HubSpot Inc
NYSE:HUBS
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
450.09
720
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
HubSpot Inc
You don't have any saved screeners yet
Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the HubSpot Fourth Quarter and Full Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions].
Thank you. I will turn the call over to the, Director of Investor Relations, Charles MacGlashing. You may begin your conference.
Thanks, operator. Good afternoon, and welcome to HubSpot's Fourth Quarter Earnings Conference Call. Today, we'll be discussing 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 John Kinzer, 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 the section 27(A) of the securities act of 1933 as amended and section 21(E) of the securities exchange act of 1934 as amended.
All statements other than 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 in business outlook, including our financial guidance for the first fiscal quarter and 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 to our Form 10-Q, which was filed with the SEC on November 1, 2017, 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 in a reconciliation of the differences between each of the non-GAAP financial measures and the comparable GAAP financial measures can be found within our fourth quarter and full year 2017 earnings press release in the Investor Relations section of our Web site at www.hubspot.com.
Now, it's my pleasure to turn over the call over to HubSpot's CEO and Chairman, Brian Halligan.
Thanks, Chuck, and good afternoon, folks. Thanks for joining us as we review HubSpot's fourth quarter and full year 2017 earnings results. Let's get right to it.
The HubSpot's ended 2017 on a strong note, fourth quarter revenue increased 39% and non-GAAP operating income margin improved to a positive 4%. The fourth quarter closed out a great year of performance where HubSpot's full year revenue grew 39%. Total sales and marketing customers surpassed 41,000 and non-GAAP operating margins grew to a positive 2%, very, very happy with HubSpot's performance over the last year.
Okay, let's unpack those 2017 results in a bit more detail, so you can see how we’re thinking about HubSpot in 2018 and beyond. We will start with what we’ve been doing on our freemium model. We’ve really started to move the needle here. Investors often ask me, why a premium model makes sense for HubSpot. You’ve likely heard me talk about this before but it bears repealing humans are changing the way they live, the way they work, the way they shop, or the way they buy. This is as true in the SMB space as it is for consumer markets. More and more, companies want to try before they buy and sometimes even before they talk to sales rep. That’s why million of consumers get started with services like Drop Box or Spotify where the use a free version for a while and then fall in love with it and then upgrade to the paid versions overtime.
The good news is our freemium model is the total win-win for SMB users and for HubSpot. Why is that? Well, for customers, it's a lighter, easier and more natural path to getting value out of our products before having to commit to a contract. For HubSpot, it allows us to sell to users, people who are actually using the products and getting value out of it as opposed to leads.
This helps lower our overall cost to acquire customer, an important component of our customer unit economics and a metric we have set over here at HubSpot. It also serves to protect us from disruptions from below, which adds to our competitive mode. Think of it is adding a particularly angry alligator to the moat surrounding the HubSpot castle. And strategically, freemium attracts tons and tons of users and all those users even the non-paying ones attract more partners and ultimately increase the value of our entire ecosystems surrounding HubSpot, something I'm very excited about. All sorts of goodness with our move into the freemium model.
We get off to a pretty good start with the freemium motion in 2017. We added loads of free users to the platform and we increased the amount of revenue that's originating from our free products as well. It took a bit of the time to figure it out, but our sales team has made a lot of progress in this front and momentum is really starting to gain steam. In 2018, we're going to keep our foot on the accelerator with R&D investments we’re making into the freemium products. We're going to keep making it as easy as humanly possible for user to get started on that HubSpot platform.
Now, a second key initiative for us is rather old fashioned. We are trying to even more deeply delight our customers. You see when I asked our customers about why they buy, more often than not they say something to the effect of a colleague of theirs highly recommended it to them. Now our own sales and marketing efforts are very effective but our word of mouth is becoming our most important channel to market, so we’re going to invest even more heavily in our customer success.
And so beginning in 2017, we've doubled down on our efforts across the full end-to-end customer experience to make sure word of mouth continues to work well for us. A good example of this is how we've automated self service on boarding for new users that weren’t on boarded when HubSpot was initially purchased. When someone starts using HubSpot after the onboarding period is over, they naturally don’t do as well as the originally user who is trained on the product. We're doing some really clever things to catch those folks and make them successful. This has the ability to carry outsized leverage in helping new users get more value out of HubSpot, which drives increased usage and higher retention rates. Now as we focus more on customer delight, we're discovering more and more ways where we can invest a little and gain a whole lot.
Now, a third key initiative in 2017 focused on evolving HubSpot away from a single product company to a front office suite company with the goal of becoming the growth suite for SMBs. We made really good progress in this front over the last year. In fact, out of our 41,000 total customers, we've got nearly 10,000 of them using our Growth Stacks, both the sales and the marketing products. Having new products to sell has given the sales team additional entry points into all together new prospects and we've seen really strong growth in cross-selling really in both directions. That’s good for HubSpot and its great for customers because a lot of good things happened when a customer adopts the full Growth Stack.
With the full sales marketing and CRM stack, customers are able to grow bigger by having all of the tools they need in a single place and grow better by making it easy to deliver a superior end-to-end experience to their customers. And for HubSpot, customers using the entire front office suite carry higher levels of revenue retention and they deliver higher life time value, which is great. It's great for our customers and for our numbers and it serves as further confirmation that we’re headed in that right direction.
Now, let's talk a little bit about this multi-phase journey that HubSpot's on and where we’re headed in the next few years. Back in 2006, the first phase where HubSpot began when Dharmesh I were just starting out. And what we build basically a marketing application company. We booked something very useful to deliver ton of value to marketing customers in digital agencies all over the world.
There is a lot of opportunity in the marketing space among SMB's, because so many SMB's are just now discovering the value of matching the way they market and sell the way customers shop and buy. Businesses are still working on adapting to the massive changes going on in human behavior that we saw for like the shift from email to messaging, from PR to social, from text to video, so on and so on.
The second phase for HubSpot really started back in 2014 when we introduced our free CRM product. This is when we really started down the path of transforming ourselves into a front office suite company where folks could run all of their customer facing activities on HubSpot. We've expanded the value we create for marketers and agencies to now include sales people and sales management. There is still a ton of opportunity here to create value as we have a lot of work to do, including delivering on our third line of business, the Customer Hub. With the Customer Hub, our full suite of products will enable HubSpot to support the next step in the inbound customer journey and help companies turn customers into promoters. We’re on a good trajectory towards becoming a suite company and the opportunity is just tremendous.
To wrap up what I'm excited about in 2018, we have a clear plan with the detailed set of plays that I have confidence we can execute against. First, we want to continue to bring users on to the platform in a lighter touch more modern way with our freemium offerings. This is starting to work really well but we want to lean even more heavily into freemium in 2018. Second, we want those folks who use and buy the products to be delighted, delighted customers are our best source of new customers and our best channel to market. Then third, once we bring customers on to the platform, we want to show them the incredible value that comes with using the entire Growth Stack across marketing, sales, CRM and customer service.
Ultimately, when we look out beyond 2018, we continue to see a ton of opportunity, some which we’ll be able to share with you at our INBOUND event in September. But suffice it to say, we don’t feel like we're anywhere close to being done with where we can go with our products, the company, this vision, and the value we can deliver for our customers worldwide.
Now, before I hand it over, as I'm sure you've seen, John will be leading HubSpot at the end of 2018. I like to provide a few thoughts about his departure in the transition that will be taking place over the coming months. First, we've initiated a search process for a successor and we're confident we’ll find a great replacement. Second, on behalf of HubSpot, the Board of Directors and the more than 2,000 HubSpot employees, I want to thank John for his significant contribution since joining HubSpot in 2013. He was instrumental in our transition from a private to a public company. He’s been a great partner in the company's development.
Third, I want to tip my cap to John on how he is leaving HubSpot. He is leaving a great team behind him that’s super productive and capable. He is leaving at a time when the company as is healthy as has ever been, and he is leaving us plenty of time for a nice long transition. I look forward to working with John to the remainder of 2018 and I look forward to being friends with him through the rest of our long days.
With that, I will turn it over to John now to take you through the financials and our guidance.
I appreciate the kind words, Brian. Before I get into the financials, I want to thank Brain, Dharmesh and the entire HubSpot team for giving me the incredible opportunity to be CFO of this amazing company. It's been the best professional experience of my life, which has made this decision all the more difficult.
With that said, I'm at a point in my life where there are lot of things outside of work that I'm passionate about, including spending more time with my family and dedicating even more time to the non-profit board work that I'm currently involved in.
In addition, last year my family and I made the decision to move back to the D.C. area. As a result, I've been making the commute back and forth from D.C. to Boston, which as you can imagine, can be difficult at times. Now, it feels like the right time for me to move on. The company is executing extremely well and I have high confidence in both the management team and finance team to continue performing at a high level. I'm also very confident that we will find a great CFO to succeed me and I'm very much looking forward to working with them through the end of 2018 to ensure a smooth transition.
Again, I want to thank all of you on the call and the more than 2,000 HubSpotters that have made my time here so incredibly rewarding. Okay, with that out of the way, let's jump into the results.
The fourth quarter capped-off another strong year here at HubSpot. We delivered strong revenue growth, full year non-GAAP profitability and over $22 million of free cash flow, all while continue to make significant investments for our future growth. Fourth quarter revenue grew 39%, driven by 40% subscription revenue growth and 20% services revenue growth.
Revenue growth exceeded our expectations given the strong Q4, as well as the two point tail wind from FX. HubSpot ended the quarter with 41,593 total customers, up 48% year-over-year. Average subscription revenue per customer was down 4% year-over-year and 1% quarter-over-quarter to $10,255. As we've discussed in the past, the reduction in annual subscription revenue per customer is the result of adding a bunch of lower price sales and marketing starter customers through our freemium motion. While these customers start at the lower price point, they tend to increase their subscriptions as they grow their usage and add new products overtime.
Deferred revenue growth came in at $139 million, growing 44% year-over-year. While calculated billings defined as revenue plus the change in deferred revenue came in at $126 million, up 41% versus the fourth quarter of 2016. The billings growth exceeded our expectations due to a strong finish to the year and just about a 5 point tailwind from FX. As always, remember that billings growth will vary from revenue growth due to changes in billing terms, currency rates and product mix.
For the remainder of my commentary, I will discuss non-GAAP results. Now, let's take a look at our margins. Fourth quarter gross margin came in at 81%, up 2 points year-over-year. Fourth quarter subscription gross margin came in at 86%, up 2 points from year ago and services gross margins came in at a negative 18%, up 3 points year-over-year.
Fourth quarter operating margins improved 6 points to a 4% margin when excluding the impact from the INBOUND event in the fourth quarter a year ago. International revenue performance continued to be strong in the quarter, growing 65% year-over-year and representing 35% of HubSpot's total revenue. At the end of the fourth quarter, we had a total of 2,081 employees at HubSpot, up 30% year-over-year. CapEx including capitalized software was $7 million in the quarter, up from $4 million last year. As CapEx related to our facilities build-out picked up in the quarter. We expect CapEx to average about 7% of revenues for the full year 2018, which is a slightly lower percentage of revenue than we have seen in the past due to the timing on our facilities build out.
With that said, we still anticipate CapEx as a percentage of revenue to average closer to 7% to 8% over the medium to long term.
With that, let's dive into guidance for the first quarter of 2018.
Total revenue is expected to be in the range of $109.2 million to $110.2 million. Non-GAAP operating income is expected to be between a profit of $4 million to $5 million. Non-GAAP net income per share is expected to be between of $0.10 to $0.12. This assumes approximately $40.3 million diluted shares outstanding.
And for the full year of 2018, total revenue is expected to be in the range of $481 million to $485 million. Non-GAAP operating income is expected to be between $20 million and $24 million. Non-GAAP net income per share is expected to be between $0.51 to $0.59. This assumes approximate $40.7 million fully diluted shares outstanding.
As you adjust your models for 2018, keep in mind the following. We expect free cash flow to be about $30 million for the full year. As you think about quarterly timing, consistent with 2017, we anticipate strong free cash flow in the first and fourth quarter, and free cash flow to be more muted in the second and third quarters, given the material vendor payment we make in the second quarter, followed by the payments associated with our inbound event in the third quarter.
We anticipate stock based compensation will be approximately $76 million. Lastly, as a result of the adoption for the new revenue recognition guidance, ASC 606, we anticipate a couple of point benefit to operating margins, which is included in our guidance. Keep in mind that there is no impact to cash flow as a result of the adoption as a new guidance.
With that, I'll hand the call back over to Brian for his closing remarks, Brian?
Thanks, John. You may have seen that we got a couple of great shout outs in 2017. Glassdoor says we’re the seventh best place to work for comparably says we’re the second best place to work for. HubSpot's secrete sauce has always been our people, we’re really fortunate to have such a special crew that work for one another and are driven around HubSpot's mission to help SMB's grow better. I want to close by thanking each and every one of those HubSpotters all 2,000 plus of them, all our customers, all our partners and all our investors. We are here on a mission to help companies grow better and we're thrilled to be in business with all of you.
Operator, can we please open the call for few questions.
[Operator Instructions] Your first question comes from Bhavan Suri with William Blair.
Wanted to touch on just the overall inbound marketing opportunity, one of the things we’ve been hearing more about is that small businesses are now doing their own blogging and search engine optimization. I guess when you look at that space the freemium has done really well. But if you look at that core business, it was a little above these entrants what I would say is, slightly bigger or small businesses. Are you seeing any push back on the core offering? Do you see any them say we can do some more of this ourselves or any of the partners suggesting they’re seeing any of that.
I will cut the market into -- in my mind, I cut it into three pieces. There is the 1 to 10 employee market, the 10 to let's call it 1,000 to 2,000 employee and then 1,000 to 2,000 up. We play largely in that 10 to let's call it 1,000 or 5 to 1,000 in there. And they typically have a full time marketer, a little marketing department. And the problem they have when we first started HubSpot is even worse than they have today. The problems they are dealing with are first their buyer is changing the way humans are evaluating their products, the way they live, the way the shop, they way they buy is really changing. They’re having a hard time keeping up with it. So that's the first problem they’re dealing with it. And second problem they’re really dealing with is it just is a plethora of tools they have to deal with.
So let's say they want to blog on their own, they can do that and they can use WordPress for their blog but then they’re hiring in SEO consultant; and then they are buying a social media application; and then they are putting in a lead management solution; and then they are buying at data solution; and they are planning their own CRM and email marketing. And the next thing you know, they have eight-nine different pieces of software, that's like buying a car by buying an engine from one company, a chair wheel from other company and putting it together for yourself.
So I think these companies from 10 to 1,000 when I hear need that’s more than ever that they want an all one solution. They really value the ease of use. They want one bill to pay, one company to deal with, one user interface to learn all of that kind of together. So I think our value prop has stood the test of time frankly.
And then one follow-up, just flipping it the entire other way with sales professional and despite your guys’ focus on the mid market, it was obviously the higher end offering. I just like to get some idea of reception and then also by the partners, how are they fighting -- I know its early days, but early traction with that product? Thank you.
We released -- just to refresh folks’ memory, we released the sales professional product at INBOUND, started telling it in October. So we've got a sales starter product $50 per user per month spot one user at a time. The new sales professional is $80 per user per month and the initial purchase is bundled with five users. That's gone exceptionally well, got it sold very well through Q4. The big difference between that product and the starter is the workflows tools and put in and they can do lead routing with it, and it's gone really well.
The way the market is kind of split out is let's say you've got between five and 25 employees or five and 15 employees, you’ve get maybe two to three sales reps. They are tending to buy that sales starter product and then companies let's say between 15 and 20 and let's say a 100 to 200 employees, they seem to be buying that professional version of the product. And it's been well received and feeling very, very good about it.
On the second part of your questions regarding partners, so far so good. The way I think about the partners is when we first started, if you wind the story all the way back to beginning of HubSpot, we're really a marketing application software company. And we went to market directly also with agency partners. And those agency partners were largely Web site designers, search consultants, social media consultants, PR agencies that work with us to go implement inbound marketing inside these companies.
Some of them are really rooted in marketing and want to stay in marketing, let's say they have real design shops and they don’t want to get into sales but a lot of them, particularly a lot of our best partners, have moved down the funnel with us and are not only selling our marketing products but really starting to sell our sales product to sales professional products and selling much more of an end to end solution on helping people transform not only the way they market but how they sell and go-to-market in a more holistic way. So, so far so good on the partners’ side, feeling quite good about that over the long haul.
The next question is from Mark Murphy with JP Morgan.
So my first question is just on the magnitude of the revenue upside, the strength of the revenue guidance. There really was billings acceleration. It was very noticeable this quarter. And I understand there is a little FX benefit. But still, it just seems like the business accelerated into a higher trajectory this quarter. And so I'm curious maybe what surprised you positively in the quarter. Do you think Growth Stack is resonating faster than we expected, or is it more the low touch strategy or perhaps you detected a little better spending climate overall in the background or something…
Mark, let me start that off and then I'll turn it over to Brian. I mean, we saw about a 5 point benefit to billings and about 2 points derivative. So that defiantly help, but we did have a strong quarter and I’ll let Brian talk a little bit about that.
I'll give you an old fashioned answer. I think our products have gotten better overtime. We saw the real problem that lots and lots of companies have. The way we solve it is unique relative to our competition. It’s a big, big underserved market. We’ve really invested in R&D and we’re starting to get a return on some of those investments. I think it’s just old all fashion. I think the team and HubSpot, all the employees, have executed quite well. So I wouldn’t say I'm super surprised by it, I'm happy about it. But feel like we're starting to get a return on some of the investments we made overtime.
And then as well, could you walk us through the time frame for our customer service and what you're calling Customer Hub that offering the time frame for that to be introduced, when you think it would contribute to bookings?
We’re going to release that -- we're sticking with our schedule first half of the year this year, feeling good about it. I think the product will be great. I would just say, I suspect it will be similar to the way we release our sales product. So we released the sales product a while ago, its tens of millions of dollars and it’s growing very fast, and it’s really, really exciting what's going on there. I wouldn’t expect that this year there is this giant surge of revenue from it. I think -- but I think it will be a big, big business for us over the long haul. So schedules haven’t changed, feeling bullish about it, hoping it’s a repeat of what we did on the sales product side and working hard on that.
Your next question comes from Brad Sills with Bank of America Merrill Lynch.
I just wanted to ask guys the ASP has been holding at this 4% decline, but the volume business, the volume of customer adds has been significant. What do you think in terms of effort to sell marketing into the sales base? I know what sales pro that might make it easier, I know also that that’s a new focus for the company.
So Brad, I think you're right. We always talk about ASRPC being an output versus an input. Really strong customer growth and we’re bringing in lot of through the freemium motion marketing starter and sales starter customers. As we think about the effort, I think Brian and I were talking earlier like we used to give ourselves a B-minus on the effort to sale marketing into sales and maybe that's moved up to B-ish. We’d like to keep getting that up a little bit more, it take some time. But definitely starting to resonate and definitely started to see some success on selling that marketing product into the sales customers.
Yes, I’ll echo that. We’ve got 40,000 plus customers about 10,000 of them are growth stack. And so that's going well. There is a lot of people buying both upfront, a little more than we expected I think you might say. And there is a lot of people buying marketing first and buying sales and sales product and then the marketing product. I think maybe John probably give us B on that, up from B- minus on the last call. I think that's super-super promising. One of the other things I really like about what's going on inside of HubSpot is we’ve started the marketing product and then we built the sales product.
When we built the sales product we said let's build the sales product, mostly we’ll do this is the second line of business, let’s sell it into the marketing install base. But we challenged that team to build with something that is remarkable, and still good that not only will we sell it into the marketing install base, but it would be a magnet for new customers that we could eventually sell the marketing product into. And that has largely played out quite well, that sales product and the free CRM product are best they are working.
And then one more if I may please. Just any color on how the up sell or cross sell motion is going with the sales base. Now that you've got some history here, customers that are one year plus, are you finding that these folks are adding more users that are at the pace that you would expect and just any color there would be great? Thanks again.
Yes, overall I would say it's gone pretty well actually, feeling good about it. The thing that changed a hair is that people used to buy, they only have one choice, they could buy the starter product and it was $50 per user per month. Now a lot of our revenue is coming from that professional product and they buy five seats upfront, so the mix has changed a little bit starting in Q4. And I think you will see that next year. Overall, I think it's a good change but it's a bit of a shift that's going on inside them all.
Your next question comes from Ross MacMillan with RBC Capital Markets.
Maybe just a couple one, just on the transition if you will of the pricing model in Q4 on the sales pro product to the five user $80 price point. Just curious, do you think that had any pull forward effect at all? And I guess subsequent to that, what was -- was it a trend rate in the business for the latter stage of the quarter?
Yes, so we definitely saw a bit of an impact in October, that's when we announced it and we did a lot of a grandfathering for our old customers. Then it was steady the rest of the quarter, so nothing crazy the rest of the quarter. But in general we’re seeing good reception to that. We are seeing probably a bigger percentage of people with the sales professionals than we expected. I think it's over 50% of our sales business is coming from sales professional, which is obviously good and I think you saw that in the results.
And then maybe just one other, I get asked this question a lot and it relates to your domestic growth versus your international growth. We actually saw I think by my math the domestic growth rate tick up a little bit here in Q4. But obviously, it's been hovering at that 30% rate. And I think the assumption is that the domestic market is where you would see the greatest uptake of new products like sales. So I was just curious when you look at that mix in your business between domestic and international. How do you feel about the growth rates you're seeing domestically and are you seeing the adoption rates of sales in the domestic market on plan or better than you thought? Thanks.
Overall, I feel good about the domestic business. It feel like we're well positioned and growing fast. I feel even better about international where we're made some huge steps over the last few years, starting to get a return on them. So really to your question, I don’t think there is a huge, huge difference in our business between the adoption or pick up rate on something like the sales professionals skew in the U.S. versus international. I don’t think it’s widely different. John, correct me if you think I'm wrong about that.
No, I think that’s right. It was nice to see that, like you said Ross, to see that domestic tick up a point to the 29%. But as we talked about lot, I mean we’ve been investing heavily internationally, the unit economics are slightly better there and we’ve been hiring a bunch of sales people, investing in marketing, localizing the product and creating native content, a lot of different things. And to Brian's point, we’re really seeing those investments pay off.
The next question is from Tom Roderick with Stifel.
Its actually Parker Lane on for Tom Roderick, thanks for taking my question. To piggyback on earlier question actually. What are the early conversations been like on the pricing front with Customer Hub and how do you feel about the general preparedness of your sales people to have another product in the bag. Thanks.
Feeling good about it. I think our sales org is getting a lot better at moving some selling single point product to more of a suite and being a front office partner. And I think [technical difficulty] but for now, stay tuned. But suffice to say we're going to have a paid product that’s going to be a nice line of business that should grow well over the long, long term for HubSpot. We’re feeling really good about it.
Your next question is from Alex Zukin with Piper Jaffray.
This is Taylor Reiners on for Alex. I just wanted to ask one of the things that we picked up in our conversations related to agency partners is increased excitement around growth in your ISV ecosystem. So companies like DataBox are showing it quite a bit more. I'm wondering looking forward, how are you thinking about your ISV ecosystem. And is this going to be an increasing area of focus and investment overtime.
I'm feeling really good about it. I agree with the agency partners. DataBox is one I am excited about. It’s the guy who used to work at HubSpot, Pete Caputa, who left HubSpot and went and became CEO of this company DataBox. And what DataBox does is super-cool. They pull data out of HubSpot and Google Analytics and all different kinds of other apps and build dashboards of different applications and reporting. And he’s had really nice penetration selling into our partners and our customers. And that’s exactly what we want to see. We’ve been opening HubSpot up over the years. We have more and more API coverage of our products. Those APIs are getting richer. They are getting better supported and more consistent. And that's going to continue to grow. And as that grows, at the same time our user base is growing. And we're just getting to be much-much more attractive for companies like DataBox to integrate to and build their business around. So I'm feeling -- that's the story we don’t beat the drum louder enough on. That's the story that's really developing and I think it's quite exciting for us.
And then just a quick follow-up, I was wondering if you can talk a bit about the timing of INBOUND this year. It's still towards the end of 3Q, it’s a little bit earlier. I was wondering if that had any impact on your pipeline or into the fourth quarter or your execution. And if that have anything to do with pulling it back a little bit more in 2018?
No, I mean you could imagine, you have the book these things well in advance. So I mean it’s pretty much when the convention centers available. It's going to be around that early September or late August for the foreseeable future. So it's more just based on timing.
The one time we had in Q4 that was a one-off actually. It should usually be in September I think it's locked into September for the next three to four years.
I think that's right, yes.
The next question is from Jennifer Lowe with UBS.
As I'm looking through the guidance on free cash flow and as you noted on the operating margin side where there is a bit of a benefit from the ASC 606 adoption back of the envelope, it looks like it's about 230 basis points of margin expansion year-over-year, but free cash flow margin looks pretty consistent in the guide relative to what you did in '17. And A, I guess I wanted to just see if I'm running that math right. And B to the extent there was the couple 100 basis points or couple of points of benefit from ASC 606, it seems like the guide is more flattish on the margin. So I was just trying to reconcile that with what the incremental investments are in the year and then just versus the broader framework that you've talked about in the past on margin expansion.
So we're expecting 2-ish points on 606. So depending on where you exactly get on the range, we could get one or so points margin expansion based on the guidance. As you know, in general in our guidance, I mean there is a range of outcomes and we’ll endeavor to do better. But specifically to next year and where we've talked a lot about and Brian's talked a lot about investing in R&D, and we expect to take R&D as a percentage of revenue up 200 or 300 basis points in 2018.
And we were really able to hit our stride and hiring towards the middle to the end of the year. And just really been able to bring in a lot of really talented people, and I think that's why we’re able to bring out the Customer Hub as quickly as we can and continue to build out that platform. So we think it's the right thing for the long-term prospects of the business. But at the same time, we’re committed to margin expansion year-on-year.
And maybe just one more for me, looking at this steady acceleration in the customer metrics. Is there any color there on how much of that's marketing starter, how much of it is uptake of sales. But how much of it’s just the core traditional marketing offering any directional signal on where you're seeing the greatest traction would be super helpful.
I mean, I was definitely on the acceleration and we definitely got that some from some of the starter products. But we're still seeing broad based customer growth and we talked a lot about the fact that that put some pressure on the ASRPC in the short-term, but customers that we can up sell and cross sell going forward. So really encouraged on the customer number, it set a new record in the fourth quarter but generally the fourth quarter is the highest. So we would expect that to moderate a bit going into next year.
The next question is from Samad Samana with Stephens.
John, I'm going to take a different approach. If I can convince you to stay that would be great, because you haven’t missed a quarter as a CFO, so that’s my request, done leave.
Samad, you’re too nice.
Well, now come the annoying questions, so I opened with the nice part. I just wanted to get an idea, now that the sales professional the higher dollar skews been out there for a few months. Are you seeing any difference in who you're either replacing with that product or competitively who are you finding yourself in deals with against that product and then may be a follow question as well?
A little bit. There is some functionality in the starter product that call it a mid market company with 50 employees wanted and needed. And so we delivered some stuff in that new skew that answered the mail. So we're getting slightly larger company, it’s a slightly larger teams and the sales ops department to adopt it. And that sales starter product is smaller teams, typically driven by the rep note sales ops department. And so I think we hit the nail on the head in terms of what we put in there and we're moving -- I wouldn’t say we’re moving up market, but we're matching the target market of our sales skew, sale professional skew with that marketing professional skew in a nice way.
And then to that end, John, did you see a noticeable change in the net subscription dollar retention rate in the fourth quarter since that was launched. And may be just generally how that trended in the end of year, I don’t think you called that out in the call yet.
Yes, so the fourth quarter was nice, it was above 100%. I think the full year slightly above the 100% as well. If you look at retention, one thing that you should be thinking about is there are some new dynamics with that number, couple of things to think about. First of all, on sales professional product, as Brian said, people are starting with five seats, whether they actually have those seats or they just buy those seats. So could be little bit slower up sell after that, because the old product had -- you just bought one at a time. So that’s something to think about.
Then the other thing to think about is in now that cross sell is such a big think, if we sell the marketing product to a new customer, that doesn’t impact retention. If we sell the marketing product to a sales customer, it’s great for retention. So in general, I would caution people to get to excited about one quarter here or there on the retention front. But over the long-term where the annual numbers I think it’s still very important.
I would add to that. So the thing that surprised us on maybe on the upside is the amount of customers coming in buy that Growth Stack upfront, which has been more than I thought, felling good about the cross sell and the Growth Stack overall.
The next question is from Terry Tillman with SunTrust Robinson Humphrey.
In the spirit of trying to be differentiated, I don’t want to say congratulations or kind of miss you, or any of that stuff. I guess John, will you invite us to your going away party or at least meet to your going away party, and when is that?
It’s going to be a roast not a party, by the way.
And shocked by the way, that wasn’t one of my questions, so don’t ding me. Brian, it's great to hear what you just said to the last question about surprised by the Growth Stack, actually selling the Growth Stack together earlier on and initially with the new customer. What I'm curious about isn’t there a different sales cycle was that a longer sales cycle though, even though it's a great benefit to bigger ARPU. But is the sales cycle linked in some, and so maybe this could mean the way your quarters play out, it's a little bit more backend loaded?
It's not materially different. When someone buys one sales starter seat, that's a pretty short sale cycle, they are using the free product and then they upgrade sometimes they talk to reps, sometimes they don’t. It's a little longer if they’re buying with sales professional. But I don’t see a huge difference and I haven't -- and a lot time looking at, but I haven’t seen a huge difference between some of these buying marketing pro plus sales pro versus marketing pro, it might be a couple of days. But it's offset by the marketing starter being faster and the sales starter being faster, if anything.
And then just the second question, it's just a bigger picture question. Just looking back and reflecting as you guys have had learnings on becoming a multiproduct story selling a growth stack. What is one of the learnings or couple of learnings that you've noticed from sales in CRM? Obviously, the sales product, which you monetized that you will bring to bear and maybe could help you optimize getting out of the gate with Customer Hub. Thank you and nice job.
I think one of the things we did right and wrong was when we came up with that sales product, we've started it like when you watch all those apple movies. We started it as like skunk work project away from the core marketing business and iterated like heck on it, and got to the point in terms of revenue and growth and unit economics and motion that we pulled it back into the core company. The good news about that was we did figure out a new freemium model and we're able to take a lot of our learnings from that start up within the start up and applied across the whole company.
So what’s interesting about that is usually you would take the new product and apply the old business model to it. We took the new product, figured out a new business model and then applied that to the old business. In this case, we're not going to do that, we like our business model. We like this freemium motion. We think we’re in pretty good shape there. And so we’re just going to take the Customer Hub products and apply the existing model to it. So we don’t have to completely go back and set the drawing board and reinvent our go-to-market, as well as come out with a new product. That's the one bigger hub it's going to be more straight forward.
The next question is from Nate Cunningham with Guggenheim.
Brian based on the early conversations you’ve had with partners. How excited are they about customer service and do they feel like that's something they know how to sell?
I would say it's very similar to the early conversation -- that's a great question, very similar to the conversations I have with them about sales. I remember when I first told the partners, yes, we’re going into the sales business CRM business. Some of them were really excited like great we can increase our retainers, it will be sticker, we’ll deliver more value. And others scratched their head and said really why, you guys are doing great in marketing and we’re a Web design company, we don’t want to get into that. It's quite similar where some of the bigger agencies that are more sophisticated are saying, yes, now we can go into helping people with their entire customer life cycle from attracting leads to closing customers, delighting those customers turning those delighted customers into a marketing channel for you. And they are seeing it as we can increase our retainers for them, call it 10,000 a month to 15,000 a month, and all it will be stickier and more valuable. So it’s very -- it rhymes with what happened on the sales side.
The next question is from Kirk Materne with Evercore ISI.
John, first of all, congrats on your next endeavor. It’s been pleasure working with you. My question for you would be the subscription gross margins, it’s continued to track higher and I think you were anticipating that. I guess just an 86%, how much more upside do you have to go on that front? And I guess if it’s going to be, you’re really not going to be getting as much leverage from that, I assume we should be looking more to sales and marketing given your comments around R&D. Thanks.
And I think you're right on that front. On the gross margin side, I think there is still a little bit of room as the mix continues to shift towards subscription. I think the actual subscription gross margin mostly is played out. There could be a little bit of room there. But I think the leverage going forward, like you said, is sales and marketing but it’s also G&A. There is some room there as well, just leveraging especially on the sales and marketing side as we lean harder to R&D and the freemium motion really kicks in.
And then just one follow-up for Brian. Brian, having your commentary around people buying the Growth Stack perhaps little bit faster than you thought. Ross asked this earlier, I just really want to put a fine point on it. It seems like the adoption of that is pretty equal in the U.S. and international, I guess that’s just somewhat surprising given international is perhaps a little bit earlier stage market for you guys. Thanks.
It may be a hair better in the U.S. but the international adoption is pretty good. One of the things we did when we rolled out the product is we don’t roll it out in the U.S. and then figure it out and then roll out international, we rolled it out everywhere. And the way we build products and the way we internationalize products is pretty cool where they basically build the English version and at the same time they get it translated into the other five languages that we support, and so there is no lag time there. There may be a little bit of difference, but it’s relatively immaterial.
The next question is from Brian Peterson with Raymond James.
Kevin here on for Brian, thanks for taking my call. On the customer service offering, I realized it’s still early there. But how would you expect the ramp for the customer service cloud to compare to CRM product from a longer term perspective. And I guess do you think there is anything may be different on how those customers may buy a service product versus maybe the traditional sales and marketing?
Kevin, we won’t know of course until it really hits the market. But my personal feeling is it will look similar to the sales products that ramped up overtime. And we continue to iterate it and it got better and better and then it crossed the chasm and hit the main stream. That sales product -- tens and millions of revenue growing well over 100%, but it took a couple of years to get there. And I think my guess is it will be a similar trajectory but we will know more -- we will know more in six months and we can talk about that.
The next question is from Brent Bracelin with KeyBanc Capital Markets.
This is Lisa on for Brent. My question was really around the Growth Stack and Sales Pro. Based on the numbers you guys gave, it looks like your attach rate improved to about 24% to 25% versus 15% two quarters ago, which is really the most material step-up we've seen. So I was wonting to understand if that’s mostly a function of now addressing more mid-market customers with the sales professionals here versus any other changes you’re seeing with how you’re selling the Growth Stack?
Yes, I think that step up that 15% to 24% was year-over-year versus quarter-over-quarter but -- we're just getting a little feedback, I don’t know if you guys are hearing it. So I said that the Growth Stack year-over-year had gone from 15% to 24%. But I think the question was is there anything we see in mid-market versus attach rate versus the lower end and we see it across the board. I mean wouldn’t say that necessarily we’re seeing it one place than the other, it’s resonated pretty much across our customer base.
I think what you’re starting to see is we had a starter product, the littler companies we’re buying it in those core mid-market companies that we’re buying are marketing enterprise and marketing pro, it wasn’t quite there. The new functionality we released in the sales professional skew is good and it’s what mid-marketing companies want. And so you’re probably starting to see the mix change a little bit and that attach rate go up, because of that also I just think the sales organizations starting to figure out how to sell it. And not only that but we invested in a growth team inside of HubSpot, the cross functional team is running out our product but it's really made a lot of investments. And they are really doing well, CRM adoption has been good and now that’s starting to really come together.
Your next question is from the line of Derrick Wood with Cowen.
This is Jim Fitzgerald filling in for Derrick, and I just had a quick question on the competitive landscape, who you guys are seeing competitively in core sales and maybe how win rates have been trending there overtime. And I guess the same question for the customer service product who you expect to compete against there, when it comes out?
No huge changes since the last call on the competitive landscape. We continue to cooperate and compete with salesforce.com in the market. If its SMB company we do very, very well, if it’s an enterprise company they will do very, very well. I think we’re well positioned there and really happy with where we sit in the market. We compete well and no big change in win rate that I can tell. I think there will be a whole different set of competitors, so we’ll compete with on the professional services product. And I think we will compete well there as well. And the touch tones for HubSpot there is two really, one is we’re obsessed with -- and this is a little bit weird. We’re little bit less and obsessed with our customer, more obsessed with our customers’ customer, how are humans changing their expectation of how they serve instead of calling and waiting on line for 15 minutes and then talking to someone and not getting satisfactory answer and bounce to the second line of support and retelling your story what your problem is, people expect to be able to Google the problem, be able to chat with you, expect to you to have memory about those problems. So we’ll be building a very modern perspective into our product.
The second thing I would think that will be killer is it will all be in one, so you'll have your entire end-to-end experience will be managed under the HubSpot umbrella all of our software, our partner software, it will be very easy to manage and you will be available to create a really remarkable delightful end-to-end experience with HubSpot.
The next question is from Koji Ikeda with Oppenheimer.
Congrats on the quarter and congrats John on the news and best of luck, and thanks for taking my questions. I wanted to ask a question on the HubSpot connect program. We see the app integrations have grown from somewhere around 100 in December to around 120 in January, and it looks like it’s sitting around 135 here in mid-February. So it look likes the connect program is scaling into a really nice ecosystem here. And I guess what's the best way to think about the growth and integrations and the future opportunity it presents for HubSpot. And I guess thinking way into the future and maybe this question is just way ways too early, but I want to ask it anyway. And is there eventually a platform driven application ecosystem placed here similar to what we’ve seen with salesforce.com and its app exchange? Thanks.
I would agree that it’s growing exceptionally well. I'm really proud of the team there. And I think it’s a function of a whole bunch of things coming together, one and I mentioned some of these. Our API coverage and quality is improving and there is relatively good size investment and that going into HubSpot. So it’s easier for third party developers to dig in. Two, I wouldn’t say we’re ubiquitous by any means but the number of users of HubSpot has grown quite a bit, and it’s not just the paid user but the free users in there, that’s getting to be quite a large number and the larger that number the more attractive we are to third party connect partners, and for we've invested in the team that works on that stuff to work with third party development partners. So I think our value prop to third party developers is increasing. You will see us continue to invest in that and I would encourage you to come at INBOUND and stay tuned for where we go in the future.
There are no further questions at this time. I will turn the call back over to Brian Halligan for closing remarks.
Great, thanks to all of you for joining the call and look forward to talking to you next month or next quarter, I guess. Thanks to all.
This concludes today's conference call. You may now disconnect.