Earnings Call Transcript - HUBS Q2 2024

Operator, Operator

Good afternoon and welcome to the HubSpot Q2 2024 Earnings Call. My name is Harry and I will be your operator today. At this time, all participants' lines are in a listen-only mode and there will be an opportunity for question-and-answer after management's prepared remarks. I would now like to hand the conference over to Senior Director of Investor Relations, Ryan Burkart. Please go ahead.

Ryan Burkart, Senior Director of Investor Relations

Thanks, operator. Good afternoon and welcome to HubSpot’s second quarter 2024 earnings conference call. Today, we’ll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is 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 statements of historical fact are forward-looking statements, including those regarding management’s expectations of future financial and operational performance and operational expenditures, expected growth, FX movement, and business outlook, including our financial guidance for the third fiscal quarter and full year 2024. 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 we expect to file 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 measures 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 second quarter of fiscal year 2024 earnings press release in the Investor Relations section of our website. Now, it’s my pleasure to turn the call over to HubSpot’s Chief Executive Officer, Yamini Rangan. Yamini?

Yamini Rangan, CEO

Thank you, Ryan, and welcome to everyone on the call. Today, I'll share our Q2 2024 results, discuss trends driving our momentum, and highlight early wins from our Spring Spotlight product launches. I'll also reiterate our strategy and playbook for winning both in the short and long term. Let's dive in. Q2 was a solid quarter for HubSpot with revenue growing 21% year-over-year in constant currency. We delivered another quarter of operating margin growth with 270 basis points of margin expansion year-over-year, driving our operating margin to 17%. I'm really happy with the operating leverage we are continuing to deliver while driving growth. Total customers grew to 228,000 customers globally, driven by over 11,200 net customer additions in the quarter. I'm thrilled to see customers consolidating on HubSpot, the consistent focus on innovation and execution demonstrated by our teams, and momentum we have in becoming the customer platform of choice for scaling companies. Our starter year continues to fuel volume on the low end of the market, driven by product and pricing improvements. We have removed friction and have made it easy for customers to get started with HubSpot. We've streamlined the checkout process, so customers can now make clearer decisions about the functionality and seats they need. But most importantly, we're delivering compelling value for business owners focused on driving growth and gaining better visibility on customer trends in this environment. As a result, we're seeing strength in free sign-ups and starter ads. In up-markets, our Q2 results were driven by multi-hub and large deal momentum. We saw more customers start with or expand into multiple hubs, resulting in larger deals. Over 45% of new business in our polls tiers came from customers using three or more hubs. Within customers adopting multiple hubs, we saw three popular combinations. Marketing and sales hubs are our main front doors, marketing, sales and Service Hubs. Innovation in Service Hub is driving momentum and marketing sales from Content Hub after Content Hub launch in April. The higher mix of multi-hub deals and the momentum we have with upmarket customers led to larger wins in Q2. Upmarket customers want to simplify and consolidate their tech stack and our focused investments to serve their needs and our pace of innovation make us their top choice. Let's talk about our pricing model changes that we introduced in early March and how it's progressing. As a reminder, we lowered the price point to get started with HubSpot, removed seat minimums to reduce friction to upgrade and created a core seat for customers who want to edit CRM records. We did this to make HubSpot easy to buy and easy to grow with. When we made these changes, we expected it to lead to lower initial ASP, higher volume of customers and more upgrades and expansion over time. In Q2, we continued to make progress on driving higher volume to offset the ASP declines and expect this to happen in the next few months as we focus on enablement. We continue to see solid expansion trends with a multi-point increase in net revenue retention rate at month three for customers on the new pricing model as they buy exactly what they need and expand when they need more. Overall, we continue to have high conviction that the pricing change is the right decision for our customers and therefore, for HubSpot. To round out Q2, let's talk about the innovation we drove with our Spring Spotlight product launches and how they're driving momentum. In April, as part of our first Spring Spotlight, we introduced major updates to Service Hub and launched Content Hub. The Service Hub update was a big unlock. It now supports both customer support and customer success teams on a single unified platform. We saw the number of wins with 100-plus service seats grow 55% year-over-year and 30% year-to-date. In addition, we saw a 200% increase in portals closing tickets in the help desk since the relaunch. In terms of Content Hub, our goal is to provide an AI-powered content marketing solution that can help marketers create and manage content. And the response has been fantastic. The attach rate for Content Hub to Marketing Hub has tripled since the launch and is now nearly 50% for new marketing hub wins. This high attach rate is being driven by innovative AI features like content remix, AI blogs and brand voice. Brands like Tripadvisor, World Wildlife Fund for Nature and Morehouse College are all using HubSpot content solutions to grow. Overall, we're thrilled to see our product innovation drive value for our customers. On to the macro environment. We're seeing the same trends as last year and Q1, slower decision-making, more decision-makers involved and scrutiny on business case and value before spending. When decisions are made by committees, that often includes CEOs, CFOs, CROs, and many times requires Board or BCP firm approval. The bar for buying continues to be high. We also see companies consolidating on fewer platforms that can help them grow. We're executing on our clear and proven playbook to drive growth in this environment. Let me step back and connect the dots on our playbook, where we are seeing momentum this year and how this sets us up for both short and long-term success. Our playbook for executing in any macro is clear. We solve for our customers, help them grow by providing an AI-powered customer platform and drive the pace of innovation that can make it easy for customers to stay ahead. HubSpot excels when we know exactly who we are serving, and we have never been more clear. We are determined to delight growth professionals in marketing, sales and service at scaling companies and to help them grow. This focus on solving for our customers and deep listening has resulted in clear momentum in customer acquisition. More importantly, it has led to strong retention with customer dollar retention consistently in the high 80s. As a company, we're doubling down our focus on our customers and are energized about helping them grow. The way we help them grow is by providing an AI-powered customer platform, which includes best-in-class engagement hubs, Smart CRM, which unifies customer data and teams and a connected ecosystem with app and solution partners. This platform strategy is working as more customers consolidate on HubSpot to lower cost and drive growth. In June, we crossed over one million active app integrations installed by Pro plus customers with more than 35% of them using 10 or more active app integrations. Customers are bringing more data together within HubSpot and driving more insights from that data. In addition, we made a choice to embed AI in all of our hubs and within our Smart CRM, and this strategy is beginning to work. The early traction with Content Hub and the step change attach rate of Content Hub to Marketing Hub is just one example of the strategy working. According to our customer Sandler, HubSpot AI has been a game changer for our marketing and sales teams, helping both groups create personalization at scale with messaging, actionable insights and increasing new prospect engagement with our brand by 25%. Customers have an appetite to drive more growth powered by AI, and that's where we are focusing our efforts. In addition, we expanded support for sensitive data, which moved into beta in Q2. HubSpot's sensitive data solution makes it easy for customers to protect sensitive personal information to support their compliance with regulations like GDPR. This expands our opportunity to serve more customers in industries like healthcare, financial services, and insurance, and makes it easy for customers to manage complex compliance processes. Early adoption looks promising, existing enterprise customers are using new features to manage sensitive data, and they're seeing higher conversion rates and average selling prices with new customers. Our pace of innovation and focused execution have been crucial to our success now and will help us grow in the long term. Reflecting on our results and progress, our strategy is working. I hope that it is abundantly clear we run our business for the long term and are focused on solving for our customers, innovating our platform and prioritizing strong execution. This has been and will continue to be our priority. And that is what will continue to set us apart to drive durable growth and create long-term shareholder value. With that, I'll turn the call over to Kate to take you through our Q2 financial results. Kate?

Kate Bueker, CFO

Thanks, Yamini. Let's turn to our second quarter 2024 financial results. Q2 revenue grew 21% year-over-year in constant currency and 20% on an as-reported basis. Subscription revenue grew 20% year-over-year, while services and other revenue increased 18% on an as-reported basis. Q2 domestic revenue grew 20% year-over-year. International revenue growth was 22% in constant currency and 21% as reported, now representing 47% of total revenue. We added over 11,200 net customers in Q2, ending the quarter with a total customer count of 228,000, growing 23% year-over-year. Again, this quarter, the strength in customer additions was driven by momentum at the low end. Average subscription revenue per customer was $11,200, down 2% year-over-year in both constant currency and on an as-reported basis. ASRPC continues to be driven by several offsetting factors, a positive impact from an increasing number of professional and enterprise customers adopting multiple hubs, offset by the headwind from the continued strong volume of lower ASP starter customers we've acquired over the last year. Gross retention held nicely in the high 80s and net revenue retention was stable at 102%. While we continue to see strong customer dollar retention and downgrade trends, customer upgrade rates remain challenged, similar to Q1. We expect this behavior to continue in the back half of the year with net revenue retention holding around current levels. Calculated billings were $648 million in Q2, growing 20% year-over-year in both constant currency and on an as-reported basis. The remainder of my comments will refer to non-GAAP measures. Q2 operating margin was 17%, up 3 points compared to the year ago period, driven by the continued impact of our go-to-market efficiency and infrastructure optimization efforts. Net income was $104 million in Q2 or $1.94 per fully diluted share. Free cash flow was $92 million in Q2 or 14% of revenue. Finally, our cash and marketable securities totaled $1.9 billion at the end of June. With that, let's review our guidance for the third quarter and full year of 2024. As Yamini shared, we continue to operate in a challenging and volatile external environment. And our guidance assumes that the difficult demand environment persists through the back half of the year, but does not get materially worse. For the third quarter, total as-reported revenue is expected to be in the range of $646 million to $647 million, up 16% year-over-year at the midpoint. We expect foreign exchange to be a slight headwind to as-reported revenue growth in the quarter. Non-GAAP operating profit is expected to be between $107 million and $108 million. Non-GAAP diluted net income per share is expected to be between $1.89 and $1.91. This assumes 53.5 million fully diluted shares outstanding. And for the full year of 2024, total as-reported revenue is now expected to be in the range of $2.567 billion to $2.57 billion, up 18% year-over-year at the midpoint. We now expect foreign exchange to have a neutral impact to as-reported revenue growth for the full year. Non-GAAP operating profit is now expected to be between $437 million and $441 million. Non-GAAP diluted net income per share is now expected to be between $7.64 and $7.70. This assumes 53.4 million fully diluted shares outstanding. As you adjust your models, please keep in mind the following; we now expect CapEx as a percentage of revenue 4% to 5%, and free cash flow to be about $380 million for the full year of 2024 with seasonally stronger free cash flow in Q4. And that, I will hand things back over to Yamini for her closing remarks.

Yamini Rangan, CEO

Thank you so much, Kate. To close out, we have a large opportunity ahead of us, and we are well on our way to becoming the number one customer platform for scaling companies. Our pace of innovation is high and our focus on driving usage and value with our customer platform and AI is clear. I look forward to seeing many of you at our Analyst Day at INBOUND on September 18th and sharing the progress we've made this year and the confidence we have in building an enduring company. I want to thank our customers, partners, and investors for their continued support and a huge, huge thank you to all HubSpotters around the world for staying focused on solving for our customers every single day. With that, operator, let's please open up the call for questions.

Operator, Operator

Thank you. And our first question today is from the line of Samad Samana of Jefferies. Please go ahead, your line is open.

Samad Samana, Analyst

Great. Thank you. Hi Yamini and Kate and everybody. Thanks as always for the time. Good evening. Hey Yamini, it's great to see the growth sustain and stabilize above 20%. One of the things that we are particularly curious about is where growth has changed the most in the portfolio over the last six months? So, for example, how did the growth rates across the main hubs look and have they all slowed in an equal manner? Is there a particular hub where new business growth has reaccelerated or is doing better than expected? Just curious if we can maybe peel that back a little bit. Thank you so much.

Yamini Rangan, CEO

Hey Samad, thank you so much for the questions. I appreciate your support as always. I'd say the answer starts with our strategy of becoming a customer platform for our scaling companies. And when we sit on that strategy, we said that we're going to build best-in-class engagement hubs. But most importantly, we're going to build a platform that unifies data insights across all of those hubs. If I were to point to one thing that you're seeing in the last few quarters, it is the multi-hub momentum. And I mentioned this during the prepared remarks; there are more common combinations of multi-hub wins that we're seeing, starting with our front doors of marketing, sales, followed by sales, marketing, and service. And then certainly, this past quarter, we saw more Content Hub attached to the primary hubs. If I step back and approach this from a customer perspective, our customers acquired a bunch of point solutions and they are struggling to integrate all of those data points into actionable insights and to control the cost. They're looking for much better ways to be able to get all of that information into a single platform, and we are that platform of choice. We can connect all of the data across marketing, sales, service into a single platform. The power of HubSpot is not just in a specific hub. It's really in the insights that we deliver across multiple hubs in the platform. So if there's a story to take away, there's really that multiple hubs are gaining momentum across the past few quarters.

Operator, Operator

Thank you. Our next question today is from the line of Mark Murphy of JPMorgan. Please go ahead. Your line is now open.

Mark Murphy, Analyst

Thank you. I'll add my congrats on very nice execution in a difficult environment. And just continuing on that point you just made, Yamini, I was wondering if you could update on that phenomenon in terms of traction with your payments product. Since it became one of your primary goals, I'm wondering how customer activity is evolving there beyond simple payment processing and moving into what you just described, the ability to produce that code, build the line and CRM and track it across the whole HubSpot platform, maybe kicking off other actions. Is that behavior that you see evolving? And then related to that, just wondering if there is any way you could characterize the payment volume or kind of monetization you're seeing in payments?

Yamini Rangan, CEO

Hey, Mark, thanks a lot for that question. The way to think about it is exactly the way you posed the question, which is it is part of that connected platform. Everything comes down to that. When we began our payments journey, we had a very key hypothesis in terms of the value we can add to customers. Bringing commerce data, transaction data, payments data into the CRM is going to be valuable for our customers and we are certainly seeing that play out in terms of the payments journey. Last year, we expanded payments to be able to support other processes and allowed our customers to bring their own processes like Stripe. That has had the impact of opening up our opportunity and having more customers, more international customers come on to our payments platform. From a functionality perspective, we have continued to drive innovation. The bigger area of focus for us this year has been driving product-led growth for our payments. You can see this within our navigation, you can access payments directly from our navigation bar now, and that has continued to improve the discoverability of payments. In terms of payment volume, we've seen really good payment volume. We have seen the monthly transacting customers grow into the thousands, and we're very pleased with the momentum there. Additionally, we have seen that when customers transact with HubSpot, the percentage of the revenue that they're flowing through HubSpot is much higher than what we expected. Now all of this is good, but I would continue to remind that this is a longer-term bet and we are willing to be very strategically patient as we continue to see progress within that. But again, it all comes back to the value of our customer platform within each of our hubs as well as commerce. Thank you so much for the question.

Operator, Operator

Our next question today is from the line of Brad Sills of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Brad Sills, Analyst

Great. Thank you so much, and great to see the progress with the multi-hub deals. I guess, I wanted to go back to a comment that was made earlier in the call that the upgrade environment is challenging. And I guess that's been the reason behind some of the delays here in the macro environment in some of the larger deals. On that note, is it also due to the fact that you're seeing these multi-hub deals, more multi-department deals, more strategic kinds of deals that could also require more board-level approval and more multi-departmental sign-off that's also causing this delay? In other words, how much of this is macro that's causing some of the delays you're seeing versus the fact that HubSpot is now becoming more of a platform company with increasing multi-touch deals?

Yamini Rangan, CEO

Brad, thanks a lot for the question. In terms of the macro environment, we are seeing very consistent conditions with what we saw in Q1, and what we described as customer trends is slower decision-making, committee buying and a high cone of budgets, which certainly requires Board and other approvals. That does lead to lengthening of the deal cycle, and we talked about that. Now the counterplay for that is that as we talk to customers, they want to consolidate on fewer platforms and HubSpot is becoming that platform. We see that there's a lot more value we can add by providing a unified customer platform. And so, in fact, we see that this is speeding up the deal. So there's a counterbalancing impact between what we see from the macro to the trend that we see in terms of consolidating to fewer platforms. I would say that those two play off each other. Broadly, when we talk to customers, even when they are not ready to make a decision, it's mostly not now for HubSpot and not necessarily a no, and they always come back a few quarters or even a few months after and see the value of consolidating on HubSpot.

Operator, Operator

Thank you. Our next question is from the line of Alex Zukin of Wolfe Research. Please go ahead. Your line is open.

Alex Zukin, Analyst

Hey, guys, thanks for taking the question, and congrats on solid execution in a difficult environment. I want to ask a two-parter, because it occurs to me that just on the margin side, that sequential margin improvement that you guys saw was some of the best, I think, you've ever posted. And particularly, if I look at the sales and marketing line, maybe just walk through kind of where that leverage is coming from, where it can go? And then separately, if you look at your cash position today, about $2 billion, along with really strong free cash flow generation, as you think more about that consolidation of tools and stack, what’s HubSpot's viewpoint considering the private market environment and the plethora of assets available there? How do you see this opportunity set in broadening your value proposition?

Kate Bueker, CFO

Maybe I'll start, Yamini, with the margin question, and then you can dive in. Thanks, Alex, although I will note the sharp violations of the one question rule. We were very pleased with the margin performance that we had in Q2. Operating margins came in a little bit better than we had expected. Revenue came in a little bit better, including some help from foreign exchange. We also had a modest shift down of expenses from Q2 into the back half of the year. That said, the primary drivers of the year-over-year leverage were really two things. One was improvement on the gross margin side. Our team has had some really nice wins optimizing our core product infrastructure, and you're starting to see the impact there. We are also continuing to make some progress here on driving go-to-market efficiency, particularly in services and support.

Yamini Rangan, CEO

In terms of our strong balance sheet position and how we plan to use it, it really comes down to our philosophy that we want to build a beautifully crafted customer platform for our customers. The traditional playbook has been acquiring growth, but we think that is detrimental for customers' growth and have always prioritized customer experience. As we look at potential ways in which we can continue to expand our platform, we'll do so organically. We'll certainly look at technology and talent that allows us to move faster on product innovation, but we will also ensure that we are doing that without disrupting our customer experience and making sure it is really seamless. We’ve done things like Clearbit as well as pricing, but in both cases, we have really spent time integrating back into the customer platform to deliver on the promise of customer experience. You can expect us to continue to do that.

Operator, Operator

Our next question is from the line of Brent Bracelin of Piper Sandler. Please go ahead. Your line is open.

Brent Bracelin, Analyst

Thanks for taking the question here. I wanted to go back and touch base around the Generative AI journey here. I think it was about a year ago, you first started talking about and integrating AI into the platform. I know early on, we had fears that it might be a drag on margins as you take on additional costs. But if I look at margins, gross margins, they've actually gone up in the past year. So what have you learned as you've integrated AI into the platform regarding the opportunity for HubSpot to leverage AI? What parts of the AI strategy are you confident that it's going to work, and which parts do you think there's less optimism?

Yamini Rangan, CEO

It's a great question. It has been a year plus since we started launching our AI innovations in March last year. Our strategy has been twofold. The first one is that we would embed AI into our hubs and the entire platform. We are not going to charge a separate cost for AI or build a separate SKU. The rationale behind that strategic choice was to remove friction for our customers to introduce as much innovation to their day-to-day work and then drive adoption. If you look at that strategy, it is working. The best point I can make is the launch of Content Hub. We launched Content Hub as part of the spotlight, and if you look at the features driving adoption and the higher attach rate of Content Hub, it's all AI features. Content Remix and our partners love showcasing Content Remix to our customers. When customers see Content Remix, they immediately get excited and they begin to adopt it because you can take one piece of content, maybe a written blog, and convert it into videos, social posts, emails, and it does so beautifully while saving customers a ton of time. Our strategy of embedding AI into the Hub and platform is working well. The second bet is that we want to add a ton of value before we begin to monetize it separately. That is also playing out. We're working to see repeat usage of customers, and we are definitely seeing traction in Enterprise and Pro tiers where we have driven adoption. We will also be principled about making sure that the value is repeatable before we begin to monetize. Those are the things that are working well. If I step back and say, how is AI developing, it's kind of like how the Internet began with networking infrastructure layers and large language models; it takes time for application innovation to take place. We are quick in terms of innovation but strategically patient in seeing this technology transformation take shape for our customers.

Dharmesh Shah, CTO

Just one quick note to add since we're talking about margins, developments we see in the AI industry overall is a continuous and relatively dramatic reduction in the cost for these flagship models. We've seen OpenAI lead the field. Cloud has come out with a comparable flagship model that's close to GPT. They are open-source models now. OpenAI just announced another 30% to 50% reduction in price. So, we're seeing dramatic decreases in the cost of rolling out these AI features. We're not anticipating any impact on margin in the near term.

Operator, Operator

Thank you. Our next question today is from the line of Gabriela Borges of Goldman Sachs. Please go ahead, your line is open.

Gabriela Borges, Analyst

Good afternoon. Thanks for taking our questions. Yamini, I wanted to follow up on the prepared remarks around HubSpot achieving HIPAA compliance. Help us understand how meaningful this milestone is. Is there a way to think about what percentage of deals perhaps you wouldn't be invited to because you didn't have HIPAA compliance or how much this expands the TAM opportunity for you now that you have access to those customers in healthcare and financial services? Any color that would be helpful.

Yamini Rangan, CEO

Yes, Gabriela, thank you so much for that question. Yes, we are pretty excited about this fairly big milestone; our partners are super excited, our customers are excited about this. To take a step back, what we announced in Q2 is that we're making it easy for customers to protect sensitive personal information to be able to support compliance with regulations like GDPR and HIPAA. What that means is that we will now support audit logging, authentication features, account security recommendations, all those things that customers need. But more importantly, it will help us open up our TAM and address the needs of customers in verticals like healthcare, financial services, and insurance. This is an exciting long-term opportunity, and we think it will make HubSpot a great solution for those verticals and customers with those kinds of use cases. In terms of Q2, the momentum out of the gate and customer interest has been great. The majority of activations are from our enterprise customers, which is not surprising because they have the most sophisticated needs for managing sensitive data. We have seen healthy pickup, both in ASP and conversion rates in those areas. There's a lot more to come, but it certainly makes us an even better fit in larger portions of the market.

Operator, Operator

Our next question today is from the line of Elizabeth Porter of Morgan Stanley. Please go ahead, your line is open.

Elizabeth Porter, Analyst

Great. Thank you very much for the question. I wanted to ask about the net new customer additions in the quarter. When we back out Clearbit from last quarter, it does look like additions improved sequentially. It sounds like we're starting to see some of the benefit from higher new logos under the new pricing model. My question is, how should we think about the unlocked volume of new customers under the new pricing model, and any change to the initial view for roughly 10,000 additions per quarter through the year? Thank you.

Kate Bueker, CFO

Yes. Thanks, Elizabeth. We are encouraged by another quarter of really strong customer additions. As I mentioned in the prepared remarks, the strength was again driven by healthy additions at the low end, a trend we've been seeing for four to six quarters now. Net customer addition is not an input metric for us. It is an output metric, and it moves around from quarter to quarter. Given the volume is really at that low end, in any given quarter, we typically run multiple experiments within the starter customer base. These experiments could include optimizing purchase flows, optimizing activation, and there may be pricing and packaging plays or demand funnels in any quarter. It’s hard to tease out one impact from another based on how many different things are happening. In particular, it's hard to tease out the impact of the new pricing model. For Q2, we did see a nice step-up in Pro customer additions, which I would assume is more directly associated with the new seat model. As I think about the back half of the year, we have a number of large cohorts from a year ago coming up for renewal in the next couple of quarters. Given this combination and the fact that you heard from both Yamini and myself about ongoing macro weakness, particularly in small business, my expectation for net additions in the back half of the year is $9,000 to $10,000 per quarter.

Operator, Operator

The next question today is from the line of Terry Tillman of Truist. Please go ahead, your line is open.

Dominique Manansala, Analyst

Hi, this is Dominique Manansala on for Terry. Thanks for the question. Looking at some of the significant currency moves recently, I'm curious whether your foreign exchange outlook has changed at all and if you're considering any additional hedging strategies?

Kate Bueker, CFO

Yes. Thanks for the question. You are absolutely right; currency has been incredibly volatile in recent times. We tried to provide some guidance or perspective in our guidance at this time last quarter. We were expecting a bit of a tailwind to the full year from currency. We’re basically neutral for the year. In terms of hedging, you’ll see in our 10-Q, we have started to do cash flow hedging that has a modest impact on overall revenue.

Operator, Operator

The next question is from the line of Parker Lane of Stifel. Please go ahead, your line is open.

Parker Lane, Analyst

Yeah. Hi. Thanks for taking the question. Yamini, you cited a bunch of really healthy metrics on the service side of the business, including the 100-plus seat customer cohort being up 55%. I was wondering if you could talk about maybe two or three of the features that came out as part of the relaunch that are most appealing to those larger customers, and if the composition of the competitors has changed at all, given the number of features you brought to the table.

Yamini Rangan, CEO

Thank you, Parker, for that question. I am excited about the innovation within Service Hub and also very excited to see customer adoption. Three big things happened with the Spotlight and Service Hub relaunch in April. The first is that for the first time, we are actually serving the customer success persona within our customers. That brings together customer success and support teams. We know customer success leaders right now care a lot about retention. That's why we launched a new workspace specifically for customer success managers to track and manage their book of business, and that's been very welcome by our customers. The second is that we overhauled the help desk, which now has a new and unified ticket and conversation interface. With the new unified help desk interface, we’ve seen a 200% increase in the portals closing tickets in the help desk and an increase in the number of portals that are closing 20-plus tickets, showing that we're continuing to drive usage there. Lastly, it’s not just one specific enterprise feature, but a whole set like advanced SLAs, more robust routing, better support management, all aimed at serving our upmarket customers who need more sophisticated support features. The momentum we see in Service Hub isn’t just hub-specific. It's the value of having service, sales, and marketing teams work together that provides a unified view of their customer, and that’s what we’re pleased about.

Operator, Operator

Thank you. The next question is from the line of Ken Wong of Oppenheimer. Please go ahead, your line is open.

Ken Wong, Analyst

Great, appreciate you guys giving me a question. Just wanted to circle up on a dynamic you called out last quarter where you mentioned a shift towards lower quality leads. Is there anything to report as to whether that has normalized back to partner-source leads, or are you still running into that issue?

Yamini Rangan, CEO

Ken, thank you so much. Yes, it has normalized back. It is really in a healthy place right now. In Q1, we shared that we saw a mix shift at the top of the funnel from partner-sourced and qualified leads to more of rep-sourced leads that take more time. We're definitely seeing good progress on the partner and qualified lead side. There are a couple of ways we engage with partners. The first is co-selling, where the partner team and the HubSpot sales teams work closely together. This co-selling motion has been doing really well and has been consistently up in the first half of this year. The partner sourcing motion, where partners bring more deals, saw a bit of weakness in Q1. But as soon as we saw this in early Q2, we rolled out clear enablement plays for both partners and partner development resources within HubSpot. We’ve been laser-focused on execution. Based on all this, we’ve seen that mix shift back to what we normally see and what we are happy with. I feel pretty good about the trends going into the second half, and the mix of demand as we go back into the second half of the year.

Operator, Operator

Our next question is from the line of Brian C. Peterson of Raymond James. Please go ahead, your line is open.

Johnathan McCary, Analyst

Thank you. This is Johnathan McCary on for Brian. Maybe kind of related to that last question, but I'm curious after a few months now of the new pricing model, how would you say the sales reps have adjusted to that? Was there any sort of learning curve they're still in the process of, or was that a relatively seamless transition for the team?

Yamini Rangan, CEO

Thanks a lot. I think there is a learning curve, and our sales teams as well as the partner teams are settling into that seats motion. As we stated, the changes made as part of this pricing change were to lower the price point to get started with HubSpot, remove the seat minimums so our customers can upgrade to Pro and Enterprise without any friction, and create a core seat for customers. We expected ASPs to decrease, the volume of customer wins to increase, and better upgrades over time. It’s a slightly different motion for our sales reps, and it's a higher velocity motion. We have focused on enabling our reps on the steps they can take, the qualifications they complete, and how to progress deals quickly. We're beginning to see the overall volume offset the ASP drop, and we’re pleased with the progress, but it's taking a little bit of time, and I’m happy with how our sales teams have responded to the change in motion. Overall, it's progressing as we want it to.

Operator, Operator

Thank you. Our next question is from the line of Tyler Radke of Citigroup. Please go ahead, your line is open.

Michael Berg, Analyst

Hey, this is Michael Berg on for Michael Turrin. Thanks for taking the question. I wanted to ask about the new pricing model in a slightly different manner. One of the points you've referred to several times on this call is the starter upgrade motion playing up over time. I'm just curious how and what you are seeing today in that motion and whether that has picked up any meaningful amounts since the new pricing model was launched?

Yamini Rangan, CEO

Thank you so much for the question. We pay a lot of attention to our starter upgrade rates. The good news is that starter cohorts continue to upgrade at healthy rates, pretty consistent with what we've seen over the last few years, even with the healthier volumes seen over the last few quarters.

Operator, Operator

Our next question today comes from the line of Siti Panigrahi of Mizuho. Please go ahead, your line is open.

Siti Panigrahi, Analyst

Thanks for taking my question. Returning to the seat-based pricing changes, you previously discussed this new model being net neutral to ARR for the year. I wonder if you could provide an update there? What do you see in terms of the volume versus price dynamics in Q2 and until August, and is this still a net neutral ARR impact?

Kate Bueker, CFO

Yes, Siti, thanks for the question. We still expect the seat model change to be neutral to growth for 2024. As you heard from Yamini, we continue to make progress with the new sales motion and expect another sequential improvement in Q3. We also see really solid expansion trends. We talked about a multi-point increase in our net revenue retention at month three for customers on the new model as they purchase what they need at startup and upgrade in real-time. That gives us added confidence in a 6 to 8-point increase in net revenue retention for seat-based customers shared last quarter.

Operator, Operator

Thank you. Our next question is from the line of Kirk Materne of Evercore ISI. Please go ahead, your line is open.

Kirk Materne, Analyst

Yes. Thanks very much. Kate, there was a very nuanced change, but you did pick up CapEx a little bit from 4% to 5%. I'm just curious if that's AI-related? I realize it's a small absolute number, but just kind of curious how we should read that if there's anything directionally to consider as we start thinking about 25% as well.

Kate Bueker, CFO

Yes, I appreciate the question. The largest part of our CapEx is actually capitalized software. There are a couple of things that are driving that increase from what you noticed as 4% to 5%. One is that we've been investing heavily in our product and engineering organization, and that, in itself, would lead to an increase. The other thing we're seeing is that the share of time our engineering and product teams are spending developing new features and functionality is increasing, which is driving that uptick in CapEx.

Operator, Operator

Thank you. Our next question is from the line of Eamon Coughlin of Barclays. Please go ahead, your line is open.

Eamon Coughlin, Analyst

Hey, guys. Eamon Coughlin on for Ryan Macwilliams. Thanks for taking the question. In Q2, can you just maybe touch on the contribution to net retention from pricing, seats, tiering, and cross-sell? Has this changed for Q2? Could this change as the price change rolls through the existing base?

Kate Bueker, CFO

Thanks for the question. Let me take a step back and touch on net revenue retention in general. As a reminder, net revenue retention for the quarter was flat at 102. We saw really a consistent set of trends influencing net revenue retention for Q2. First, we continue to see strong gross retention in the high 80s. Second, we’ve been seeing stabilization over the last few quarters on downgrades, and that continued into Q2, particularly with season contacts. Finally, we've been experiencing some challenge with our upgrade motions, and we faced those challenges in the quarter with our expansion motion. Even though we've seen those early positive signs with the new seat-based pricing model that you mentioned. Overall, we believe net revenue retention will stay around 102, give or take a point in the back half of the year, primarily influenced by improvements in the external environment and the maturing of that seat-based model, which will take a few more quarters before we can expect anything to trend up significantly.

Operator, Operator

Thank you. Our next question is from the line of Taylor McGinnis of UBS. Please go ahead, your line is open.

Taylor McGinnis, Analyst

Yeah. Hi, thanks so much for taking my question. Since there is some rounding in the constant currency growth rates and numbers, Kate, are you able to offer a little bit more color on how the second half 2024 constant currency revenue growth guide now compares to the implied second half 2024 constant currency revenue growth guide given last quarter? It would suggest it might be a little lower. If that’s true, can you comment on what might be driving that extra conservatism on the back of what looked like to be a really solid Q2 and if you are seeing anything at start of Q3 and in July that might be driving some of that, thank you very much.

Kate Bueker, CFO

I appreciate the question. Our updated full-year guidance is up by $15 million at the midpoint. This includes more than $10 million of FX benefit in the back half of the year. It’s based on the latest forecast, knowing that FX has been highly volatile. When you take a step back, I'll reiterate comments made in the prepared remarks and in earlier questions: the external environment remains challenging. There’s a high degree of uncertainty in the macro and foreign exchange markets. As always, we ran various scenarios while evaluating our back half guidance, and we want to provide guidance we feel confident in our ability to achieve, which is what we did this quarter.

Operator, Operator

Thank you. The final question in the queue today is from the line of Jackson Ader of KeyCorp. Please go ahead, your line is now open.

Jackson Ader, Analyst

Great. Thanks for taking our questions, guys. I'm curious, I think we've lapped the initial pilot program on the seat-based model from Australia and New Zealand, so I'm just curious what the behavior is when some customers that might have signed annual contracts come up for renewal after that first year.

Yamini Rangan, CEO

What we have shared over the last quarter on the pilot program in ANZ still holds, which is we see a strong and healthy customer base because people are buying what they want, upgrading as they need it, and we see net revenue retention month 12 is 6 to 8 points higher than what we see under the legacy model.

Operator, Operator

Thank you. This will conclude the HubSpot Q2 2024 earnings call. Thank you to everyone who was able to join us today. You may now disconnect your lines.