Good afternoon. My name is Jen, and I will be your conference operator today. I would like to welcome everyone to the HubSpot Q3 '21 Earnings Conference Call. Chuck MacGlashing, Head of Investor Relations, you may begin your call.

Thanks, operator. Good afternoon, and welcome to HubSpot's Third Quarter 2021 Earnings Conference Call. Today, we'll be discussing the results announced in the press release issued after the market closed. With me on the call this afternoon is Yamini Rangan, our Chief Executive Officer; Dharmesh Shah, our Co-Founder and CTO; and Kate Bueker, our Chief Financial Officer. Before we start, I'd like to draw your attention to the safe harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Exchange Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than the statements of historical facts are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, the leadership transitions and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2021. Forward-looking statements reflect our views only as of today and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our Form 10-Q, which will be filed with the SEC this afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between such measures can be found within our third quarter 2021 earnings press release in the Investor Relations section of our website. Now it's my pleasure to turn over the call to HubSpot's Chief Executive Officer, Yamini Rangan, Yamini?

Thanks, Chuck, and greetings, everyone. Thank you for joining us today as we review HubSpot's third quarter 2021 results. I hope you were all able to join us a few weeks ago for our Annual Analyst Day at INBOUND. We covered a lot of ground as part of those sessions. So today, what I want to do is to focus on the great results in Q3 as well as the strategic pillars guiding us on our path to becoming the number one CRM platform for scaling companies. Let's kick things off with a look at our Q3 results. We're continuing to see strong performance across the business, with revenue growth of 47% in constant currency year-over-year, and total customers growing 34% year-over-year to more than 128,000. As we've seen over the past year, small and medium businesses continue to embrace our modern CRM to connect with their customers, drive insights from customer interactions and transform their businesses for the digital age. Our strong results speak to the fact that HubSpot is providing the right foundation for these companies to scale. At our Analyst Day, I provided an overview of our long-term growth strategy and introduced the four strategic pillars guiding our investments. So today, I'd like to share how our recent product announcements at INBOUND are helping us make meaningful progress towards our long-term goals. Our first strategic pillar is to deliver a world-class front-office platform by investing in new and existing hubs as well as driving the extensibility of our platform. We're always looking for ways to address the evolving needs of our customers and expand our addressable market. We'll continue to explore the development of new hubs, invest in anchor hubs like marketing and sales and accelerate innovation around emerging hubs like Operations Hub. Earlier this week, we officially launched Operations Hub Enterprise. This is a great example of how we are accelerating innovation in emerging hubs. As you all know, we first launched Operations Hub Starter and Professional earlier this year to help customers get all of their data into HubSpot and build more advanced automated workflows. Now with Operations Hub Enterprise, our customers are able to report on that data in more connected and consistent ways to generate insights to drive growth. We also announced important improvements to Service Hub, including custom surveys and a new customer portal that's currently in public beta. We'll continue to invest so that our individual hubs are powerful and easy to use. But we also know that much of HubSpot's magic comes from how our hubs seamlessly work together. And with more than half of our customers adopting multiple hubs, we know that more and more companies are realizing the unique advantage that comes from managing their entire front office in one platform. A great example of this multi-hub approach in action is Triage, a staffing agency that arranges assignments for traveling nurses across the U.S. After connecting its back-office systems to our platform and implementing our marketing, sales, CMS, and Operations Hub, Triage has seen increased efficiency and performance across the company. Their email click-through rate doubled, their sales team's capacity grew by 60%, and they are now able to quickly mobilize for flu or COVID vaccinations. There is still plenty of runway left when it comes to going broad and deep with our hubs and platforms. I'm really excited to see where the needs of our customers will take us next. Our second strategic pillar is to strengthen our segmentation approach across product and go to market and this is driving product innovation at HubSpot in two key ways. First, we're bringing high-end features that have traditionally only been available to large enterprises down to our small and mid-market customers. And second, we're bringing a human-friendly product and purchasing experience traditionally seen in small and mid-market businesses up to large enterprises. At INBOUND this year, we focused on the latter half of the strategy, announcing new, powerful and easy-to-use features that add tremendous value to our enterprise tier. In addition to new plant-wide governance features like permission sets and audit logging, we also launched SAM DOCSIS, a feature that enables customers to test changes to their portals without impacting their primary account. In Marketing Hub Enterprise, we introduced Business Units, a new feature that enables customers to manage multiple brands to ensure a more consistent and targeted experience for their audiences. And new enterprise level forecasting tools in Sales Hub and Service Hub help managers keep track of their team's progress towards their goals. All of these enhancements help our larger customers customize their usage of HubSpot without adding complexity as they continue to grow. We're seeing success in our segmentation approach. On the high end, we are consistently closing more large deals and have seen an 81% year-over-year increase in Q3 large deals. Our Starter addition is also fueling customer acquisitions. That segment has grown from a small percentage of our customer base a few years ago to more than 50% of our total customers as of Q3. Now let's turn to our third pillar, investing in commerce and payments. As I discussed during our Analyst Day, commerce has traditionally been thought of as an extension of the back office. It was sold to finance leaders, it was about collecting revenue and driving cost efficiencies. But commerce as a part of CRM is fundamentally different and it's about enabling growth, not saving money. We're excited about the long-term opportunity for an integrated payment solution. That said, we're still in the very early stages of this opportunity, and there are years of runway for growth. For now, we're focused on reaching U.S.-based B2B companies with fewer than 100 employees so that we can deliver a strong product to market fit before expanding internationally. Having the product market fit in one geography ensures that when we go international, we're able to capture a significant portion of GMV of any country we enter. And while it's only been available for about a month, we have seen nice momentum with our open beta as customers tap into the ability to quickly and easily start taking payments. One early adopter is ZenPilot, an operations consulting business that needed to scale operations but was being held back by a labor-intensive payment system. ZenPilot's previous system could only process credit card transactions and required manual work to process payments via ACH. With HubSpot Payments, ZenPilot is able to accept ACH payments with ease. The sales team is able to focus more on lead generation activities and therefore, have increased leads by 30%. The early feedback from customers like ZenPilot is evidence that we are on the right path in enabling our B2B customers to deliver a consumer-grade buying experience. I'm very excited about what the future holds for HubSpot Payments in the long term. Our fourth and final pillar is to continue to scale HubSpot. As you've heard Brian and Dharmesh say before, we want to build a company that future generations can be proud of. As part of that vision, we're investing in hiring and growing diverse talent, working on our environmental initiatives, and doubling down on protecting our customers' data and scaling our systems to meet their needs. By investing in these four pillars, we're building a strong foundation that will serve both HubSpot and our customers as we chart our next phase of growth. I'm incredibly excited about our long-term opportunity, and I'm very confident that we have the right strategy, the right investments, and the right team in place to help us execute and win. With that, I'll turn it over to Kate to give an overview of our fantastic financial results. Kate?

Thanks, Yamini. Let's turn to our third quarter financial results and our guidance for the fourth quarter and full year of 2021. Third quarter revenue grew 47% year-over-year in constant currency and 49% as reported. Q3 subscription revenue grew 49% year-over-year, while services and other revenue increased 39%, both on an as-reported basis. The momentum we've seen over the last year and a half continued into the third quarter with broad strength across the business. We saw continued strength in revenue retention in Q3, trending nicely above our new target level of 110% with healthy customer dollar retention continuing to be a big driver of our overall strong retention performance. Net revenue retention also continues to benefit from multiple upgrade drivers including strong cross-sell activity and seat expansions. Domestic revenue grew 41% year-over-year in Q3, while international revenue growth was 54% in constant currency and 58% as reported. While our international and domestic revenue growth rates in constant currency remained flat quarter-over-quarter, international revenue as a percentage of total revenue increased 3 points year-over-year to 46%. We added 7,100 net customers in the quarter, growing our total customer count by 34% year-over-year to 128,000. Average subscription revenue per customer grew 9% year-over-year to $10,500 as we saw a continued positive mix shift towards our professional and enterprise tiers, along with strong installed base selling. As we've discussed over the last couple of quarters, we expect these trends to continue into Q4 with net customer additions of about 7,000 and high single-digit year-over-year growth in ASRPC. Deferred revenue as of the end of September was $376 million, a 45% increase year-over-year. Calculated billings was $353 million growing 45% year-over-year in constant currency and 43% as reported. Billings growth in Q3 was impacted by the strong installed base selling mix in the quarter, slightly lower billing duration, and a more difficult comparison as a result of COVID-related customer plays in the year-ago period. The remainder of my comments will refer to non-GAAP measures. Third quarter gross margin was 80% down 2 points year-over-year as a result of increased customer usage and the launch of our new EU data center. Subscription gross margin was 83%, while services gross margin was negative 9%. Third quarter operating margin was 10%, up 2 points compared to the same period a year ago. At the end of the third quarter, we had nearly 5,500 employees, up 38% year-over-year. Net income in the third quarter was $26 million or $0.50 per fully diluted share. CapEx, including capitalized software development costs, was $16 million or 5% of revenue in Q3. Free cash flow in the quarter was $38 million or 11% of revenue. We continue to expect CapEx as a percentage of revenue to be about 5% in 2021 and now expect free cash flow to be about $180 million for the full year. Finally, our cash and marketable securities totaled $1.3 billion at the end of September. And with that, let's dive into guidance for the fourth quarter and full year of 2021. For the fourth quarter, total revenue is expected to be in the range of $356 million to $358 million, up 42% year-over-year at the midpoint. Non-GAAP operating income is expected to be between $34 million and $36 million. Non-GAAP diluted net income per share is expected to be between $0.52 and $0.54. This assumes 50.9 million fully diluted shares outstanding. And for the full year of 2021, total revenue is now expected to be in the range of $1.287 billion to $1.289 billion, up 46% year-over-year at the midpoint. Non-GAAP operating income is now expected to be between $113 million and $115 million. Non-GAAP diluted net income per share is now expected to be between $1.76 and $1.78. This assumes 50.7 million fully diluted shares outstanding. As you adjust your models, keep in mind the following: At current spot rates, we expect FX to be a slight headwind to as-reported revenue in Q4 and still expect a 3-point tailwind for the full year.

Thanks a lot, Kate. Before we wrap up, I want to extend a huge thank you to our customers, partners, and employees for your support over the last quarter. It was such a joy to connect with you all during INBOUND, and I have felt so welcomed and energized as I transitioned into the CEO role. As you heard me talk about at INBOUND, we're now in the age of the customer. Customers want and expect a frictionless connected consumer-like buying experience at every step of their journey. Fortunately, we've been building for this new era at HubSpot and are uniquely suited to meet the moment as evidenced in this quarter's strong financial results. Our most recent product announcements are designed to help companies create customer relationship magic and our four strategic pillars will enable us to continue to deliver on our mission of helping millions of companies grow better in the future. And with that, operator, please open up the call for some questions.

Your first question comes from the line of Alex Zukin with Wolfe Research.

Congratulations on a great quarter. Yamini, this might be your first one, especially regarding the demand environment. Can you share what you observed during the quarter? Did you notice any seasonality or summer holiday weakness internationally? Additionally, we've been hearing in the news about supply chain issues and reports of advertising companies experiencing some concerns. Are you noticing any effects from that? Also, do you have any insights about the pipeline for new customer growth or existing customer expansion as we head into Q4?

Alex, thanks a lot for the question. We are seeing the same headlines that you mentioned in terms of supply chain challenges, macro environment. But I'll say that there's not a set of factors that have outsized exposure to here at HubSpot. In terms of the demand environment and the demand patterns, it's really solid. And if I step back and look at why we feel very good about the demand environment, it's two things. One, the world has changed. Since the start of the pandemic, customers have looked for digital solutions and the buyer expectations have changed pretty significantly where they need consumer-like buying experiences. They want to be able to connect to their customers digitally and they want to be able to grow and accelerate growth in this environment. And two, we have the perfect solution for that. HubSpot has a very unique value proposition. We have crafted the solution and we provide consumer-like user experience with enterprise-grade features, and that is resonating really well in terms of the market. So I feel very good about the demand environment and what we are seeing in the pipeline. And this reflects both across our North America business as well as international business. So feeling pretty good.

I understand. That's very helpful. Kate, one of the questions I expect to receive tomorrow concerns the fact that for the past six quarters, billings have outpaced revenue growth, even when adjusted for constant currency. You mentioned that this quarter presented some challenges regarding billings that we should consider. Could you elaborate on these, particularly regarding the deferred revenue and explain why it isn't necessarily a clear indicator of future revenue growth? Your guidance also suggests strong growth for Q4 subscription revenue.

Yes. Sure thing. I would just start by saying that we actually feel really good about delivering constant currency billings growth in the mid-40s, especially when you look at the sort of tougher comparison that we have here in Q3 relative to Q2, it's basically 12-or-so points more difficult. Also what I mentioned a few things that were headwinds to constant currency billings in the quarter. There's a little bit of a headwind from duration. And you may recall in my prepared remarks that I noted that this was a very strong installed base selling quarter that also has a little bit of a headwind as it relates to billings particularly around deferred revenue. FX on deferred is very tricky and you may recall, in particular that the euro weakened against the dollar pretty dramatically over the course of Q3. And so the impact on deferred revenue from FX was much more acute. There is about a four-point headwind to deferred revenue on a constant currency basis versus an as-reported basis.

Mark, are you there?

Yes, I'm here. Sorry, I never heard my name called. So I don't know if I was disconnected for a moment. But that's the case.

You can go ahead, Mr. Morgan.

Yes. I'm flattered to be called Mr. Morgan. So Yamini, at the Analyst Day, you had mentioned the touchless sale. And I think the fact that most B2B companies haven't started on it yet. I'm wondering how is that vision of the touchless sale resonating with your customers who are in this open beta of HubSpot Payments? And what is their feedback to you so far?

Yes. Great question, Mark. So at the Analyst Day, what I said was that in terms of the two ways that companies typically sell, one is the touchless sale and then the other is the rep-assisted sale. Now in terms of cashless sales, B2B companies haven't just gotten started in terms of online processing of services and software. And our hypothesis is that we can really help them and enable new revenue streams for a company. Now in the prepared remarks, I mentioned an example of a company, ZenPilot. They are in the consulting business. They wanted to start processing and that's an example of a touchless sale. In terms of the open beta, that's also where we are seeing interest, Mark. We're seeing companies that are in services that are thinking about new online revenue streams that haven't done it before, and this is an easy and seamless way for them to grow. It's pretty early days. We've been in open beta just for a few weeks here now, but we're definitely seeing interest in terms of opening new revenue streams. So we'll keep watching.

Okay. Understood. As a quick follow-up, Kate, we're noticing that the growth is impressive. The revenue growth is actually stronger than it was before the pandemic in Q3. It's interesting to see this growth being robust without heavily depending on a significant increase in customer additions. I'm curious where you are seeing the most noticeable increase in average selling price. I'm wondering if it's related to custom objects enabling some of the larger accounts at the top of your target range with the Enterprise Hubs of sales and marketing, or if it's a more widespread trend, including down-market as well.

Yes. Thanks for the question. I think the good news is that our KPIs of customer additions and ASRPC kind of came in exactly where we told you that they were going to. We did see that nice pickup in ASRPC, really in that high single-digit range. And again, that positive momentum in ASRPC is a mix-driven calculation. The customer mix is moving towards that Pro and Enterprise. And we, again, I'll highlight the strong installed base selling commentary for Q3. And both of those things are like, key drivers of ASRPC growth.

Your next question comes from the line of Samad Samana with Jefferies.

I'll echo the congrats on just a great quarter even as the comps get tougher. So maybe first, Yamini, for you, I have a follow-up on the payment side. Can you talk about the front office CRM approach HubSpot is taking to payments and the advantages that HubSpot has over other more entrenched back-office-centric competitors that are more closely tied to accounting systems?

Thank you, Samad. That's really my favorite question about payments because the way we think about payments, commerce is part of CRM is fundamentally different. It is about enabling revenue growth for our customers. And it's very, very different from commerce as part of the back office, where traditionally, it is about talking to the finance leader and focusing on collecting revenues and cost efficiency. And over the past few quarters, as we have gone back to our customers and asked them how we can enable growth, it became really clear that we needed to embed commerce and payments as part of CRM. And there are three ways in which we can drive that growth. The first one is what I just talked about with Mark's question, which is enabling new revenue streams. So if you think about touchless, this is not where B2B companies have traditionally focused, and so we want to enable new revenue streams and provide opportunities for growth there. The second area for growth is really helping with the rep-assisted last-mile sale. So what I mean by that is HubSpot historically, we have focused on rep-assisted sales. But the last mile, which is core to cash has been the hardest nut to crack. And we want to focus on that. We want to streamline and simplify it so that the reps can now focus on growth initiatives and demand-generation activities. And so we do that right, we're going to actually enable growth for our customers. And then the third thing which I'm super excited about is commerce brings context to every customer interaction. If you can imagine, having a commerce object deeply embedded within CRM, you now have more information when you run marketing campaigns. You can run marketing campaigns on abandoned cart. You have much more information in terms of sales interactions because you know where the invoice stands. You have much better service interactions because it's prioritized by the purchase history. So commerce deeply embedded within CRM is just really valuable in terms of enabling growth. And so I think we're taking a very different approach and enabling growth for our customers. So I'm excited about the longer-term opportunity here.

Very helpful. And then maybe a follow-up for Kate. The 47% growth on constant currency staying the same quarter-over-quarter despite a tougher comp was impressive. And I think one of the things related to that is the stat around an 81% increase in large deals in the third quarter. I haven't really heard the company talk about large deals, more, just which SKU is being adopted. So I'm curious if you can maybe just help us understand how we should think about large deals and how you're defining it? And then maybe just how should we think about that going forward from a contribution standpoint?

Yes. I think I talked a little bit about the Analyst Day when we tried to highlight the strategic pillar around segmentation. Internally, we look at what we call large deals as anything that is greater than $3,000 MRR. And we've seen that the volume of those deals increased 81% year-over-year.

Your next question comes from the line of Ken Wong with Guggenheim Securities.

First question, I just wanted to get a sense for I think earlier it was mentioned some of the advertising peers out there are running into kind of the occasional issues with the IDFA. How do you see that potentially impacting HubSpot's business? Does that push customers more towards an INBOUND strategy? Would love to see if you guys are running in any tailwinds, headwinds on that front.

Thanks for the question, Ken. If we take a moment to reflect, we sometimes find ourselves in difficult situations in our personal lives, such as forgetting significant dates. Similarly, in a privacy-focused world, issues arise when there's an overabundance of personal data being remembered and recognized. This has led to some recent developments. However, HubSpot has always been rooted in the concept of INBOUND marketing, prioritizing consumer friendliness and privacy. We've maintained this approach throughout our 15 years. As the industry evolves towards greater privacy, these changes have generally been beneficial for HubSpot. The recent shifts, particularly in app tracking, primarily affect companies with large advertising networks or extensive mobile applications that rely heavily on tracking. HubSpot does not fall into these categories, so we don't anticipate any significant impact on our business from these developments.

Got it. I really appreciate that Dharmesh. And then, Kate, just thinking about the shape of the quarter. I think in the past, you guys had mentioned that, I think, in July, HubSpotters were given a break also potentially saw higher than typical PTO. Any sense of kind of how the linearity played out from July through September and to the extent that you can comment on October, November kind of how that demand lifecycle looks?

Yes. I mean I think I'll stick to Q3, but you're exactly right and have a great memory. We made a decision to give the organization a break at the very beginning of the quarter, and we had a global decompress for all of our employees. And that obviously creates a bit of a slow start to the quarter. We feel great about where we landed for the full quarter, but we definitely saw momentum in the second couple of months as a result of that, I would say, well-deserved break on behalf of our employees.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

Perfect. I wanted to touch on the payments business a little bit. I'm sure you're getting a lot of questions from investors on that one. How are you thinking as far as like disclosing the traction that you're seeing in that business as it starts to ramp? What are the milestones that we should be looking for and you'll be looking for as far as really just broadening out the initial set of customers that are involved in the beta program?

Stan, thanks for the question. I'm going to maybe address this from a broad strategic perspective and then I'll have Kate to address it in terms of how we'll be tracking it. As you heard us talk about at the Analyst Day, this is a long-term opportunity that we are very, very excited about. And specifically, we have a targeted approach. The target market that we're going after are U.S. companies with 100 employees or less that are B2B, mostly focused on services and software. The reason we are focused on that market is, first, it allows us to build a delightful product experience that customers can love. And even within that market, we see it as a pretty large market, tens of billions in GMV within that segment. And we want to start with that market. And we're going to make sure that in terms of both the payment features as well as commerce features, we are focused on delivering and driving market adoption and I think longer term, there is a significant opportunity for us to grow both upmarket domestically as well as internationally. And I'll pass it to Kate so she can address your question on how we will track and share our results.

Yes. Thanks, Yamini. If I just take a step back and look at the specific customer segment that Yamini outlined in the U.S.-based customers with 100 or fewer employees in that sort of B2B software and services space, as Yamini said we think that's a tens-of-billions-of-dollars-of-GMV market for us. And that would translate into something that looks more like hundreds of millions of potential payment volume for us over the next couple of years. And as I covered at the Analyst Day, HubSpot's going to earn a transaction fee on this payment volume. And the amount of that transaction fee is going to depend on the payment method. It's going to depend on the transaction size, and we will recognize that fee as revenue to HubSpot. There'll be an associated cost with that transaction, most notably for credit card transactions that's it, that interchange fee. And so the gross margin for the payments business is going to be a much different and lower gross margin than what we're used to on the software side. That said, the sales expense in growing the business is also going to be very different than the core software business, and we feel really good about the overall margin for HubSpot over time. We will likely, in the near term, record any revenue under what we call services and other revenue stream. And as we ramp up over time, we will have to evaluate when it is the appropriate time to break that revenue out.

Got it. And then, Kate, I wanted to revisit billings briefly. You did a great job explaining the significant foreign exchange impact on billings at the end of the quarter compared to the foreign exchange benefit we observed in revenue. Regarding the duration aspect of billings, could you clarify which of the challenges you encountered this quarter, between foreign exchange and duration, was more significant? Also, could you provide some insight into the extent of the headwind from the billings duration?

Yes. So the FX headwind to billings overall was, net, was a 2% headwind, right? And that's a combination, as you are indicating, of a tailwind to revenue with a more extreme headwind to the deferred revenue component of billings. In terms of the relative impact of duration versus FX, I think it's a combination of duration and the fact that we have a higher mix of installed base selling that sort of make up the other part of the difference between constant currency revenue and constant currency billings.

Your next question comes from the line of Bradley Sills with Bank of America Securities.

Congratulations on a nice quarter. Maybe I'll ask another question on the ASP question in another way. With the kind of growth you're seeing there, net revenue retention has been accelerating now for several quarters. Are customers landing with multiple hubs more so than in the past? I think historically, we think of HubSpot where a customer will start with marketing or sales or CMS; those are great entry points, and then you'll see the cross-sell a year or two later. Now that you're kind of moving up market and there's more enterprise additions, are you seeing customers commit to multi-hubs kind of an initial land deal more so? And what does that mean for kind of future expansion opportunity potentially?

Brad, thanks for the question. I'd say that we see three things that happen across our customer base. The first is, what you said, which is more multi-hub. And you can see that reflected in the numbers that Kate shared at the Analyst Day. And so we definitely see the multi-hub customers land. We're seeing still really good front doors with marketing and sales hubs. Each of those hubs have gotten really good over the past 12 to 18 months. And so they are very good front doors. And so we see that land-and-expand motion. And then as you know, we launched the CRM suite, both at the starter level as well as the goal level, and those are also really good front doors. And so across the board, we are seeing all three motions. Now I will say in terms of multi-hub, when our customers adopt multi-hub, the value that they get because it's a seamless user interface, because it's a single data model, and there's a single view of the customer, it's just much higher. We see when customers adopt Sales Hub plus Marketing Hubs, they get much more leased than they just had Marketing Hub or Sales Hub loans, the same powerful combination with Marketing Hub and CMS Hub or Sales Hub and Service Hub. And so I think what you're seeing is that there are great front doors into adoption. There is also a growing trend towards multi-hub as well as suite adoption. The combination of all three are what you see as results in terms of ASRPC growth.

It's good to hear. I have a question about the Service Hub. There seems to be a perception that customer service is more suited for larger businesses, as small businesses typically do not have a separate support desk and can manage support within their sales teams. Do you share this perspective? Furthermore, as you transition towards a more enterprise-focused approach, can we anticipate an acceleration in the adoption of the Service Hub? We've already seen strong performance from it, but could there be even greater integration in the future?

Yes. In terms of service adoption or interest at the lower end, we don't believe it's limited to larger enterprises. We see an increasing number of customers wanting to provide online support, whether through email or chat, even if they don't operate a call center. This is definitely a need. The Service Hub product is performing very well, and the trajectory we're following is similar to what you observed with sales over the past few years. There are key features we need for sales, such as custom objects, and once we start implementing those, we notice an increase in adoption rates. Then, we see that hub becoming an entry point to the HubSpot platform. We anticipate something similar will occur with the Service Hub. We recently launched a customer portal feature at a recent INBOUND event, allowing customers to log in, view their tickets, and interact with their data and accounts. This was one of the significant features customers have been requesting consistently, moving us further along the path we need to take. We believe 2022 will be an exciting year for Service Hub. The market opportunity is substantial among our target customers of 1,000 to 2,000 employees, and we understand their needs and are focused on executing our strategy.

Your next question comes from the line of Brian Peterson with Raymond James.

I wanted to follow up on your response to Brad's question. I'm curious about how well customers understand what this new frontier in digital engagement models will look like. Are they at a stage where they're willing to invest in multiple hubs at once, or are they still focusing on one at a time due to limitations in their execution capabilities? What insights are you gathering from customers about this new digital engagement landscape?

It's a good question, Brian. I believe the maturity levels within our customer base vary significantly. Some customers are still in the early stages and have realized over the past couple of years that they need to adopt a digital-first approach. They are starting with one hub and then expanding. On the other hand, there are customers, such as the Triage example I mentioned in my prepared remarks, who understand that they need a comprehensive digital front office platform to accelerate their growth in light of current market demands. It ultimately depends on the customers' maturity. One thing I can say is that our approach has been very well received by customers. We have adopted a unique method for developing our solutions, enabling customers to avoid the hassle of integrating multiple applications in their tech stack. They can start with one or multiple hubs or go all in, and our distinct approach to product development and the value our customers gain from our full suite are resonating well in the market.

Great. That's good to hear. Maybe a quick follow-up for Kate. One of the bullish takeaways for me at the Analyst Day was the net revenue retention above 110. I believe you indicated it, that would kind of be the new normal going forward. I think I have that right. But I'm curious, how can we frame that in terms of the average revenue per customer trend? I know it's not the same cohort overall. But should we think about that maybe lagging the 110 figure by a couple of points? I'm just curious if there's any read-through from the NRR that we should be looking at in terms of the revenue per customer growth?

Yes. Thanks for the question. I think that you are right at Analyst Day, we shared a new target level for net revenue retention at or above 110%. And what we talked about was a couple of different drivers. The first of those drivers was really strong customer dollar retention. That's what we call it internally; may refer to it as gross retention. And what we said is about half of the impact on total net revenue retention was associated with improvements on customer dollar retention. The other piece of that is that our upgrades are improving, and we have a diverse set of upgrade drivers that are helping to increase net revenue retention that sort of second half, those drivers will also help drive ASRPC growth, right? So it's not that retention is driving. It's the same core adoption of a greater portion of the platform that is driving both the net revenue retention and higher ASRPC.

Your next question comes from the line of Michael Turits with KeyBanc Capital Markets.

So two questions. Yamini, for you. Obviously, everyone is very excited about the payments. Can you talk about how you're thinking longer term about e-commerce more broadly? And then I've for Kate.

We are excited about payments and equally enthusiastic about our core business. Looking at the long-term payment opportunity, there's a lot we can do to support our customers' growth. Our approach involves embedding payments in various formats, such as forms, web pages, and meeting requests, which will drive adoption. On our roadmap, you will see us increase payment adoption. Additionally, I am excited about integrating commerce context into CRM and vice versa, which will create significant value for our customers by ensuring commerce context is present in every interaction, whether it involves marketing, sales, or service. These initiatives will create substantial opportunities for us while enabling customer growth. We view the roadmap and long-term opportunity in payments positively. Moreover, our core business is strong and growing well, and we continue to invest in our strategic pillars while focusing on developing a world-class CRM platform. Thus, we are balancing new opportunities with our core business.

And then Kate, you said that for '22, not to expect a meaningful improvement in margins. Can you just talk about what some of the puts and takes are there and how they may or may not be shifting in terms of what's the headwind and what's the tailwind to margins how that balances out next year?

I think the key point to consider is how we balance growth and profitability. At the highest level, our focus has been on building sustainable long-term growth for the company while regularly seeking ways to expand margins. We utilize our long-term financial framework to help achieve that. However, we do not want to miss out on significant, high-return opportunities for future growth just to meet specific leverage targets year over year. We feel optimistic about the opportunities ahead and intend to continue investing in them. The areas where we will invest in 2022 are consistent with where we have been investing over the past couple of years. In particular, we aim to enhance our R&D organization to foster innovation, as we believe it is essential for strong and sustainable growth. While I can't provide specific changes for 2022, I can say that we will keep investing in areas where we have seen strong returns and where we believe we can continue to achieve strong returns, primarily through product innovation.

Your next question comes from the line of Michael Berg with Wells Fargo.

This is Michael Berg on for Michael Turrin. Congrats on a great quarter. I have a quick question and then a follow-up for Dharmesh. In this environment we're seeing right now, it appears to be a pretty strong or difficult hiring environment. And with HubSpot being such a focus on culture and retention, can you kind of walk through what you're seeing in the hiring environment? Any trouble getting people on board or any better or worse retention within your employee base?

Thank you for your question. We are very pleased with the long-term investments we've made in our culture and employer brand, which have proven beneficial during these challenging times. We have not experienced a direct impact from the Great Resignation, although we recognize that there is activity in the broader market. Our employer brand remains strong, and we embraced the concept of a hybrid and remote workforce even before the pandemic, making us even more adept at it now. I believe we are in a position of greater strength than before. The value of our culture and the flexibility within our workforce is well-regarded. We have always considered culture as a product we develop alongside our main product, and both are performing exceptionally well. Thank you for your question.

Your next question comes from the line of Parker Lane with Stifel.

At the Analyst Day, you mentioned about 60% of the business is coming direct versus the remainder coming from solution partners. Wondering if you could break down what the composition of that looks like in the enterprise customers here, particularly with some of the go-to-market investments you've made there over the past year.

Thank you for the question, Parker. In general, you're correct. If we analyze the segments, our partners tend to focus more on the upmarket for several reasons, including more customers, integration, CRM implementations, and customization. Consequently, there's a greater emphasis on the upmarket segment. Our strategy regarding our Solution Partner ecosystem has been consistently clear. Historically, this ecosystem comprises about 4,000 members, primarily marketing agencies. However, we've invested significantly to diversify this ecosystem, and we are pleased with the expertise that has developed in assisting our upmarket customers. This serves as a competitive advantage for us. Our partners excel at understanding both our customers and our products. When they engage, we experience high customer dollar retention and revenue retention. We recently held an event for partners after INBOUND where we discussed our strategy and our commitment to enhancing our sales and service approach with them. We are making substantial investments in enabling partners, connecting them with customers, and building expertise within the solution partner network. We are eager to see this ecosystem flourish.

Your next question comes from the line of Rishi Jaluria with RBC Markets.

Just one from my end. I wanted to drill back on to some of the upmarket penetration. Yamini, I think that 81% increase in large deals year-over-year in Q3 really, really and great to see that. Maybe can you help us understand with this upmarket penetration, how you're kind of balancing the investments that you're making there with wanting to keep that same e-commerce-type approach and self-service approach that has worked for you historically. And maybe directionally, can you give us a sense for with these larger customers, what sort of impact that tends to have on your net dollar retention?

Rishi, thanks for the question. I think it really goes back to our strategic pillar, which is strengthening our segmentation approach. So both at the Analyst Day as well as prepared remarks, we talked about the investments we are making to make sure that every one of our segments are optimized. We have broadly key segments. You've heard us speak about this, 1 to 20 segments where we are investing in product-led growth. The 20 to 200 segment, which is our traditional sweet spot from both a product and go-to-market perspective and the upmarket segment, which is the 200 to 2,000 segment, where we're making a lot of investments. And as we've mentioned before, we are being very thoughtful and deliberate in making product as well as go-to-market investments. Our clear view is that both of these need to be in complete lockstep in terms of execution. So the success that you're seeing with the upmarket is one, because of the product. We have worked on the product extensively, and we've talked about wanting to maintain a consumer-grade look and feel while investing in powerful features and that is beginning to work. And in terms of go-to-market, we have invested in sales enablement, partner enablement as well as brand marketing efforts. And so the results of our segmentation strategy is what is reflected both in terms of customer dollar retention as well as revenue retention. And this is kind of what Kate mentioned earlier in her comments about revenue retention.

Your next question comes from the line of Ryan MacDonald with Needham & Company.

Yamini, in your last two questions, you mentioned the upmarket strategy. I want to focus on the partner channel and its role in driving upmarket deals. You recently launched Operations Hub, and I’m curious about the feedback you’ve received from the partner channel since the announcement of INBOUND. How do you think this will help tap into the higher end of your business over time?

Thank you so much, Ryan, for the question. Yes, the Operations Hub Enterprise was just launched this week. And as you all know, we launched Operations Hub Starter as well as Pro earlier this year in April. And that's actually an example of one of the hubs where we co-launched it with partners. Our partner community has been just incredibly involved in terms of the beta program. They were incredibly involved in terms of identifying early use cases. And we co-launched Operations Hub. In fact, that launch event was probably the highest NPS partner event that we have had all year. And the feedback from partners in terms of Operations Hub has been very, very promising as well as positive. Now the broader point in terms of how we are enabling go-to-market with partners upmarket. As we optimize our product investments as well as go-to-market investments, we've been working hand-in-hand with partners in driving expertise within the partner ecosystem to enable them to take more complex implementations and that's beginning to work. And I'm very pleased with how our direct teams and partner teams have been working collaboratively this year.

Your next question comes from the line of Arjun Bhatia with William Blair.

Kate, this one might be for you. It appears that many of the trends we've discussed regarding suite expansion, such as multi-hub adoption and upsell, along with suite adoption, do not appear to be temporary. So, as we look beyond Q4, should we consider that the model has structurally changed, allowing ACV growth to remain in the mid to high single-digit range, not only in Q4 but also in 2022 and beyond?

Yes. Thanks for the question. I think what we have shared, Arjun, is that we feel like the trends that we saw in Q2 and in Q3 are going to continue into Q4. In terms of longer term, these are not metrics that we manage the business against. And you heard Yamini talk about the segmentation strategy where we intend to innovate both at that upmarket, but also with the Velocity segment that is more lower end. And as we innovate at one end or another year to continue to see movement in both of those KPIs. So I think it's fair to say that in the short term. But over the longer term, we're going to continue to see a little bit more volatility.

Your next question comes from the line of Kirk Materne with Evercore.

Could you discuss whether the trends you're observing in the upper segment of your business differ between the U.S. and international markets? I'm curious if the adoption rates of Service Cloud and content management products are similar internationally compared to the U.S. or if they follow the typical pattern seen in other SaaS companies where international trends tend to align with the U.S. I know your company has a more balanced approach, so I'm interested in your insights on this.

Yes, we've been very, very balanced in terms of both international growth as well as North America growth. And as you heard us talk about, international is about 46% of our revenue and consistently growing really well. In terms of adoption trends, it's quite similar. In a lot of international markets, they are still a bit earlier in terms of digital transformation and adoption of digital products. But overall, for example, Operations Hub has done really well there. And going multi-hub with CMS and marketing has done quite well there. And so the trends are pretty consistent across both of the markets.

Your next question comes from the line of Siti Panigrahi with Mizuho.

This is actually Matt Diamond on Siti's behalf. One quick one. I'm curious about the magnitude of customer engagement that came after the INBOUND conference. If you could compare that to years past, that would be super helpful.

That's a good question. Overall, INBOUND, the product announcements, received very, very favorable positive feedback from customers. We had really good engagement both in terms of the breakouts as well as the spotlight sessions and the NPS for some of the sessions were better than even last year. So overall, INBOUND landed really well. The engagement of our customers has been really good and feedback in terms of the announcements there, Operations Hub Enterprise, Sandbox, Business Units, the feedback for a lot of those features that we announced at INBOUND has been very, very positive. It's still early days. It's just been a couple of weeks since INBOUND. And so we'll likely see more momentum in Q4 based on the announcements at INBOUND.

Your next question comes from the line of Terry Tillman with Truist.

This is actually Joe Meares on for Terry Tillman. You talked a lot about the product announcements, I think, on the call, but I'm just wondering from a very high level of the three major announcements that you guys made which have customers made the most noise about in the last three weeks since the Analyst Day?

That's a good question. I think I broadly categorized our product announcements into three areas. The first one is Operations Hub Enterprise that we just launched in November; really positive feedback. We've seen very good momentum not just for the Enterprise product but also for the Pro as well as Starter releases earlier this year. So we're seeing consistently good feedback there. I think the second class is just a lot of the upmarket-related big powerhouse features that we launched, right? So you heard us talk about Business Units, which, again, is another domino feature within Marketing Hub Enterprise. You heard us talk about Sandboxes and forecasting, which is pretty big in terms of sales. So a lot of customers that have been looking or will need this in the future are excited about that category of features. And then Payments. Payments is early days, but a lot of customers are engaged in conversations in terms of how they can we had new revenue streams and enable consumer-like buying experiences. And so those three, I would say, are probably the big categories of interactions with customers.

There are no further questions at this time, Yamini Rangan. I turn the call back over to you.

Thank you so much. It was great seeing a lot of you at INBOUND and do great work in Q4. We'll see you in the new year.

This concludes today's conference call. You may now disconnect.