Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I'd like to welcome everyone to the HubSpot Second Quarter Earnings Conference Call. Call. I will now turn the call over to Chuck McGlashing, Director of Investor Relations.
For HubSpot, you may begin your conference.
Thanks, operator. Good afternoon, and welcome to HubSpot's 2nd Quarter 2018 earnings conference call. Today, we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Brian Halligan, our chief executive officer and chairman and Kate Bueker, our Chief Financial Officer. Before we start, I'd like to draw your attention to 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 Act of 1933 is amended, and Section 21E of the Securities Exchange Act of 1934 is 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 3rd fiscal quarter full year 2018. 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 10Q, which was filed with the SEC on May 10th, 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 our of the differences between each non GAAP financial measure and the comparable GAAP financial measure can be found within our second quarter 20 18 earnings press release in the Investor Relations section of our website at hubspot.com. Now it's my pleasure to turn over the call to hubspot's CEO and chairman, Brian Halligan.
Thanks, Chuck, and good afternoon folks. Thanks for joining us today as we review HubSpot's second quarter 2018 earnings results. Let's get right to it. Q2 is another strong quarter with 38% revenue growth, 5% non GAAP operating margins, over 48,000 customers growing 40% from the prior year. Is we're starting to see the fruits of our increased investment in R&D.
R and D is really cranking you now. This time last year, we had a full marketing up, starter, basic, Pro and enterprise additions, and we narrowed toe in the water on sales up just the starter edition. Since then, we've added a sales up professional relaunched Marketing Hub starter with email capabilities, and we launched a brand new third hub with our service hub professional product. Also, this time last year, we had about 80 third party integrations. Today, we have more than 175 integrations either live or in beta, including some major ones like Facebook, Shopify, Slack, and Stripe.
These R and D investments are enabling us to shift our value prop from helping companies generate leads online to helping companies craft a remarkable and complete buying experience with their customers online. Okay. Let me say a couple of things about service subs. It's a very important addition to our lineup. Our approach to product innovation has always been a bit different.
Traditionally, you go out to a prospective customers, to marketers, sales managers, customer support teams, and ask them what they want in need. At HubSpot, we study human behavior, how our customers' customers are changing the way they shop and buy, and then we help companies figure out how to change the way they market and sell to match that. That's what we did products into their own hands. Inbound marketing created a whole new way for growing businesses to get found with useful content at the search box and in the social feed. The internet had opened a giant wormhole of opportunity for companies to generate leads in a whole new way in HubSpot helped those companies go through it.
To date, we see another major shift happening in the way people make purchasing decisions that we believe creates enormous opportunities for small and medium sized businesses. Today, a vendor's customers are the most important source of information for their prospects. Think about it. When you're trying to figure out if a product or services worth buying, what do you do first? You probably go online and read the customer reviews and what customers are saying has a huge impact on your buying More and more, customers, nonvendors, drive the demand.
And in this world, the old funnel model is making less and less sense. Today, you've got to delight your existing customers, turn your best customers into word-of-mouth promoters and leverage them to pull new accounts in. The buying process these days works more like a flywheel than a funnel. And what ultimately spins that flywheel is a seamless delightful customer experience. The more customers you have are who are successful, the more delighted they are, the faster that flywheel turns.
And it feeds on itself. Customers are one of the greatest growth opportunities for companies today in HubSpot's product now enabled set. This flywheel phenomenon is the inspiration behind extending our offering to include service hub. But our service product isn't designed to match the old way humans wanted to interact with companies. It's designed to match the new way, not long ago.
It was just fine to let your customers call, wait on hold for 10 minutes, describe their problem in great detail, not have that problem solved, get transferred, hold again for 10 minutes, describe their problem in great detail again, not have that problem solved, etcetera, etcetera. That just doesn't fly in 2018. Customers want extreme convenience. They expect to be able to go to Google and find the answer. If not there, chat on your site with someone or something to get the answer.
And if all that fails, then they expect to call a clueful human who has the context needed to answer their question on the first try. That's exactly how we designed it. It's got a knowledge base, chat functionality, a ticketing system, a feedback system, all in one that's built right into our IRM system, it's super slick. I was talking to one of our customers, Jennifer Linerhan, a VP at Mendaxo, a fast growing M and A offers a service company here in Boston, who says the relationship between customer delight and word-of-mouth referrals is central to their growth playbook. She goes on to say, our typical customer is Type A.
They wanna move fast. They have no time for anything. And like anyone, they get impatient with repeating the same information twice. For example, take their goals. The customer shares them in great detail with their sales rep during the sales process, doesn't want to have another conversation later with one of the customer success managers about those goals.
With the HubSpot platform, our customer service manager are able to easily reference the goals and any other pertinent information that we set forth early in the conversation with customers, which is incredibly important for building trust. Now, Jen goes on to say, right now, we're in a phase where we're seeing a lot of blue ocean opportunity, lots of new accounts, However, our plan is to grow seat numbers by 10 x once we get a customer on board, which occurs largely from internal word-of-mouth referrals. As such, we expect our revenue mix to shift over time with the majority of our growth is coming from existing accounts. What's more, the M and A business is fairly incestuous with lots of people moving around within the industry and people maintain relationships across company a word-of-mouth is a critical factor in how we attract new businesses. I wanna thank Jen and the Medaxo team for being a HubSpot customer since 2015 and also for being one of the first customers to adopt service up.
You can see how the customer success team is already making use of to complete their flywheel so that existing customers are fueling new sales within accounts and in new accounts as well. The Naxos growth is aligned with the modern way buyers learn and make buying decisions through word-of-mouth. We think this is an inflection point just like inbound was an inflection point. Back then, we weren't the only ones to have figured it out. People were using blogging tools, doing SEO, email automation, but we were the leader in bringing all of these tools together in an all in one marketing system for SMBs.
We're also not the first ones to figure out the customers of the true engine of growth for companies as we scale. People have been cobbling together disparate tools to improve customer service experiences for a while, but the HubSpot gross suite is built specifically for SMBs and it's seamlessly tied to your sales and marketing data to give all your customer facing reps unparalleled context. Really, really great stuff. Our mesh and I are incredibly proud of what the HubSpot team has built over the last year, and there's a lot more to come. Speaking of more to come, I encourage all of you to join us the 1st week of September for our 2018 inbound and Analyst Day here in Boston on September 5th.
We have some great presentations focused on our business during the Analyst Day Purge portion. We have some amazing speakers from great companies like LinkedIn, Facebook, Google, Microsoft, Amazon, and Stripe. Inbound 2018 is going to be our best year yet I hope to see you all there. Okay. With that, I want to end by welcoming Kate Bueker to the HubSpot team.
As many of you know, Kate joined us in June as our new Chief Financial Officer of replacing John Kinzer. Kate brings almost 25 years of financial and operational experience to HubSpot She's a rare financial leader with a proven track record of helping businesses scale and deliver results and confidence that her extensive experience will help us take spot to the next level. Really excited to have Kate aboard. Welcome, Kate. Now I'll turn it over to you to go through the financials in our guidance.
Thank you for the warm welcome, Brian. I'm thrilled to be a part of the HubSpot team. Before we get into the financial, I wanted to start by thanking Well, and I'm grow better. Okay. Let's turn to our 2nd quarter financial results and our guidance for the third quarter.
Overall, we're pleased with the strength of our 2nd quarter results. As Brian highlighted, we delivered strong revenue growth over $5,000,000 of free cash flow 2nd quarter revenue grew 38%, driven by 38% subscription revenue growth and 27% services growth. Foreign exchange continued to be a tailwind to revenue in Q2, and revenue growth in constant currency was 34%. HubSpot ended the quarter with 40 came in at $10,004, which was down 2% year over year and flat to Q1 levels. International performance continued to be strong in Q2, with international revenue growth of 61% year over year, or 51% in constant currency.
International revenue represented 37% of total revenue in Q2, up one point from last quarter. Deferred revenue as of the end of June was $153,800,000, a 38% increase year over year, while calculated billings, defined as revenue, plus the change in deferred revenue, was 120 $5,600,000, up 32% from Q2 of last year. It's important to note that currency movements within the quarter resulted in a headwind in currency revenue change rates as well as changes to billing terms, product mix, or the timing of revenue recognition versus billing. We continue to expect billings growth and revenue growth to generally track in line over the long term. The remainder of my comments will refer to non GAAP measures.
2nd quarter gross margin was 81% in consistent with Q1 and up 1 point year over year. Subscription gross margin was 86%. Also consistent with Q1 percent, down two points year over year. 2nd quarter operating margin was 5.3%, an increase of 2.5 points year over year and flat to Q1 operating margin. As Brian mentioned, we continue to make significant R and D investments across our suite of products and believe that investments we're making today will help to lay a strong foundation for future growth.
At the end of the second quarter, we had 2441 employees, up 37% year over year. We had another strong quarter of hiring coupled with continued lower than expected attrition, which positions us well to execute on our growth plans. CapEx, including capitalized software, was $8,300,000 in the quarter. We still expect CapEx as a percentage of revenue to average $4,000,000 or $0.18 of earnings per diluted share. With that, let's dive into guidance for the third quarter of 2018.
Total revenue is expected to be Non GAAP per share is expected to the point 8 to $498,800,000, up from our previous guidance of $489,000,000 to $492,000,000. Non GAAP operating profit is expected to be between $24,300,000 up from our previous $6.3 $0.67. This assumes approximately 42,500,000 fully diluted shares outstanding. With the strong performance in the 2nd quarter free cash flow, we now expect full year free cash flow to be between $34,000,000 $35,000,000. As you adjust your models for 2018, keep in mind the following.
As Brian mentioned, we will be holding our 2018 inbound event during the third quarter of this year and anticipate it will have 3 points of negative impact to the third quarter operating margins. In addition, we would expect free cash flow to be breakeven slightly positive in a strong quarter for free cash flow. At current spot rates, currency would be neutral to Q3 year over year revenue growth, and a modest headwind to revenue growth in Q4. Given the increase in our stock price the dilution from our convertible bond and the associated warrant we're now forecasting a fully diluted share count of 42,500,000 shares for the year. With that said, we still expect our stock based compensation expense will continue to impact noncash interest expense, which The expense will results.
To close, well for the future. With that, I'll hand the call back over to Brian for his closing remarks. Brian?
Thanks Kate. And again, welcome aboard. I think you're joining HubSpot at a great time. We've got a pretty good flywheel spinning rate now. Success customers are making it easier than ever to attract even more customers.
Energized employees are making it easier than ever to attract even more quality employees and a rock solid technology basis making it easier than ever to deliver new solutions. Sometimes people ask me if I yearn for those good old startup days, And I say absolutely not. Kate, these are the good old days right now. With that in mind, I want to close by thanking our customers, our partners, our investors, and all the hub spotters around the globe are helping us with our mission to help millions of organizations grow better. Operator, can we please open the call for
Your first question comes from Richard Davis from Canaccord.
Brian, last year, I thought you made a good point at inbound in which you kind of explained that saying no to a project is almost as important as saying yes. Kind of what are some of the things that you've kind of said no to or at least postponed? That would be
helpful. Yeah. We say no to lots of things all the time. In fact, our mission I have an unlimited number of potential projects you could possibly imagine the number of projects in our head that we would love to do But, you know, there's only a certain amount of resources going around, but lots and lots of ideas, for example, for new homes lots of lots of ideas for new opportunities for go to market motions, lots and lots of ideas for what we can do with the platform. We both feel like HubSpot is still in the very early days of its development.
And, you know, the stuff in our head, it's still very early in what we think we can do for our customers in the market. So there's a lot to know going along here at HubSpot, Richard.
That's good. You're doing well otherwise, but I appreciate that. Thanks.
Your next question comes from Bhavan Suri from William Blair.
Thanks and a good quarter there. Just and I apologize for background noise, but just to follow-up on Rich's question a little bit more. You've chosen to make investments in growth and product growth in lots of street areas. So think about the sales motion, think about the customer hub motion, guess I just have to understand is my first question. Just, you know, as you think about sales, marketing inbound, customer support, all those lines are blurring, and you have competitors out there.
What are you seeing either today in competition or in competitive response to your approach to say, hey. We should pull these things together, which makes a ton of sense, but, you know, you have large competitors, small competitors. I'd love to understand what you're seeing in the competitive environment.
Sure. That's an awesome question. If I kind of roll the clock back to why we started the company, we saw a big opportunity to help companies change the way they market to match the way people shop for stuff. In the early, really the 1st 8 years of HubSpot were around do we help companies generate a lead? And there was a big arbitrage opportunity there, and we did really well.
We feel like the new arbitrage opportunity for companies these days is how do you create a delightful end to end And I think of myself like this morning, I woke up on my Casper mattress and then it reached over and I put my Warby Parker glasses on and then I grabbed my iPhone and I put on Spotify and listed some music. And then I went in and shave with my Dollar Shave Club razor. And then I put my trunk club clothes on, and then he took an Uber to the office All of those companies are winning and disrupting their industries with delightful end to end beautiful customer experience. And so HubSpot, part of the reason our R and D investments have gone up and part of the reason I think we're going to really have a long durable growth path here. Is we're going to solve a problem that's a big, big opportunity for our customers to improve the way they go to market and they go to market motion.
So that's kind of what's going on. In terms of competitors, the main competitors really, gosh, I got to glue all kinds of applications together. There's a company out there called blissfully, the the number of applications companies use in your average mid market company has 35 different apps that they glue together to try to try to create one of those experiences. It's exceptionally difficult to do. We create sort of the all in one experience and everything works together And the offering is pretty unique in the marketplace.
And so the competitive environment has been pretty good. I feel like we're winning lots of deals and lots of growth to come.
That's really helpful. I mean, you know, the funny thing is, is you see a bunch of your competitors comment on Warby Barker and a bunch of the same guys. And, and then you think about sort of like that world and the interesting question ultimately will be how many more are left, right? So so I wake up in the morning and there's, you know, 99,000 of these companies. And then in in 5 years, there's 5000 companies.
It'll be interesting to see how it plays out. I guess, I guess, my question second question, my follow-up is like about cross sell. So obviously, you guys have a reasonably unique model, even compared to competitors about how you leverage their partners, whether it's agencies, digital partners, etcetera. I'd love to just get some color on the cross sell, especially for CRM, which seems to be doing quite well. And the move up market.
What you're seeing out there, from your partners for the CRM product? And then, and then couple of that sort of the move up with CRM, which may not be possible in the core marketing inbound offering, but certainly it's possible in the CRM offering. Just some color there would be great. Thank you.
Sure. I actually just back to your first point. I think the opportunity left, a lot of these consumer industries have been transformed. The B2B world is still very much marketing and selling in the same way they did 4 or 5 years ago. So the opportunity we see the next big wave is how do we help mere mortal B2B companies with 50, 100 employees transform their go to market and their customer experience to match the way people actually shop and buy today.
So feel like it's super early innings for B2B and that the lessons learned from B2C are very applicable. In terms of partners, partner channel is doing great. We've got I don't think we've updated them, but at least 3000, partners these days. Most of the partners started as marketing agencies. We're recently starting to sign up more IT partners, CRM partners, sales partners, so feeling good about that channel going forward.
Great. Thank you guys. Congrats and thanks for taking my questions. Okay.
Your next question comes from Brad Sills from Bank of America.
I just wanted to ask, now that the service hubs out, you have you've had sales hub out for quite some time with CRM, are you starting to see larger organizations within your target range of 20 to 2000 employee size companies? Are you starting to see more activity from the higher end of that in kind of departmental sales now that you have a full end to end suite and others still work be done in rounding it out, but with the components that you've added more recently.
Hey, Brad. I'll take it to Brian. I would say in the sales hub side, we started out with a sales hub starter product Mostly startups were buying that and they were doing pretty well with it. Over time, we enhanced it in the last, I think it's November, October. I can't remember.
We came out with sales are professional. We're starting to move up to slightly larger companies there and departments of bigger companies in slightly larger seat commitments there. Service hub's still early, but I think it'll follow a similar trajectory that the sales have followed. And our focus sort of one of the things I like about HubSpot is prolural products. That's sort of our bread and butter.
It's a great fit for a company between, call it, 10 employees and a couple of 100 employees. That starter product is 5 to 25 and overlaps a little. The enterprise product maybe 100 to 1000 overlaps a little in there. And there's been a ton of optimization around the middle, a little bit of optimization on the bottom, lot more room to go and a lot of room to optimize on the top. So we feel like it's still pretty early days, particularly on the sales hub and the service hub.
Great. Thanks, Brian. And there's been some focus on GDPR potential impact. And I know heading into the quarter, you guys were saying, small impact expected. If you could talk a little bit about how you saw that play out during the quarter, if that
would be helpful, please. Thank you so much.
Yes, we were we weren't sure exactly how it would play out. To be very honest with you. And on the top line, it really didn't have much impact. And my theory on that is twofold. 1, most of our customers really do inbound marketing, right?
Instead of buying a list and cold calling, people are buying a list and spamming people, which is a real no no at gd you know, they pull leads in in a very inboundy way. So inbound and GDPR, you know, they're friends. The second thing is g d p the way the g d GDPR language was set up is if you have a list of contacts that's less than two years old, you're in good shape. It's the older contacts that you've never touched and the vast majority of our European customers are less than two years old. So It was barely any noise on the top line in terms of GDPR.
We actually saw a little bit of noise more on the bottom line. You want to talk about that, Kate?
Sure. We did see some modest COGS spend in the quarter as we came into compliance with GDPR. You could see sort of a modest compression in our product gross margin in Q2. A little bit of that will linger into Q3 and we think we'll be back on track by Q4.
Excellent. Thanks guys.
Your next question comes from Mark Murphy from JP Morgan.
Yes, thank you. I'll add my congrats and a warm welcome to Kate. So first off, I wanted to start off, just any any commentary on ServiceHub in terms of bookings or billings in Q2 or performance versus what you expected? Anything either qualitative or quantitative, that would help us understand a little deeper level, the the trend line for service hub?
Going well. Came out and the reps were psyched about it and the customers were psyched about it. We sold more than we expected to right out of the gate. Going really, really well. And the product's early, but good.
That product's gonna get a lot better. One of the things we've done at HubSpot and one of the uses of proceeds on the R and D side is back last about a year ago or even earlier. On the underlying platform of HubSpot, we did a very careful job of creating a layer of services for email, a layer of services for social, for search, for web pages and whatnot. And so when we built this new hub, service hub, we're able to assemble those in a very clever way and move relatively quickly. And so the product, what's nice about that is it rhymes so well with the sales hub and rhymes so well with the marketing hub.
User interface is the same. There's one view of the customer in there and everyone's on the same page. So it's early, but it it did pretty well, right out of the gate and that product is going to get a lot better. I think it's going to be, I think it'll be similar to the sales hub. It started out as, you know, it sat it starts slow and it builds, it takes a while, but I think that's going to be a big business for us.
Okay. And just as a
quick follow-up, Going back to Brad's question on GDPR, would you look back on it at this point and say that the GDPR risk factor or risk point is essentially behind us now? I mean, in other words, it came and when without much impact and you, you, you sort of understand it, it's in the rearview mirror, or would you say that, well, it's it's sort of fading off as a risk, or or is it somehow kind of still to be determined in your eyes? What'll what'll ultimately happen as a result of GDPR?
Yeah, I think it's large, the European side of it, there's some new legislation that's going to come on board around privacy, but it's basically It's basically in the rearview mirror in terms of risk in Europe.
I think the nature of GDPR
could find its way. And I kind of hope it finds its way into the United States. There's some legislation, in California that is a little bit similar to GDPR and then if it passes, we go into place in 2020. But I don't think we'll have a big impact from it, if it happens, I would say it's largely in our rearview mirror. It was close to a non event for it.
It costs us a little more in COGS, but almost a non event.
Okay, excellent. Thank you very much.
Your next question comes from Stan Klonsky from Morgan Stanley.
Perfect. Thank you so much. And maybe just to follow-up on the question that we just got on the service hub. Maybe just a slightly different way of thinking about it. You've had another quarter of talking to partners about service hub and the overall selling motion for the service hub.
What kind of feedback are you getting from your partners? And as much as you're already starting to see some early traction with the product, Is that coming through partners, or is that coming through more direct directly through your inside sales reps? And then I have a quick follow-up.
Yep. That's a really good question. I think it will it it it the the course of it will rhyme with the way Sales Hub works. So when Sales Hub came out of the gate, it was mostly most of the revenue was coming from the direct sales force. It took the agency channel a little bit longer to pick it up Now they're starting to sell it pretty well.
Same type of thing is happening with service of the direct side. Comes out of the gate a little bit more quickly. And then the agency side will pick it up. The agency business is interesting. Most of the agencies we have were started as marketing agency.
And Some of them are delighted to come into the sales business, the service business in the end to end customer experience business others just want to stick to their knitting and marketing. And so it's starting out of the gate a little bit more towards, direct, but I think it'll shift over time. Feedback I'm getting from customers in the rep is they're liking it aloud. They like a couple of things. One is instead of having to go out and buy a knowledge base and buy a ticketing system and buying an SEO tool and buying, net promoters scores surveys and 4 or 5 different applications you have to glue together, it all comes in 1.
The second thing they like is it's completely it's not integrated in. It's same basic database, same view as the customer that, that you get whether you're in marketing or sales and service. So if a service person gets on the phone with somebody, And damn, they have all the context of why did this person buy? What type of marketing campaigns do they go on when the salesperson gets on the phone? Oh, how many tickets do they have open?
All of that stuff it's not syncing back. It's the same data. And that seems to be the magic. I think overall, the way the industry will go, this is my prediction, is more and more companies will buy the whole thing together, just like you don't use Gmail with Outlook calendar, you buy all of Outlook or you buy all of Google services. I think more and more companies over the long haul will decide.
All this stuff belongs together just like the office productivity stuff, and they're going to buy it from one vendor. And the big value of it is having it all together.
That makes a lot of sense. Thank you, Brian. And maybe just a quick housekeeping item What was the revenue retention rate in the quarter versus the commentary that we heard in Q1 of it being somewhere in the high 90s?
Yes. So I think that you've heard, the team say that we expect that revenue retention is going to bounce around from quarter to quarter. And that sort of not to focus so much on the number within a specific quarter. We did actually happily revenue retention come back above 100% in Q2. That was driven both by increases in customer dollar retention as well as an improvement in our up sell rate, specifically our cross sell rate You know, we're gonna continue to see that bounce around from 1 quarter to the next, but we do believe that we can, over the long term, keep revenue retention sort of at that 100 plus.
Perfect. Thank you so much. That's it for me.
Your next question comes from Ross MacMillan from RBC Capital Markets.
Thanks so
much and my welcome Kate as well. First question just for Brian, I was just curious, you've introduced the Marketing Hub starter, which is a different SKU relative to the marketing starter product. I wondered if you could just maybe talk about the differences and then on what the intent is with that product? Why did you introduce that marketing hub starter product? Thanks.
Great, Ross. Good to hear from you. There's a bunch of little enhancements to happen to it, but the Walker 1 is we added email marketing to the product. And We added a new email editor in the product that is really slick and really easy to use. Marketing Hub starter, like a lot of our products, we put them out there, And we're like a lot of software companies like Google and others where it's early and then we iterate and make it better over time.
This was a huge step function iteration in this product to make it much, much better. And it just came out a couple of weeks ago, but we are selling a lot more of the marketing starter than we were before. And the price point is higher than the marketing starter before. The theory behind why are we playing this game down to the starter level? The reason we want to do this is what we imagine is, let's say, Ross, you go out and start a company with one of your friends and you're getting going and you say, boy, I need I need a lightweight easy way to start doing email marketing and putting forms on my side.
We want you to start with HubSpot and start with starter and move to basic and pro and to price. You want to kind of get you early and grow. It's a little bit like AWS, so they do their business. They start you very early and they scale up with you. What we haven't traditionally had is that entry point.
We haven't had that starter layer. Over the last year, we add in that starter layer. And I think that's going to pay huge dividends for us. That's helpful. Thank you.
And then just not so much a DDBR question for Kate, but just maybe an international growth question. I think I have international growth that 67% in Q1. I think there was a benefit from FX. So it was maybe something like 63 or so constant currency. And then this quarter, it's down to 51.
So is that just, I don't know, like a law of large numbers that that business is just decelerating to that degree now? Or were there any other sort of puts and takes on the international revenue growth Thanks.
Yes. So we did see a big, FX headwind on international, but I think your numbers are a little bit off. So let me make sure that we correct them. Our as reported growth for our international business this quarter was 61%, and that is down from 67. Our as our constant currency growth is 51, but that's down from 54.
So it's really a 3 point to acceleration in international and roughly half of what you're seeing on an as reported basis is the impact of FX.
Understood. Thanks for the clarification. Congrats.
Your next question comes from Tom Rodich from Stifel.
Hi, it's actually Parker Lane in for Tom. As we look at your professional services line in the last three quarters, it's sort of accelerated and a bit a bit more of a contribution than it has last couple of years. I'm wondering if that is related primarily to the fact that you're relying on the channel a little bit less for your newer products or if there's any other puts and takes there we should, be aware of.
There's not a lot of I don't have a lot of commentary on that. It may be because we more of our sales professional customers or buying professional services, something like that?
Yeah. One of the other things that that's a good question. 2
Parker is that professional services gets a bump into the first quarter, just given that the fourth quarter tends to be our seasonally strongest quarter of the year. So we'll see the services attached to marketing. But at the end of the day, it's sub-five percent of overall revenue. And frankly speaking, it's a item and a division that we use to support our subscription growth.
Yeah.
So it's not something we're necessarily trying to grow a lot. One of the traps, a lot of is interesting when we first started HubSpot, we had a board member, a really good guy who was very successful guy, but at one point in his career, he had started a marketing software company. And he gave us some great advice. He said the trap that all these startups and marketing fail on is they end up turning into professional services companies and their outsourced. And he said, build your software company, make the software easy to use, teach people how to use it, build a channel around it, and we've stuck to that.
And I think that's been a was some very good advice we got in the early days of HubSpot.
Yeah, it makes sense. And then as sales start to mature and customer hub into the picture as well. Are you seeing any improvement in the motion of selling into the marketing product, selling the sales customers on the existing marketing suite in any way shape or form?
Yes, we're starting to get better at it. It's slowly but truly getting better. What we're really good at, better than I expected is selling both upfront. And I think it's a little bit like I was talking about before. Either you're kind of an outlook person or your Gmail person.
I think more and more companies are making that call like, hey, HubSpot's our go to market partner. We're gonna buy the whole suite. That's gone very, very well and the percentage of our businesses coming from the growth suite is really encouraging these days. Great. Thank you.
Your next question comes from Alexander from Piper Jaffray.
Hey guys, thanks for taking my question. I guess if I step back for a second, if I look at customer growth, which has been trending north of 40% here for quite some time and ASPs down a few percentage points. But I guess I wanna get a sense for, are we kind of basing now at 10,000, from an average subscription perspective? Or do you see that going lower? And then as you look at the second half of the year and maybe beyond, do you is that 40 plus percent number sustainable in your mind and as service subtraction and sales subtraction continue to ramp, do we go higher?
And then I've got one small follow-up.
Okay. That's a great question, Alex. I'll take, I'll start and maybe get out on. Those two numbers are going to be hard to pin down for all of you analysts. And and and I'm not trying to be evasive.
It's just there's kind of pushes in pulls on them, and it's going to be a little bit hard to predict what they do. For example, last quarter, we came out with service hub. And it's professional edition product that we charge $400 a month for. And so that has one action on both of those numbers, like more of that was cross sell, let's say. And there's a little bit of ASRPC lift from that.
This quarter, We've got a new $50 to $100 marketing hub starter product. The volumes on that are very big. But that's going to push down ASRPC. And if I were you, I would assume we're not done releasing these additions. There'll be more of these and some are going to push and some are going to pull.
And so when I look at the business personally, I look at those numbers. I try not to get too wrapped around wrapped around on the axle, but I'm looking at is that revenue continuing to grow at a high rate? Can we keep that high rate of revenue growing? What can we do to do that? Can we keep the earnings growing at a steady rate on the bottom line?
I try not to get too wrapped up about those two numbers because they're going to be very hard to predict.
Yes. The only point I would add on top of that is that as we release products that timeline for the impact on those 2 metrics is very different, right? So, the customer count is going to have a more immediate impact, but ASR will sort of take a while, just given the SaaS business.
And then maybe just a quick follow-up on the bottom line. If you think about some of the moves you guys have made and talked about more of a self-service frictionless sales motion. If I look at sales and marketing as a percentage of revenue, it seems to increase sequentially. And I'm curious kind of what the progress has been on that initiative, how successful been and kind of how we should see sales and marketing as a percentage of revenue trend obviously beyond the third quarter where it's has the impact from inbound.
Yes. I think that we, you know, we have talked a lot about where we think the sales and marketing as a percent of Ravi percentage of revenue will go over time. And we still think that's the place where we're going to get the leverage, over time. We did see it step back a little bit in Q2, but we still think the long term trajectory there is the right one.
Yeah, I would pile on. We, we, we're making a lot of R and D investments in and we think they're going to pay off. We're starting to see really good responses to some of the products releases, more stuff to come. And I think we can get nice leverage on that sales line over time. I agree with you on that.
And if I could sneak one in just on growth stat customers, is it possible to get a sense for your subscription dollar retention rate that you're seeing on the growth stack customers? Is it playing out that the upsell and retention there is a lot higher as they adopt both products and then any high level commentary on the growth rate of growth stock customers year over year?
Yes, I can start with the retention and then you can talk about the growth rate you know, we do continue we don't give a specific number on the retention for growth for the growth stack customers, but we do we continue to see that retention sort of above, single product customers.
Yeah. That really, I mean, yeah, it's better. It's been going well. Those customers stickier and happier and the word-of-mouth better with them. And we're really good at selling them upfront.
I still think we have work to do on getting good at selling one product and then selling the other one in after. And it's an ongoing effort, and we've got some stuff in place that we're working on there. But I think that's the future for HubSpot. How do you get them in early? How do you get them in a starter?
And then how do you sell them the whole suite? And then how do you grow with them? I think I think that play is gonna work.
Great. Thank you guys.
Your next question comes from Terry Tillman from SunTrust.
This is Eric Lemus on for Terry. Thanks for taking the question. I just had one on Service Hub. Correct me if I'm wrong, but Brian, I believe you said in your prepared remarks that service hub was actually being sold to some net new customers, you know, if if that is right, you know, is that an opportunity for you guys to actually lead on a new deal with ServiceHub? And if those are net new customers, are they the same profile as your historical type customers?
Yeah, that's a great question. Most of the ones that are buying service hub only are part of a very large pool of free CRM users of ours already and they're using the CRM. And what they would do historically is that buy our sales product, and kind of try to manage the customer relationships in there, but now we've got a natural fit for them where they're going in and they're using the ticketing system and whatnot. I think much of the revenue in the short term will be cross sell on that, but over the long haul I hope it looks a lot like the sales business where there's as much of the business coming from the sales product that are net new dollars to our platform as our cross to our platform. We hope to make it such a good product and people start there.
That's great color. Thank you.
Your next question comes from Jesse Helsing from Goldman Sachs. Yeah.
Hey, guys.
Thank you. I had a question
about partners. I'm wondering, Brian, what the strategy is with these newer products and getting the partners the channel involved and how that's going? Are you using the same partners to sell ServiceHub as an example, or you going and recruiting new ones. What's the approach there?
Yes,
that's a great question. If I think about our agency partners we have today, they split some of them just stick to their knitting and marketing and some move to sell the full customer experience sweet and they're both doing fine and we give them the choice. So of course, we give them a little nudge that we hope to hope they'll come on the journey with sell the whole thing, but we don't make them do that. There's another initiative underway inside of HubSpot to sign up new types partners, not marketing agencies or web development agencies, but IT companies, that go do implementations of software CRM implementer sales coaches, there's a swath of new opportunity for us on the agency side. There's a project ongoing.
It's starting to go pretty well. We're starting to sign up different types of agencies. I think it's a good opportunity for us.
Got you. Thanks. And a follow-up on, on, I think it was Alex's question around customer growth If I look at net adds, year over year, they grew about 4% by my calculation versus 5 ish, I think, last quarter. I guess maybe I would expect that adds growth to pick up a little bit with all these new products. Is there do you expect to start to happen as you introduce more and more of these different types of packaging options and skews to market?
It might the the marketing starter, has gone really well this month. So that might you might see some of that. You've got to like I said, you got puts and takes. Your marketing starter is going to be a tailwind to that number where there's gonna be lots of lots of customers. But then we're trying to really get good across selling the existing customers.
So that's just a tough number to to use as a proxy for for how well we're doing. There'll be puts and takes over time. Over time, I expect that number of net new customers, though. Over the long haul to grow.
Your next question comes from Jennifer Lowe from UBS.
Great. Thank you. I wanted to follow-up just on the net dollar retention rate. And I there was a comment that it continued to to do, or to tick back above 100. And the piece that was doing really well there was upselling in particular cross sell.
And I know, I think Brian, you mentioned that it was a little bit better selling marketing into the sales customer base. Is that it or were there other cross sell opportunities that seem to have done a bit better this quarter? And is it potentially durable going forward that you just have those figured out a bit better now?
The the other one is we sold ServiceHub into, into a fair amount of our marketing and sales customers that helped as well. I think I agree with Kate. I think that number bounces around. It for example, a good example of that is marketing hub starter. I expect that's not going to be a north of 100% retention business in and of itself, although there will be lots of cross sell opportunity with that.
But I would expect the customer dollar retention on that to be below, for example, the normal customers. And there's gonna be puts and takes that that push that above and below a 100%. Again, I think over the long, long haul, the business runs at over 100%. But I think it'll bounce around a little bit as we as we announce these new products and some pull it up and some push it down.
Great. And maybe just one more quick one. You know, as you, I, and so I think we've just touched on this a little bit, but I think earlier you talked about bringing in key partners and other partners sort of outside the traditional agency base. Where is that initiative at this point? And what are sort of the opportunities think those partners can get you into that, that the agency partners and your direct efforts couldn't?
I would say it's the bottom of the first inning. There's a team of 6 or 7 people working on it. And there's a lot of them. For example, sales coaches, there's 20,000 different companies in the United States. Most of them are bespoke little companies that do sales coaching.
There's many, many CRM implementers in the United States. There are tens of thousands of companies that implement Microsoft products or implement G Suite inside of companies. So it's it's sort of we're pivoting our approach to try to, try to attract some of those folks. And early results are pretty good on it. We expanded team a bunch at the beginning of this year and it's going to get more resources.
Your next question comes from Brian Peterson from Raymond James.
Hi guys Kevin here on for Brian. Thanks for taking my call. It looks like there's a little bit of incremental expense in the third quarter that's pressuring the amount of leverage I would have expected. Can you talk about what's going on there?
Sure. Why don't I? I'll take that one. I think you heard both Brian and I talk about the fact that we've had really strong hiring in the couple of quarters, particularly on the R and D side, coupled with a really, very low attrition across the company. We think it sets us up really well for the second half of the year and moving into 2019.
But it obviously puts a little bit of pressure on Q3 expenses. And then there are a couple of other items in Q3 that are, put a little bit of pressure on expenses. Inbound is obviously a Q3 item. And there are three points of, pressure on margins due to inbound. And then we talked briefly about the lingering impact on the product COGS associated with GDPR.
We think Q4 looks good, looks really strong from a profitability perspective. And so that gave us the confidence to bring up the full year number.
Your next question comes from Kirk Materne from Evercore
Great, thanks. This is actually Peter Levine in for Kirk. I'm sorry if I missed it, but can you tell me where the U. S. Or North America growth was in the quarter?
And as you look at your international opportunity, what do you think the level of maturity is for marketing automation is today versus where the U. S.
Yeah. I'll take the first part. U. S. Growth was flat, at 27 flat to prior quarter at 27%.
I think it's probably less penetrated internationally than it is in the United States, but I think it's early on on on both. There's lots and lots of opportunity out there for both, but it's probably a little earlier in the cycle on international.
Your next question comes from Brent Bracelin from KeyBanc.
Thanks for taking the question here. One quick one for Brian on sales hub follow-up for Kate on sales hub, Brian. Obviously, we're early days, you think longer term, we're going to go to the bundle, but Could you give us a sense on, what's driving the sales hub growth this quarter, kind of the mix between net new lands versus cross selling. Has there been any sort of shift this quarter on that mix?
I think the big shift that's happened over the course of the last year is sales hub professional products. So the sales hub starter was good product. It was relatively simple. SalesUp Professional is much richer. It's got automation in there.
And so slightly bigger companies are buying it with more seats buying couple seats and then buying more. And so the ASP is definitely way, way up year over year on that sales hub product. The nice thing about the going up as the sales reps are excited about it inside of HubSpot and they're out there pushing it and selling it. They're starting to use that product and really understand it. And so that product line's gone exceptionally well for us.
We're really happy with it. We think it can be a ginormous business for us over time. We're hoping, we can execute the same land service up.
Your next question comes from Derrick Witt from Cowen and Company.
Great. Thanks. I wanted to touch back on retention. And now that the original Marketing Starter product has been in the market and been in your metrics for over a year. I mean, given this is targeted at the low end and I presume the mix has been rising, how has that impacted your overall customer or dollar churn rates?
It's been a moment to take this.
Yes, I'll
start and you can add. It's been pretty the Marketing Starter product was okay. And there weren't it wasn't a huge chunk of revenue or a huge number of customers. There's a material uplift in both the revenue and the customers from that product since we announced it a couple of weeks ago. A material uplift.
And so that's why I keep talking about it. I do think, what's interesting about it is there's a lot more of these marketing starter customers coming in. And they're spending more per customer coming in. And so I think it's going to impact some of the ASRPC numbers and some of the total customer account numbers in interesting ways. They're a little bit hard to predict right now, but overall, I think it's going to be a very healthy business.
The retention rates for the customers historically who bought marketing up starter, weren't great, quite honestly. I think the retention rates on the new cohorts of the new much more powerful marketing Hub starter going to be much better. It's not something a lot of people are talking about, but I think it's going to have a nice impact strategically for us over a long, long period of time.
There are no further questions at this time. I will turn the call back over to the presenter.
I hope everyone comes to inbound. We look forward to seeing you there. It's going to be a great event and thanks for joining us today.
This concludes today's conference. You may now disconnect.