Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to Hub Bot's 4th Quarter and Full Year 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the call over to Chuck McGlashing, Director of Investor Relations.
You may begin your conference.
Thanks, operator. Good afternoon, and welcome to HubSpot's 4th quarter and full year 2018 earnings conference call. Today, will 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 Bueger, 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 the statements of historical fact are forward looking statements, including statements regarding management's expectations of future financial and operational performance, and operational expenditures, expected growth and business outlook, including our financial guidance for the 1st fiscal quarter full year 2019. 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 to our Form 10 Q, which was filed with the SEC on November 7, 2018, for a discussion of the risks, and uncertainties that could cause actual results to differ materially from expectations.
During the course of today's call, we'll refer to certain non GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non GAAP financial measure used or discussed and a reconciliation of the differences between each non GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter 2018 earnings press release in the Investor Relations section of our website at hubspot.com. Now, it's my pleasure to turn the call over to HubSpot's CEO and Chairman, Brian Halligan.
Thanks, Chuck, and good afternoon folks. Thank you for joining us today as we review HubSpot's 4th quarter and full year 2018 earnings results. It is strong ending to 20 in a really good year overall. So let's get right to it. We grew revenue 37% for the full year and closed out Q4 with 35% revenue growth, which is 37% growth at constant currency.
Our full year non GAAP operating margins expanded four points to just over 6% and total customers surpassed 56,000, up 36% year over year. Honestly, 2018 was one of the best years in our history in many ways, especially when you think about it from a product and customer value perspective. We started the year with a really strong marketing application business that helped our customers generate leads in a fast growing sales enablement business that helped sales people sell. We ended the year with a full suite of marketing sales and customer service products that helps our customers grow better by crafting a remarkable experience for their customers. In addition to that, we built out that suite in such a way that small startups can start with our starter layer move into our professional layer as they grow and ultimately
purchase
portfolio and value proposition, we started evolving how we thought about how we grow better ourselves and speaking specifically about the Flywheel Growth model. In 2018, we started shifting from seeing our business as a traditional funnel to viewing it much more as a flywheel. The old funnel was great, but attended to view customers as just an output, while the more modern flywheel recognizes the central role customers play in driving growth through up grades in a specialty word-of-mouth. Customers are not an output. They're the beating heart of your business.
When you cut down the friction in your customer experience, you speed up the momentum of your business overall. Let me give you an example of the Flywheel in action. I met one of our customers, a company called Stella on a recent trip to Europe Stella has 800 employees. They provide home cleaning, childcare, and healthcare services in Finland. We didn't need a major marketing push to get into Stella, we just needed my new friend, Ville.
Ville was a HubSpot customer at his last company, and he had recently joined Stella. He enjoyed using HubSpot in his last role. So as soon as he got to his new job, he led the effort to bring HubSpot on board. Started with Marketing Hub in January of 2018. In June, they picked up Sales Hub starter and in September, they added ServiceHub Professional, And then in November, they upgraded to the full enterprise growth suite across the board.
Now as they scale, the value they're getting from HubSpot is scaling up with them. But it's not just about scalability for our customer. It's all about creating a better experience for their customers. Now that Stella is using marketing, sales and service hubs together, every team at their company is working off the same shared understanding of their customers too, and that kind of alignment pays off in so many ways. All of these new products in our flywheel mentality is working all over, not just at Stella.
In HubSpot, we're seeing lots of new customers buying multiple products upfront and our new products have improved our cross sell motion allowing us to reach nearly 20,000 multiple product customers in Q4, up 90% year over year. Customers are also responding to our new growth suite bundled pricing with nearly 50% of our new triple product customers in the quarter buying all three products upfront through the bundle. We think customers will find more value by using the full suite and multi product customers carry better unit economics or HubSpot than single product customers. In addition, The relaunch marketing starter product continues to get great traction with customers on this product up 3x year over year. This in turn has helped drive a nearly twofold increase in upgrades from marketing starter to the professional enterprise tiers over the last year.
The nice thing about how these hubs and tiers work together is that they enable customers to grow and use more of HubSpot on their terms when they need it. As excited as I am about the progress we've made transitioning HubSpot from an app company to a suite company in 2018, I'm even more excited about the momentum we have going into 2019. In 2019, we will again be focused on 2 parts of that flywheel equation first, increasing the force applied to our flywheel by word-of-mouth from existing customers. We're working on a long list funded high return projects in 2019 that we think will make an existing suite even more valuable to our customers, particularly at that enterprise tier. 2nd, decreasing the friction in our flywheel by making HubSpot easier to do business with for companies of all sizes with a particular emphasis on our premium model, we want to match the way we go to market with the way modern humans buy these days.
There's lots of low hanging fruit left for us on both these flywheel initiatives in 2019, HubSpot's still in its very early innings in its development. One more thing about 2019. We've used the Warren Buffett quote with you before that goes something like someone is sitting in the shade today because the seed was planted several years ago. Several years ago, we planted the sweet seed and it's starting to throw off some shade for us today with much more shade to come in the future. In 2019, you'll start to see a new seed we're planting as we shift HubSpot from an all in one suite to much more of an all on one platform.
We want to be able to help our customers grow better. And although we'd love for them to completely rely on HubSpot's applications to do so, The reality is that a modern business has lots of important applications. What we want to do over time is enable our customers to use all of their applications with HubSpot. Today, HubSpot manages its own applications data, its own applications workflow, and reports on all of its own data. In the future, we expect HubSpot to manage all of our customers' front office applications data all of their front office workflow and report on that entire experience.
You're starting to see the beginning of the shift. We announced a strategic partnership with our friends at AWS. We greatly expanded our API endpoint footprint and support We built some killer integrations of our own to commonly use applications like Stripe and Slack, and we welcomed a couple 100 connect partners into our program who have integrated their applications in the HubSpot. All of this will further expand the value we can create for our customers who would open up new growth opportunities for us. So stay tuned for more in this front over time.
Okay. With that, I'll turn it over to Kate to run through our financials and our guidance.
Thank you, Brian. Let's turn to our 4th quarter and full year financial results and our guidance for the first quarter full year of 2019. Q4 was a very strong quarter for HubSpot. We delivered strong revenue growth over $25,000,000 of free cash flow and $14,000,000 of non GAAP operating profit. 4th quarter revenue grew 35% year over year on an as reported basis, and 37% in constant currency, up nearly two points from Q3 2018 constant currency revenue growth.
The sequential increase in the quarter is q4 subscription revenues grew 35% year over year as reported, while services revenue grew 49% year over year. Services revenue growth in Q4 benefited from a mix shift towards our professional and enterprise SKUs and an uptick in classroom training. While we're pleased with this overall performance, keep in mind that services revenue represents a small percentage of our overall revenue, and we expect services revenue to grow more slowly than subscription revenue in reported and 35% in constant currency. As Brian discussed, we had a really strong year of revenue growth overall in 2018 driven by several factors, including strong lead generation, new product releases, and a seasoned sales force that executed very well. HubSpot ended 2018 with 56,628 total customers, which was up 36% year over year.
Average subscription revenue per customer in Q4 was $10,012, down 2.4% year over year and up slightly compared to Q3. While we are encouraged by the sequential increase, we continue to expect this metric to bounce around depending on product mix and the amount of new versus installed base selling in any quarter. International performance also continued to be strong in Q4, with international revenue growth of 48% year over year on an as reported basis and 52% in constant currency. Domestic revenue growth reaccelerated in Q4 to 28% up two points from Q3. International revenue represented 38 percent of total revenue in Q4, up three points from last year.
During 2018, we opened a new office in Bogota and announced plans to open an office in Paris later this year. We continue to see point $5,000,000, a 33% increase year over year, while calculated billings defined as revenue, plus the change in deferred revenue was $166,900,000, up 33% year over year. Currency movements within the quarter resulted in a headwind to calculated billings, which grew 35% in constant currency, up a point compared to Q3 constant currency billings growth. The remainder of my comments will refer to non GAAP measures. 4th quarter gross margin was 82.3 percent, up slightly sequentially and up a point year over year.
Subscription gross margin was 86.5 percent, flat sequentially, while services gross margin was 2.5%, up nearly 16 points sequentially and up 20 points year over year. Full year gross margin was 81.6%, up nearly a point compared to 2017. 4th quarter operating margin was 9.8%, up 5.85.4 points from Q3 and Q4 of last year, respectively. Full year operating margin was 6.3%, up four points versus 2017. As we've talked about in prior quarters, the adoption of ASC 606 had a positive impact on operating margin for the year because we extended This contributed 3 points of margin expansion to our 2018 results, while the underlying business delivered one point of leverage.
We continue to drive operating leverage in the business that is consistent with our long term framework for growth and profitability, and we remain committed to the framework At the end of the 4th quarter, we had 2638 employees, up 27% year over year. Attrition remained favorable throughout 2018, which positions us well to execute on our 2019 growth plan. CapEx, including capitalized software development costs, was $8,100,000 in the quarter $33,500,000 for the full year. Moving on to earnings. Net income in the 4th quarter was $15,800,000 or $0.37 per diluted share.
Full year net income was 36.9 With that, let's dive into guidance for of $146,500,000 to $147,500,000. Non GAAP operating income is expected to be between 9 point $5,000,000 $10,500,000. Non GAAP diluted net income per share is expected to be between $0.23 to $0.25 This assumes approximately 44,400,000 fully diluted shares outstanding. And for the full year of 2019, Total revenue is expected to be in the range of 6.48 is expected to be between and $1.16. This assumes approximately 45,600,000 fully diluted shares outstanding.
We expect full year free cash Currency movements created a 4 point positive impact on reported revenue growth in both Q1 and Q2 of 2018. Was roughly neutral in Q3 and was a headwind of a little more than a point in Q4. Given the volatility in FX rates throughout 2018, we thought it would be helpful to provide some additional context for how FX will impact our as reported growth rates in 2019. At current spot rates, we're forecasting foreign exchange headwind of approximately $8,000,000 to as reported 2019 revenue. Which would equate to a 1 to 2 point negative impact to as reported growth.
Substantially, all of this currency impacts will occur in the 1st 2 quarters of the year. Offset by one point of margin pressure from the amortization of sales commissions expense under ASC 606. This will result in one point of operating margin improvement on an as reported basis Furthermore, we expect to realize the majority of 0.5%, which is a couple of points below our historic average. We expect CapEx as a percentage of revenue to return to 8% in 2019, primarily as a result strong year of operational and With that, I'll hand the call back over to Brian for his closing remarks.
Thanks, Kate. 2018 was a great year for us with the business performing well and I'm bullish on the outlook for our business entering 2019. There's a lot that goes into driving the results we've gone over today, and the credit goes to the HubSpot team behind these results. We've invested a lot of energy these days into making our HubSpot team a more diverse and in inclusive place for employees to work. That investment starting to pay off.
In Q4, we were recognized again as a top company for diversity and women by comparably, we were recognized for the first time by Fortune as the best workplace for parents. We have a lot more work to do in 2019 on diversity, inclusion and belonging at HubSpot, but I'm encouraged by our recent progress and excited about all the good stuff to come. With that in mind, I want to close by thanking all those HubSpires for the work they do and the different passions and perspectives they bring to their jobs. Thank all of our customers, partners and investors for a really great year in 2018. I'm super excited about 2019.
Operator, could we please open the call for
Your first question comes from Mark Murphy from JP Morgan.
Thank you very much. Congratulations on a great finish to the year. Kate, I was wondering how material of an uplift you think the premium marking addition can be for you this year, if there's any way to pencil out some math on that. And as well, Brian, I think you've hinted in the past that there are other things out there after marketing
sales and service.
I was just curious how you feel about the bandwidth of your engineering team to go after that just given all the product they've developed last year. And just whether that's mostly a reference to all in one platform or are you looking at other markets like commerce or content or anything else? Thank you.
Hey, Mark. It's Brian. I can take those. In terms of the you called it the premium marketing edition, we call it the enterprise you. So far so good.
We announced just to kind of take you through it. Inbound, we announced a new marketing hub a bunch of new features in marketing hub at a new price point and it sold pretty well in Q4. That product, I think, is priced well and will sell well throughout 2019. Of alongside that will make it a very powerful combination. So off of the races, they're feeling good.
That marketing hub product on the enterprise side got a lot better. It's going to get even better over the course of this year. There's a couple I sat with the product folks today is a bunch of cool stuff coming in that throughout 2019. So I'm psyched about that. In terms of new hubs, yes, we got 3 now and I guess I would say we're not done.
We've got 2, 3. We have really solid ideas for new hubs in our heads now. I guess I would give you guidance that over maybe the next 3 to 5 years, we'll add a bunch more hubs. I want to stay away from forecasting too short term on but more hubs coming, more opportunity there. And at the same time, we're investing in the platform side.
And we're investing heavily in our APIs and the support of those APIs, we're enabling third parties to integrate really nicely into HubSpot we're building some really nice integrations to HubSpot. So things are really hopping on the R and D side at HubSpot. The R and D team is really performing well. The recruiting is going well. The teams will manage feeling really good about that.
Your next question comes from Brad Sill from Bank of America Merrill Lynch.
Thanks guys. Just a question, please, on the ISV opportunity, you're just speaking about there, Brian, with the work on the APIs. I mean, is the expectation that you are expecting more sale, custom sales apps from third parties, or is this more of a marketing play? Where do you see the most opportunity for some of these third party applications?
That's a really good question. I think it's across the board. It started when we first started opening things up couple of years ago on marketing, but we're starting to see a lot of activity on the sales app side. And it's early, but we're starting to see some on the service side as well. So I think you're going to see integrations across the platform, some are cross platform entirely or some are, department specific, but It's starting to pop kind of everywhere.
Really excited about that. It creates a lot of value with our customers. Like I think of the journey we've been on And for the 1st really 8, 9 years of HubSpot, we were in the business of selling an application that helps our customers generate leads And then we've moved to selling a suite of applications that help our customers really orchestrate their customer experience and try to improve that. And over time, we want to let our customers not just use our applications, but we've been many, many other applications that they're already using or could potentially use to really create beautiful end to end customer experiences that help them grow better. So we're on a journey here at HubSpot still early.
Going quite well. I think you're going to see that partner program really pop over the next year or 2.
Great. Thanks, Brian. One more, if I may, please, just on sales Pro now that it's been some time since the product's been in the market, the new version. What are you seeing in terms of uptake there and what is the interplay with sales pro with existing CRM applications. Is this more greenfield opportunity or is it sales pro running alongside what these customers might already be running?
That's a good question. We just to remind everyone, we came out with a sales pro product last November, Chuck?
Last inbound?
Yes. Last inbound. Okay. Last inbound. And no, no, no, no, no, sales pro product, not the, service per product.
So it's a year ago.
Sales pro.
And yes, yes, year
ago. November of 2017.
Yes, November of 2017. That thing is going really well, really, really well. The reps love selling it. The customers are picking it up and running with it. That thing is a very popular product.
And, most of the time, people are using Sales Hub Pro on top of our CRM. Sometimes people use Sales Hub Pro on top of other CRMs. More and more, we're seeing the trend in our installed base, and I think that they'll and industry wide. They kind of people pick up a platform or a hub and then they use some of our apps and other applications and weave the whole thing together. In some cases, there's mixed environments, but I think the trend will be kind of one platform level partner that you'll build around.
So lots of sales up pro sold with with our free CRM. Great. Thanks, Brian.
Your next question comes from Samad Samana from Jefferies.
Hi, good evening. Thanks for taking my questions. Brian, one for you and then a follow-up for Kate. On the expanded AWS partnership, I think it was announced in mid 4Q. Can you help us think about how we should think about that impacting the customer funnel in 2019?
And could you expand on some of the joint go to market effort in and how you think that's going to drive kind of as a new customer or if it's already driving new customers, how should we think about that opportunity? And then I have a follow-up for Kate.
I'm super psyched about that partnership. We're a big customer of theirs, of course, and we've designed some unique go to market things with them. You might have noticed Samad that they were a giant sponsor in down this year and they will be for the next couple of years. They're particularly interested in our HubSpot for startup track. That's a program inside of HubSpot that's going really, really well.
And our HubSpot for startup team in their AWS for startups program are working on a whole bunch of stuff that we're doing together that are really interesting and unique that are starting to get rolled out. So I think that's a pretty cool partnership, really, really excited about it.
Great. And then Kate, ASRPC increased quarter over quarter for the first time since 3Q 2017. And kind of conversely net adds was, it was small, but it was down slightly year over year. I'm just wondering you just help us understand if that's just kind of timing related or just help us understand the seasonality of why if either one should be seen as an inflect and obviously they're both doing well, but we're just trying to get some color as we think about modeling forward for 2019.
Yes. So, we're obviously very happy with the customer growth this quarter. We saw continued strength in the growth of our customers from the marketing starter. But what we're probably more excited about is that you get sort of a positive impact on, ASRPC from a sequential perspective on top of the continued robust growth of the net additions. I don't think we're going to be able to do that every quarter.
And as we've said in the past, there'll be pushes and pulls at the high and low end of our customer base. I wouldn't view either result as an inflection point for us. I think over the next set of quarters, we're going to continue to see ebbs and flows.
Great. That's really helpful. Thanks again for taking my questions and congrats on a great quarter.
Your next question comes from Alex Zukin from Piper Jaffray.
Hey guys, thanks for taking my question. Maybe just a question on the freemium and low touch customer acquisition strategy that you talked about and deployed in 2018. How you plan to expand on that in 2019? And how do you see that impacting margins in 2019 and beyond?
I can start with that. Sure. Yeah, one of our big goals is here is to really just match the way we sell it, the way people buy and part of that is the premium edition. You roll back the clock, the premium edition got started 3 years ago, really on the sales hub side of the business and worked real well. And so we rolled it out with the Service Hub product.
Just now, we're really getting quite serious about rolling that out within the Marketing Hub product. So it's still early days on it. But it seems it's working really well, really happy with that shift to premium. We want to see this year more and more of our starter business come in with frankly no touch, a little touch or no touch where people can start on the freemium and play around and then get a good deal with it and just buy that starter without having to talk to a sales rep. The company I really admire who's really good at this stuff is probably admire them too is at Lafayette and we've got the president of Atlassian on our board Jay Simons and they've been very influential on us that as we move our model closer to where they are.
Yes, I would say from a margin perspective, I think we're very bullish at the long term benefits of the freemium model. Think in the near term, we continue to talk and look at the unit economics, which remain robust for the company. And so at these sort of returns on our investments, we will continue to invest in our go to market on the both the freemium side and with our direct and partner ecosystem.
Great. And then just if I could squeeze 1 in on the competitive environment, what are you seeing from both the larger vendors, Salesforce and Adobe with their recent acquisition of Marketo as well as any kind of competition with vendors such as Zendesk and any other small direct competitors coming into the market? How do you see that the environment kind of playing out and win rates for 2019.
We haven't seen a whole lot of change, frankly. We see a fair amount of salesforce.com and when our fair share of deals We never see Adobe. They're pretty much off market. We see a little bit of Marketo, but they're very enterprisey. The The truth of it is our products have gotten really good.
We're well positioned in the market. We're unique in the market. Our value prop really pops. Our implementation team does a nice job. And so buying HubSpot, like I remember, started the company 13 years ago, it was pretty risky buying HubSpot.
What HubSpot thing where these HubSpot guys and nowadays, man, the value prop is super strong. It's a no brainer to buy HubSpot these days. So feeling good about our position in the market.
Your next question comes from Richard Davis from CG Financial.
Hey, thanks. Maybe just drilling a little bit on Mark Murphy's question. So do you guys just logically, do you draw a line kind of a bright line between kind of front office and back office Like, when we talk to companies, they're like, man, we'd like to be able to get paid. And so that's a financial app, which is oftentimes considered back office. Is that do you guys say, listen, all we are is front office?
Or how do you think about that? Thanks.
Hi, Richard. It's primarily we think of ourselves as front office. We have recently added an integration with Stripe. It's nascent, but it's pretty slick. And so it gets a little gray in there, but we consider ourselves a front office platform we consider ourselves a platform to help people really create remarkable go to market motions that's how I would think about it.
It's a little bit of grayness there on the payment and the invoicing. A little bit of grayness on the payment and the proposal there, but company. Got it. And then quick question
on the CapEx, you improved that really nicely. Is there a component that we should think about that would improve with your partnership with AWS? Because generally, you see that happen. That's something that, so it's 8% kind of a trend line? Should it go to 6 over time?
Or how
do you think about that? Thanks.
Yes. If you think about our CapEx specifically, there's really 2 components of our CapEx. One is the spend on our facilities and the other is software capitalization associated with our internal development activities. I think underlying your question is really what hap we had a very strong free cash flow quarter. The operating performance of the company obviously drove that result, but we did have a one time benefit in Q4.
From the restructuring of the DOE signed with AWS. In addition, 2018 was a light year for us in terms of facilities build out. And I did note in my opening comments that there is a material build out in Dublin in 2019 that will help support our continued growth internationally.
Super. Thank you so much.
Your next question comes from Brian Peterson from Raymond James.
Hi guys. Thanks for taking the question. And so I wanted to hit on the marketing starter product a bit. You mentioned that 2 XE upgrades this year How are customers typically on the starter package before they upgrade to the higher tiers? And does that change at all if they're coming on from self-service?
Okay. Brian, I'll take that one. The reality of the starter product is a pretty small, the marketing starter product is pretty small business until, I guess, July of 2018. When we really shorted up and the big thing we added was email marketing to it and dramatically increased the amount of up people using it and the ARPU of that's gone up. So that's a very, in my mind, it's almost like a brand new business starting last summer.
We're watching very carefully the trend of how long do they use starter before they go to pro and whatnot, but the reality it's only in my mind, it's only a six month old business at this point, so it's hard to say. Having said that, that is an initiative going on inside the marketing team, the general manager of our marketing hub, it's on his list to really figure out how to get that flow going from free. The starter to pro and enterprise. That's not something we had focused on previously on the marketing side, and he's really focused on it this year. And I think he'll get that machine rolling.
Got it. Thanks, Brian. And just wanted to hit on linearity. Anything that we should think about in terms of how the quarter developed through December? And then anything that's changed thus far in January?
Thanks guys.
Yes, I think Q4 is probably a little bit unique in that sense because we rolled out some pricing increases as of November 1st. So there was some positive benefit to October as a result of some of the pricing increases. But Q4 is generally a very strong quarter for the company.
Your next question comes from Bhavan Suri from William Blair.
Hey guys, this is actually Arjun Bhatia on for Bhavan. Thanks for Just wanted to touch on your customer profile a little bit. You've talked about going after customers that have about 2000 employees are in that range. Can you just talk about how your customer profile has changed over the past few quarters as you've targeted this larger base?
Arjun, I'll take this, Brian. That's a good question. Here's how if I just step way back how I think about it, is we have 3 segments inside of HubSpot. We have the small business segment, which is kind of between call it, 2 employees and 20 employees, mid, which is $20,000,000 to $200,000 and enterprise, which is $200,000 to $2000. And historically, our sweet spot's been at that middle layer, the pro layer, $20,000,000 to $200,000,000.
And I would say we've got kind of perfect product market fit and error products that we give an A or go to market, everything's really nice. What we've done over the last 12 months is really invest below that in the 2 to 20 and above that in the 200 to 2000. So I would give our product market fit, for example, 2 years ago when those 2 layers may be a C. And I don't know if we're an A yet, but we're getting closer and closer to an A on the starter layer and the enterprise layer. In terms of the median and mean employee side, they haven't looked at it recently, but it hasn't changed materially.
The products have gotten stronger up on both ends and they kind of push and pull on the metrics and you see some of that in some of Kate's remarks.
Yeah, that's helpful. And then just on customer expansion trends, how should we think about the dynamic between what's driving, what's driving customer dollar expansion between increased usage tier upgrades and maybe multiproduct adoption?
Sure. Why don't I take that? I think what we have said about retention is that we think over the long term, retention can stay above 100% We did see that retention in Q4 was above 100%. Customer dollar retention remains in sort of the low to mid-80s for the company. Think the big, contributors to the increased retention overall were the upsell the addition upgrades that we've been seeing as well as continued cross sell into the installed base.
Very helpful. Thanks.
Your next question comes from James Rutherford from Stephens Inc.
Hey, good afternoon. I wanted to start and get on the go to market strategy around service hub. I know you're beginning to develop the channel partners there. But just curious if you'll lean more on direct selling into 2019 or if you've kind of think you've gotten the channel to a place where that's going to be a big sales motion for you all?
Yes, I think the reality is when we come out with these new hubs, our direct sales force grabs and runs with them pretty very fast. It takes us a little longer to get that into the partner channel. Some of the partners are selling full stack and they sell sales and marketing and service the whole thing together. Some of the partners are really marketing agencies and they always want to be marketing agencies. So I think out of the box probably in 2019, a little bit heavier push on the direct side.
Over the long haul, I think it will look pretty similar to the sales business and the marketing business.
Okay, thanks. And then one more, if I may. On the market, I'm just curious your read on small business sentiment and the health of that market seems to be very positive based on the revenue guide, but just hoping you'd write some commentary on SMB appetite invest in new software, both domestically but perhaps more importantly on your international markets? Thank you.
I think that's an excellent question. I haven't noticed any change. I sit on the sales floor here at HubSpot and I talked to the reps a lot and I talked to prospects and customers a lot. I just haven't seen any pullback in demand or hedging with budgets that's unusual or we're worried about recession. I mean, it doesn't mean it's not happening, but I haven't heard it really at all so far.
It feels solid.
Thank you. Very helpful.
Your next question comes from Ross MacMillan from RBC Capital Markets.
Thank you. And my congratulations on the reacceleration of growth Maybe I can start with some of the changes you made around pricing. I think there are 3 main ones: Marketing Hub Enterprise there's a price increase, the growth bundle, that you introduced, the growth suite bundle, and then the elimination of basic Brian, I'm just curious if you think about those 3 things, which ended up having the kind of biggest surprise to you in terms of impact on the business and maybe you could explain why?
I don't know if they're all pretty similar. I mean, the marketing hub, we had a good November because we were going to raise the price, but we do that a lot in Q4 every year with a different product. I think that'll I think we got to the price point that the market kind of expects in there. I think for think we're in good shape there. I think the growth suite work, we got a ton of we're getting a ton of growth suite business.
It's really encouraging to see. It was like Bill, I talked about in the opening remarks, where he started with marketing and then he added sales and then he brought the full enterprise growth suite. Like, I think we're going to see a lot of that. Eliminating the basic, I feel good about that. That basic product was a little awkward in there.
It wasn't packaged quite right. There was a sort of a heavy touch sale involved with it. So I like the fact that we've got the starter in there and the pro with a heavier touch. I wouldn't say any of them really caught us by surprise with you.
No, I agree. Yes.
I think kind of as expected.
Was, I guess, specifically on basic, did that, did you see a good trade up effect to pro versus a trade down, if you will. Was that a good outcome in terms of that basic price point?
It kind of a mix you know, if you were using basic, we were pretty aggressive grandparents. So we grandparent people in pretty aggressively. But if you're coming in now and you normally would have bought basic, you're seeing some go to pro and some go to starter. It's sort of a wash frankly, when we peel back the numbers.
That's helpful. And can I just add one other one, just on platform,
Sure?
If I'm an existing customer and as we think about platform, is this just that I'm going to have access to a set of 3rd party applications that I can plug in through APIs? Or is there something else that I will experience as a customer as you make this journey from sweet to platform?
Yes. I think over time, this will be a big change, Ross, where if you looked at hub spot 2 years ago, pretty much people use HubSpot with HubSpot. They didn't really have it connected to anything else. And it was a pretty monolithic out standalone application. If you look at our real good customers today, maybe somebody who's using the Pro suite, man, they're plugging all sorts of other app locations into HubSpot in a really cool way, whether it's they're plugging slack in, they're plugging, event bright in, they're connecting their WordPress website.
They've got all these different applications that they're plugging in. And the way they're going to be able to do that is very powerful. Like Traditionally HubSpot. We've managed the data inside of HubSpot. We've managed the workflow between your different HubSpot applications and we've reported on all stuff inside of HubSpot.
Imagine in the future, we'll manage the data from all your front office applications and you'd be surprised I'm putting front office applications people use. We'll manage the workflow across all of those applications and then we'll report on all the things happening in there. And so it's a nontrivial shift that's going on inside the company and the value prop for our customers. And it's already started and I think it's going to be a big tailwind for us over
the long haul. Your next question comes from Scott Berg from Needham And Company.
Hi, this is Ryan MacDonald on for Scott Berg. Talking more about the platform approach going forward, as you're looking at sort of net new customer opportunities, does there actually then have to be a shift in the selling motion at all? For those customers to sell the platform approach? And if so, is there a prioritization that goes, into sort of the 3 core modules, given the existing selling motion?
Yes. The selling motion hasn't dramatically changed yet. There's some small incentive tweaks we're making to try to encourage some folks in our organization to really encourage our customers to use HubSpot writ large, not just our applications, but really use it to manage the whole customer experience. We'll probably lean into that harder in 2020 as the platform gets more developed as our marketplace gets more developed as our APIs get better. Thing about the platform that's interesting is there's 3 ways to kind of come to life.
One way it comes to life is we'll build an integration like we build an integration too. Slack or Stripe, for example. The other way comes to life is there's lots and lots of little applications out there sales and marketing applications where they're using our API, the same API to integrate their product. And the third is there's lots and lots of our partners and customers who have relatively advanced use cases who want to just build functionality using our APIs today. So it's really opening up a lot of opportunity.
To expand the value prop for us.
Got it. And then just one quick follow-up on sales hub. I think last quarter you talked about that most of the adoption was really around net use customers or that had been sort of the early trend there. Can you talk about if that still sort of remain the trend or if you've been able to drive more up sells or if there's any initiatives in place to sort of switch that focus?
I think it's a it's a nice combination of new and cross sell. There's a lot of cross sell going that, okay, I'm using the Marketing Pro product. I'm interested in that sales hub product. And there's definitely some upsell too where I'm using the free CRM. And all I could use is sales starter.
Oh, it looks like SalesPro might be a good fit. So it's kind of coming in from 3 different directions on it. That sales hub product is going remarkably well for us.
Your next question comes from Tom Roderick from Stifel.
Hi, it's actually Parker Lane in for Tom. Thanks for taking my question. So as we think about the move into new markets like Columbia and then the the Paris office opening this year. Is much of your early momentum in these markets sort of on the free and the starter program? And then it starts to move upstream professional and enterprise as your channel starts to grow and the awareness of HubSpot builds or is it sort of whole hog early days?
And then has there been a substantial mix shift towards net customer growth in international markets? Has it held pretty steady between international and domestic? Thanks.
I can answer the first one.
I would say Columbia and Paris, those are 2 markets. Columbia is really the hub for Latin America. We've been in Latin America for a long time with a very small direct sales organization and an agency partner organization. We've been selling into Paris from Dublin for a long time. It's sort of similar where we've got some direct sellers in there and some agencies.
The way that it typically goes when we enter a new office is that market is, let's say, and this is a rough number. 70% of the revenue coming out of that market through partners, agencies, in 30% is direct. When we open an office, they both grow, but the direct tends to grow a little bit faster. And the mix will shift a bit over time. And I think over time, for instance, in LatAm, we'll get to fifty-fifty ish is my guess.
But yeah, I'm excited about both of those. We get a lot of business out of Paris and a lot of business out of Latin America. I think we can sort of the volume in both those markets.
And on the mix of product and new versus installed base selling, domestic versus internationally, they're actually pretty similar, which was a bit surprising to me at the beginning, but they track each other quite closely.
Your next question comes from Jennifer Lowe from UBS.
Great. I actually wanted to ask a question to Kate about just replacing the operating margin guidance and the ASC 606 impacts. And I think you had said that looking at 2018, there was about a point of core expansion and then 3 points benefit for ASC 606. Looking at 2019, it sounded like there's sort of two points of core with the one point of offset from ASC 6. And so just sort of focusing on sort of that cash basis, the point of expansion last year versus the two points, assuming I understood that correctly, next year, how should we sort of think about that?
Because clearly, there's still a lot of investment going into the business. Are you sort of managing around the optics of the ASC 606 number and that's how we should be thinking about it? Or I guess I'm just trying to piece through what sounds like a bit less incremental cash investment once you peek, pick through the pieces there?
Yes, I would say, so two things. 1, You have the dynamics of 606 correct. So when we adopted the 606 standard, we chose not to go back and restate our historical results. Which means that when you look at 2018, there's about $16,000,000 of commissions expense that we would have under the old standard expense the P and L that we capitalize and will amortize over a period of 2 to 3 years. In 2019, we will continue to capitalize commissions expense, but we'll start to see some of the expense from 2018 flow through the P and L.
So net versus like a status quo, there was some benefit, but there was a headwind to margins year over year. We aren't managing around 606 per se. We actually look at the financial framework that we've laid out around growth profitability and we, invest, to make sure that we're aligned, to that framework over the long term.
That's helpful. Thank you.
Your next question comes from Michael Turrin from Deutsche Bank.
Hey, great. Good afternoon. Thanks. I was hoping we could spend a minute on the upmarket opportunity and some of our your observations around how having the broader suite of enterprise products could be influencing that opportunity set as well as whether that's also adding the potential for you to maybe hold on to some of the existing customers even longer? Thanks.
I think the up market opportunity is interesting. I just kind of want to caution when I say up market. I'm really talking about what most people will call mid market company between 202,000 employees. There's a lot of them out there. And they're buying HubSpot.
They're really seeing the value in it. And at inbound, we announced some new fee and marketing hubs that they like. There's more new features coming there. We come with the sales hub enterprise, which is a good product in that service hub enterprise. So We're expecting that segment to 200 to 2000.
We're expecting it to perform well and to get some really nice traction over time. We're closing some nice deals there. But we're not doing the traditional, Hey, let's go up market and compete with Oracle and SAP and Salesforce and Adobe and a lot of those larger companies, we think the opportunity for HubSpot is in that mid market to build a big, big, big company in the middle. Where those companies are underserved and we want to bring really sophisticated powerful technology to them and make it simple for them to adopt and grow their business.
Yes, understood. That's great. Thanks guys.
Your next question comes from Derrick Wood from Cowen and Company.
Great. Thanks. Kate, as you, I guess, dovetailing on that as you guys focus more on selling your enterprise versions and going up into the mid market, are you finding any shift in invoicing structure? And I guess specifically, are more deals being invoiced annually? And how if so, how should we think about the impact on overall deferred revenue growth?
Yes, we haven't seen a material shift in the composition of our sort of install base of customers around contractor payment terms. I think that frankly stems from the fact that as we're going up market, we're also going down market and so there's a balancing act that's happening.
Okay. And then, curious on your guidance for Q1, it implies about 2 percent sequential growth. And if you look historically, it's typically been a decent amount higher than this. Are there some puts and takes you're considering for Q1 this year that may look different than past years?
Yes, I think there's probably a couple of things to talk about. We're obviously feeling good about our guidance coming off of a strong Q4. And we've taken a very similar approach to guidance, as we have in the past, A couple of things from Q1 from Q4 to Q1. 1 is currency, which we've talked about at length in the prepared remarks. But there is, there's a headwind from Q4 to Q1 on the currency side.
The other thing I've noticed what's happening in the services business we talked about Q4 as being a particularly strong quarter for our not our service hub, but our services business. And we do not expect that to repeat in Q1.
Your next question comes from Stan Zlotsky from Morgan Stanley.
Hi, this is Hamza Fodderwala in for Stan Zlotsky. Thanks Just a couple of quick ones from me. As you move into larger customers, as you talked about earlier, Are you seeing any material changes or elongation in your overall sales cycles? I think what you're seeing inside of HubSpot is up in that 200 to 2000 segment. It's probably getting a hair longer, but in that 2 to 20 segment is probably getting a hair shorter and overall it's staying pretty similar.
Your next question comes from Terry Tillman from SunTrust.
Hey, this is Eric Lemus on for Terry. Thanks for taking the question. Brian, I wanted to touch on something you said in your prepared remarks and on an earlier question, talking about handling the workflow and reporting on the entire experience. So as the product suite starts to progress and you gain more customers more in that enterprise market, Now how important is to have a deeper reporting or analytics types tool? And then as you look at the overall roadmap, how would you would you prioritize reporting and analytics in the future?
Eric, I think it's very important fact, we just had a meeting about that this morning. We were talking all about reporting the analytics. I would say we're good at it. I think there's an opportunity to get great at it and have a lot of value for our customers. We've got a good sized team working on it and we hope to make a bunch of progress in 2019 on it.
I'm glad you asked about that.
Our next question comes from Kirk Materne from Evercore.
Great, thanks.
This is Peter Levine in for Kirk. Just one quick one follow-up here. On you talked about the initiatives on your channel partner. Can you maybe share with us any updates on any notable partners sign that are outside of your traditional marketing agency network. And then for Kate, if you can, can you tell us the percentage of revenue contribution that come from channel partners?
Thanks.
I would say the mix has been shifting over time. And it used to be obviously 100% marketing agencies, website designers, that field consultants, folks like that, More recently, we've signed up a lot of there's a whole slew of companies out there that all they do is implement CRM. System. So we signed up a bunch of those folks. I think we signed up a bunch of folks who implement, G suite and Microsoft Office folks like that a little more technical and Let's see.
And then we've signed up a lot of ISP partners, partners that are building, integrating into our API building extensions on how spot that are pretty interesting. So, yeah, the partner profiles change like HubSpot. We said a few years ago on calls like this, we're shifting from an ask company to a suite company. And we're very much a suite company today and the partner, partner channels have all been alongside us in the probably a half step beyond our direct org, but they're right there. And doing quite well.
There are no further
questions. Just to answer your second question, about 40% of our revenue comes from partners.
Yes, which is flat with where it was in the 3rd quarter.
All right. Thanks everybody for joining the call. Thank you.
This concludes today's conference call. You may now disconnect.