of full-circuit reporting, which is really hard to do when you've got kind of these siloed products, and that's one of the appeals of the HubSpot platform.

Thank you. We have our final question from Siti Panagari from Mizzou.

Please go ahead when you're ready.

Thank you. Thanks for squeezing me in. Not sure if this question was asked. If I look at your Q4 guidance, that looks really conservative. When I look at historical guide for four Qs, usually like 4% sequential. Versus slide this year. So wondering, is this mostly effects or you have some kind of incremental conservative and back into the guidance, considering the macro environment.

Yeah, why don't I, I'll take that. I think, you know, if you were paying attention on the call, we've definitely spent a lot of time talking about the challenging environment in which we're operating. And that is certainly reflected in the Q4 guidance. In addition, you know, you highlight FX. That is also an incremental headwind for us into Q4. We called out $4 million of incremental headwind as a result of foreign exchange movements. And so it's really both of those things that are contributing to our Q4 guidance. We are assuming that the environment stays about how it is operating today. And as always, we want to make sure that we can work confident in our ability to deliver, even if it gets just a little bit worse from here.

Thank you. I would now like to hand it back to Yamini for any final remarks.

Well, I want to do a big call out to HubSpotters globally. They are just so focused in executing, so thank you. My heartfelt thanks to all of the employees, and also thanks to customers, partners, and investors. I look forward to talking to you next year.

Thank you all for joining. This does conclude today's call. Have a lovely day, and you may now disconnect your line.