Lisa Mullan - Director of IR Brian Halligan - CEO and Chairman John Kinzer - CFO.

Terry Tillman - Raymond James Brad Sills - Bank of America Richard Davis - Canaccord Brent Thill - UBS Stan Olszewski - Morgan Stanley Matt Coss - JPMorgan.

Good afternoon. My name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the HubSpot Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Lisa Mullan, Director of Investor Relations at HubSpot, you may begin your conference..

Thanks, Connor. Good afternoon and welcome to HubSpot’s second 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 the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman; John Kinzer, our Chief Financial 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 third fiscal quarter of 2015 and the full-year 2015, our position to execute on our growth strategy, and our ability to maintain existing and acquire new customers and partners.

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-Q, which was filed with the SEC on May 7, 2015 for a discussion on the risks and uncertainties that could cause actual result to differ materially from expectations. Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures.

There is a reconciliation scheduled showing GAAP versus non-GAAP results, currently available on our press release announcing financial results for the second quarter ended June 30, 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’s CEO and Chairman, Brian Halligan..

Thanks, Lisa. Hi everyone and welcome to our second quarter 2015 call. Before we dig into the Q2 results, I would be remiss if I didn’t mention the press release we issued last week. You may have seen, we recently announced the CMO transition with Kipp Bodnar taking over HubSpot’s Chief Marketing Officer from Mike Volpe.

My co-founder Dharmesh and I personally played a big role in helping bring Kipp into HubSpot five years ago. He has been leading our demand [indiscernible] operations as VP of Marketing and have been doing an outstanding job. He is an industry recognized author and speaker on B2B and inbound marketing. He has got an amazing team working for him.

Really confident that we will have a great transition with Kipp and keep our momentum at the business. HubSpot is on a roll. We have got a 1,000 great employees that will keep us rolling. Although I am not proud of the way our CMO transition played out, I am proud of the transparent culture of HubSpot, which brought the matter to light.

Now, on to Q2 results. When we went public last fall, we laid out a plan to grow revenues rapidly while gaining nice leverage on the bottom line. And I am happy to report that in Q2 we continued to deliver on those commitment. Revenue increased 58% year-over-year in Q2.

Coupled with this powerful growth, we achieved non-GAAP operating margin expansion of 13 points compared to last year and margin expansion of 3 percentage points compared to last quarter. What I am really excited about is, cash flow operations turned positive for the first time.

As we said on the road show, we wanted to operate under our own team and with this accomplishment we are well on our way. So let’s unpack that 58% growth. There are two drivers. First, we are having lots of new customers, 36% year-over-year growth in the number of HubSpot customers.

Second, our customers are gaining more value and paying us more per product. Our average subscription revenue per customer grew 15% year-over-year. What I love, love, love about our model is that when we grow, our customers gain value and grow themselves. Our incentives are really nicely aligned with our customers.

When our customers grow, they add contacts to our database, they add second URL, they upgrade from basic to pro to enterprise and the user CRM, Sidekick tool. That’s what’s leading to that big increase in average revenue per customer.

I think our 36% year-over-year customer growth is because we are solving for a fundamental problem that’s pretty much every mid-market company faces today. Companies have to change the way they market and sell their products to perfectly match the way humans actually buy stuff today.

So how are we doing this for them? Well, even though to me, I’d like to take a bit of walk down HubSpot history road. The first four years of HubSpot really about opening up the top of the funnel turning complete strangers into visitors on our customers’ websites.

We get really, really good in helping companies or visitors in terms through search engines, social media sites and through their blogs. The next four years at HubSpot were about turning those visitors into qualified leads for our customers’ sales reps.

We did this by building marketing animation software that solve the middle of the funnel puzzle for our customers, extreme segmentation in nurturing executed through your website, email and social. We got really, really good at that too. Over the next four years, you can expect us to continue making investments in the bottom of the funnel.

This chapter is going to be about turning those qualified leads into totally delighted customers. We feel like the B2B selling process needs to change as radically if not more than the B2B marketing process did in order to really match the sales process with the way humans actually buy stuff in 2015.

This is where our CRM and Sidekick product come into play. Though our customers are able to grow with HubSpot from the top of the funnel all the way to the bottom, to illustrate how this works, I’d like to introduce you to a great HubSpot customer, IDS.

IDS is a transportation service company that helps businesses move their products across the country. IDS has 200 employees right in our sweet spot. Recently, I caught up with Alicia Dale , IDS’ marketing coordinator. When Alicia decided to buy HubSpot for IDS in 2012, she signed up with one URL and paid us $8,400 a year.

Fast forward to today, and she is now hosting two URLs with HubSpot, so her contact in the system have grown over six fold. She is an active user of our new CRM product and she is using the heck out of all our tools across the top, middle and bottom of the funnel.

In three short years, IDS’ spend with HubSpot has more than tripled to over $31,000 a year, that you, Lisa. That’s what we do. We are in the business of helping our customers grow and I love seeing customers like IDS grow alongside HubSpot. In my mind, HubSpot isn’t just selling the marketing and sales platform, we are selling a growth platform.

We are helping companies do the nitty gritty of getting visitor to the website, turning them into leads and then turning them into happy loyal customers. And that’s just another way of thing, we’re helping these customers grow.

And launching new products like our sales product is the logical next step in building this powerful growth platform as it is matching the way human shoppers buy today. But let’s talk about our CRM and Sidekick products. Why are our products different from the other CRM and sales tools out there that people use today.

What makes our sales product different is they are built for today. They are built to work in the modern world. So how do these products work? Well, let’s say you’re a sales rep and you want to sell into a certain company, call it ABC Corporation. So you put that company name to the HubSpot system.

Our software then goes out and finds pretty much everything relevant there is to know about the company, a buyer of the company, the number of employees, location, social media link, telephone numbers, it also finds out who inside your company is connected to whom inside of ABC Corp.

It does always for you in the background automatically versus forcing the rep to go through tons of research on our own. HubSpot sales products literally work for the sales rep, it’s a different animal than in traditional CRM system. It doesn’t stop there, because then we build a timeline of what’s going on with the targeted customer.

Anything that happens for the targeted customer, news articles about them, press releases that mention them, interesting tweets about them, [indiscernible] all end up, and there is timeline, again automatically and that just keep growing over time, so we built this living, breathing body of information for the sales reps rely on as mean into the sales.

HubSpot sales products don’t force the sales reps do tons of work researching information and adding into the system, our sales product literally work for the sale reps. And then when the sales rep picks up the phone, it has an awesome conversation, let’s say with the CTO of ABC company.

When you use the HubSpot sales products, all your calls with customers are automatically recorded and placed right on that timeline. Any emails you send to the customer go back and forth and again automatically show up on the timeline. It’s all there in one place and you really never have to lift a finger.

This timeline becomes a very rich resource to the sales person and is just the resource they need to match the way the world works today. When the sales rep gets on the phone with the CTO from ABC Co, they’re already up to date about the customer’s business.

If the sales rep’s manager wants to know what’s going on, they can just listen in to the recorded call. If the sales person leaves the company, your new sales rep has a whole timeline right there in front of him.

As we launch new products like the CRM and Sidekick product, a nitty [ph] little side effect is we’re creating a vast new customer ecosystem that we can cross our other products into. Take for example Spire Wireless, a HubSpot CRM user. Spire Wireless installs and monitors remote wireless sensors across multiple work site locations.

These sensors use wireless network to send data from different networks back to Spire’s customers making their worksite safer and more efficient. After trying the usual CRM suspects, Spire was struggling to find a product that would fit the bill.

Jae Reichel, Spire Wireless’ CEO set it back, with every CRM we tried, the same issue came up again and again. The tension between CRM being useful versus all the time we need to spend manually entering data. The way HubSpot CRM integrates with our email and automatically populates all sorts of data solves this fundamental tension for us.

Today, Spire is growing like gangbusters. This year, Spire has grown from 3 to 10 people, it will be at 20 people by the end of 2015. The best part about Spire’s growth story is that by June, Spire had upgraded from our CRM product to become a HubSpot marketing customer too.

As Jae explained it, Spire’s first business software plan looks like a spiral web, a dozen different companies handling a small portion of our business process. We knew that we wanted to do marketing automation, but we weren’t ready to make that decision.

Starting with the CRM made that decision for us, using it to turn the conversation from if we would use the marketing platform to when. It gave us functions without complexity. Now, when we look at our chart for sales and marketing software, there is just one sticky note and it says, HubSpot.

I love customer upgrade stories like Spire and look forward to sharing many more stories like it as time goes on. Now, let’s take a look at how HubSpot’s growth is showing up in our partner channels. We love our partners. In fact, over 40% of new revenue comes to HubSpot through our 2,500 plus strong partner channel.

We lever even more when our agency partners grow. So we do everything we can to help them succeed. When a new partner joins HubSpot, we give them access to tons of tools to help them grow. We give them white label e-books for degeneration, campaign kits for lead nurturing and personalized coaching on making the sale.

We give them a name and channel account manager, inbound training for other employees, client services workshop and partner benchmark, so they can measure their results. Soup to nuts, our partners get it all, whatever they need to grow their businesses with HubSpot.

A couple of years ago, we rolled out a program that rewards partners when they hit certain milestones. Initially, we had silver and gold partner tiers, but so many people grew beyond those tiers that we expanded the program in to platinum and diamond partner levels.

Who knows, we might have to roll out to titanium and plutonium levels at the rate we’re going with some of these partners.

After starting the program just two years ago, we already have four partners that are each managing over $40,000 of monthly recurring revenue at the diamond level, Square 2 Marketing, RPM, Kuno Creative and New Breed, love these guys. Each one of them has an amazing story of growth and success that we’re terribly proud to be associated with.

And when partners grow with HubSpot, HubSpot’s business scales. Just think a real ramp happens when a partner adds that second, third and tenth and 20th customer to our platform. This does wonderful things to our long-term return. As you might imagine, the cost to acquire that 20th customer is way lower than the cost to acquire their first customer.

So our partners are growing with HubSpot and they are helping their customers grow with HubSpot, every step of the way. We love watching our partners succeed. We’ll keep sharing their stories with you. Finally, I will conclude with a couple of housekeeping items. In May, we announced that we renewed and extended our agreement with salesforce.com.

This is a five year agreement and ensures that 17% of our marketing customers who integrate with salesforce.com CRM products can continue to do so. On the international front, we told you that we would expand our international efforts.

We are full steam ahead on delivering on this objective and in June, we announced that we’ll have our office up and running in Singapore in the fourth quarter of 2015. That’s it from my remarks. I’ll turn the call over to John who will walk us through the financial highlights and guidance.

John?.

Thanks, Brian. Our second quarter showed both strong operational and financial performance. HubSpot’s business is scaling and you can see it as we achieved a significant milestone in the second quarter as we reached positive cash flow from operations.

This was several quarters earlier than our goal and just as revenue and profitability have exceeded expectations, operating cash flow did as well. From here on, we generally expect to be cash flow positive from operations. However, in certain quarters like next quarter, when we have our inbound conference, we will swing back to a loss.

So let’s take a closer look at our second quarter performance. Second quarter revenue came in at $42.9 million, which was above the high end of our guidance. Revenue grew 58% year-over-year, a 10 percentage point improvement compared to second quarter 2014 and consistent with our reported first quarter growth of 58%.

Subscription revenue was $39.3 million, also growing 58% year-over-year and represented 91% of our total revenue. Subscription growth was driven by healthy customer additions, strong revenue retention and continued increase in average subscription revenue per customer. Services revenue was $3.7 million in the quarter.

Services benefited from the impact of consulting deals that were unique and not likely to repeat in the near term. Given this, you are likely to see a sequential decline next quarter for services revenue.

The focus of our services team continues to be the successful on-boarding of our customers and encouraging further adoption of our various inbound applications, which is shown to be highly correlated with long-term retention. The strong services revenue performance resulted in positive non-GAAP gross margins in the quarter.

We expect services margins to vary from breakeven to slightly negative margins in the near future as we onboard new customers and migrate our remaining customers from our old content management system to our new content management system. Headcount grew to 1000 employees, up 39% from the prior year.

We continue to hire rapidly to meet the growth in our business, while gaining leverage as the business scales. Non-GAAP gross margins came in at 75% for the second quarter, a one point improvement quarter-over-quarter and a five point improvement year-over-year.

Non-GAAP operating margin was a negative 13% in the second quarter, a 3 percentage point sequential improvement and a 13 percentage point improvement year-over-year. Foreign exchange rates negatively impacted our revenue growth by 5 points.

Like the first quarter, this top line headwind was substantially offset by foreign exchange business to our expense line items. International revenue was another bright spot in the second quarter, growing 70% year-over-year and representing 23% of our total revenue.

We are working hard to expand our international presence and in June, we announced we would have an office in Singapore up and running in the fourth quarter of 2015. Our newly launched Sydney office, which we launched in the third quarter of 2014 is showing impressive growth.

Year-to-date, Sydney has over achieved relative to our expectations and two of our top sales people hail from our Sydney, Australia office. International and domestic operational results were strong in the second quarter. HubSpot ended the second quarter with 15,839 customers, up 36% year-over-year.

This growth is being driven by continued strength in both our direct and partner channels. Average subscription revenue per customer increased 15% compared to the second quarter of 2014 to $10,127.

This growth was largely driven by customers adding contacts to their databases, customers buying second URLs and customers upgrading from basic to professional and professional to enterprise editions of our product.

As we have previously said, revenue from our sales products to customers who aren’t marketing customers represents a small percentage of our total revenue and it is not included in the calculation of our average subscription revenue per customer. Revenue retention again came in the high 90s.

We currently expect to be able to maintain strong revenue retention in the coming quarters. Moving on to our balance sheet and cash flow, we ended the second quarter with $152 million of cash and marketable securities and we had no outstanding debt.

CapEx, including capitalized software was $1.2 million in the second quarter which was very low as we incurred minimal facilities buildout. In the second half of 2015, we will see CapEx increase as we move forward with expansion plans in our Cambridge, Dublin and Sydney offices. This increase will be weighted more heavily in the fourth quarter.

All in, we anticipate full year capital spending to come in at 6% to 7% of our full year revenue. Calculated billings, defined as revenue plus the change in deferred revenue for the second quarter of 2015 came in at $46.2 million, up 55% versus the second quarter of 2014.

Billings growth will vary from revenue growth due to factors such as change in billing terms and the timing of revenue recognition versus billing. Second quarter billing trends were generally in line with prior quarters. Let’s move on to guidance.

For the third quarter of 2015, total revenue is expected to be in the range of $44 million to $45 million representing year-over-year growth of 46% when using the midpoint of the forecasted range. Third quarter non-GAAP operating loss is expected to be in the range of a loss of $11.3 million to $10.3 million.

Third quarter non-GAAP net loss per share is expected to be in the range of a loss of $0.34 to a loss of $0.32. This assumes approximately 33.9 million basic shares outstanding.

Given the strong fundamental and operational performance of our business in the second quarter, we are raising our full year 2015 guidance for revenue, non-GAAP operating loss and non-GAAP operating loss per share. For the full year 2015, total revenue is expected to be in the range of $171.7 million to $173.7 million.

This new guidance represents year-over-year growth of 49% when using the midpoint of the forecasted range. Full year 2015 non-GAAP operating loss is expected to be in the range of a loss of $30.9 million to $28.9 million and full year non-GAAP net loss per share is expected to be in the range of $0.92 to $0.88.

This assumes approximately 33.3 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. In 2016, our Inbound Conference will be held in the fourth quarter of 2016 and not the third quarter.

We plan to return to hosting our conference in the third quarter in subsequent years. Also, as you look at your models, please keep in mind the higher CapEx in the second half I referenced earlier in my prepared remarks. To wrap up, we are executing against the business plan we outlined for you when we went public last fall.

Our business is strong and our products are in high demand. I am proud of our results and look forward to seeing many of you at the upcoming investor conferences and at Inbound in September. Now, I will turn it back to Brian for closing remarks..

Thanks, John. Before we take your questions, I’d like to highlight a couple of awards that we are real proud of. First, I am excited to announce that in June we were ranked the number one place to work in Boston by the Boston Business Journal.

That’s important because that’s the kind of award that makes up for the talent magnet which matters to great candidates who can pick and choose where they go to. Second, we were named the 15th best small to medium sized company to work for in the United Stated by Glassdoor.

This is great, because the ranking is based on ratings made by our 1,000 amazing employees. Glassdoor is the company ratings as Yelp is to restaurant ratings. I’d also like to take a moment to talk about my favorite week of the year, the week of our Inbound Conference which will be held September 8 through 11 here in Boston.

We hope you all come to Inbound which is an awesome conference and it’s also where we talk about the great new stuff our engineers have been up through all year. As one of our attendees last year hit the nail on the head when she described the conference as the cross between an Apple product launch and a Grateful Dead concert.

Last year we had over 10,000 people in Inbound with 75% of them in Inbound for the first time. This year we expect even more than that. We’ve got a great line up of speakers including Daniel Pink, Brené Brown, Seth Godin, Jonah Peretti, Sophia Amoruso, Amy Schumer and Aziz Ansari.

We will run a special investor track on September 9 in conjunction with Dharmesh and mine afternoon keynote. Please reach out for Lisa to gain more information on how to sign up. I hope to see you all there. Lastly, I would like to thank our awesome employees, awesome customers and awesome partners, it’s a pleasure working with you every day.

With that, I will turn the call over to the operator for your questions.

Operator?.

[Operator Instructions] Your first question comes from the line Brent Thill with UBS. Your line is open. Your next question comes from the line of Terry Tillman with Raymond James. Your line is open..

Hey, good afternoon. I guess there is some good things going on in Cambridge, nice job. First question. Brian, it’s more of a bigger picture question. I thought it was symbolic that you all were in Gartner report this year on lead management.

The reason why I think it’s interesting is usually it seems like Gartner has enterprise customers that are looking at the Magic Quadrant and that sort of thing.

Is there anything to read into your inclusion? Is maybe something that could be a broader strategy for you guys over time to drift higher into the enterprise market, because I know that product is geared to be able to scale into larger businesses, but I am just curious is there change in terms of maybe an appetite to move up market or drift up market if you will?.

[Technical Difficulty] Another reason being that the Internet kind of disproportionately benefits small business relative to large. I think they can – it’s a great time to be a small medium business. It’s a great time to be a growth company and we’ve always wanted to position that. So we are really sticking with small medium sized companies.

It’s going great for us. The market is wide open, we are competitively posited in there very well. Our brand is strong in there. Our go to market model really matches it, so no big change. I wouldn’t read too much into the Gartner inclusion. I guess, Terry, I wouldn’t think too much about it, wouldn’t read too much about it.

From day one, I mentioned I’ve really been focused on building a company really focused on helping small and medium sized companies grow, really grow and I kind of feel like the Internet disproportionately benefits small relative to large companies and HubSpot is sort of building that platform to help them do it. It’s pretty wide open market.

There is not a lot of competition in there. That’s not a rip and replace market. It’s relatively greenfield, still haven’t seen much change there. Our competitive positioning is very strong in that market. Our branding is very strong in that market.

Our go to market strategy is, it’s handcrafted kind of to match the way those companies buy and to penetrate deep into that market. So, I guess I wouldn’t read too much into the Gartner inclusion..

Got it, all right thanks. And John, maybe quick financial question or questions.

Your stating now that you could be operating cash flow positive each quarter I guess other the user conference quarter but is there anything to think about seasonality of the cash flow and then I would like you to repeat the service gross margin expectations because I missed that on the call. Thank You..

No worries Terry. So, on the operating cash flow side, not a lot of seasonality in our cash flows, a little bit more in the first quarter just because we get so many billings at the end of the year that were collected at the beginning of the next year, but it should be fairly consistent across the quarters absent inbound as you mentioned.

On the services gross margin side, we had a couple one-time deals in the quarter which grows services revenue up. Absent those deals, we think services revenue will come down a little bit in the third quarter and the margins will go back to breakeven or a slight loss on the services margin side.

We’re really focused on the services side, getting our customers up and running, getting them successful, so that they really stay with us a long term and really drive long-term subscription revenue..

Your next question comes from the line of Brad Sills with Bank of America. Your line is open..

Hey guys, thanks for taking my question and congratulations on a very nice quarter. I wanted to ask about CRM and Sidekick, now that these two offerings have been in the market for a couple of quarters now.

Could you provide a little color please on how they’re impacting the business, I know CRM is free, Sidekick you just started charging for, but maybe just separately how each of those is impacting both pull through of the suite and then direct revenue contribution to the extend you can, please..

Hey Brad, it’s Brain, really good question. Feeling really good about it, we’ve got 60,000 companies where they’re users of our sales products, so really getting nice, nice spread of it, it’s going well. We’re really focused on weekly active users of the product, trying to get lots and lots of reach with it.

Next year, we’re going really focus much more on monetization and really starting to move your spreadsheets next year.

What I think is very exciting about it is, what you’ll see over time is that our marketing customers will start using our sales products and you heard about that in my opening remarks from IDS, where they’re using the marketing products, then they started using our CRM product and maybe started using our Sidekick product, so they’re paying us more, when they’ve got all that products together, our solutions gets very sticky and so I think it will improve retention rates as well.

And then on the other side of that, the CRM product is designed not only to be used by our existing customers but by net new customers, it’s designed to be valuable just in and of itself.

So, I talked to you on my opening remarks about Inspire, the wireless company and they started using our free CRM product and then their natural inclination is to buy our marketing products, so then they bought our marketing. So, I think you’re going to see some really nice action on that over time.

Frankly, right now we’re focused, it’s an early stage start-up, it’s like Series A start-up inside of HubSpot, going well really focused on weekly active users, I would look to -- we’ll make more comments about it later on how it will move to your spreadsheets but feeling good about the early days of it..

That’s great thanks, thanks very much. And then just one on new customer growth, seems to be accelerating nicely over the last or has accelerated nicely over the last several quarters.

Would you attribute that to productivity in both the channel and then the direct salesforce, the awareness do you think, you’re kind of hitting critical mass now in terms of awareness on inbound marketing and HubSpot in the SMB segment. That’s it from me, thanks guys..

Yeah, I think it’s a combination of a lot of good stuff coming together Brad. I think the marketplace in general is waking up to the idea that boy, the way people shop and buy stuff today, it’s changing, and if we keep marketing and selling the same old way, we’re going to hit some roadblock.

So, this idea of inbound marketing is kind of crossing the chasm if you will. Secondly, I think our products are really well suited for this new type of buyer and our products are really solid now, our engineering teams have done an unbelievable job and the products are good, they work and I think word of mouth is spreading.

I think the team’s execution has been good, we brought some new leaders in, actually from Salesforce.com, a little over a year ago, they’ve done a great job, our sales team has done a great job. So I think it’s a combination of the market coming together, the product is really good and pretty good execution, I think the team has done a great job..

That’s great, thanks Brian..

Your next question comes from the line of Richard Davis with Canaccord. Your line is open..

Thanks.

So, most of customer, the way you described where you’re kind of going is via customer experience platform, so when I kind of look at companies like that, that would allow a company to kind of get customer feedback kind of understand it in real time, take action to improve the customer experience and then access the social graph within your company, so you know who should interact with the customer.

So where are we in that evolution, is it, you could use a baseball analogy, preferably not the Red Sox but something like that, where are we in that process..

I would avoid Red Sox analogy. I actually, Richard, I haven’t called it the customer experience platform yet, I think I like that expression, it’s not one I’ve used, I think of HubSpot more in that, we’re a growth platform, we help you get more visitors and turn them into leads and then turn those leads into happy customers as much as possible.

We’re probably in that second inning of that game, there is a lot more stuff in our collective heads that we can build to use to delight our customers and to help them grow more. We by no means feel like we’re out of ideas [indiscernible] it’s still very early in our ideas of how to do that.

There’s probably an opportunity starting hinting at this around customer feedback and dealing with customer feedback, that’s not an area we’ve invested in, it’s something that’s an interesting space where others are doing relatively well, we look out from time to time but we’re really focused on more of that front-end, how do you acquire that customer, how do you acquire more customers, how do you do that faster, how do you do in a way that really matches the way people buy today..

Got it, that’s helpful, thanks Brian..

Your next question comes from the line of Brent Thill with UBS. Your line is open..

Thanks, I figured out how to use my phone. Just on the ARPU of 15%, you guys have had really consistent ARPU growth and it seems like there is a tremendous opportunity to take your base from basic to pro and then pro to enterprise.

And I’m just curious if you have any more detail in terms of how to think about where that progression is going in terms of that move and anything that you’re seeing that’s prompting customers to realize they’re probably on too low of a level, and they need to move up?.

Hey Brent, it’s John. So as you think about the ARPU, the biggest driver we’re seeing right now is the contact tiers, when people are successful with inbound marketing, they add more leads to their database and they’re growing their customers and their subscription grows.

So we get that, we also get customers that have multiple lines of business that add a second URL to their subscription which drives it as well.

And then what you mentioned, basic to pro and pro to enterprise, and there is both functionality differences but also as you add more contact tiers and your contacts to your database at some point you would just upgrade automatically based on the pricing.

So we’re seeing all of this different things driving the ARPU, as we think about it going forward, I mean, recently we’ve seen customers grow 35%, 36%, our ARPUs grow 14%, 15%. I think you’re going to see that same relationship on the growth between customers and ARPU.

There is still a ton of opportunity to gain a lot more customer relationships with domestically, internationally. We’ve just launched our Sydney office last year, we just talked about Singapore, so lots of opportunity internationally, but domestically it’s pretty wide open, pretty dream field as well.

So, you’ll continue to see us grow on both of those levers, but there is still a lot of rooms on the ARPU side..

Just as it relates to that on the enterprise side, is there a sense of what percent of the customer base is on enterprise today?.

So -- I don’t know if I have that exact number but it’s been about 15% I think. It might be slightly above that right now, that’s from a customer standpoint. Revenues are a lot higher just given the price point. It’s about a third of the revenue..

Okay.

And just as a last follow-up, just on the agency side, it’s been obviously a unique differentiator for you and I’m curious if you see any changes on what’s happening there and maybe if you could also talk about the international expansion on that side that give you more distribution help?.

Hey, it’s Brian, thanks for the question. Agency side is going well. Happy with the progress there. We’re adding lots of agencies and agencies that have been around for a while are starting to really grow and gain some leverage with us. So, we’re happy with that. It’s a bigger piece of our international business.

So, if you think about an international business, it’s kind of a two-step process. Step number one is, we can sell direct and through resellers into English-speaking countries. So, we are direct in Northern Europe and we’re direct in Australia now. As we -- while that’s going on, we let resellers sell in non-English speaking countries.

Over time, we’ll able to go direct on both sides. So, as you might imagine, the percent of revenue coming through agencies are bit higher internationally than it is in United States, but very healthy on both sides. We’re really pleased with the progress there..

Thank you..

[Operator Instructions] Your next question comes from the line of Stan Olszewski with Morgan Stanley. Your line is open..

Hey guys, thanks for taking my question. A couple of questions for you.

First one, on sustainability of your dollar retention rates, certainly very impressive, the high 90s that you have -- that you’ve been putting up, how do you see that continuing especially as you are lapping tougher comps of dollar renewals rates in the back half of 2014?.

Yeah, Stan, it’s John. We think we can sustain the high-90s in the coming quarters. As you think about going forward, what levers that might take to move it up from there, it would be launching new products that we can sell back into the base.

Most of -- almost all of our upsell that’s been driving our revenue retention is really coming from volume-based things. People adding contact peers, people adding second URLs, things like that.

We really haven’t had the products to sell back into the base and so, that’s something that’s top in mind for us and so, stay with us, stay tuned for some announcements there. But from that standpoint, we think it’s sustainable and then those would be the levers that we’ve taken up from there..

Okay, great.

And then just qualitatively if you could help us, how has unit retention trended while your dollar retention has been in high-90 range?.

So, our renewal rate of the customers is in the low-80s. So, we’ve kind of maintained that. It’s up obviously when you look back into the 2013 timeframe, it was in the low-70s, then we’re up and now in the low-80s and then the upsell rate is getting us up to the high-90s..

And that’s been over the last couple of quarters has been pretty steady in that low-80s number?.

Yes..

Okay. And then, last question for me, on customer acquisition costs, how is that been trending? From the number, it looks like it’s been -- it should be fairly steady but I just want to double-check..

It is, it is. We’ve -- as we look at our lifetime value to customer acquisition costs, it’s been very strong and steady at those levels. That’s why we’re adding a lot of sales reps and keep going really fast just because we know the economics still look great and the returns will come over time..

Okay. Great. Thank you guys..

Your final question for today comes from the line of Mark Murphy with JP Morgan. Your line is open..

Hi, good afternoon. This is Matt Coss on for Mark Murphy. On the subscription gross margin, you are enjoying a nice march up in expansion. I think it’s expanded in just about every quarter for the last ten quarters or so.

What would you say as sort of an upper limit or how would you characterize the expansion going forward, maybe to help set realistic expectations. And then on the service side, the gross margin you said it should be kind of breakeven to a slight loss.

How should we think about that maybe for the next four or six quarters?.

So, on the subscription gross margins, like you said, we have seen nice improvement on that side. We’re really doing a great job of as we get bigger, we are taking advantage of pricing.

The market is treating us well on that side but not only that, our team has done a great job in optimizing the software to actually have a smaller footprint and so, it’s been able to let us scale our hosting cost. So, that’s been a good lever for our subscription gross margin. So, I think you can stay high -- stay in these levels.

To the extent we can continue to do those things, there is some opportunity to lift it from here.

On the services side, like I said, yeah, we’ll dip down to negative gross margins now that we -- we don’t have that one-time benefit in the second quarter and then I would think of a next four to six quarters you’re going to see slight negative to breakeven on the services gross margin, not really a focus to maximize those.

Just do everything we can to make customers successful, so that we can improve the subscription renewal rates..

Got it. Thank you very much..

If there are no more questions --.

Yeah. Thanks everyone for joining, really appreciate it. I hope to see you all at Inbound in a few weeks. Thank you very much..

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