HubSpot reported a solid 23% year-over-year revenue growth in constant currency, with operating margin growth of 120 basis points, driving the operating margin to 15%.
Total customer growth was 22% year-over-year, reaching over 215,000 customers globally, with over 11,700 net customer additions in the quarter.
Product and Strategy Updates
Significant growth in Starter customer additions and continued strength in Sales Hub and multi-hub usage.
Introduction of new features in Sales Hub, including a new prospecting workspace and advanced sequences.
Enhancements to Smart CRM capabilities, such as UI customization, broader governance, permissions, and integrations like LinkedIn Sales Navigator sync.
Over 35% of Pro+ customers are now using 3 or more hubs, indicating room for growth and innovation.
Market and Demand Insights
After strong Q4, demand weakened in Q1, similar to 2023, with increased budget scrutiny and decision-making processes.
Shift in lead flows from high-quality inbound and partner-sourced leads to lower quality rep-sourced leads, affecting deal progression.
Despite challenges, customer dollar retention remained high in the 80s.
Pricing and Seats Model Change
Introduction of a new pricing model based on seats in early March to reduce entry-level pricing friction and encourage upgrades.
Initial impact of the seats model change led to lower ASPs but slower volume growth in new customers, with positive trends emerging in April.
Product Innovation and AI Integration
HubSpot’s commitment to innovation highlighted by the launch of over 100 new product features, including 70 AI features during the Spring Spotlight.
Introduction of Content Hub, Service Hub innovations, and extensive AI-powered features across the platform.
AI adoption continues to rise, with over 50% of enterprise and 25% of Pro portals using AI features.
Financial Outlook and Guidance
Q1 2024 revenue grew 23% year-over-year, with subscription revenue also up 23%. International revenue now represents 47% of total revenue.
Net customer additions expected to remain around 10,000 per quarter throughout 2024, with average subscription revenue per customer (ASRPC) slightly down in constant currency.
Net revenue retention was 101%, or 102% excluding Clearbit impact.
Q2 2024 revenue expected to be in the range of $617 million to $619 million, with full-year 2024 revenue projected to be between $2.55 billion and $2.56 billion.
Operational Adjustments and Error Correction
Discovery of a $14 million overstatement in subscription cost of goods sold since Q4 2021 due to a calculation error, resulting in a $2 million operating income adjustment for Q1 2024.
Question and Answer
HubSpot’s Durable Growth and Market Dynamics
Question
How much of HubSpot’s healthy growth is due to larger customers offsetting SMB weakness, and can market share gains in the 500 to 5,000 employee segment continue driving growth?
Answer
HubSpot is experiencing cautious strength in both the lower and upper segments of its customer base, with customers in the lower segment benefitting from reduced friction, lower prices, and increased value, while those in the upper segment prioritize time to value and faster onboarding.
The company’s platform approach and focus on innovation, particularly in AI, are driving durable growth across all segments.
Buyer Urgency and Behavior Dynamics
Question
Can you provide insights into the underlying drivers of buyer urgency, particularly the quick oscillation observed in December and Q1, and how buyer behavior in Q1 compares to a year ago when interest rates and inflation were a concern?
Answer
Q1 exhibited a cautious buying environment characterized by tight budgets, more decision-makers, increased meetings and demos, and a higher incidence of proof of concepts before purchase decisions.
This behavior is consistent with the caution observed throughout 2023, suggesting that December’s dynamics were more of an anomaly.
HubSpot’s strategy of focusing on communicating business value, platform consolidation, and a product roadmap with continuous innovation remains effective in addressing customer needs amidst the fluctuating environment.
Macro vs. Micro Dynamics and Clearbit Contribution
Question
Can you elaborate on the impact of macroeconomic factors versus pricing changes on buying urgency, sales cycles, and proof of concepts, and provide further details on Clearbit’s contribution to revenue and billings in the quarter?
Answer
The introduction of the new seat-based pricing model in March led to a faster adoption by customers, resulting in a steeper decline in average selling prices (ASPs) than anticipated.
Clearbit contributed approximately 1.5 points to revenue and billings growth in Q1, with an expected full-year contribution of approximately 1 point.
Full-Year Guidance and Macro Environment
Question
Given the potential worsening of the macro environment, how should we interpret the company’s decision to maintain its full-year revenue guidance?
Answer
HubSpot is maintaining its full-year guidance despite acknowledging the continued caution among customers, longer deal cycles, and tighter budgets.
The company’s confidence in its guidance is supported by positive trends such as strong gross retention, marginal improvements in downgrade activity, and the expectation that the seat pricing model, while initially a headwind, will eventually be neutral to overall ARR in 2024.
Seat-Based Pricing Model Dynamics and Outlook
Question
How does the $10 million headwind from the seat-based pricing model in Q1 translate to the full year, and will the model eventually become a tailwind as adoption increases?
Answer
The faster-than-expected adoption of the seat-based pricing model led to a sharper decline in ASPs, and it will take a couple of months for the volume of customer additions to catch up and offset this decline.
As a result, the company now expects the seat model change to be neutral to overall ARR for 2024.
Clearbit Integration and AI Strategy
Question
Can you provide an update on the traction and integration of Clearbit, and how the data obtained from Clearbit is contributing to HubSpot’s broader AI strategy?
Answer
The integration of Clearbit is progressing well, with Phase 1 focused on making the Clearbit product available to HubSpot’s installed base customers.
The vision is to leverage Clearbit’s enriched data and AI tools to drive insights across HubSpot’s entire customer platform, accelerating the company’s customer platform vision.
The combination of enriched data, AI, and a unified platform is expected to deliver significant value to customers and drive further innovation.
New Customer Adoption of Seat-Based Pricing
Question
What were the factors influencing new customer adoption of the seat-based pricing model, and were there any go-to-market changes implemented to address potential challenges?
Answer
The seat-based pricing model was only introduced for new customers at the beginning of March, so it is still early to draw definitive conclusions about adoption trends.
The model represents a significant change in the go-to-market motion, requiring reps to drive faster velocity and differentiate between Starter and Pro customers, which may have initially impacted adoption.
However, the company has implemented extensive enablement and provided clarity on the approach for both partners and reps, and customer adoption of the model is encouraging.
AI Adoption and Proof of Concepts
Question
Can you provide insights into the potential for AI proof of concepts to move into production and drive upgrade rates by the end of the year, or is this a longer-term dynamic?
Answer
The cautious buying cycle is leading to an increased demand for proof of concepts, particularly in the context of platform consolidation.
While AI adoption is still in the early stages for many customers, there are leading adopters who are rapidly incorporating AI into various aspects of their go-to-market functions and seeing positive results.
HubSpot’s focus this year is on driving repeat usage and educating customers on the benefits of AI, which will contribute to long-term adoption and potentially impact upgrade rates.
Top-of-Funnel Lead Flow Dynamics
Question
Can you provide more details on the lead flow dynamics observed, particularly the shift away from high-quality INBOUND and partner source leads to lower quality rep source leads, and the characteristics of these lower quality rep source leads?
Answer
The observed mix shift from INBOUND and partner source leads to more rep source leads occurred in Q1.
INBOUND and partner source leads are typically more qualified and ready to purchase, while rep source leads require more time and effort to progress through the sales pipeline.
The characteristics of rep source leads include longer time to progress, particularly for larger deals, but retention characteristics remain consistent once customers are onboarded and activated.
AI Roadmap and Premium Features
Question
Are there any AI use cases that show potential for being offered as premium-only features, and could this be a catalyst for premium mix and ASP growth in the future?
Answer
HubSpot’s vision is to embed AI across all Hubs and its entire platform, driving adoption and potentially contributing to premium mix and ASP growth.
The company is already seeing a significant portion of AI features being adopted by Pro and Enterprise customers, particularly in content, service, and guided selling use cases.
While it is still early days, the focus on usage and repeat usage of AI features is expected to positively impact upgrade rates over time.
AI and Competitive Landscape
Question
Has HubSpot’s differentiated approach to AI and its rapid innovation in this area contributed to any meaningful advantages in the competitive landscape, particularly in the upmarket segment?
Answer
HubSpot’s approach of embedding AI features across its platform and making them accessible to all customers, combined with its unified customer platform, offers a differentiated strategy compared to competitors who may charge for AI features or require services engagements.
This approach is expected to drive faster adoption and provide a competitive advantage, particularly in addressing age-old go-to-market challenges and enabling customers to derive value from AI more quickly.
Net Revenue Retention and Upgrade Dynamics
Question
Is the potential pressure on net revenue retention (NRR) purely a byproduct of upgrade rates, and were there any customer hesitations ahead of the seat licensing roll-out to the base that may have impacted upgrade behavior?
Answer
While NRR remains strong, upgrade rates were particularly challenging in the quarter, despite early positive signs of seat expansion with the new pricing model.
The company did not observe any customer hesitations related to the upcoming seat licensing roll-out that significantly impacted upgrade behavior.
