Earnings Call Transcript - HUBS Q2 2023

Operator, Operator

Hello, and welcome to the HubSpot Q2 2023 Earnings Call. My name is Alex, and I will be coordinating the call today. I will now hand over to your host, Chuck MacGlashing, Head of Investor Relations. Please continue.

Chuck MacGlashing, Head of Investor Relations

Thanks, operator. Good afternoon, and welcome to HubSpot’s second quarter 2023 earnings conference call. Today, we’ll be discussing the results announced in the press release that was issued after the market close. 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 impact of the restructuring, expected growth, FX movement and business outlook, including our financial guidance for the third fiscal quarter and full year 2023. Forward-looking statements reflect our views only as of today and as accepted as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today’s press release and our Form 10-Q, which will be filed with the SEC this afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today’s call, we’ll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between such measures can be found within our second quarter 2023 earnings press release in the Investor Relations section of our website. Now, it’s my pleasure to turn over the call to HubSpot’s Chief Executive Officer, Yamini Rangan. Yamini?

Yamini Rangan, CEO

Thank you so much, Chuck, and welcome to everyone joining us on the call. Today, I want to highlight our continued momentum in Q2, reiterate our playbook for winning in this macro environment, and close with updates on our generative AI roadmap as well as insights based on customer usage. Let's jump into our Q2 results. Q2 was a solid quarter for HubSpot with revenue growing 26% year-over-year in constant currency. We delivered 700 basis points of margin expansion year-over-year, driving operating margin to 14%. We have talked about our strategy for balancing growth and profitability, and we are purposefully executing against this strategy. I'm really happy with the operating leverage we delivered while driving growth in the quarter. Total customers grew by 23% to over 184,000 globally, fueled by over 7,600 net customer additions in the quarter. I'm very pleased with the strong results in Q2. The consistent performance demonstrated by our team and the momentum we have in becoming the platform of choice for scaling companies. Q2 results were driven by two key themes: our ability to deliver product innovation for our customers and our ability to consistently execute our bimodal go-market strategy. As you have seen over the past two years, our bimodal strategy is working, our starter tier continues to fuel volume on the low end of the market, driven by product and pricing optimization. That said, the story in Q2 was about market momentum with continued growth in multi-hub as well as full suite adoption. We saw more new customers starting with multiple hubs, fueling larger deals. One-third of our Pro and Enterprise customers are now on three or more hubs, which is up by four points year-over-year. In addition, we continue to see Sales Hub pick up steam with larger customers. Our investment in upmarket functionality, like customization and extensibility and governance is paying off as we win bigger deals with Sales Hub. Service Hub also gained traction upmarket in this quarter with 12 of our 25 largest deals, including a Service Hub attach. Companies are looking to improve handoffs across their marketing, sales and service teams, and they want a clear schedule of customer insights. By connecting Sales Hub and Service Hub, support can lock tickets that the sales team can now see because there is one central contact record. That context helps sales teams close deals and is just one example of why a connected front office platform is so powerful. Take MarineMax, a national boat retailer, for example, before HubSpot, their legacy CRM was causing a disjointed customer experience. They couldn't effectively value leads from marketing to sales and because the CRM was difficult to use, sales reps weren't adopting it. Since switching to HubSpot and adopting Marketing Hub, Sales Hub, Service Hub and Ops Hub, MarineMax has increased annual revenue by 113% and reduced their average sales response time from days to minutes. They now have a shared visibility across the entire customer journey, leading to a better and faster customer experience. I love hearing that our connected value proposition is resonating and that our product innovation is driving clear value for customers. Now, I want to shift gears to talk about the macro environment. Overall, customer buying trends remain steady. Budgets remain under scrutiny. Multiple stakeholders continue to be involved in decisions. And while buying trends have not improved, they have not gotten worse either. Customers are continuing to optimize their budgets, and we can see this optimization across seats, additions, contact tiers and portals. The bar has risen, but companies are continuing to invest in digital transformation and prioritize platform level decisions. This is where HubSpot shines. We have a proven playbook for driving growth with our product innovation and focused execution. On the product side, HubSpot continues to win by being extremely easy to use and extremely powerful under the hood. Our product innovation is in high gear, and I want to highlight just a few developments from the quarter. With Marketing Hub, we doubled down on omnichannel by moving Instagram reels into public beta as marketers increasingly focused on short-form social video. We also introduced Event Visualizer to give customers even more insight into their audiences' activity and get deeper analytics on customer behavior. With Service Hub, we introduced content Assistant into inbox, so that service teams can leverage generative AI to respond to customers faster across various channels. We're also enabling teams to summarize customer conversations with generative AI and move that functionality into private beta in Q2. Lastly, on our path to building a more customizable and extensible CRM, we released customized pipeline use, enabling our customers to edit their views based on currency and tags that are specific to their business. We also improved permissions and user management for custom objects. This has been a top request from our enterprise customers. Our pace of product innovation is just cranking, and I'm very pleased with the progress we are making in becoming the platform of choice for scaling companies. On the go-to-market side, how we sell is why we've been successful. We've built a competitive moat with three go-to-market motions: product-driven, partner-driven, and direct sales-driven. Our customers tell us that the way our sales and customer success teams serve them sets us apart. They see a notable difference in our team's ability to move quickly to demo the value of HubSpot, articulate clear platform consolidation benefits, and align the best partners to deliver services. Today, over 40% of all newcomer Annual Recurring Revenue and existing customer expansion is co-sold and influenced by our partners. While the macro environment remains challenging, what we sell and how we sell continue to be unique differentiators for HubSpot to drive durable profitable growth. Lastly, let's shift gears to talk about everyone's favorite topic, generative AI. Last quarter, we talked about generative AI, and it is a transformative shift for small and medium-sized businesses and what this means for marketing, sales and service. In short, we believe AI will not replace go-to-market teams; it will guide and assist them to drive better customer outcomes. Today, I want to provide an overview of how we're building an entire layer of AI assistance across our platform, how our customers are responding, and what our unique differentiators are with AI. We launched ChatSpot earlier this year, and it has quickly grown to 70,000 total users with 20,000 prompts ingested weekly. Our customers tell us that they appreciate our weekly updates. They love how quickly we are innovating with new AI capabilities, and they are getting value from the breadth of actions ChatSpot is helping them take. Customers are using ChatSpot to prospect for good fit companies based on location, industry, recent news, and more. They're creating entire campaigns with SEO research, blog title generation, and image generation, all from within ChatSpot. The easy chat interface combined with the power of HubSpot's platform have our customers eager for what's next with ChatSpot. We also launched Content Assistant earlier this year, and since moving it to public beta in June, adoption has grown by 10 times, with 26% of our enterprise customers using it today. Customers are describing Content Assistant as a game-changer because they can quickly generate social copy, blog content, and prospecting emails, all based on insights without having to leave HubSpot. Content Assistant embeds generative AI into our customers' natural workflow, helping them work faster and smarter, right where they are. As I look at our AI roadmap, we are ambitiously building AI into the entire CRM platform, so our customers can get even more value from our platform. We want to help scaling companies power their entire customer journey with AI, and we believe we can help them leverage AI better than other platforms for three reasons. First, data is the fuel for AI, and HubSpot has unique data. While other platforms provide data on who your customers are, HubSpot has data on who your customers are, what they did across channels, and what they bought. When we bring together the power of large language models with deep contextual first-party data in HubSpot CRM, magic happens. Second, HubSpot is where work gets done in the front office. We own the workflows that scaling businesses use every day. We're beginning to see this play out with content assistant usage mentioned earlier. Finally, generative AI needs human intervention to work responsibly, and we've always had a human-centric approach to product innovation. We're committed to having a strong customer feedback loop and implementing feedback very quickly. We're well-positioned to become the AI leader for scaling companies, and we’re moving fast. We are prioritizing AI use cases in our roadmap and without giving too much away, AI is going to be a major theme at our INBOUND conference in September. I'm excited for you to learn more about our AI strategy and roadmap at our upcoming conference. Reflecting on the quarter, I'm very pleased with how our teams are driving the pace of product innovation, focusing on iterating quickly with AI, while executing on our bimodal strategy. This focus and alignment is what will continue to set us apart to drive full and profitable growth. 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 2023 financial results. Revenue grew 26% year-over-year in constant currency and 25% on an as-reported basis. Subscription revenue grew 26% year-over-year, while services and other revenue increased 23% on an as-reported basis. Domestic revenue grew 25% year-over-year, while international revenue growth was 29% in constant currency and 26% as reported. International revenue represented 47% of total revenue in Q2. We added over 7,600 net new customers in the quarter, bringing our total customer count to over 184,000, up 23% year-over-year. Average subscription revenue per customer grew 3% year-over-year in constant currency and 2% on an as-reported basis to $11,400. Our Average Subscription Revenue Per Customer growth was driven by continued multi-hub adoption by our professional and enterprise customers, offset by the large volume of starter customers we added at the low end of our bimodal strategy over the last few quarters. Gross retention remained healthy in the high 80s for the quarter. Net revenue retention was 103%, down one point sequentially, driven by continued spend optimization by our customers across seats, additions, contact tiers, and portals. While we expect pressure on net revenue retention in the near-term to persist, we continue to see strong gross retention and believe we can maintain net revenue retention above 100%. Calculated billings were $542 million in the quarter, growing 22% year-over-year in constant currency and 25% as reported. The remainder of my comments will refer to non-GAAP measures. Operating margin was 14%, up seven points compared to the year-ago period. On a year-over-year basis, operating margin benefited from the restructuring actions we took at the end of January as well as a seasonal shift in hiring into Q3 and Q4. While these factors have helped drive a step change in operating margin, we continue to invest in critical areas such as product innovation, AI, and internal systems and data to ensure we're building the foundation for continued margin expansion as we scale. Net income was $70 million or $1.34 per fully diluted share. Free cash flow was $60 million or 11% of revenue, and our cash and marketable securities totaled $1.7 billion at the end of June. And with that, let's review our guidance for the third quarter and full year of 2023. As Yamini highlighted, we continue to operate in a difficult macro environment. Customer budgets remain tight, decisions by committee are the norm, and customers continue to look for ways to optimize existing spend. Our guidance assumes that these weak macroeconomic conditions persist throughout the second half of 2023. For the third quarter, total as reported revenue is expected to be in the range of $532 million to $534 million, up 20% year-over-year at the midpoint. We expect foreign exchange to be a 1- to 2-point tailwind to as reported revenue growth in the quarter. Non-GAAP operating profit is expected to be between $67 million and $69 million. Non-GAAP diluted net income per share is expected to be between $1.22 and $1.24. This assumes 52.6 million fully diluted shares outstanding. And for the full year of 2023, total as reported revenue is now expected to be in the range of $2.116 billion to $2.122 billion, up 22% year-over-year at the midpoint. We now expect foreign exchange to be a 0.5-point tailwind to as reported revenue growth. Non-GAAP operating profit is now expected to be between $293 million and $297 million. Non-GAAP diluted net income per share is now expected to be between $5.24 and $5.29. This assumes 52.3 million fully diluted shares outstanding. As you adjust your models, keep in mind the following: We expect capital expenditures as a percentage of revenue to be roughly 5% and free cash flow to be about $260 million for the full year of 2023, 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 with our commitment to building a sustainable and equitable company. One of our goals as an organization is to build a company future generations will be proud of. Making progress on our environmental, social and governance efforts is a critical part of that journey. We released our annual sustainability report in Q2, and I want to highlight a few key developments. On the environmental side, we submitted our targets for validation by the science-based targets initiative, joining over 5,000 companies committed to ambitious climate action. In our effort to build a more diverse and inclusive company, we reached 47% female representation company-wide, nearing gender parity. We launched a customer trust center for our customers so they can learn more about our security, privacy, compliance, and governance practices. I'm really proud of the progress we are making to build a diverse and sustainable company. I want to thank our customers, our partners, and our shareholders for the continued support of HubSpot. And a big thank you to all our employees who are executing with focus and solving for our customers every day. I look forward to seeing many of you at our Analyst Day as part of our INBOUND 2023 event on September 6. With that, operator, let's open up the call for questions.

Operator, Operator

Our first question for today comes from Samad Samana from Jefferies. Your line is now open, please go ahead.

Samad Samana, Analyst

Hi, good evening and thank you for taking my question. Yamini, I wanted to ask you about the traction in the upmarket segment. You've mentioned deals that range from $3,000 to over $5,000 in monthly recurring revenue, which is significantly higher than the average. I was curious if you've seen an increase in momentum recently on the enterprise side. If so, could you elaborate on the factors contributing to this? How much of it can be attributed to the product enhancements you mentioned today versus the discussions around AI and the advantages of HubSpot's single platform, as opposed to any setbacks from competitors? Please consider both the momentum in traction and the reasons behind it, especially if there are any shifts.

Yamini Rangan, CEO

Yes. Thank you, Samad, for that question. Definitely pleased with the continued momentum of the market. As you know, we look at our target market as the 1,000 to 2,000 employee segment, with upmarket being the 200 to 2,000 employee segment. We’ve had a lot of focus and investments going into upmarket segments, so we're gaining traction for a variety of reasons, including all of the ones that you just mentioned. To give a little bit of color, I'll start with what we're seeing with upmarket customers. There are a couple of customer trends that we see upmarket. First off, upmarket customers are consolidating on platforms. Over the last couple of years, they've purchased several disparate systems, and this is the time that they're focusing on eliminating costs while also getting clear visibility across the entire customer journey. The second thing is the focus this year for upmarket customers has been on sales productivity. Headcount is constrained in this environment, but customers still need to hit their growth targets. So, they're leaning into equipping their sales reps with the right technology solution to be successful, and we certainly see larger Sales Hub-driven deals within our customer buying patterns. Now, that said, upmarket has been a strategic priority across the company, both from a product and go-to-market side. Our product has improved significantly and is meeting the needs of upmarket customers, which has been a constant drumbeat across the past few quarters. Ultimately, a product is easy to use but very powerful under the hood, and that's a differentiator. I think the perception has also improved upmarket. We’re gaining momentum with exact and scaling companies, and we've always had a great relationship with CMOs and the marketing organization, but now CEOs, CFOs, and COOs understand the value of HubSpot as well. Finally, both our partner teams and direct teams are really able to clearly communicate the value of HubSpot as well as drive cost savings for our customers, and how we sell is also why we win. We're pleased with the progress of the market, and I think all of those factors really play into it.

Samad Samana, Analyst

Very helpful. Thanks, Yamini. See you at INBOUND in September.

Yamini Rangan, CEO

See you there.

Operator, Operator

Thank you. Our next question comes from Elizabeth Porter of Morgan Stanley. Your line is now open, please go ahead.

Elizabeth Porter, Analyst

Great. Thank you very much for the question. I was hoping you could provide a little bit more color around the dynamics when you launch free products. Was there any pent-up demand in the beginning that could be waning and impacting the new user sign up, or how big of a funnel do you have to still work through on converting those free sign-ups to paid customers? Thank you.

Kate Bueker, CFO

Thanks, Elizabeth. This is Kate. I'll start and then others can join if they want. Look I think you're asking about the free sign-ups because you saw a sequential drop in our net customer additions. I will confirm that, that is very much a dynamic happening with starter. We did see a quarter-over-quarter decline in starter. The free products that you highlight are one of a number of things that we use to drive demand at the low end of our bimodal strategy. We consistently look to move functionality down into our free and starter products. We consistently experiment in pricing and packaging. We're launching free tools on a regular basis. So, there is a normal ebb and flow to the free user base, and ultimately, the net starter additions that you'll see from one quarter to the next.

Elizabeth Porter, Analyst

Thank you.

Operator, Operator

Our next question comes from Mark Murphy of JPMorgan. Your line is now open. Please go ahead.

Mark Murphy, Analyst

Thank you very much, and congrats on the results. Yamini, at the last Analyst Day, I believe you and Kate had mentioned that Sales Hub had crossed through $450 million in ARR, and it had done that with mid-50s growth at that time. Interestingly, I went back and looked at this; it was growing faster than Marketing Hub was when it was that size. Realizing that most companies never have that kind of a second act or third act, can you explain what is it that is propelling Sales Hub so rapidly? And whenever the economy does return to normalcy, do you think that, that can continue to carve out a stronger arc than what we saw historically with the marketing cloud?

Yamini Rangan, CEO

Mark, that's a great insightful question. This goes back to the fact that we are in the middle of a fairly big transformation at HubSpot, one that we've been talking about for many years. We have been on this journey to go from app to suite to platform. When we go from app to suite and Sales Hub becomes a legitimate front door, it drives faster adoption within the installed base. So, the second product and the third product, new ports product, have the benefit of having the install base of the first product. That's what you're beginning to see. Dissecting the customer trends: every leader that I talk to is looking at ways to eliminate costs but drive better results. Over the last couple of years, many have purchased point solutions and are either struggling to integrate those or finding the costs prohibitive. We are now seen as a powerful, cost-effective platform in this environment, and that helps with Sales Hub momentum. If you are a Marketing Hub customer, it makes more sense to get Sales Hub; if you're looking to drive cost savings, buying multiple hubs and eliminating costs while getting better customer insights is effective. Our strategic priority this year was to focus on driving product leadership in Marketing, Sales and Service Hub, and that’s exactly what our product teams are focused on innovating. Just this past quarter in Q2, we released sequences on mobile, driving more prospecting efficiency with reporting and better-embedded pipeline metrics. All these are examples of functionality that drive up market momentum. Second and third hubs always have the benefit of the first one. When customer needs meet with product innovation and go-to-market execution, we begin to see the consistency of the results that we are seeing now.

Operator, Operator

Thank you. Our next question comes from Rishi Jaluria from RBC. Your line is now open, please go ahead.

Rishi Jaluria, Analyst

Wonderful. Thank you so much Yamini and Kate. As we think about your continued momentum upmarket and going head-to-head with some of the larger competitors, one feedback we hear from customers is that there are certain enterprise-grade features and functionality that they don't quite yet have available natively in HubSpot. How do you think about using generative AI to speed up the development around a lot of those enterprise-grade features and be even more competitive against some of the larger, but also maybe legacy competitors? Thanks.

Yamini Rangan, CEO

Yes. Great question. I'll start, and Dharmesh, feel free to chime in there on the development side as well. Our focus is really that 20 to 200 and then 200 to 2,000 customer base, and you're absolutely right. There's a long list of innovation we can continue to do to expand our share of that market, which is exactly why this is our number one priority within the company. We want to increase that product depth and leadership within that market. There's a long list of innovation that we are working on and our pace of innovation has been pretty high over the past few quarters for that reason. I do think at the same time, customers look at us as a way to get visibility across all of the products that are organically built while eliminating costs, which is why you see us as a platform of choice for enterprise companies. Generative AI has the potential to accelerate productivity, not just in front office functions, but also for engineering, and that's something we are looking at. However, it is still early days in terms of driving the pace of innovation even further. Dharmesh, feel free to add there.

Dharmesh Shah, CTO

One thing I'll add is that generative AI opens up an entire generational opportunity. I've been in CRM software for 30 years now since pre-cloud. Once we advanced to the cloud, we kind of created an entire new industry around cloud-based CRM. I think we're going to see something similar with generative AI. HubSpot's approach has always been to democratize technology as it emerges. Our focus is on SMBs, and we want to do the same thing we did when we launched our CRM. We want every company to benefit from a really good CRM. Now that generative AI features are coming, our philosophy is to democratize them and make them available to every company.

Operator, Operator

Thank you. Our next question comes from Brian Peterson of Raymond James. Brian, your line is open. Please go ahead.

Brian Peterson, Analyst

Thanks for taking the question. I wanted to pivot off upmarket and focus on mid-market for a second. I'd love to understand if the vendor consolidation trend that you're seeing is also happening in the mid-market as well, or is there maybe more of a spend rationalization here? I'd love to get your perspective.

Yamini Rangan, CEO

Yeah, Brian, I think it's happening in mid-market as well. There is absolutely no doubt that we see it. For us, mid-market is what we define as a 20 to 200-person company. If you look at what is driving vendor consolidation across all segments, it’s based on how customers have grown over the last couple of years. SMBs were thrown into the digital environment post-pandemic, and during that time, they purchased several point solutions or some enterprise-class solutions. Both have proven to be costly and brittle when it comes to getting customer insights. A mid-market company is also looking to eliminate costs while driving better customer insights, and we see the same trend. We begin to see more multi-hub as well as full suite pro and enterprise deals within the mid-market segment.

Operator, Operator

Thank you. Our next question comes from Alex Zukin of Wolfe Research. Your line is now open, please go ahead.

Ryan Krieger, Analyst

Hey, guys, this is Ryan on for Alex. Thanks for taking the question. If you look at the customer additions in the quarter, clearly, they're very strong at over 7,000 again. Can you help us understand the price change on the starter bundle, how that impacts the trajectory of the net adds after a few months of the change being in the market? Is there an initial pop in demand, and then it reverts, or what's the cadence following these price changes? And was that a contributing factor to why the number was down sequentially?

Kate Bueker, CFO

Yeah, I'll start. Net adds were down a bit from Q1 to Q2, but they were very much aligned with the expectations that we had internally and the expectations that we shared on the call last quarter. The other thing to note is they were much more balanced across additions than what we've seen the last couple of quarters. In both Q4 and Q1, we were surprised by the stronger performance in Starter, which was the driver of overall new customer additions. Starter did decline a little bit, but is in line with our expectations, and we would frankly expect it to stay in and around these levels over the next couple of quarters.

Operator, Operator

Thank you. Our next question comes from Terry Tillman of Truist. Your line is now open, please go ahead.

Joe Meares, Analyst

Hey guys, this is Joe Meares on for Terry. Appreciate you taking the question. Just curious, on the 3Q 2023 and 4Q 2023 implied revenue guide, it looks like about 18% growth year-over-year ex-FX. Acknowledging the tough macro, is that decline from the first half largely macro-driven, or is that something that you're seeing as far as your individual net revenue retention being affected?

Kate Bueker, CFO

Maybe I'll just kind of take a step back and talk about how we approach guidance. We approach guidance in a very consistent way. I just finished my fifth year at HubSpot, and we've approached guidance in the same way every quarter during that period. We try to create a set of numbers that we feel good about our ability to deliver across a variety of scenarios. We took the same approach this quarter. Both Yamini and I shared in our prepared remarks that the external environment remains challenged, and that is the foundational baseline assumption for our guidance. That said, we want to provide guidance that we can deliver even if things get a bit worse from here.

Operator, Operator

Thank you. Our next question comes from Michael Turrin of Wells Fargo. Your line is now open, please go ahead.

Michael Berg, Analyst

Hi, you've got Michael Berg on for Michael Turrin here. I wanted to ask on pricing and packaging. You've added a number of features across all hubs, but notably Sales Hub. As you incorporate generative AI, could you help us understand how you might think about either increasing prices or taking more of the value you deliver to your customers? Thank you.

Yamini Rangan, CEO

Yes, Michael, I appreciate that question. Thank you. Our pricing philosophy has not changed. If you step back and think about what our pricing and packaging philosophy has been, it's to add value first and then think about pricing changes next. When we had this discussion on AI monetization, I mentioned exactly the same thing, which is to add value first and then look at pricing. We've added tremendous value in terms of Sales Hub. Last year, we increased Marketing Hub Enterprise pricing, but that was after consistently adding value; four years of adding value into that tier. We feel very comfortable with the impact we have in terms of our customers’ experience. We follow the same pricing philosophy whether AI or Sales Hub is concerned. Ultimately, we think we are in the early stages of a big transformation—the journey of moving from app to suite to platform—and across all of that, our focus is to add-value, gain market share, and adoption before monetizing.

Operator, Operator

Thank you. Our next question comes from Michael Turits of KeyCorp. Your line is now open. Please go ahead.

Michael Turits, Analyst

Hey everyone, there's been an interesting discussion about net revenue retention. My question is regarding Average Subscription Revenue Per Customer: when do you expect to see a positive impact? Additionally, you mentioned that Average Subscription Revenue Per Customer is stronger in the higher tiers as opposed to being affected by the lower tiers. Can you provide some insight into that? Was there any acceleration observed going forward and across the tiers this quarter?

Kate Bueker, CFO

Yeah. The Average Subscription Revenue Per Customer is obviously the other side of the coin to net customer additions. There's a difference across the metrics in that ASRPC is a lagging metric reflecting the revenue activity seen over the last four quarters. So any movement will be muted. What you saw with ASRPC is an expanded uptick in the low single digits, which is what we expected and shared last quarter. The progress with multi-hub adoption in professional and enterprise customers was the big driver of this expansion. However, there was an offset based on the significant net additions we've seen over the last four quarters at the starter tier. As for the outlook, we think ASRPC will hang around the low single digits for the next couple of quarters. If we strip out starter, ASRPC is expanding at a higher rate.

Operator, Operator

Thank you. Our next question comes from Parker Lane of Stifel. Your line is now open, please go ahead.

Parker Lane, Analyst

Yeah, hi team. Thanks for taking the question. Yamini, HubSpot has always been a very horizontal platform. As you're making this up-market shift, do you see any appetite in the enterprise category for more industry-specific features and tools? As you think about the future penetration of this opportunity, is it necessary to have those types of tools, or do you feel like there's enough work being done in the partner community and integrations to support a healthy use case there?

Yamini Rangan, CEO

Yeah. Great question, Parker. I think it's more of the latter. If you think about the big transformations we’re on, we’re going from an app to a suite to a platform. Both of those transitions are still in their early innings. Our market share penetration across both is still single digits. With the level of product innovation happening and focused execution, we have the opportunity to take it to strong double digits in market share. The list of innovation and things we can bring remains very robust and long. We're going to focus on these opportunities. AI gives us a tremendous opportunity to drive more market share gains and adoption. As you said, partners are leaning into certain verticals and can absolutely continue to do that, but we feel that the opportunity ahead remains very early stages with a great runway.

Operator, Operator

Thank you. Our next question comes from Keith Bachman of BMO. Your line is now open. Please go ahead.

Adam Holets, Analyst

Hi, this is Adam on for Keith. Thank you for the question. I wanted to touch on the commission changes and any incremental feedback you might have on reactions there. Does that have any effect on the decrease in starter?

Yamini Rangan, CEO

Let me start with the first part, which is the partner commission changes. We're really pleased with the response from the partner channel. I've talked to many of our elite partners before and after the change. We are consistently getting feedback from our partner channel. We spent a lot of time communicating the reasons behind these changes. Our goal is to drive consistent value-added engagement with customers and our partners, facilitating multi-hub adoption within our customer base. The commission changes aligned with our company's direction. Partners have increased engagement with customers as a result of this change, which is a great outcome for everyone involved. Kate, do you want to address the starter?

Kate Bueker, CFO

Yes, I would agree. The partners tend to be focused more on the upmarket side of our customer base. They did not have an impact on the quarter-over-quarter change in net customer adds.

Operator, Operator

Thank you. Our final question for today comes from Kirk Materne of Evercore. Your line is now open. Please go ahead.

Kirk Materne, Analyst

Thanks very much. Yamini, I was wondering if you could just talk a bit about the upmarket dynamics and whether that’s coming from geographies like the US being a little ahead of EMEA in terms of Hub sales. Just any commentary regarding the geographic perspective regarding upmarket trends would be appreciated.

Yamini Rangan, CEO

Kirk, I didn't get the first maybe 10, 15 seconds of the question, I got the geo differences. Can you repeat the first part, please?

Kirk Materne, Analyst

Sorry. Are you noticing any market dynamics?

Yamini Rangan, CEO

Okay. I think I got the geo differences. I will say no notable differences across our major markets. What I talked about regarding customer buying patterns, they remain consistent: budgets, stakeholder involvement, and project management. No notable differences. The broad themes across the pipeline indicate significant sales initiatives this year, emphasizing sales representative productivity, increased multi-hub adoption for visibility across customer pipelines, and a higher desire for platform consolidation to eliminate costs while maximizing return on investments. This trend of becoming the platform of choice for scaling companies is consistent across all regions, but we remain very focused on executing to meet high standards.

Operator, Operator

Thank you. We have no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.