Earnings Call Transcript
HUBSPOT INC (HUBS)
Earnings Call Transcript - HUBS Q1 2024
Operator, Operator
Good afternoon, and welcome to the HubSpot First Quarter 2024 Earnings Conference Call. My name is Harry, and I'll be your operator today. I will now hand over to Ryan Burkart, Senior Director of Investor Relations, to begin. Please go ahead.
Ryan Burkart, Senior Director of Investor Relations
Thanks, operator. Good afternoon, and welcome to HubSpot's First 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, the ability to realize the anticipated benefits of the Clearbit acquisition, expected growth, FX movement and business outlook, including our financial guidance for the second 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 on Friday, May 10 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 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 first quarter and 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 joining us on the call. I'll begin by sharing our Q1 2024 results, update you on what we are seeing from a demand perspective and wrap up by highlighting our recent product launches from the Spring Spotlight and our ongoing efforts to accelerate innovation for our customers. We kicked off the year with solid revenue growth of 23% year-over-year in constant currency. We delivered another good quarter of operating margin growth with 120 basis points of margin expansion year-over-year, driving our operating margin to 15%. Total customers grew by 22% year-over-year to over 215,000 customers globally, driven by over 11,700 net customer additions in the quarter. I am thrilled to see more customers consolidating on HubSpot as their preferred customer platform for growth. Our Q1 results highlight consistency in why we win. Customers across all segments are consolidating on HubSpot because it is easy to use, easy to scale and delivers fast time to value. In the lower end of our segment, we saw continued strength in net customer additions driven by free users upgrading to Starter and pricing optimization plays, including our seats model change driving Starter and pro customer growth. In upmarket, the big themes of the quarter were continued strength in Sales Hub and multi-hub as customers consolidate on HubSpot as their platform of choice. Sales Hub is emerging as a clear winner driven by the innovative features we launched at INBOUND. Our customers are adopting the new prospecting workspace and advanced sequences as a way to drive better alignment between marketing and sales. In addition, we have opened up our Smart CRM to support UI customization, deliver broader governance and permission capability and deeper integrations like the sync with LinkedIn Sales Navigator, which is driving up-market momentum. Our land and expand strategy is working, and we have three main front doors for customers: Marketing Hub, our original hub, where we continue to innovate; Sales Hub, where we see huge momentum; and multi-hub as customers consolidate on HubSpot. Over 35% of Pro+ customers are now on three or more hubs, and we have more room for growth as we drive innovation. We're thrilled to see the continued momentum in Sales Hub and multi-hub and it's a clear validation that our strategy of going from app to suite to customer platform is working. Switching gears to macro. After a strong finish in Q4, we saw a return to weaker demand conditions in the first quarter, similar to what we experienced in 2023. The buyer urgency that we saw in December did not carry over into Q1. Instead, we saw a return to higher scrutiny of budgets, more decision-makers getting involved and a need for more demos and proof-of-concepts before signing on purchase decisions. At the top of the funnel, we saw lead flows shift away from higher quality inbound and partner-sourced leads to lower quality rep-sourced leads. This shift plus the lower buyer urgency slowed down deal progression and, in some cases, pushed deals out of Q1 and into Q2. While deal close and upgrade rates remain under pressure, we continue to see strong customer dollar retention in the high 80s, which underscores the value that our unified customer platform delivers for our customers. Now for an update on seats. In early March, we introduced a pricing change based on seats to lower the price points to get started with HubSpot and remove the pricing friction for customers to upgrade from Starter to Professional edition. While we continue to be very excited about the model change for our customers on HubSpot, the timing and speed of the change caused a negative impact on our business in March that will likely persist for a couple of months. As a reminder, we expected this change to lead to lower initial ASP, higher volume of customers, and higher rates of upgrades over time. In March, we saw faster adoption of the seats model by customers, which led to a more immediate impact of lower ASPs, but a slower pickup in the volume of new customers. We're seeing more positive trends in April, but it's going to take a few months for the higher volume of additions to offset the initial lower price. Having said that, I want to be clear that we have high conviction that the seats pricing change is the right decision for our customers as it will allow them to get started and scale more easily with HubSpot. And it is the right decision for HubSpot as it will allow us to bring many more customers onto our platform, grow our net revenue retention rate as customers add more seats over time, and align pricing with the value we are creating from our AI-powered Smart CRM. Okay. Let's talk about product innovation, which has been a consistent theme over the past few years and gives me high confidence in our ability to drive durable growth. The pace of innovation has accelerated in our industry with AI, and we are setting that pace for scaling companies. Innovation is happening in days and weeks, not months or years. Marketing, sales and service teams are going through a major technology shift. But keeping up with that innovation can be a full-time job in and of itself. So to make it easy for our customers to stay ahead, we've decided to have not one but two big launches each year, INBOUND and Spring Spotlight. You all have seen INBOUND and our customers love the innovation that comes out each year. In April, we launched our first Spring Spotlight that featured over 100 new product releases with over 70 AI features. And we saw over 200 million earned media impressions and nearly double the engagement rate on social channels compared to INBOUND 2023. Super exciting. I want to highlight three big areas of innovation from our Spring Spotlight for you: Content Hub, Service Hub and HubSpot AI. HubSpot gives marketers a better way to grow with INBOUND marketing, and we are now doing it again by reinventing content marketing. We're taking CMS Hub, which used to be about website and digital presence and transforming it into Content Hub, powered by AI to create and manage content across the entire customer journey. As part of Content Hub, we launched AI content creation to make it easy to create multilingual content. Content remix to make it easy to create full pipeline of content based on a single asset. And brand voice to make it easy to generate content that has consistent brand voice. Our goal is simple. We want AI to power every content use case and light the way into the future of content marketing. Let's talk about Service Hub. I'm really excited about the innovation here. We believe that delighting current customers is even more important than acquiring new customers. So we're relaunching Service Hub to bring customer support and customer success teams together. To help scale customer support, Service Hub now includes advanced SLAs, more robust routing and support management tools. To help customer success teams drive retention, we launched a new customer success workspace that can help CSM handle their tasks, track their pipeline and see customer health scores with clear next steps. Service Hub now includes more than a dozen AI-powered tools like GPT-powered chatbot, real-time recommendations and call summaries to speed up resolution. We're embedding AI to make Service Hub even more valuable and delivering a unified customer platform. As one of our customers said, 'By bringing marketing, sales and service teams together on HubSpot, we're removing the guesswork for our leaders and giving them the confidence that customers are getting what they need.' As we set the pace of innovation with AI embedded across all hubs and our customer platform, we are keenly focused on driving adoption and usage. Adoption has continued to increase with over 50% of enterprise portal using AI features along with over 25% of Pro portals. Customers are leveraging AI for personalized content generation, call summarization and are automating their go-to-market motions to drive productivity and growth. There is a lot more room to drive repeat usage, and we are laser-focused on helping our customers grow with HubSpot AI. Overall, we're still in the early innings of transforming from a suite to a customer platform. We're becoming the de facto standard for scaling companies, and we are setting the pace of innovation with AI. This gives me confidence in our ability to drive long-term durable growth. With that, I'll hand it over to our CFO, Kate Bueker, to take you through our financial and operating results.
Kate Bueker, CFO
Thanks, Yamini. Let's turn to our first quarter 2024 financial results. Q1 revenue grew 23% year-over-year in both constant currency and on an as-reported basis. Q1 subscription revenue grew 23% year-over-year, while services and other revenue increased 15% on an as-reported basis. Q1 domestic revenue grew 21% year-over-year. International revenue growth was 24% in constant currency and 25% as reported, now representing 47% of total revenue. We added over 11,700 net new customers in the quarter, including the onetime addition of nearly 800 customers from the acquisition of Clearbit. This brings our total customer count to over 215,000, growing 22% year-over-year, fueled by our continued strong Starter customer additions. Average subscription revenue per customer was $11,400, flat in constant currency and up 1% year-over-year on an as-reported basis. We continue to see a positive impact on ASPs from multi-hub adoption of our professional and enterprise customers, offsetting the impact of large new cohorts of low ASP Starter customers in recent periods. In addition, Clearbit added approximately a 1 point benefit to ASP in Q1. As I shared in February, we expect to maintain net customer additions around 10,000 per quarter throughout 2024 with ASP down low single digits in constant currency. Gross retention held in the high 80s in Q1, and net revenue retention was 101% or 102% if you remove the impact of Clearbit in the quarter. While we have seen a stabilization in downgrade rates over the last couple of quarters, customer upgrade rates were more challenged in Q1. We expect similar trends to continue in the near term with net revenue retention holding around current levels throughout 2024. Calculated billings were $641 million in Q1, growing 22% year-over-year in constant currency and 20% as reported. The remainder of my comments will refer to non-GAAP measures. Q1 operating margin was 15%, up 1 point compared to the year-ago period. We continue to see solid progress towards our intermediate operating margin targets across the business. Net income was $89 million in Q1 or $1.68 per fully diluted share. Free cash flow was $104 million in Q1 or 17% of revenue. Finally, our cash and marketable securities totaled $1.8 billion at the end of March. In connection with the quarter close, we discovered an error in our calculation of the cost of goods sold related to how we calculate a credit in our hosting agreement with AWS. As a result, we overstated our subscription cost of goods sold by a total of $14 million since Q4 of 2021. Calculating this credit correctly resulted in a $2 million pickup to operating income in each of Q1 2024, in Q1 2023. As you update your models, you should assume a positive $6 million contribution to operating income for the remainder of the year, which is included in our guidance. This had no impact on revenue, ARR, operating cash flow and free cash flow in the current or prior periods. We have concluded it was not material to prior periods and we'll be correcting the relevant financial statements for comparative purposes in our upcoming 10-Q, which we expect to file on Friday, May 10. Before we dive into guidance, I wanted to touch quickly on the macro environment. As Yamini shared, we continue to operate in a challenging external environment and the buyer urgency we saw in December did not carry over into Q1. Customer decision-making is measured and budgets remain tight. Our guidance assumes that these weak conditions persist through 2024. Now let's review our guidance for the second quarter and full year of 2024. For the second quarter, total as reported revenue is expected to be in the range of $617 million to $619 million, up 17% year-over-year at the midpoint. We expect foreign exchange to be a 1 point headwind to as-reported revenue growth in the quarter. Non-GAAP operating profit is expected to be between $92 million and $93 million. Non-GAAP diluted net income per share is expected to be between $1.62 and $1.64. This assumes 53.3 million fully diluted shares outstanding. And for the full year of 2024, total as reported revenue is expected to be in the range of $2.55 billion to $2.56 billion, up 18% year-over-year at the midpoint and consistent with our prior guidance. We now expect foreign exchange to be roughly a 1 point headwind to as-reported revenue growth for the full year. Non-GAAP operating profit is now expected to be between $426 million and $430 million. Non-GAAP diluted net income per share is now expected to be between $7.30 and $7.38. This assumes 53.5 million fully diluted shares outstanding. As you adjust your models, please keep in mind the following: We still expect CapEx as a percentage of revenue to be roughly 4% and free cash flow to be about $365 million for the full year of 2024, with seasonally stronger free cash flow in Q4. And with that, I will hand things back over to Yamini for her closing remarks.
Yamini Rangan, CEO
Thank you so much, Kate. I want to close by sharing what keeps us grounded and excited about the future. We crown ourselves on not what is changing today but what will not change for our customers. Our customers will need easy-to-use solutions that can help them grow. Our customers will need us to drive innovation so that they can compete with bigger companies in the age of AI. This is exactly what we are focused on. Our customer platform is gaining momentum with more front doors like Sales Hub and multi-hub, and they remain focused on a massive opportunity to help millions of organizations grow. Okay. I want to thank our customers, partners and investors for their continued support. And a 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
And our first question is from Samad Samana of Jefferies.
Samad Samana, Analyst
It's great to see the healthy growth for HubSpot. A lot of other SMB software vendors have struggled and HubSpot has been able to maintain that durable 20% plus growth. So it's good to see that. Can you help us understand how much of that is more traction with larger customers offsetting SMB weakness? And if that's the case, as we think through the rest of 2024, can market share gains in that 500 to 5,000 employee segment of the market keep powering this durable growth?
Yamini Rangan, CEO
Thank you for the question, Samad. We are still navigating a cautious buying climate, which is evident across all segments of our customer base. Nevertheless, in this environment, customers are consolidating on fewer platforms, and we have become the preferred choice. This is why we have consistently focused on lower total costs of ownership, greater value, and quicker time to value, which has been our strategy during this soft macro period. Regarding the 500 to 2,000 segment compared to the lower environment, we are observing cautious strength in both areas. In the lower environment, we are reducing friction, lowering prices, and enhancing value. For our Starter suite customers, the complete customer platform we offer is an exceptionally attractive value proposition, which explains the strength in net customer additions. More importantly, once customers choose HubSpot, they tend to stay, reflected in our high customer dollar retention in the 80s range. For the upper end of the segment, time to value is critical. In conversations with larger customers, their priority is to get up and running and have their teams using our platform within weeks, rather than the 8 to 10 months typical with other legacy platforms; this advantage is why we succeed. We are investing in product innovation and delivering fast time to value. While the environment remains competitive, we believe we are making the right moves towards sustainable growth as we transition from an application to a suite to a platform focus. We are dedicated to innovation across all segments, particularly with the integration of AI into the platform.
Operator, Operator
Our next question today is from the line of Mark Murphy of JPMorgan.
Mark Murphy, Analyst
So I'm curious if you have any sense of the underlying driver of the buyer urgency having picked up in December and then weakening during Q1. It seems like a bit of a quick oscillation there. And just in terms of the buyer behavior year-to-date, how does it feel if you compare it to one year ago when we were a little closer to the trend line changes for interest rates and inflation?
Yamini Rangan, CEO
Mark, this is Yamini. Thank you for the question. Let me share kind of what we saw and maybe provide some contrast across the different periods that you mentioned. We saw choppiness in the environment in Q1. And very specifically, we saw tight budgets, more decision-makers, more meetings, more demos. And even for the first time, more proof of concepts before customers got ready to make purchase decisions. And as I mentioned before, this was different than what we saw in December, even accounting for the seasonality differences between Q4 and Q1, December felt more like an anomaly and it felt like in Q1 we are back to a very cautious buying environment. Now it certainly could be what you mentioned, which is just caution in terms of interest rates in the environment. So it felt more like what we saw throughout 2023, and December felt like an anomaly. So look, we know that month-to-month, quarter-to-quarter, the environment might look different, that's why we have consistently leaned on the same playbook, which is, in our case, the playbook is communicating business value, communicating the value of consolidating and lowering the TCO and driving a product roadmap, which is built in with innovation, so we continue to deliver the needs for the customers across these segments.
Operator, Operator
Our next question today is from the line of Alex Zukin of Wolfe Research.
Alex Zukin, Analyst
I wanted to explore the differences between macro and micro factors, particularly regarding buying urgency, sales cycles, demos, and POCs, and how these might differ between SMBs and larger markets. Did you notice if the pricing change extended the sales cycles at all? Also, for Kate, do you have any information on Clearbit's contributions to revenue and billings for the quarter?
Yamini Rangan, CEO
Yes, I'll address the first question about the macro and pricing factors. We introduced the seating change in March, which resulted in faster adoption by customers of the seats driving model compared to our experiences in ANZ and during our pilot phase. This increase in adoption led to a more rapid decline in average selling price. However, we are starting to see improvement that may help counterbalance this price drop. This situation differs from the macro changes we've observed, where the buying environment remains cautious, requiring more meetings, calls, and discussions before reaching a decision. It’s challenging to separate these influences, as they both had distinct effects during the quarter. Kate, please address the second part of the question.
Kate Bueker, CFO
Yes, sure. Alex, Clearbit drove about 1.5 points to revenue growth and billings growth in the first quarter, and we still expect that Clearbit will provide about 1 point of growth for the full year.
Operator, Operator
Our next question today is from the line of Carolyn Valenti of Goldman Sachs.
Carolyn Valenti, Analyst
This is Gabriela. I wanted to ask you, Kate, on how to think about the full year guidance and the impact of macro? So full year guidance for revenue is the same, it sounds like the macro environment got a little bit worse through the quarter. So is there a company-specific dynamics to the positive outlook? Or have you always assumed a little bit of room for macro degradation as we think about the full year?
Kate Bueker, CFO
Yes, Gabriela, thanks for the question. We are holding our full year guidance, and there are a few things that are leaving us to do that. The first one that you heard from both Yamini and I in the script as well as in some of Yamini's early comments on this call. Customers are still cautious about their spending, right? Deal cycles are longer, budgets are tighter, and our foundational assumption and guidance is that this behavior will continue throughout 2024. There's also about $10 million of incremental FX headwinds from the strengthening of the U.S. dollar from this period over when we set guidance last time. And then the combination of the seat pricing model timing and the Q1 macro pressure is causing another $10 million or so of headwind in the quarter-over-quarter expectations. That said, there are some great things that we're seeing. Gross retention remains strong in the quarter. There are some marginal improvements in downgrade activity that we're seeing, particularly for seats and contacts. Our guidance philosophy hasn't changed. We want to have a high degree of confidence in the guidance that we share, and we think we achieved that in what we put forward today.
Operator, Operator
Our next question is from the line of Keith Bachman of BMO.
Keith Bachman, Analyst
Yes. I apologize for the background noise at the outset. I wanted to come back to that for a second, and the last question and really focus on seats and pricing. And so you mentioned that, Kate, that the transition was maybe a $10 million headwind quarter-over-quarter. But how does that reflect as you think of the full year? Does the seat-based pricing actually turn into a tailwind because there's greater adoption as we get through the year? But maybe just talk about what happened during the quarter, but how do you see that transitioning as we get to exit run rate for the year?
Yamini Rangan, CEO
Keith, this is Yamini. Let me maybe start with explaining what the changes and what we expect, and then Kate can take the second part of how this impacts our guidance for 2024. So just to step back, why did we make this change? We lowered the price of Starter to make it easy for customers to get started with HubSpot. We removed seat minimums to make it easy for customers to upgrade to Pro and Enterprise. But the real benefit of the model. This is why we like it so much is it leads to fewer downgrades and more upgrades over a period of time. So in a nutshell, this pricing change allows us to acquire more customers who can start with exactly what they want and can buy more when they need it. And that is good for customers because it leads to healthier customer cohorts, it's really good for HubSpot. Now as we mentioned in the prepared remarks, what surprised us is that we saw a higher percent of customers adopt seats in month 1 compared to what we saw in the pilot. So we expected the ASP to go down, volumes to go up and offset each other immediately. But because more customers are adopting the model, we're seeing a sharper decline in ASPs, and it's going to take a couple of months for the volume of customer additions to catch up and offset that ASP decline. So there is a short-term trade-off, but we are very convinced that this is right thing for customers. This is right thing for HubSpot, and therefore, it's a right thing for all of you as investors. Having said that, Kate, I'll let you talk about the guidance point.
Kate Bueker, CFO
Yes. Let me add a couple of specifics to the overall story that Yamini shared. We expected to see customer ASPs fall as part of the seat model change. Because of the pace, it happened quickly in March. And we saw ASPs fall by 20% to 25%. This is very consistent with what we saw in the pilot that we ran in ANZ. In the pilot, we also saw an increase in deal velocity that roughly offset the lower ASPs. And so the end result there was that new customer ARR was basically neutral. And because of the sort of sharp pace of adoption, we did not see the velocity in March step-up enough to offset the lower ASP. Now April was better but not enough to make up the new customer ARR to be neutral. And April short-cycle deals, which are kind of a leading indicator to what we would see, actually look very similar to the pilot, which is highly encouraging. The other piece of good news is that the upgrade rate for customers that are on the new seats model is healthier and very similar to what we saw in the pilot in ANZ. It's about a 6- to 8-point improvement in net revenue retention depending on the addition. So the motion is accretive. It's just going to take a little bit longer than we initially thought for that to play out. And as a result, what we now expect is that the seat model change is going to be neutral to overall ARR for 2024.
Operator, Operator
Our next question is from the line of Rishi Jaluria of RBC.
Rishi Jaluria, Analyst
I apologize for any background noise. I wanted to dive a little bit deeper into Clearbit. Can you give us a sense for how traction with the product and the integration is going? And maybe how all the data that you're getting from Clearbit can play into your broader AI strategy?
Yamini Rangan, CEO
Rishi, thanks a lot for the question. It's early days with Clearbit, but it's going really well. It's been 1.5 quarters since the team got integrated into HubSpot. Now if we take a step back, the vision that we have is really to bring that type of enrich data and powerful AI tools so that can drive insights into our entire customer platform. We think that this is a way for us to accelerate our overall customer platform vision. And we are seeing that play out. So Phase 1 of integration was really to bring the Clearbit product into the hands of our installed base customers. And that is going well. It's again early days. But really, the thing that we are excited about is natively bringing the company enrichment data, the instance data and the contact enrichment data natively into HubSpot, so it can power all use cases. And this is the way we see the world operating. When you start thinking about a campaign, you already have the information about the companies that look like your customers and then you can apply AI tools on top of that so that your campaigns can be supercharged. So the combination of enrich data, AI, and a unified customer platform is really powerful, and we feel very good about where we are going in terms of that vision.
Operator, Operator
Our next question today is from the line of Elizabeth Porter of Morgan Stanley.
Elizabeth Porter, Analyst
I wanted to revisit a question about the pricing change. It was encouraging to see existing customers quickly adopting more seats, but I would like to focus on the volume from new customers. What do you think are the main obstacles in attracting new clients to the seat model? Is it primarily a matter of education and the availability of the new model, or is there less willingness to explore new solutions? Additionally, are there any adjustments in your go-to-market strategy to engage new customers?
Kate Bueker, CFO
Why don't I just start, Elizabeth, with a bit of a clarification. We moved to the seats model pricing for new customers only at the beginning of March. The existing customers will begin being migrated over to the seats model in the back half of 2024. That's going to take some time. As we talked about last quarter, we're going to migrate customers at the same ARR at which they are currently on our platform. And then we will cap any increase on their subscription at 5% when they renew their following time.
Yamini Rangan, CEO
I think in terms of resistance or any additional actions we need to take, customers are responding positively to the model and are adopting it. However, it represents a significant change in our go-to-market strategy. Our sales representatives need to accelerate their efforts and clearly identify which customers are Starter with one or two seats versus Pro customers with more seats. It takes some time to settle into this new approach. That said, we have made significant progress in enabling our entire go-to-market strategy and have clarified how partners and their representatives should approach it. While it may take a little while for the model to fully establish itself, the key indicator we are observing is strong customer adoption.
Operator, Operator
Our next question today is from the line of Kirk Materne of Evercore ISI.
Kirk Materne, Analyst
Yamini, in terms of your partners, I mean, there definitely seems to be a lot of interest around AI more broadly. Is there any chance that proof of concepts can move into production and that can help upgrade rates by the end of the year? Or is it a longer-term dynamic? I know it's a bit of a guessing game, but I was just kind of curious about how you see the functionality you're bringing to bear with AI playing out over the course of the year. I realize it's a multi-year journey, but just kind of curious on how that dynamic is going thus far?
Yamini Rangan, CEO
Yes, that's a great question. Your inquiry touches on two aspects: AI usage and adoption, and proof of concept. The proof of concept is influenced by our current cautious buying cycle. Customers are interested in consolidating on our platform and want to ensure everything is solid before committing further. Regarding AI, we launched our first set of products about a year ago, and most are now generally available. In April, as part of our new Spotlight initiative, we introduced around 70 additional AI features. We're observing that some customers are actively leading with AI, exploring how to implement it across various departments within their go-to-market strategies, and they are progressing quickly. This is evident in the adoption of content use cases, service summarization, call deflection, and Sales Hub AI features. Conversely, many customers are still experimenting or figuring out their initial use cases, which will require more time to realize value. This year, our focus is on encouraging repeat usage. From a product standpoint, we're dedicated to fostering this, and from a go-to-market angle, we aim to educate customers on how their data can be leveraged for enhanced productivity and growth. While it may take some time for AI usage to fully take off, we are excited about the innovation and the pace of customer adoption we've seen so far.
Operator, Operator
Our next question is from the line of Parker Lane of Stifel.
Parker Lane, Analyst
Yamini, addressing the top of the funnel. You said you saw a lead flow shift away from high-quality INBOUND to partner source leads. With partner source leads to lower quality rep source leads, how would you characterize that lower quality rep source lead? Is that a particular type of customer that's showing up there? Is it those with worse retention characteristics, worse characteristics or a combination of all of that?
Yamini Rangan, CEO
Parker, great question. Thank you for asking me this question. Maybe I'll take a minute to explain what I meant. So what we saw in Q1 was a mix shift from INBOUND and partner source leads to more rep source leads. Now INBOUND leads are when customers come in, raise their hands and say that we have a need and we want to kind of move quickly. Partner source leads are when partners have had conversations with our prospects and bring us a qualified lead. These two lead types tend to be more qualified and more ready to purchase. Now in the beginning of the year, we saw a mix shift down from those two sources, and we compensated that by rep source leads. Our reps talking to customers, calling customers. Now the only difference is that the rep source leads take more time to progress in the sales pipeline. It's not an immediate interest and ready to purchase customer that's coming into the pipeline. It takes more calls and more demand. So the characteristics is that it takes longer, especially to progress like larger deals. And so we saw that dynamic. But in terms of retention characteristics, it's pretty much the same, right? Once customers are part of HubSpot, they get onboarded and they get activated and we focus on kind of the usage. So hopefully, that explains that mix shift comment I made. Thank you, Parker, for the question.
Operator, Operator
Our next question is from the line of Brad Sills of Bank of America Merrill Lynch.
Brad Sills, Analyst
I wanted to ask a question around the AI roadmap here. Obviously, a lot of innovation that you've highlighted here that's going into the base product. I think in the past, you've said that you're kind of looking at some of the features that could go into premium-only versions. I'd just be curious if you're finding some use cases that you think are interesting that could do that? And what are your thoughts on just that being a catalyst? I know it's further out, but could that be a catalyst for premium mix and ASP growth? Just any of those dynamics, I think, would be great.
Yamini Rangan, CEO
Brad, thanks a lot for that question in terms of like AI and how we're thinking about it. Maybe just to step back, our vision is to embed AI in all Hubs and through our entire platform. And that's exactly what we're doing. We are moving very quickly to build a robust roadmap of AI features and Spring Spotlight that we just launched and announced was full of those kinds of features. And if you think about our monetization strategy, it is threefold. When we embed AI across all Hubs and across our entire CRM, it drives adoption. We're seeing more people actually start with the full platform. They get exposed to AI, and we're beginning to see that lift in terms of overall adoption. The second thing, and you're absolutely right, we have talked about more features being at the Pro and Enterprise tiers. And in fact, we said that nearly 65% of the features that are becoming generally available in the first half of 2024 will be in the Pro and Enterprise tiers. And that's also where we are beginning to see more adoption. In the prepared remarks, I talked about 50% of Enterprise customers experimenting and leveraging AI features and 25% of Pro customers are using AI features. And when you look at that, it falls into the bucket of content use cases, service use cases as well as guided selling use cases. So all of that shows that we are on the right path. And when we do that, we're going to see kind of the upgrade rates in terms of Pro as well as Enterprise. It's still early days. And so our focus is usage, it's repeat usage and making it super easy for our customers to adopt and innovate with AI.
Dharmesh Shah, Co-Founder and CTO
Just one quick note. This is Dharmesh. If you reflect on last year, 2023 was the year of ChatGPT and chatbots, and we were early in the market with our chatbot product. This year is going to be the year of Agent AI, featuring AI software that can operate at a higher level to achieve more complex goals. That's the direction we're heading towards, and we believe it's an even more valuable functionality that we can bring to the platform.
Operator, Operator
Our next question today is from the line of Michael Turrin of Wells Fargo.
Michael Turrin, Analyst
You got Michael Berg on for Michael Turrin here. I just wanted to ask on AI in the realm of competitive landscape in moving upmarket. It seems like you guys are moving at a very fast clip and kind of taking a differentiated approach to AI. Has this helped any meaningful capacity in the competitive landscape, particularly upmarket?
Yamini Rangan, CEO
So let me take that. Thank you for the question. Look, we have a very different approach for AI. And our approach, if you go back to 2014, we said everybody needs to have a great CRM. And if you look at like 2023 last year at INBOUND, we said everybody has to have a great AI-powered CRM. And so our approach has been to embed all of the features into Hubs, embed all the features into the platform and make it super easy for our customers to start with AI features and continue to grow with AI features. I think it's a very differentiated strategy, one that leans into our strength of easy to use, fast time to value. And that's very different from a lot of the competitors that are on the path of charging for AI features or getting started with a services engagement. And one of the things that we have recognized about AI is this, go-to-market teams have had the same age-old problems over multiple decades. They spend too much time looking at information. They spend too much time collecting and gathering instead of being in front of customers. They spend too much time capturing information that can then be part of the handoff. AI creates a new approach to solving age-old go-to-market problems. And we want to do it in a way where it is fundamentally easy for our customers to adopt. And so I do think that our approach is differentiated and our approach is going to help our customers adopt it faster. I don't know if Dharmesh, you have more to add there.
Dharmesh Shah, Co-Founder and CTO
Yes. Just one quick note. So HubSpot, one of our core differentiators for a long time has been our unified customer platform. We have all the data in one place. And this makes it very differentiated from other players in the space where kind of step one in order to get value out of AI, you got to first figure out how to get all your data together and make sure everything sort of makes sense. From the get-go, HubSpot is already together, it's already unified. And so that's what makes it possible for us to kind of embed AI across the entire platform, make it available to hundreds of thousands of companies and learn from that feedback because we get adoption and usage very, very quickly. So I think we have a very kind of HubSpot-specific take on democratizing AI, making it accessible and then learning really fast based on the usage and leveraging our customer data platform.
Operator, Operator
Our next question today is from the line of Ken Wong of Oppenheimer.
Ken Wong, Analyst
I wanted to dive in on NRR. With strong retention, downgrade stable, I guess, is it fair to assume that the potential pressure that's embedded is just purely a byproduct of upgrade? And then kind of secondarily, any reason to think that there was any hesitation from customers ahead of seat licensing rolling out to the base in the second half that might have caused some pause on upgrade behavior?
Kate Bueker, CFO
Yes. Why don't I take that one? Net revenue retention in the quarter was 102% for the organic business. And when you add in the impact of Clearbit, it was 101%. A couple of positive trends there. We've consistently seen that customer dollar retention has held for us really strongly in the high 80s, and we saw that again in Q1. The other thing that we've been seeing over the last couple of quarters is a stabilization in downgrades, particularly in seats and contacts. That said, and I think that we are not the only ones that you've been hearing this from, upgrade rates were particularly challenging in the quarter. Even with some of the early positive signs that we saw in seat expansion with the new pricing model, we did still see significant pressure in upgrade rates.
Operator, Operator
Our next question is from the line of Terry Tillman of Truist.
Terry Tillman, Analyst
This is Bobby Dee on for Terry. Curious to learn more about the evolution of the customer success following several promotions announced in early April. What was the thought process on leaving the Chief Customer Officer role unfilled? And could there be opportunities to drive more alignment between customer success, sales and marketing as a result?
Yamini Rangan, CEO
Thank you for the question, Bobby. We announced that our Chief Customer Officer, Rob, left in early April. You're correct that we decided to flatten the organization, with marketing, sales, and customer success now reporting directly to me. A few years ago, we needed the Chief Customer Officer role to unify marketing, sales, and customer success and to establish a cohesive strategy. When I joined 4.5 years ago, that role was created, and it has been effective in aligning those departments at HubSpot. Now, we need to focus on speed and execution, and I'm excited that we have a strong group of leaders with extensive go-to-market and HubSpot experience who are ready to step up. As mentioned in our press release from earlier in April, Kip Bodnar, our long-serving CMO, is moving into an executive leadership role and is a leading voice in AI. Christian Kinnear, who has been with us for a long time and has a global outlook, will be leading sales after previously managing international sales and serving as Chief Sales Officer. Jon Dick, who has been with HubSpot for over 8 years in the marketing organization, will take charge of our customer success team and is very passionate about the entire customer journey. We are fortunate to have such a strong group of leaders, and we believe it’s the right time for them to take on these responsibilities. We have a clear direction in terms of strategy, and I'm excited about the contributions they will make.
Operator, Operator
Our next question is from the line of Tyler Radke of Citigroup.
Tyler Radke, Analyst
Yes. Maybe I'll direct this at Kate. So obviously, just the color on the FX assumptions impacting the full year guide. But despite holding the full year guide constant, you were able to raise operating income guidance. So could you just talk about some of the incremental savings that you saw there? And whether there's any incremental FX impact on that, too?
Kate Bueker, CFO
Yes, Tyler, thank you for the question. As I have mentioned before, we always aim to find a balance between growth and profitability, and we are making progress toward our profitability targets. We are confident that we will achieve the 18% to 20% target by 2026, along with our longer-term goal of 20% to 25% profitability. Looking ahead to 2024, we plan to return to a more traditional hiring pace throughout the year, anticipating about 10% growth in our headcount by the end of the year. We are making substantial investments in R&D to promote innovation and to lay the groundwork for long-term growth, as evidenced by our recent Spring Spotlight. We are funding this by increasing efficiency in our go-to-market organization, especially within customer service marketing and partner commissions, as well as optimizing our real estate footprint. Consequently, we expect to achieve more than 1 point of leverage, particularly in the second half of this year.
Operator, Operator
Our next question today is from the line of Arjun Bhatia of William Blair.
Arjun Bhatia, Analyst
This is Chris on for Arjun. I wanted to return to some of the commentary you made about demand. It sounds like it's pretty consistent with what we've heard from some of peers in the space. It seems like there was some softening in front office demand during the first quarter that was at least somewhat unexpected. Are there any areas of conservatism or sources of confidence in guidance that you'd like to highlight if these conditions were to continue to worsen?
Kate Bueker, CFO
Yes. Why don't I just sort of talk about how we approach guidance. As always, we endeavor to put forward guidance that we have a high degree of confidence that we can meet. We have a rigorous forecasting process. We have a rigorous guidance process that we've been using consistently for a very long time. We do a lot of scenario analysis to try to land on the guidance that we feel confident in our ability to achieve. And frankly, that reflects all of the risks and upsides that we see.
Operator, Operator
Our next question today is from the line of Brian Peterson of Raymond James.
Brian Peterson, Analyst
This is Johnathan McCary on for Brian today. So you mentioned the strength in sales and marketing, specifically as front doors this quarter. We heard a little bit last quarter of some of the increased traction in Service Hub as an on-ramp, and I've heard that from partners as well. So just curious if that's still a trend you're seeing for Service Hub you had the conversation in the last 90 days?
Yamini Rangan, CEO
Yes, certainly. When we think about front doors, we identify three: marketing, Sales Hub, and multi-hub. The most common combination in multi-hub includes marketing, sales, and service. We're starting to notice our customers adopting the full platform and using multiple hubs. Specifically regarding Service Hub, we made excellent progress this quarter. We officially relaunched Service Hub as part of our Spotlight, and it has been extremely well received. The product team deserves recognition for their accomplishments. Last year was significant for Service Hub Pro, and we worked hard to enhance the Pro tier. This year, our focus has shifted to making all tiers of Service Hub competitive and robust. In the Spring Spotlight, we introduced advanced SLAs, improved routing, and support management tools, all designed to better serve our upmarket customers, making the Enterprise tier even stronger. We also launched our customer success workspace for customer success managers, aimed at creating a unified environment for them to manage their responsibilities and connect with sales and support teams. Additionally, we are exploring how to enhance Service Hub with AI capabilities, and we notice our customers adopting these AI features. Overall, I’m very pleased with the momentum in Service Hub from both a product and customer adoption perspective, and I'm happy with the traction we are observing there.
Operator, Operator
Our next question is from the line of Michael Vidovic of KeyCorp.
Michael Vidovic, Analyst
This is Mike on for Jackson Ader. Just quickly on the partnerships and your channel partners. You talked about seeing fewer partner source deals this quarter and having to rely more on direct sales sourcing. But I guess what are you seeing in terms of the different dynamics between, call it, your direct sales motion and your channel sales motion as it relates to the pricing change?
Yamini Rangan, CEO
Yes. I think on the pricing change, overall, nothing specific in terms of the change between partner as well as direct sales. Now in terms of what we made as a comment earlier for partner source sales, on the partner side, we've seen great success with our core selling motion. And what that means is partners as well as our direct reps work together, and that co-selling motion is up 65% year-over-year. Now on the flip side, when that co-selling motion is really strong, then partners spend a little bit of time less time in generating and sourcing their own deals. And so we always want to have the right balance between that co-selling as well as partner sourcing, which is exactly what we are focused on right now. So we've rolled out partner enablement. We have rolled out a ton of resources to make sure that our partners and our direct teams work in a way where both the co-selling as well as the partner sourcing is in balance, and we're certainly seeing that in Q2.
Operator, Operator
Thank you. And with no further time for any questions, this will conclude the HubSpot First Quarter 2024 Earnings Call. Thank you all for joining. You may now disconnect your lines.