Lisa Mullan - Director of Investor Relations Brian Halligan - Chief Executive Officer and Chairman John Kinzer - Chief Financial Officer J.D. Sherman - President and Chief Operating Officer.

Brent Thill - UBS Richard Davis - Canaccord Terry Tillman - Raymond James Stan Olszewski - Morgan Stanley Mark Murphy - JP Morgan Michael Huang - Needham Owen Hyde - Pacific Crest Kirk Adams - Rosenblatt Securities.

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the HubSpot First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session.

[Operator Instructions] I will now turn the call over to Lisa Mullan, Director of Investor Relations at HubSpot. You may begin your conference. Thanks Mike and afternoon everyone. Welcome to HubSpot’s first quarter 2015 earnings call. Today, we’ll be discussing the results announced in the press release that was issued after the market closed.

With me on this call today is Brian Halligan, our Chief Executive Officer and Chairman; John Kinzer, our Chief Financial Officer; and J.D. Sherman, our President and Chief Operating Officer. Before we start, I’d like to draw your attention to the Safe Harbor Statement included in the today’s press release.

During this call, we will make statements related to our business that maybe considered forward-looking, including statements concerning our financial guidance for the second fiscal quarter of 2015 and the full-year of 2015, our position to execute on our growth strategy, and our ability to maintain existing and acquire new customers.

These statements reflect our views only as of today and should not be considered our views as of any later date.

Please refer to the cautionary language in today’s press release and to our Form 10-K, which was filed with the SEC on March 5, 2015 for a discussion on the risks and uncertainties that could cause actual result to different materially from expectations. Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures.

There is a reconsolidation schedule showing GAAP versus non-GAAP results, currently available on our press release announcing financial results for the first quarter ended March 31, 2015, which is located on our Investor Relations website at www.hubspot.com. And now it’s my pleasure to turn the call over to HubSpot CEO and Chairman, Brian Halligan..

Thanks, Lisa. Hi everyone and welcome to our first quarter 2015 call. I am happy for two reasons, first the snow finally melted here in Boston. Second, we had a really, really good quarter. Revenue grew 58% year-over-year in Q1, what’s nice about, it’s our fourth consecutive quarter of revenue acceleration.

If you went to last year, we grew 44%, then 48%, 51%, 53%, and now 58%. That’s a really good growth and I am very pleased with the results. Now you might say, why are you getting so much growth in the business? What’s changed? That’s a very good question. My answer is pretty straight-forward. Nothing, nothing has changed.

It is just that we are getting really well in our plan we talked about when we went public back in October 2014. There are really two simple drivers of all this growth. First, we are adding lots of customers. To grow our customers 35% year-over-year in Q1, by the end of Q1, we were up to 14,746 HubSpot customers.

The combination of our inbound methodology and our software platform enables our customers to grow and these customer ad numbers indicate that the word is spreading about that. The second growth driver is that the customers we have are getting more value from us and are getting more valuable to us.

Our average revenue per customer is up 15%, year-over-year as customers are paying at an average of $9,740 annually. Revenue retention has moved up from the high 80s a year ago to the high 90s this quarter. In addition to the nice growth we got on the top line, we’ve got 18 points of leverage on the bottom line as well year-over-year.

Now, let’s talk about these customers who are driving this growth. As much as we love attracting new customers and selling more stocks to them what we really love is helping our customers unleash the power of inbound market and grow their own companies. We hosted a lot of marketing courses for our customers, online and in person.

In fact, not that long ago in chatting with one of customers Jeff Valentine, the Chief Marketing Officer of Fonality. Jeff was in our Cambridge headquarters to attend one of these hugely popular marketing seminars just one the many on ongoing training classes we offer our customers around the world.

Fonality is a Dallas based company that sells web-based phone systems, which is a super competitive industry. Before HubSpot they used ad words, they used to do co-calling, and they did a lot of list buying until they came to the conclusion that that just didn’t work anymore. Today, we complete embrace inbound marketing.

So starting in HubSpot in January of 2014, Fonality has had spectacular results. They have brought our normal 6000 new customers that’s a 135% increase in their new accounts. They’ve also increased the average customer size by over 40%, triple traffic to their website mostly thanks to organic search in social share.

And just HubSpot, Fonality measures our marketing efficiency in terms of life time value in cost to acquire a customer. Since adopting HubSpot, Fonality has seen their LTV to CAC ratio shoot up over 40%. And now it has completely changed our business with indoor market.

As customers like Fonality grow by using HubSpot, they are using more of products and are becoming increasingly less likely to leave. In other words our customers are becoming more valuable to us because we are becoming more valuable to them and that’s exactly the way it should work.

And we’ve seen this kind of customer success over and over and over and over and over gain. Finally, we like customers like Fonality because they have 200 or so employees in a small department that was trying to pull together five or six different applications, which is way too complicated for them to manage and they integrate.

HubSpot is really good in helping mid-market companies like Fonality with their all in one simple solution. We’re going to mouth around our customers’ success stories like Fonality is fueling our growth. And it’s not just word of mouth that makes HubSpot successful.

The other reason why we are successful is that we have a unique go-to-market model that really matches our target market. In HubSpot’s case, I think how we attract customers is almost as important and why we attract customers.

We wrote the book on inbound marketing, literally wrote the book and you can rest assure that at HubSpot we drink our own Champagne. We practice what we preach in for a very good reason, it works. Inbound marketing work’s plain simple and our recent momentum is a reflection of that fact.

So knowing this, it will come as no great shock to you that our go-to-market model is to rely on inbound marketing to attack the mid-market. Inbounding marketing works. We are quite good at pulling customers in and acquiring warm and educated leads. That’s really hard to do with old school marketing techniques.

Of course the proof is [indiscernible] we generate over 40,000 leads a month just from our blogging and content creation. You might be familiar with Alexa, it’s a subsidiary of Amzaon that records the frequency of visits to various websites.

Thanks to inbound marketing, as of April 30, HubSpot is a 445th most visited website in the United States and the 637th most visited website in the whole world, remarkable.

Now, when a customer buys our software, they are not just signing up as a HubSpot customer, they are joining a movement and we have a all methodology and educational eco system including a 2,300 strong partner network to support them in growing that movement and making it their own.

Our goal is to help these mid-market businesses grow by teaching them how to do sales and marketing better. It’s a great line of work to be in because we love, love, love helping our customers succeed.

A bit more about that eco system at HubSpot, we’ve got insanely active customer forms and in person HubSpot user groups also known as HUBs that people together to learn about our products, share best practices, and spending inbound word. In 2014 alone, the HUG program grew by 60%.

Last year our happiest and most engaged customers were showing up to their local HUGs and rubbing shoulders and learning more about what inbound can do for them. In the first quarter of 2015 alone, we hosted a 106 HUGs worldwide, an all time record for a single quarter.

In addition, we owned 130 HUG locations and our new life occasions include places like Tel Aviv, Milan, and Costa Rica. We love HUG they do so much to help support our global HubSpot community. We are not just seeing success from our direct business. The roughly 40% of revenue coming from our partnered channel continues to grow like a gangbox [ph].

This is where that amazing HubSpot ecosystem kicks in again.

To support our customers that come into our various agency partners, we have partner Summits where we bring together our many and varied partner teams so they can listen to them, learn from their successes and help them set leverage HubSpot even better for themselves and the clients own growth and success.

In a recent partner summit, I met up with one of our partners from Austin Texas. Chris Heiler the CEO of Landscape Leadership. One thing I love about Chris’ story is that his marketing agency can focus on one vertical, the landscaping industry.

When Chris signed up with us a HubSpot partner in June of 2012 he had just one customer and less than a $100,000 in annual revenue. In just one week after going live with HubSpot, one week Chris added his second customer. Fast forward three years to today and Chris has increased his business five-fold.

He has now grown so much that he has four full time people on his staff and is on track to generate over $0.5 million in annual revenue. Way to go Chris. In fact I love this story so much that I invited Chris to speak at our last company meeting. Because customer and partners success like this is HubSpot is all about, inbound just would be.

One of our favorite things to see is when HubSpot customers use HubSpot for all their marketing activities, and what I also love about Chris at Landscape Leadership is that he and his team are using every part of or software.

Our top of the funnel products, our middle of the funnel products, he is hosting his website with HubSpot, he is using the heck out of sidekick, and he loves our CRM. He is also getting his clients use many parts of the HubSpot products suite.

In fact 80% of his clients use the HubSpot content optimization system, which means customers can design and host their website using HubSpot’s technology. He plans to have 80% of his clients on the HubSpot CRM by the end of the year, and is having no trouble evangelizing sidekick it’s catching on like wildfire.

I’m going to say it again inbound works, HubSpot works, and our customers love inbound marketing HubSpot and use it to grow their businesses. They love being our customers’ growth partner. Before I finish up, I have to mention one more thing that made me very happy in the last few months.

HubSpot was recently ranked Number 1 as the best all around marketing automation system in VentureBeats March 27 marketing automation index. This is particularly meaningful because this acolyte comes from folks who matter the most to us, more than a thousand marketing professionals that participated in VentureBeat survey.

What’s particularly cool about winning that award that we offer our customers much, much more than marketing automation, which I consider middle of the funnel functionality, helping companies manage their leads.

In addition to marketing automation, HubSpot really excels in helping companies generate leads at the top of their funnel through their website, search and social. They also help companies convert those leads into customers at the bottom of our funnel with our new sidekick and CRM software.

We pull all that together in one easy to use system for mere modern mid-market businesses. Since Dharmesh and I started HubSpot, we have never been more excited about the future then we’re today. We haven’t even really begun to reap the financier awards from the sales products we launched last fall. We’ve only just begun to expand internationally.

We’ve only scratched the surface on what innovative products we can bring to the mid-market. We had our board meeting the other day and I told the board that HubSpot is still in the very early innings of the base blogging. There is much more to come.

You want a glimpse into HubSpot, I hope you will join us at the inbound conference in Boston from September 9 to 11 this year. With that I’ll hand the call over to John Kinzer to talk about our financial performance in the quarter. John..

Thanks Brian. As Brian mentioned, we are off to a great start in 2015 both on our financial and operational performance. We continue to see positive demand for our products and we are confident in our ability to drive meaningful growth and profitability in the future.

Today, I’ll kick off my prepared remarks with the financial results and I’ll wrap it up by giving guidance for the second quarter, an updated guidance for the full year 2015. Let’s start with Income statement. First quarter revenue came in at $38.2 million, which was above the high end of our guidance.

For the fourth quarter in a row our business experienced accelerated growth as revenue grew 38% year-over-year. Subscription revenue was $34.9 million, growing 57% year-over-year and represented 92% of our total revenue. Both subscription and services growth were driven by healthy customer additions and strong revenue retention in the quarter.

Moving on to gross margins. This quarter we adjusted where we classify credit card expenses. Taking that adjustment into account, non-GAAP gross margins came in at 73% for the first quarter, a 2 point improvement quarter-over-quarter and a 5 point improvement year over year.

Both of these improvements assumed that the credit card adjustment has been made in the prior period. The adjustment resulted in credit card fees being moved from the cost of sales to the G&A line item and this consolidates were billing operation expenses are recorded and is now consistent with many of our peers.

The change resulted in a 2 point positive impact in gross margins and a corresponding 2 point increase in G&A costs as a percentage of revenue, but does not have any impact on our operating margins.

Non-GAAP operating margin was negative 16% in the quarter, four percentage point sequential improvement and an 18 percentage point improvement year-over-year. Foreign exchange rates negatively impacted our revenue growth by three percentage points. This headwind was substantially offset by the foreign exchange benefits to our expense line items.

Our international business continues to perform well. In January 2013, HubSpot launched its first international office in Dublin and added an office in Sydney in August 2014. Our international business has come to represent 22% of our revenue and is growing 70% year-over-year. And we're just getting started with our international efforts.

The vast majority of our effort is currently limited to English-speaking audiences. So there’s lots of room to grow. Our strong financial performance was accompanied by healthy operational results in the quarter. As Brian mentioned, we have robust customer growth in the quarter. HubSpot ended the quarter with 14,746 customers, up 35% year-over-year.

Strong customer growth continues to come from both our direct and our partner channels. Average subscription revenue per customer increased to $9740, up 15% from the first quarter of last year. Subscription revenue growth was largely driven by continued adoption of core marketing products.

Standalone sales products still represent a small amount of total revenue are not included in the calculation of our average shift in revenue per customer. Revenue retention remains strong in the high 90s in the first quarter of 2015.

As you might recall, we reported high 90s revenue retention in the fourth quarter as well, up from high 80s in the first quarter of 2014. Now, let's review our balance sheet and cash flow. We ended the first quarter of 2015 with $129 million of cash and cash equivalents and we had no outstanding debt.

Our cash and cash equivalents balance was up $5.7 million sequentially, primarily due to the $34 million net proceeds from our follow-on offering partially offset by moving $26 million into certain long-term marketable securities.

The follow-on offering consisted of $4.7 million primary shares at a price of $37 and 79% of those shares sold were secondary shares from existing shareholders. Our cash flow used in operations of $815,000 was a sequential improvement from the fourth quarter and showed that we are achieving scale in our business.

As we mentioned on our last earnings call, we had a seasonally strong fourth quarter, especially for billings and revenue retention. So the first quarter was correspondingly a seasonally strong cash flow quarter.

Calculated billings, defined as revenue plus change in deferred revenue for the first quarter of 2015 came in at $43.9 million, up 52% versus the first quarter of 2014. Keep in mind that billings growth will vary from revenue growth due to factors such as changes in billing terms and based on the timing of revenue recognition versus billing.

First quarter trends were in line with our expectations and seasonal trends. And now on to guidance. For the second quarter of 2015, total revenue is expected to be in the range of $39.4 million to $40.4 million representing year-over-year growth of 47% when using the midpoint of the forecasted range.

Second quarter non-GAAP operating loss is expected to be in the range of a loss of $7.2 million to $6.2 million. Second quarter non-GAAP net loss per share is expected to be in the range of a loss of $0.23 to a loss of $0.21. This assumes approximately 33.4 million basic shares outstanding.

For the full year 2015, total revenue is expected to be in the range of $165 million to $168 million. This new guidance represents year-over-year growth of 44% when using the midpoint of the forecasted range.

Full year 2015 non-GAAP operating loss is expected to in be in the range of a loss of $33.2 million to $30.2 million and a full year non-GAAP net loss per share is expected to be in the range of $1 to $0.94. This assumes approximately 33.2 million basic shares outstanding.

As you adjust your models, please keep in mind that in the third quarter of 2015, we will have higher marketing expenses associated with our Annual Inbound Conference, which seasonally impacts our sales and marketing expense line and our operating margins.

That said, outside the seasonally higher spending in our third quarter, you can expect operating margin improvement throughout 2015 as reflected in our 2015 guidance.

Finally, on CapEx, you can expect a modest increase in quarterly spend from our first 2015 level in the second half of 2015 reflecting the build out of additional facilities to accommodate our growing employee base. As you can see, we’ve got a lot of good things happening in our financial results.

We are seeing great top line growth and we are seeing leverage in our financial model. Our customer economics, the life time value of our customers compared to the cost of acquiring those customers are better than ever.

Given this, we are going to keep investing heavily for growth, but with the leverage in our model, we still plan on achieving positive operating cash flow in early 2016. With that, it’s my pleasure to turn the call over to Brian for his closing remarks..

Thanks, John. Before we finish up, I’d like to thank each of HubSpot’s 887 employees for their hard work, enthusiasm, and extraordinarily good judgment. We work hard to recruit the best of the best at HubSpot and then we give them the freedom to do their jobs well.

We believe that today’s workers thriving to have autonomy not [indiscernible] about pursuing our mission and hitting our metrics. They talk with the customer and constantly question the status quo. It’s an honor to get to work with them every day.

If our results today were remarkable, and we think they are, it’s thanks to HubSpot’s talented employee base. They are the ones building HubSpot’s impressive product offering, supporting HubSpot’s robust ecosystem and relentlessly pursuing our customer’s success. I love them. And if you spend as much time with them as I do, you would love them too.

Thank you for joining our call today. And thank you for taking the time to learn more about HubSpot. With that, I will turn the call back over to our operator for your questions..

Your first question is from Brent Thill with UBS..

[Audio Gap] strong annualized subscriber revenue.

And I’m just curious if you can maybe walk through what you are seeing in terms of what’s contributing to this continuation of that trend? And maybe also talk through a little bit of how you are seeing conversion between pro and enterprise? Are you seeing enterprise as a future set that more and more customers are taking from the start? Thank you..

Hi, Brent, this is John.

How are you?.

I like [indiscernible]..

I know you do, we will keep it going. Yeah, on a strong subscriber growth, I think we’ve said in the past, it really feels like we’ve hit a tipping point in the industry – in the market. Brian and Dharmesh have done a great job educating the market on what inbound revenue – inbound marketing is, and really we are seeing the fruits of those labors now.

A lot of the conversation now are really, I need a system like this versus what is inbound marketing. And so, from a top line standpoint, that’s been great. I mean we are seeing it, great growth internationally, we are seeing it in our partner channel as well as our direct channel really across the board, really strong all the way across.

On the products side, we are seeing a little bit of a movement from the basic to professional, professional to enterprise. I think as customers once again understand inbound marketing more, they need the products with more features and functionality. The basic customers tend to churn at the higher rate.

So, we are getting a little bit of a movement from there. But we are also continuing to get improvement – customers coming in, putting contacts in their database, getting more and more successful, adding more contacts to their database and that’s been driving our up sell rate as well.

So, strong customer additions and strong revenue per customer both leading to strong revenue growth..

Okay, great.

And one quick follow-on, just one the international, I know that you’ve got so much opportunity here that you haven’t had to push as hard international, what’s your approach in terms of – on the build out this year, how do you think about prioritizing different GLs as we look forward?.

Yeah, hey, Brent, this is J.D. I will take a shot at that. So as we talked about in the call, we certainly have rolled out the locations and the effort in the international somewhat incrementally. We’ve made a big bet in Dublin a few years now and that’s gone really well. Last year, we launched in Australia.

The great thing about HubSpot in the way we get our leads through inbound marketing is a lot of the marketing we do actually pulled us into those markets, because we are getting inbound leads from markets that we are not in today and also we have a great partner network that pulled us into those markets as well.

So it’s not like we have to make a start from scratch bet on a bunch of new markets and sort of re-see the market. The big bet that we have to make and we will be rolling out as over time, and I think pretty aggressively is, we obviously need to have the infrastructure to deal in multiple languages and we are starting to make some of those bets now.

So I think the international opportunity is huge for us and we are going to keep investing there and I think you will see more going forward..

Great, thank you..

Next question is from Richard Davis from Canaccord..

Great, thanks. Two quick questions. One, when you guys start an inbound campaign, even though some guys like rocket out of the gate, it seems like the majority of people would take a little bit of time to build up customer momentum.

So could you just talk a little bit about how you keep the customer happy during those early days before the journalist got the tools up? And then the second question I have was, I was talking to a handful of people, and obviously, it’s anecdotal, but is there too big of a gap in pricing between professional and enterprise and as much as you know three times more? Is there be – I don’t know, better professional or self to enterprise or something like that? Do you guys – have you faced any push back on that front? Thank very much..

Richard, maybe I will take that one as well. And maybe I will take the first one first, which is on the how we sort of onboard customers, so the way I think about that.

You are right that inbound marketing builds up over time because basically as a market you are building an asset that’s going to continue to generate leads over time rather than you are renting space with advertising on somebody else’s space.

What we do with our clients is we basically spend the first couple of months with them helping them start do run their first campaigns, and walk through their first campaign. And we have really good scale of the way, tailor that campaign to what they are trying to accomplish, and that’s a really great engagement for us and the customer.

And it’s to get them adopting the product and using the product, and really profession with it so that at the end of that on boarding, they tend to be very successful of course this is on the direct side. On the partner side, these partners get it. They know how this works and they’ve been through – they’ve got their own business start on this.

So we’ve built our methodology to get our customers up and running during that process. On the second question which is the pricing, I won’t say that we are the superstar of pricing that we’ve absolutely nailed the pricing, and we keep always looking at that.

But what it seems like is we are getting folks to upgrade there and what happens is, over time as you start with the professional and you go grow your contacts, your spend moves up where the actual increase from professional to enterprise is not that dramatic.

So if you just look at it one the pricing page, you’re comparing professional with a 1,000 contacts to enterprise or say 10,000 contacts, a big part of that gap is eaten up by the context growth. And not surprisingly the more sophisticated customers tend to have a larger database and so the pricing does make sense from that perspective.

Did that answer your question?.

Yes, perfect. That’s what I thought. I appreciate it. Thank you..

Okay..

Your next question is from Terry Tillman from Raymond James..

Hi guys, good afternoon, and nice job on the quarter. I guess Brian or John or J.D., the first question in terms of the impressive new customer growth of the 35% growth year-over-year, I am curious when you sign up big customers, if you survey them to see where they using something before or where they using really nothing before.

And if they were using something before, are you seeing any change in terms of the type of point solutions you are replacing.

Is it an email marketing replacement cycle? Is it a content management or analytics replacement cycle? Anything standout about potentially changes in the types of solutions you are replacing or Greenfield?.

Hey, Terry, it’s Brian. I’ll take that one, really good question. It hasn’t dramatically changed. In the suite of tools we compete with is, I sort of break it out into HubSpot people to strangers into visitors at the top of the funnel and then visitors into qualified leads in the middle of the funnel, qualified leads into customers at the bottom.

You just stick with that top of the funnel, our customers, they need a blog, they need a website, they need social media monitoring and they need search engine optimization and typically that will be four different vendors I’ll have to deal with in order to get that right.

And that’s pretty painful if you are let’s say 100% company with 4% marketing department.

In the middle of the funnel, folks are either using email marketing let’s say cost of contact mill chip stuff, if it’s a 20% company, if it’s a 200% company, we might compete a little bit more with let’s say a marketer in there or another marketing automation vendor. And if those haven’t changed dramatically, it’s a pretty similar set of competitors.

It’s not a rip and replace game where we are in there with another thing that looks just like HubSpot, it’s more competing with those plain solutions versus our all in one solution. And that’s part of our SMB strategy.

The company let’s say with 100 employees really, really, really likes that all in one, one telephone number to call if they get stuck, one user interface to learn one bill to pay, it makes our life a lot easier and it works very well for them. But to answer your question, no major shift there..

Okay. Thanks, Brian. And I guess as it relates to the bottom of the funnel, there was obviously a lot of excitement at the last INBOUND Conference in terms of the CRM platform there with the bottom of the funnel. You all had several more month now of your partners leveraging it.

Maybe some sort of update on how ready you think the product is and remind us again of when we could start seeing this revenue impact of the model? Thank you..

Terry, I’ll take that one. So I think we are making really good progress there. Just to step back again, I think what we did is we took a team, carved it out of HubSpot, set them off on a mission to help to go after helping sales people to be more successful at the bottom of the funnel there and I think it’s going really well.

We are really focused on this year for that team is drive a ton of users, get a lot of user growth and then learn from those users and keep rating on the software to make sure that we are driving the right level of value for the users. Specifically, on the CRM, as you said we launched that. We talked about that INBOUND Conference last year.

We started to open up the beta in Q1, so we are really still in the very early days of that but early reports are very, very positive. I think particularly the customer set we are going after that sort of 60% of our installed base had never used CRM before or really used HubSpot. In context, database almost is their CRM.

The tools is really powerful and it’s really – they are getting a ton of value add of that. So I am really optimistic about that. On top of that, if you remember what we’ve built is a series of solution that will be more focused on sales acceleration for that to help a sales person in our sidekick product, and that’s going very well as well.

Again, 2015 I think is about user growth and then I think it has an opportunity to be impactful to our top line growth in 2016. So that’s sort of the way we are thinking about it.

Still kind of like – almost a start up within the start up and I am happy with – it’s a little early to pull out the cake up and start celebrating, but I feel like there is the big opportunity there to make this really take off..

Okay. Thank you..

Your next question is from Jennifer Lowe with Morgan Stanley..

Hey guys. Good afternoon. This is actually Stan Olszewski fitting in for Jennifer. And thank you for taking my questions.

So two point five questions for you, did you like that very precise?.

Yes, very good..

So maybe just some qualitative commentary on how your customer acquisition costs trended in the quarter versus recently 2014, and how you think about your cap cost as we head through 2015..

So, Stan, this is John. I’ll take a shot at that one. So on the customer acquisition cost, they trended pretty much in line with what we saw towards the end of last year. Obviously they will ramp up in the third quarter when you add in our INBOUND marketing.

As we’ve seen the improvement in our customer economics, its come more on the lifetime value side as our retention has improved and also as our software margins have improved as well. So we are pretty comfortable in this customer acquisition cost where the right world is right now and we are leaning into it given the economics are so great.

They couldn’t go up as we enter in new international markets, but we are just getting natural leverage on those. If anything we expect them to stay in a narrow range of where we are now..

Okay, great. That’s helpful. And the second part is, on revenue retention, so you guys mentioned that your high 90s revenue retention again. Perhaps if you look to slicing dice a little bit, how has unit retention trended and how much is up sell hoping to get up into that high 90s range..

So, I’ll take that one again. So as we got from the mid low 90s to high 90s, it was a combination of the underlying renewal rate as well as up sell rate, little bit more on the up sell rate.

We feel like we are in a SMB market where our renewal rates are, we are getting about to probably – we could have a couple of more points, but we are about where we can there. And the up sell rate though, we’ve done all of this without really having another product to sell into the base.

So we are encouraged as we think about longer term on the road map as we develop more products to sell into that base if there was another lever ultimately to improve the revenue retention rates..

Okay. So you actually you hit on to 0.5, how much – when you think about your model and the guidance that you give us for 2015, what are your assumptions around retention rate going forward..

We don’t give specific guidance on some metrics or anything like that. We feel like I said I think that retention can stay at this high 90s level. Taking it higher will require new products and that’s something we have in front of us.

We give a range of guidance to take into account different outcomes in the business, but we are really encouraged with how the business is performed and we expect to continue to perform well..

Okay. Perfect. Thank you so much..

Next question is from Mark Murphy with JP Morgan..

Brian, when you look at the core marketing platform and you think about the various components, you have SEO, landing pages, blogging, content management et cetera.

How is that evolving? If you look at it in terms of usage pattern and adoption rates, is it the case that every module is equally important or is there some evolution in how that core platform is being used..

It’s a really good question.

Sometimes people will start with geez I have a problem, I want to get more visitors to our site and they start on the content marketing side with creating great blog and having it be optimized for social and really cranking it up in the search engines, and they will start there and then will move them on to landing pages and move them on to the contact database and email later.

Sometimes they come to us where they’ve got their website set up and they’ve got their blog set up, and they need help in the middle of the funnel where they’ve got leads and they want to segment those leads and they want to nurture their leads, and then they will spread to the top. There is no one pattern.

We are looking for that pattern and it’s not there. They come-in in different places and tend to spread. It’s sort of what the way it’s working. The usage overall is up, one of the things we work on at HotSpot is trying to get our customers to enjoy as much of the product as they possibly can because we see that correlated with their success.

So that’s one of our big push of this, how do we get our customers enjoying as much of our product as we possibly can..

Okay. So it happens in different fashions but there is no real trend..

One way they come in through different ways. One of the things I like about HotSpot is we do a lot of different things, we solve a lot of problems. In our implementation process, J.D. referred to this earlier, it’s about three month implementation process.

And what we try to do is, let’s pick a campaign and once run that campaign, maybe it’s a new offer product offering you have when you service your offering. In the implementation what we tried to do is, get them using as much as the product as they can.

Let’s blog about your new campaign, let’s make sure your ranking for your new campaign in Google, lets Tweet and put an LinkedIn messages and Facebook messages out there. Let’s convert those visitors on for landing pages and collect email addresses, and then let’s nurture them by email and social and the website.

So we try to hit as much of it as we can and try to get them enjoying as much as possible, but they come in through different angles..

Okay. And then as a follow-up John, I am curious why are you excluding the standalone sales products from the average revenue per customer metric. If I understood what you said earlier than that, that is what you are doing.

The reason that I ask is that, when we are engaging with your partner firms at the field level, there are signs of tangible traction with those products. And sometimes a pretty dramatic increase in ASP, sometimes 50% type of a thing according to your partner.

So I guess I am wondering how is it not material and why are you excluding it from that disclosure?.

Yeah, Mark, its J.D. maybe I’ll answer that. One reason is sort of the philosophical reason the way we are attacking this market space and then the other is statistical reason.

The philosophical one is we really are focused that we want to run that business almost like standalone business, so that we want to build a disruptive business with a much different and much more efficient hopefully at customer acquisition model. It’s a premium model.

Start with the product, whether you are a HotSpot customer or not a HotSpot customer, start to get value from the product and adopted speeches and then upgrade to $10 version per seat and $50 version per seat.

And in fact, what we’ve seen is the users and the customers coming into that product, through that funnel, were seeing about 80% of those are first time ever to a HotSpot. They are not HotSpot customers, so that’s a good news. From a statistical standpoint as you can imagine, you have individual customers who are paying $10.

And so that will really even though it’s a relatively small part of our overall revenue for the business, when you have lots of customers paying $10,000 or $10 in comparing that to customers who are paying $10,000, it really throws us the numbers.

And so I think that would actually be harder to understand what’s going on in the business that we’re blending those two things together.

We do internally look at one of the things that we look at as the traction of those products within our install base and that’s getting pretty exciting, but the easy thing, the straight-forward thing to do from a statistical standpoint is to keep them separate and then also we were really driving that business to think about themselves as a standalone business and build a different type of model.

.

Yeah that’s a very good explanation; I understand what you are saying. Is there a point at which you would reach a critical math where you would disclose it, so rather than blending it in as you said with the other customers will you disclose that on its own, is there like a threshold of materiality that you would look at..

I think there is certainly a point and I would not be surprised if that point were next year..

Thank you..

Sure..

The next question is from Michael Huang with Needham..

Thanks very much, good afternoon good quarter guys.

Couple of questions for you, I guess as I look at the really strong acquisition in the quarter I guess I would thought that in some fall off after a record number in Q4 and so drawing into a little bit, is the trend a function of pipeline or length of sales cycle or conversation rate, is there anything that you guys are doing better from an execution standpoint that actually is helping to drive that and I know [indiscernible] are we adding a new trend line for kind of what customer ads could be or is there any reason why that might be down sequentially?.

That’s good question Michael. This is Brian. I think they are up and they’ve been consistently up for two simple reasons, one is just the market is really coming together for us. They’ve mentioned I have been at this for eight and a half years.

And when we first started we were talking about this inbound marketing thing and people looked at it like we have seven heads and more and more we are looking quite seen on our inbound marketing thesis and people are buying the thesis and buying our products, they are not happy with the product, and then they move to a different company and they buy and they tell their friends about it.

So, the word of mouth is really spreading. The thing I like about HubSpot in this market is its not traditional marketing, if you look at the other marketing vendors out there, our story is quite unique. We’re talking about the big transformation in the way you market to really match the new ways that people shop and buy.

So, it is quite unique from other folks and I think the market is just Crossing the Chasm. Now, I think that’s all well and good. One of the reasons it is Crossing the Chasm is I think the HubSpot team and the whole organization is executing quite well.

I mean, the product team is building a great product, customers are loving; our service team is delighting our customers; the marketing team is generating leads well. We are kind of firing on all cylinders today, so I just think it’s the combination of those two things that are really coming together and the business is really cooking for us.

So, we couldn’t be happier. .

Got you and I imagine you were a bit early to talk about specifics around the upcoming inbound conference, maybe a last one anyway, I am not – we are going to see attendance up notably year-over-year, but what else could be different this year about this conference versus last year for example?.

I think the conference will be even more awesome this year. That’s what will be different, I hope you all come. The speakers will be different and hopefully really good. I think it’s likely you will see like you do every year.

Some very interesting new technology coming out of HubSpot and new announcements, I’m not going to slip my hand at this point, but there will be good stuff like there usually is and there will be a large strive of people. Somebody described to me what inbound was like last year, I really liked the description they said.

The inbound conference is like cross between an Apple product launch in a grapple day concert. I love that analogy. And so from that perspective hopefully that analogy holds going forward..

Great, thanks guys appreciate it. .

[Operator Instructions] The next question is from Owen Hyde from Pacific Crest. .

Hi guys it is Owen on for Brendan, just wanted to ask quick on pre-cash flow it seems like you guys are tracking better than we previously anticipated, is there any update as far as timing of breakeven or how you guys thinking about that?.

Yeah, so this is John and how are you?.

Pretty good..

So on the operating cash flow, the quarter obviously was really strong. The first quarter is usually our strongest seasonal quarter. We have more renewals around that period and we talked about how strong the fourth quarter was. So, obviously, those receivables are collected in the first quarter.

So as we look out through the year, obviously, that’s going to be strongest receipts quarter. And then you get into the third quarter, which, obviously, has inbound in it, which obviously is a bigger use of cash.

And so we feel like the business will continue to perform and we will get leverage in the business and we are really still striving towards that early 2016 operating cash flow goal..

That’s perfect. That’s all I had. I think everyone else has covered the other ones, so thanks..

And the last question is from Kirk Adams from Rosenblatt Securities..

Hi, guys.

My question kind of centers around the sales force hiring and your growth on your sales force and if you can remind us how long it takes for those guys to become productive?.

Yeah, sure, Kirk. So, we work on our sales force pretty rapidly. I think we’ve talked about there is a still a huge open market in the United States where we are just starting to get into. We’ve got 15,000 customers, I don’t maybe, there are 3 million of these customers in the United States.

So I think there is still an opportunity just to simply execute really well and keep adding sale people and we are growing really fast. And then, as I think about outside the U.S. and the international market, I mean that’s a really greenfield. I mean it’s got moist turf [ph]. I mean we can go after that base for a long time.

We are starting to think about where our next locations are and building out even larger footprint outside the United States and that’s going to be really driven by – we will get productivity from being able to sell directly into those markets as well with sales [ph] account.

So I still think – we’ve talked about a lot of the exciting stuff driving our growth like the future of new products with the sales products, with the retention gains that we’ve gotten and sold into our install base, I still think we have a huge lever with just playing, executing and adding a lot of sales growth.

We haven’t talked about the number or the rate, we are not going to disclose those numbers externally, but that is still our – at least in the near term our biggest lever for growth.

And then to your question about how rapidly people come up and ramp up to their full quota, I think we are probably along the lines that we can see with a lot of companies, maybe five to seven months to get a sales person starts fully up to their quota.

We’ve done some work to start to accelerate that a little bit, but I feel pretty good about where we are in that..

Great. And lastly, I mean, you guys have grown big time here, 58% in the quarter.

As it slows down, the way your guidance goes right now in the back half of the year to the high-30s is that user growth, is that ARPU, I mean what do we – how should we think about that?.

Kirk, as I said before, obviously, in our guidance, we have a range of outcomes that we provide. Obviously, if we are going to slowdown, I think it will be a combination of those things. But as J.D. said, we are investing heavily in the sales force. We feel really good about where the business is going.

So we are going to continue to grow as fast as we can while continue to deliver margin expansion..

All right, great. Thanks, guys. I appreciate it..

I want to thank, couple of things, I want to thank everyone for joining. I’m going to be – this is Brian, I’m going to be in New York meeting investors with Lisa next week and so, hopefully, we will be able to get together. And then, I will be at the JPMorgan conference, so hopefully we will see you there.

Thank you all for joining and talk to you soon..

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