HubSpot, Inc.

Please go ahead. Thanks, operator. Good afternoon and welcome to HubSpot's second quarter 2024 earnings conference call. Today we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Yamini Rangan, our chief executive officer, Dharmesh Shah, our co-founder and CTO, and Kate 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 expectations of future financial and operational performance and operational expenditures, expected growth, FX movement, and business outlook, including our financial guidance for the third fiscal quarter and full year 2024. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our Form 10-Q, which 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 second quarter of fiscal year 2024 earnings press release in the investor relations section of our website. Now, it's my pleasure to turn the call over to HubSpot's Chief Executive Officer, Yamini Rangan. Yamini?

Thank you, Ryan, and welcome to everyone on the call. Today, I'll share our Q2 2024 results, discuss trends driving our momentum, and highlight early wins from our spring spotlight product launches. I'll also reiterate our strategy and playbook for winning both in the short and long term. Let's dive in. Q2 was a solid quarter for HubSpot with revenue growing 21% year over year in constant currency. We delivered another quarter of operating margin growth with 270 basis points of margin expansion year over year, driving our operating margin to 17%. I'm really happy with the operating leverage we are continuing to deliver while driving growth. Total customers grew to 228,000 customers globally, driven by over 11,200 net customer additions in the quarter. I'm thrilled to see customers consolidating on HubSpot, the consistent focus on innovation and execution demonstrated by our teams, and momentum we have in becoming the customer platform of choice for scaling companies. Our starter tier continues to fuel volume on the low end of the market driven by product and pricing improvements. We have removed friction and have made it easy for customers to get started with HubSpot. We have streamlined the checkout process so customers can now make clearer decisions about the functionality and seats they need. But most importantly, we're delivering compelling value for business owners focused on driving growth and needing better visibility on customer trends in this environment. As a result, we're seeing strength in free sign-ups and starter ads. In upmarket, our Q2 results were driven by multi-hub and large deal momentum. We saw more customers start with or expand into multiple hubs, resulting in larger deals. Over 45% of new business in our Pro Plus tiers came from customers using three or more hubs. Within customers adopting multiple hubs, we saw three popular combinations, marketing and sales hubs, our main front doors, marketing sales and service hubs, innovation in service hub is driving momentum, and marketing sales and content hub after content hub launched in April. The higher mix of multi-hub deals and the momentum we have with upmarket customers led to larger wins in Q2. Upmarket customers want to simplify, and consolidate their tech stack, and our focused investments to serve their needs and our pace of innovation make us their top choice. Okay, let's talk about our pricing model changes that we introduced in early March and how it's progressing. As a reminder, we lowered the price point to get started with HubSpot, removed seat minimums to reduce friction to upgrade, and created a core seat for customers who want to edit CRM records. We did this to make HubSpot easy to buy and easy to grow with. When we made these changes, we expected it to lead to lower initial ASP, higher volume of customers, and more upgrades and expansion over time. In Q2, we continue to make progress on driving higher volume to offset the ASP declines and expect this to happen in the next few months as we focus on enablement. We continue to see solid expansion trends with a multi-point increase in net revenue retention rates at month three for customers on the new pricing model as they buy exactly what they need and expand when they need more. Overall, we continue to have high conviction that the pricing change is the right decision for our customers and therefore for HubSpot. To round out Q2, let's talk about the innovation we drove with our Spring Spotlight product launches and how they're driving momentum. In April, as part of our first Spring Spotlight, we introduced major updates to Service Hub and launched Content Hub. The Service Hub update was a big unlock. It now supports both customer support and customer success teams on a single unified platform. We saw the number of wins with 100 plus service seats grow 55% year-over-year and 30% year-to-date. In addition, we saw a 200% increase in portals closing tickets in Help Desk since the relaunch. In terms of Content Hub, our goal is to provide an AI-powered content marketing solution that can help marketeers create and manage content. And the response has been fantastic. The attach rate for Content Hub to Marketing Hub has tripled since the launch and is now nearly 50% for new Marketing Hub events. This high attach rate is being driven by innovative AI features like content remix, AI blogs, and brand voice. Brands like TripAdvisor, World Wildlife Fund for Nature, and Morehouse College are all using HubSpot content solutions to grow. Overall, we're thrilled to see our product innovation drive value for our customers. OK, on to the macro environment. We're seeing the same trends as last year and Q1. Slower decision making, more decision makers involved, and scrutiny on business case and value before spending. When decisions are made by committees, it often includes CEOs, CFOs, CROs, and many times require board or VCP firm approval. The bar for buying continues to be high. We also see companies consolidating on fewer platforms that can help them grow. We're executing on our clear and proven playbook to drive growth in this environment. Let me step back and connect the dots on our playbook where we are seeing momentum this year and how this sets us up for both short and long term success. Our playbook for executing in any macro is clear. We solve for our customers, help them grow by providing an AI powered customer platform and drive the pace innovation that can make it easy for customers to stay ahead. HubSpot excels when we know exactly who we are serving and we have never been more clear. We are determined to delight growth professionals in marketing, sales, and service at scaling companies and help them grow. This focus on solving for customers and deep listening have resulted in clear momentum in customer acquisition. More importantly, it has led to strong retention with customer dollar retention consistently in the high 80s. As a company, we're doubling down our focus on our customers and are energized about helping them grow. The way we help them grow is by providing an AI-powered customer platform, which includes best-in-class engagement hubs, smart CRM, which unifies customer data and teams, and a connected ecosystem with app and solution partners. This platform strategy is working as more customers consolidate on HubSpot to lower costs and drive growth. In June, we crossed over 1 million active app integrations installed by ProPlus customers with more than 35% of them using 10 or more active app integrations. Customers are bringing more data together within HubSpot and driving more insights from that data. In addition, we made a choice to embed AI in all of our hubs and within our smart CRM, and this strategy is beginning to work. The early traction with Content Hub and the step change in attach rate of Content Hub to Marketing Hub is just one example of that strategy working. According to our customer Sandler, HubSpot AI has been a game changer for our marketing and sales teams, helping both groups create personalization at scale with messaging, actionable insights, and increasing new prospect engagement with our brand by 25%. Customers have an appetite to drive more growth powered by AI, and that's where we are focusing our efforts. In addition, we expanded support for sensitive data, which moved into beta in Q2. HubSpot's sensitive data solution makes it easy for customers to protect sensitive personal information to support their compliance with regulations like GDPR. This expands our opportunity to serve more customers in industries like healthcare, financial services, and insurance, and makes it easy for customers to manage complex compliance processes. Early adoption looks promising. Existing enterprise customers are using new features to manage sensitive data, and we're seeing higher conversion rates and average selling prices with new customers. Our pace of innovation and focused execution have been crucial to our success now and will help us grow in the long term. Reflecting on our results and progress, our strategy is working. I hope that it is abundantly clear we run our business for the long term and are focused on solving for our customers, innovating our platform, and prioritizing strong execution. This has been and will continue to be our priority. And that is what will continue to set us apart to drive durable growth and create long-term shareholder value. With that, I'll turn the call over to Kate to take you through our Q2 financial results.

Kate? Thanks, Yamini. Let's turn to our second quarter 2024 financial results. Q2 revenue grew 21% year over year in constant currency and 20% on an as reported basis. Subscription revenue grew 20% year over year, while services and other revenue increased 18% on an as reported basis. Q2 domestic revenue grew 20% year over year. International revenue growth was 22% in constant currency and 21% as reported, now representing 47% of total revenue. We added over 11,200 net customers in Q2, ending the quarter with a total customer count of 228,000, growing 23% year over year. Again this quarter, the strength in customer additions was driven by momentum at the low end. Average subscription revenue per customer was $11,200, down 2% year over year in both constant currency and on an as-reported basis. ASRPC continues to be driven by several offsetting factors. A positive impact from an increasing number of professional and enterprise customers adopting multiple hubs. Offset by the headwind from the continued strong volume of lower ASP starter customers we've acquired over the last year. Gross retention held nicely in the high 80s and net revenue retention was stable at 102%. While we continue to see strong customer dollar retention and downgrade trends, customer upgrade rates remain challenged, similar to Q1. We expect this behavior to continue in the back half of the year with net revenue retention holding around current levels. Calculated billings were $648 million in Q2 growing 20% year-over-year in both constant currency and on an as-reported basis. The remainder of my comments will refer to non-GAAP measures. Q2 operating margin was 17%, up three points compared to the year-ago period, driven by the continued impact of our go-to-market efficiency and infrastructure optimization efforts. Net income was $104 million in Q2, or $1.94 per fully diluted share. Free cash flow was $92 million in Q2, or 14% of revenue. Finally, our cash and marketable securities totaled $1.9 billion at the end of June. With that, let's review our guidance for the third quarter and full year of 2024. As Yamini shared, we continue to operate in a challenging and volatile external environment. And our guidance assumes that the difficult demand environment persists through the back half of the year, but it does not get materially worse. For the third quarter, total as reported revenue is expected to be in the range of 646 to $647 million, up 16% year over year at the midpoint. We expect foreign exchange to be a slight headwind to as reported revenue growth in the quarter. Non-GAAP operating profit, is expected to be between $107 and $108 million. Non-GAAP diluted net income per share is expected to be between $1.89 and $1.91. This assumes 53.5 million fully diluted shares outstanding. And for the full year of 2024, total as reported revenue is now expected to be in the range of $2.567 to $2.573 billion up 18% year-over-year at the midpoint. We now expect foreign exchange to have a neutral impact to as reported revenue growth for the full year. Non-GAAP operating profit is now expected to be between $437 and $441 million. Non-GAAP diluted net income per share is now expected to be between $7.64 and $7.70. This assumes 53.4 million fully diluted shares outstanding. As you adjust your models, please keep in mind the following. We now expect CapEx as a percentage of revenue to be 4% to 5% and free cash flow to be about $380 million for the full year of 2024, with seasonally stronger free cash flow in Q4. And with that, I will hand things back over to Yamini for her closing remarks. Thank you so much, Kate.