Chuck MacGlashing – Director of Investor Relations Brian Halligan – Chairman and Chief Executive Officer Kate Bueker – Chief Financial Officer.

Brad Sills – Bank of America Merrill Lynch Mark Murphy – JP Morgan Arjun Bhatia – William Blair Stan Zlotsky – Morgan Stanley Richard Davis – Canaccord Taylor Reiners – Piper Jaffray Jennifer Lowe – UBS Peter Levine – Evercore ISI Terry Tillman – SunTrust Ryan McDonald – Needham Koji Ikeda – Oppenheimer Parker Lane – Stifel Brian Peterson – Raymond James Ross Macmillan – RBC Capital Markets.

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 Q3 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Chuck MacGlashing, Director of Investor Relations for HubSpot. You may begin your conference..

Thanks, operator. Good afternoon, and welcome to HubSpot’s third quarter 2018 earnings conference call. Today, we’ll be discussing the results announced in the press release that was issued after the market closed.

With me on the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman; 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 act of 1933 as amended and section 21Eof the securities exchange act of 1934 as amended.

All statements other than the statements of historical fact are forward looking statements, including statements regarding management’s expectations of future, financial and operational performance and operational expenditures, expected growth and business outlook, including our financial guidance for the fourth fiscal quarter and full year 2018.

Forward looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise these forward looking statements.

Please refer to the cautionary language in today’s press release, and to our Form 10-Q, which was filed with the SEC on August 1, 2018, 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 in a reconciliation of the differences between each non-GAAP financial measures and the comparable GAAP financial measures can be found within our second quarter 2018 earnings press release in the Investor Relations section of our website at hubspot.com.

Now, it’s my pleasure to turn over the call to HubSpot’s CEO and Chairman, Brian Halligan..

Thanks Chuck, and good afternoon, folks. Thanks for joining us today as we review HubSpot’s third quarter 2018 earnings results. Let’s get right to it. Q3 was another strong quarter for HubSpot with 35% revenue growth, 4% non-GAAP operating margins, and over 52,000 customers going 40% from the prior year.

These very strong numbers of the result of two big plays HubSpot began investing in a couple years ago, they’re starting to pay off. First is our investment in growing HubSpot from a single app company to a full suite company for manically increasing the value deliver to a customer.

The second is our move from a funnel to a flywheel model to operate our business. The old funnel model use customers as an output on the flywheel model recognizes the central role customers themselves play in driving your growth to upgrade, and especially word-of-mouth.

The flywheel mentality also puts a lot more emphasis on reducing friction in the customer experience. Great news is that our performance of the last few quarters gives me more confidence than ever that our investments in suite and our move towards the flywheel or paying off already and will position us for to continued growth in years to come.

Let’s dig into the suite play. Back in the spring, we further expanded our offering of products with the introduction of Service Hub. This move into the service segment was particularly exciting because it gave us an even better way to add value to our customers and help them to create their own remarkable customer experiences.

A typical customer often starts with just one of our hub, usually marketing our sales, and then later adds a second and a third hub. A couple of years ago about 20% of our revenue came from multiproduct customers since then that percentage has doubled with over 40% of our revenue now coming from multiproduct with room to grow even much higher.

By the way, we refer to this type of hub expansion and HubSpot as east-west expansion, our first of three recent product expansion vectors. At our INBOUND event in September, we released several new and upgraded products that were a major part of our north in southward expansion.

To the north, we made a massive upgrade to our marketing of enterprise and also introduced enterprise editions of sales in Service Hub. To the south, we made very important enhancements to our Marketing Hub Starter product and also released a new starter edition for Service Hub to complete the Starter suite, really, really good stuff.

Let’s dig into the northern expansion of our suite with the introduction of the robust enterprise gear, we’re better able to scale with customers as they grow. Now, if you go back to 2015, HubSpot was the natural fit for customers in the – let’s say 20 to 200 employee range.

That’d give us A for selling into and delighting a 50-person company back then we nailed that segment.

But things used to get a little bit tougher when customers grew in scaled up to a couple thousand employees for us, but now our new enterprise suite positions as well to delight customers with 200 employees all the way up to companies over 10 times that size.

As we highlighted it INBOUND, HubSpot with over 2,594 employees in eight offices around the world. As recently swapped out or existing CRM and now runs almost everything entirely on HubSpot. We use our own CRM, Marketing Hub, Sales Hub, Service Hub in a wide range of integrations plugged in.

We have a lot of head room to grow in lock step with all of our customers. In fact, this quarter, we landed our first multi-year contract with the total contract value of over a $1 million. Now, I know some of you may be thinking, Brian’s finally going to the enterprise.

Moving up market into the enterprise, I knew it, but I’m here to tell you that’s not the case. This particular deal was struck with the customer with under 2000 employees proving there’s a whole lot of value to generate by serving the midmarket.

To me this deal is a strong signal that our northern expansion is working and as our midsized customers get their own flywheel spinning, our product can nicely scale alongside them.

We’re also expanding at the southern end of the market, INBOUND we introduced a new starter version of Service Hub and made a key enhancement to Marketing Hub Starter by adding email function on it. The market has responded particularly well to this new Marketing Hub Starter product. We’ve seen some really strong early demand.

Now, this starter tier is a big part of our implementing the flywheel. Friction is the enemy of any flywheels, so we’re obsessively looking for ways to remove friction from the customer buying experience. Our starter products, you’d just that. The majority of our starter products are now purchase touchlessly.

This is great for customers who increasingly want to self-serve, it’s also great for HubSpot because the cost of acquiring a starter customer touchlessly is materially lower than our average customer acquisition cost. Removing friction from the customer buying process is fueling our flywheel.

Okay, so that was a quick overview of the slew of new products we announced in 2018. The biggest year of new product announcements in HubSpot history. Our R&D investments, they’re really starting to payoff. One of the things I still love about working at HubSpot is it still feels like the early innings of our business.

We’ve made great progress over the last couple of years, but there’s much work left to do to continue to further delight our customers and to reduce friction in our flywheel. We look forward to continuing to dig in on both these fronts in 2019.

In other areas of investment for us, it’s nascent, but has high potential in 2019 and beyond is opening HubSpot up and lending our customers connect all of their other applications through west.

Moving us from an all in one suite, eventually to more of an all on one platform where customers use HubSpot to orchestrate their entire customer experience with our applications in other vendors as well. Okay, now I’ll turn it over to Kate to take us through our financials and our guidance..

Thank you, Brian. Let’s turn to our third quarter financial results and our guidance for the fourth quarter. As Brian highlighted, Q3 was a very strong quarter for HubSpot. We delivered strong revenue growth over $3 million of free cash flow and $5.9 of non-GAAP operating profit.

Third quarter revenue grew 35% year-over-year driven by 35% subscription revenue growth and 39% services growth. Constant currency revenue growth was 35% in the quarter up one point over Q2 levels.

The sequential increase in constant currency revenue growth is the result of the strong early traction from our 2018 product launches and the benefit of a more seasoned sales team due to lower attrition rates throughout this year. HubSpot ended the quarter with 52,505 total customers, which was up 40% year-over-year, consistent with Q2 growth.

Average subscription revenue per customer came in at $9,959, which was down 4% year-over-year and roughly flat with Q2 levels. As I shared at our Investor Day in September, the largest driver of the decline in ASRPC is the significant customer growth from our relaunched marketing starter product.

Average subscription revenue per customer and in our Sales Hub and our Marketing Hub Starter continue to have positive growth year-over-year. International performance also continued to be strong in Q3 with international revenue growth of 52% year-over-year on both an as-reported basis, and in constant currency.

International revenue represented 38% of total revenue in Q3 up nearly one point from last quarter. Deferred revenue as of the end of September was $162.6 million, a 35% increase year-over-year. Well calculated billings defined as revenue plus the change in deferred revenue was $140.7 million up 32% from Q3 of last year.

Currency movements within the quarter resulted in a headwind to deferred revenue and calculated billings. Calculated billings grew 34% in constant currency, flat to Q2 constant currency billings growth. The remainder of my comments will refer to non-GAAP measures.

Third quarter gross margin was 81.7% up one point sequentially and up slightly year-over-year. Subscription gross margin was 86.5% up one point sequentially and up slightly year-over-year, while services gross margin was negative 13%, up seven points year-over-year.

Third quarter operating margin was 4.4% down one point versus Q2 and up four points year-over-year. As a reminder, we hosted our INBOUND event in the beginning of September. If you exclude the impact of INBOUND operating margins would have increased by two points sequentially and three points year-over-year to 7.4%.

As Brian mentioned, we have been investing a lot in R&D and we expect to continue to make investments that we believe will drive long-term growth for the business. At the end of third quarter, we had 2,594 employees up 32% year-over-year.

We had another solid quarter of hiring and as we discussed in Q2, attrition continues to be favorable, which positions us well to execute on our growth plans. CapEx including capitalized software was $8.3 million in the quarter. Moving on to earnings. Net income was $7.4 or $0.17 of earnings per diluted share.

With that, let’s dive into guidance for the fourth quarter of 2018. Total revenue is expected to be in the range of $136.5 million to $137.5 million. Non-GAAP operating income is expected to be between $11.5 million to $12.5 million. Non-GAAP diluted net income per share is expected to be between $0.29 to $0.31.

This assumes approximately $43.2 million fully diluted shares outstanding. And for the full year of 2018 total revenue is expected to be in the range of $505.5 million to $506.5 million, up from our previous guidance of $496.8 million to $498.8 million.

Non-GAAP operating profit is expected to be between $29.5 million to $30.5 million up from our previous guidance of $24.3 million to $26.3 million. Non-GAAP diluted net income per share is expected to be between $0.80 and $0.82. This assumes approximately $42.3 million fully diluted shares outstanding.

We expect full year of free cash flow to be between $39 million and $40 million. As you adjust your models, keep in mind the following. Currency movements created a four points positive impact on reported revenue growth in both Q1 and Q2 of 2018 and was roughly neutral in Q3.

At current spot rates, we expect a foreign exchange headwind of one to two points to revenue growth in Q4. In the quarter, we saw three point benefit to non-GAAP operating margins from our adoption of the ASC 606 revenue recognition standard.

We anticipate a similar benefit to Q4 non-GAAP operating margins to benefit from capitalizing sales commissions over a longer period of time under ASC 606 will diminish thereafter. We expect CapEx as a percentage of revenue for 2018 to be in the 6% to 7% range, which is one to two points below our historic average.

We expect CapEx will return to historical levels next year primarily as a result of a couple of international facility projects. To close, we delivered another strong quarter of operational and financial performance and believe we are well positioned for a strong finish to 2018.

With that, I’ll hand the call back over to Brian for his closing remarks..

Thanks, Kate. One of the things that’s critical to scaling a company in today’s day and age is attracting and retaining great talent. This is an area we’ve invested tremendously in overtime.

We’ve won numerous awards in this front over the years, but I was particularly pleased to see last quarter we were named the number one place to work for employee happiness in the U.S. by comparatively thrilled about that. Another area of continued investment and focus is making HubSpot as diverse and inclusive a workplace as possible.

I was happy to see that Porsche Magazine just rated us as the 18th Best Place To Work in the U.S. For Women. We have more work to do on diversity inclusion, but as pleased to see some recognition on that front. So that in mind, I want to close by thanking all the HubSpoters as well as our customers, partners and investors.

Operator, can you please open the call for some questions?.

[Operator Instructions] Your first question comes from Brad Sills from Bank of America Merrill Lynch..

Great. Thanks guys for taking my question. Congratulations on a nice quarter. I wanted to ask about just early traction with the enterprise edition, particularly from marketing.

I know it’s early, but any color you can provide on how just the general pipeline and interest has been trending there?.

Hey, Brad, it’s Brian. I’ll take this one. It’s going really well. The marketing enterprise in particular, the big upgrade actually happened on November 1, where we released a whole slew of new really compelling functionality.

What I think this does for us, is it positions us very well with the company between, let’s say, 200 and 2,000 employees to win a deal. It also positions us well as customers who signed up maybe when they had 50 employees as they scale, they will be able to keep them longer and scale along with them.

So early, early returns are good, the demand is good. As you know, we’re raising the price of that product. I haven’t really heard any pushback on it. It seems like that was a good move, so feeling great about the early traction on marketing enterprise..

Great. Thanks. And one more if I may, please, Brian. Any color on the addition of sales into the marketing pace. I know in the past, you’ve made comments that sales, your customers are adding marketing, but the other way around, is an area where you’ve been focusing on potentially improving. Any commentary there would be helpful please. Thank you..

Hey, it’s actually going really well also. We’re seeing lots of customers come in, starting with marketing and buying sales, and lots of customer come in starting the sales and buying marketing.

I guess, that there was a surprise as the number of customers who come in and bought the whole suite upfront, that’s ticked up, that’s exceeded my expectations and really happy with that. So going well on that front..

Great. Thanks, Brian..

Your next question comes from [indiscernible] from Jefferies..

Hi, congratulations on the great quarter. Thanks for taking my questions. Maybe one to start with, on the $1 million CVDR deal, I’m sure that’s going to send out for lot of people.

Brain can you double check maybe on some more characteristics about that customer maybe what products did they let say what’s the duration of that deal different at typical HubSpot deal with a customer of that size? And what convinced them to commit that much to the company that volume [ph]. Then I have couple of follow-ups. .

Hey, Suman [ph] how are you? I was very happy about that. I kind of put it in the – it’s a kind of neat thing that happened, but I’m not going to start having sort of a checklist on my desk of the number of million dollar deal, so we’re not going to start reporting the number of million dollars deals. It’s not going to be a focus of ours.

I thought it was just an interesting proof point to show they have these new enterprise products, we came out with a really good and they deliver a ton of value. The company that made the purchase, a purchase marketing enterprise, that actually wasn’t a full suite deal.

There’s been lots of nice full suite deals, but that was a marketing enterprise deal. I don’t think we would have won that deal had we not come out with all that new functionality that inbound that we’re about to release. So the new features are really working for us. The company itself is only about 400 employees.

So, I think this deal is a nice sign, that even in the mid-market we are delivering a tremendous amount of value for these customers and they’ll likely be a lot more of these in the future. But we’re sticking with our SMB focus. We’re not moving into the enterprise.

I don’t think I would really, really over focus on the number of million dollar deals that up. But the product works, the new features of working people are getting value from it.

That sales cycle on that deal is relatively short and what was interesting about that sale, it was actually involved with that sale was a lot of it was self service, kind of like what I talked about on staged INBOUND, they gave the product a good try on their own.

They used our API quite a bit in the trial and really got quite comfortable with it and then our sales door kicked in and did a fantastic job. Now one note, I would give you on that Suman, is it’s a million dollar deal, but it’s a four year deal. This isn’t a one year deal.

I want to make sure we don’t get over our skis on million dollar deal with HubSpot.

Great. And maybe just one follow-up on Customer Hub, we’re now at six months into that release. And maybe just highlight the ramp comparing to Sales Hub and maybe help us understand how that sales motion is going and the rest of that came into the product with all the bundled suite prices changing et cetera and that’s it from me. Thank you there..

Yes. Just to make sure, everyone’s got the vernacular, it’s called Service Hub, not Customer Hub. And just to refresh folks, we came out with Service Hub pro edition back in the spring and then an INBOUND we came out with the starter in the enterprise edition. So far it’s gone really, really well.

It’s ramping faster whatever we are five months in, we’re having a lot faster than the sales product did four or five months in. The product improving a lot, lot of people are buying it. I mean it’s still a really kind of like the sales product. It’s mostly, if I think of SMB, small, medium sized businesses, it’s more S and M right now.

I suspect six, nine, 12 months from now there’ll be a lot more M, but right now it’s more S, but really good reception so far we’re selling quite well, people seem to like what we’re up to and I feel like we got another hit product that are in again. So feeling really good about it..

And your next question comes from Mark Murphy from JP Morgan..

Yes. Thank you. And I’ll add my congrats. Kate, I wanted to ask you regarding the calculated billings growth where you said it.

I think you came in at 34% in constant currency very consistent, very healthy, but is there any adjustment to be made there for the increasing mix of HubSpot sales bookings, which I think pulls through a shorter duration of a couple months versus only six or seven months from marketing.

So is there any, even if it’s something settled, is there any upward adjustment to be made in that number?.

Yes. Sure. I think I would characterize as a relatively misunderstood metric in our business.

I think – if you look at the composition of the calculated billings, 90% of calculated billings is revenue, and so it’s going to take a big swing in the months upfront or what we sell in order to move that away from revenue growth over time when you’re looking at it on a constant currency basis.

So, yes, we do see a slightly smaller duration for deals on the Sales Hub, but that’s, that’s really not moving the needle tremendously in calculated billings growth..

Okay. And then a quick follow-up of maybe for Brian. Was there any actual impact from the pricing changes? I think, as you had mentioned, the price of marketing enterprise went to 3,200 a month, a starting just a few days ago.

Did that have any tangible impact on the ton of business either in Q3 or in the month of October?.

Minimal pull forward, but like Kate said it, and it’s SAP business the way we’re set up. It’s not a big swing and the numbers you’re going to see, but it helped – it helped a little bit, but it’s not life changing..

Thank you. .

Your next question comes from Bhavan Suri from William Blair..

Hi guys. It’s actually Arjun Bhatia on for Bhavan. Thanks for taking my questions. Just wanted to touch on the growth suite a little bit.

I know it’s been introduced relatively recently here, but what can you share on the initial traction you’re seeing from the growth suite and how much of a role that play in the quarter? And I just wanted to get an understanding of our customers actually landing at with the growth suite or you still seeing a single hub customer maybe transition over time into the multiproduct and all three products – product suite?.

Yes, good question, Arjun. Yes, I’ll take that. I guess my reaction to that is we come up with the growth suite offering at INBOUND. So first week in September, so in terms of the impact on the quarter itself, very, very minimal. Having said that, we got a nice uptick on it.

People were quite interested in it, and I think what’s going on in the world is more and more companies are going to kind of pick a platform in buy applications in that platform vendor and glue other applications in around it.

And I kind of think it’s like the way you would buy either G Suite or Outlook or you’re an Apple person or an android person, and it’s a bit of an all in one play. And we want to incent people to buy that way.

We think that’s the right way to buy, if you buy it all together from HubSpot and then you glue all these other third party applications in networks, so well with HubSpot, so it’s really, really nice platform to enable our customers to create a very nice end-to-end experience for their customers. So, I guess at a high level it’s going pretty well.

Had a nice uptick on it, and I think that will continue to go well, I think that’s the way over the long haul people end up buying this type of software..

Great. That’s helpful. And then maybe just to follow-up on the customer count, it looks like, customer account went up about $4,500 net new customers sequentially, which is generally higher than we’re seeing.

Just wanted to see, if there’s any impact from a inbound there or if there’s anything else that’s driving that change to be higher than it’s been over the past few quarters here?.

Yes, I think that the largest contributor there is the uptake and the new marketing starter product..

Okay. Great. That’s helpful. Thanks for taking my questions..

Your next question comes from Stan Zlotsky from Morgan Stanley..

Hey guys. Good afternoon, and thank you for taking my question. Wanted to – excuse me, once again on the U.S. versus international growth. Internationally is certainly growing very, very, very rapid clip.

When you were thinking about the investments in international versus driving growth in U.S., how are you thinking of balancing those two priorities? And then I have a quick follow-up..

Sure. I’m feeling good about the growth on both sides. International is growing very, very fast and I think that’s just a result of the investments we’ve made.

We got going in an international few years ago, we made big, big investments in opening – is in hiring people as well as big investments in translating the product, translating – offering the products and the sales and the service in different languages.

And I think those investments have largely worked and we’re getting a nice return on those investments. So we expect to invest in both where we get better returns, we invest a little faster in international, but we’re investing in both we feel like it’s still early days for HubSpot. Lots and lots of opportunity both domestically and international.

You want to add to that?.

No..

Got it. And then a quick question from Kate.

I’m not sure – I’m jumping between calls, but, did I miss the net revenue retention rate and where – how it trended in the quarter?.

You did not miss it? But you want to start and I’ll add on..

Well, we had a little argument about this actually, Stan, because, we had our best revenue retention quarter ever.

But Kate reminded me that this metric would bounce around a little bit and with all the product and packaging changes that can go up and down over time, but we had a very, very solid revenue retention, quarter, best quarter ever and really – I’m personally very excited..

Is it fair to say that was above 100%?.

Yes. Yes, it was over 100%..

It was over 100%, and I would just add that, when you look at the drivers of sort of a slight uptick in revenue retention of our Q2, it’s really the upgrade motion from the new enterprise products that we’re seeing drive that up a little bit..

Got it. Perfect. Thank you guys..

Your next question comes from Richard Davis from Canaccord..

Hey, thanks very much. Maybe kind of on that topic as you – I mean, we always ask for more, but as thinking about on the churn side, if you think about good INBOUND programs, they take consistency in.

The question I have is really have to imagine that I adopt INBOUND versus moment in time, I don’t know if that’s six months or 12 months where I’m kind of like it’s – I don’t feel like I see a lot of traction yet in that moment is when you would get churn and stuff like that.

And is there a way other tools or strategies or actions that you could take to get people through that dark moment. And I don’t know if it’s again, if it’s three months or 12 months, but you must see that to some degree I would think at least that’s what we’ve heard from talking to people. Thanks..

Yes. I mean there’s a whole slew of things we’ve worked on to improve the value we deliver to our customers over time. First, is just investing in the product and make it better and more relevant.

Second, is just trying to see very modern, so it’s social media networks changes, search engine optimization changes, sales techniques changes, keeping up with those and pulling our customers into it, pulling them into enabling them to create a better customer experience and then for them. And then we moved our packaging around a little bit.

We – what we try to do on packaging is for a while we thought or let’s just do much longer payment terms on these folks, but we don’t necessarily want to lock people in for a long time. You want to make it easier for them to buy and then offer a lot of value to them.

So we do all kinds of things I would say in a very, very focused as a company on delighting these customers and making sure they’re getting as much value as possible.

So, if I think about it like over the course of HubSpot, first started the company, Richard, we really just help people get more visitors to their site and then we help them get more leads to their database, and then we help them sell more leads.

And now we’re helping them delight those customers like the value prop and then the value we deliver to customers as dramatically expanded over time. And as a result of that, you’ve seen that retention rate come up over time..

Got it. Thanks very much..

Your next question comes from Alex Zukin from Piper Jaffray..

Hi, this is Taylor Reiners on for Alex. I wanted to double click on the growth suite bundle.

When we think about that being about a 25% discount relative to list price for purchasing the products individually, how does that compare to kind of typical discount for individual products? And then do you see that driving up on subscription revenue per customer over time as product adoption starts continue to – continues to trend higher?.

Yes. I mean, I’ll take the pieces. I think that the – the idea in designing the grocery packaging was to get some benefit for our buying the whole thing. And so, that is typically a bit more of a discount than you would get on a regular product.

I think there are other ways that you can get discounts including sort of signing up for longer commitments, et cetera.

As it relates to ASRPC, yes certainly adoption of an enterprise products in growth suite should be a positive impact on that, but as we’ve talked about historically, over the last couple quarters here, we have a bunch of competing factors that are going to move that number around.

And we’ve talked about in my recorded remarks that my – my written remarks that the – biggest driver of ASRPC in this quarter was actually at the low end of the product skew with the impact of the big customer additions from marketing starter..

Got it. Thanks and congrats on a good quarter..

Thanks, Taylor..

Your next question comes from Jennifer Lowe from UBS..

Great. Thank you. I wanted to ask about the enterprise products and sort of the early demand you’ve seen there and in particular on the net new retention – than the net revenue retention metric you mentioned, that you’re seeing a lot of strong upgrade activity within the existing base.

And I’m curious at this point how much of the demand you’re seeing is that, that is existing customers looking to get more functionality for HubSpot – with HubSpot and really interested in the enterprise offering is a bill in demand versus bringing new customers into the fold with enterprise where that is today and then where you think your aspiration to see that go over the next year or two is?.

Jennifer, I’ll take that. Thank you for the question. I gave you a kind of a mix, we’re definitely seeing what the new marketing enterprise functionality that people had marketing professional are upgrading and with the new sales enterprise skew people are upgrading there. The service business is so new, there’s not a lot of upgrading there.

We’re also starting to see some net new demand from companies between call it 202,000 employees, like our first million dollar deal that was a net new customer at the enterprise level. So what I kind of call it a wash, about the same of each so far.

I think over the long, long haul, probably more from the outside as we worked through the install base of grow customers. I think that demand will shift a bit to the outside. I also just think we’ll keep customers longer.

One of the things that’s always bothered me about HubSpot is when customers get to a certain size, they don’t turn off, I think go to another platform and frankly, that’s kind of irritating. And then I don’t think we’ll see much of that happening in the future. I think people will be very happy with it.

One other things, I think is interesting about HubSpot is, we ourselves have moved pretty much our whole business on the HubSpot, our whole front office application, front office operation and we have lots of employees, 2,500 employees, eight offices, relatively complicated organization and we’ve got plenty of headroom to grow with the product.

So, we think our customers will scale rate alongside us with the new enterprise skews..

Great.

And how do you think about opportunity to acquire new customers in this slightly larger bucket then where you’ve played historically? How are you thinking about the sales investment behind that? Is it taking the existing team you have and just giving them a broader scope of leads to pursue or is it had a little bit more of a dedicated effort given that the price points are significantly higher than what you’ve sold traditionally?.

We might add – so we break our sales – our direct sales organization into three segments of small business, which is I think a two to 25 employees, medium 25 to 200, and enterprise is 200 to 2000. We might see a little bit of an increase in the size of the sales organization into that 200 to 2000.

We’ve put some things in place on the security side to help our customers understand how secure their data is with HubSpot enabled them to get at that information more easily. We put some things in place on the legal side for contract review to make that more easy to do. And we’re working on some cool stuff on the implementation side to enable that.

And so there’s been some investment on our side, that we can continue investment to ensure that we’re ready when they call on us. I think the reality of what happens is, we were on pretty much everyone’s radar these days.

If they’re looking at a net new CRM system, I just think we’re going win a lot more of those deals when they dig in and really evaluate it..

Great. Thank you..

Your next question comes from Kirk Materne from Evercore ISI..

Thanks for taking my questions. This is a Peter Levine in for Kirk. So first question here is, when you look at the adoption of the broader suite, is there any real difference in terms of what you’re seeing in the U.S.

versus international markets?.

No, it’s generally similar..

Okay. Fair enough. And then, I know it’s still kind of in the early innings, but you’ve talked about a new kind of channel initiative targeting, targeting a more IT implementation focus partners.

Can you kind of tell us about where you are today and your expectations from these newer partners over the next 12, 24 months?.

Sure. Let’s talk about partners a little bit. We didn’t talk about them in the prepared remarks. I’ll give you my perspective on it. First eight years of the HubSpot, we sold marketing software and we build a marketing agency channel that has worked, it’s still working incredibly well.

Now when I look at those agencies, the several thousand of them, some of them are really excited about the opportunity to move from marketing to sales to service to expand their offering from just helping companies with the marketing and their website lead generation to helping them create a full flywheel and grow their business.

But not all of them are, and we’re not going to force them to do it. Many of them come from website design businesses, and they’re just not that interested in doing it. So overall marketing agency channel performing well. Many of them are selling the full suite somewhat. At the same time we have a new initiative underway, that is going pretty well.

It’s still pretty new, but I’m bullish on it, where we’ve got new agencies coming in, sales agencies, CRM agencies, IT agencies, and it’s still pretty early, it’s going to get some nice investment next year and I think that will grow nicely. And those agencies I think we’ll be much more likely to sell either CRM or sell that full suite of products.

So I think what you’ll see over time is our agency program will diversify much more in the future. One of the things, I love about HubSpot, so we actually have two channels that works very well. We have a direct channel.

The unit economics are really good and our direct channel is growing very fast and we have this agency channel growing very fast, the unit economics work, that agency channel, I think we have a chance to innovate and really do some cool stuff with over the next year or two..

Great. Thanks guys. Appreciate it..

Your next question comes from Terry Tillman from SunTrust..

Yes. Hey, thanks for taking my questions. Brian, maybe the first question just relates to one of your comments earlier around Service Hub in seeing faster ramp then you saw five months plus with the sales products.

I guess, can we just delve into a little bit more in terms of some of the drivers of the faster rate of success there, and also what I’m curious about is competition wise, what are you seeing in terms of is it replacing something, because you’ve had months in the market now? Is it replacing something or is it Greenfield [ph]?.

Yes. A couple of thoughts. When we first came out with a sales product, and I think you probably remember this, it was very light. It was, we actually called it signals. We didn’t call it Sales Hub and it was – it was a couple of very light features for a sales rep really. And it did well. It was priced very low.

Over time we grew that thing into a full on salesforce automation product that we call Sales Hub. What I would say about Service Hub is a little – it’s started off far more robust than that sales product. In fact, we came out initially with that product in the spring at the professional offering, because it was pretty robust.

One of the – you’ve all seen us increased our R&D investment over time.

One of the use of proceeds on that R&D investment was a big investment in what we call the HubSpot framework, which is an underlying platform underneath HubSpot where you can imagine there’s workflows, there’s email, there’s social, there’s webpages, and then the hubs themselves, we combine those different things and we add interesting functionality to it to bring it to life.

So what we were able to do when we build the Service Hub leverage that framework to build something relatively robust rate out of the gate, that’s the big difference. The second big difference obviously is we have much larger installed base to sell to than we have in the sales organization.

So those two reasons I think are combining for faster growth and a bigger business more quickly with the Service Hub and the Sales Hub..

Okay. Awesome. And this is my follow-up question just relates to the touchless sales motion. I know that’s still evolving this like any kind of quantification on how much of the business that is actually more of that approach. And could that be a byproduct of this increased kind of touchless sales a big faster leverage on sales and marketing.

I mean, you’re seeing leverage in the model. So, I’m not complaining, but, maybe talk a little bit more about the touchless sales motion. Thank you..

Sure. I can touch on it. That is nascent going well. What’s interesting about it is, one of the most interesting things going, we’ve talked a bunch about that enterprise layer product. Just as interesting if not more, is that Marketing Hub Starter product is going very, very well.

We came out with the kind of version 2.0 of that product in the end of July and the uptake then excellent on that product. And over half of that is, touchless, and I really liked that motion. And what we expect every time is that to be a very large pool of customers and that they over time, we’ll buy sales starter and service starter.

Some of them moved from marketing starter from marketing pro. So we’re investing in that. We’re making good progress. And that’ll be a big initiative for next year. I think you’ll continue to see us move on that path. One of the people who really inspires us is a guy named Jay Simons, he’s the President of Atlassian, he is on our board.

And the reason we put them on our board is we really liked the way Atlassian does business and goes to market. I don’t know if we’ll ever get all the way to where they are, but we’re kind of headed in that direction. And I really liked that direction we’re headed..

Your next question comes from Scott Berg from Needham..

Hi, this is Ryan McDonald on for Scott Berg. I’m just starting out with the Sales Hub, that’s – it seems it appears to be have been accretive to subscription gross margins.

When we’re looking at Service Hub, what sort of impact would you expect to have there on the margin?.

I think the subscription gross margin numbers have trended, sort of up a couple points over the last few years. It all runs on the same infrastructure. And so teasing apart the margins of the individual project – products in hubs is frankly not something that is a very easy endeavor..

Yes. Scott, one of the things that we talked about last quarter that moderated to a large extent this quarter was – we had some incremental costs associated with GDPR through the first half of the year, that largely went away in the third quarter that gave us some sequential benefit as well..

And then just a quick follow-up, in regards to professional services that, that line item continues to grow faster than a software.

Is there anything that’s changed there in terms of the services you’re providing? Are our customers consuming more for any particular reason?.

Yes. A couple of things on the services business – the first thing I would just remind you is that it’s a very small part of the overall revenue for the company, and so sort of small changes and that revenue stream generate big changes and the growth rates and profitability profile there. So just, I would first just keep that in mind.

That said, I think there are a couple of positive things that we’ve seen in the services revenue stream this quarter. One is just a benefit from the mix of a subscription products that we’re selling. So as we sell more pro and enterprise products, as we sell more marketing products that has a benefit, a flow through a benefit to services revenue.

The other thing is with the adoption of 606, there’s a small amount of revenue that gets attributed over to the services business that was not there in 2017. And so that’s going to show a little bit of benefit in terms of growth rates..

There’s no strategy change there. One of the things, I’ve always liked about the product, we give our customers two choices of implementation. Choice number one is they can do it themselves, and we teach them how to do it. Choice number two is they can outsource a lot of it to an agency partner. We’re sticking with that model. We really liked that model.

So there’s little tweaks, little tiny changes in here. But if there’s no big strategy shift going on..

Thanks..

Your next question comes from the line of Koji Ikeda from Oppenheimer..

Okay. Thanks for taking my questions and congratulations on the quarter. I’m going to throw this question out there for either Brian or Kate. Back at the Analyst Day you gave a ton of great insight on ARR metrics for marketing, sales and service.

And I know this is not something that you want to give out numerically on a quarterly basis, but I was wondering if you could just give some, some qualitative commentary on how AR trended up for the three segments here?.

That’s sort of the backwards way into trying to get us to tell you on a quarterly basis. I think the trends that we outlined at the Analyst Day, we’re continuing to see, in terms of the relative growth rates of the segment. .

Okay. Thanks, Kate. And I wanted to go back to that $1 million [indiscernible] deal. I mean, that’s an awesome, awesome for you guys congratulations.

Just, just thinking about the install base as a whole, I mean, is that really that big of anonymous anomaly in deal size or are there other customers in the wheelhouse that are already somewhat near that zip code or even trending just sort of that level? I mean any sort of commentary that it would be great..

Yes. Just a reminder that’s a four year deal. So let’s just say, and I don’t even know if this case, let’s say 250K per year. We have other customers in that range at this point. I think you’ll see customers that – that the largest customer you have in per year revenue.

I think we’ll see that drift up over time as we get more enterprise deals and we get more of these suite deals because believe is to growth factors going on. One is the north factor and the other is the east west factors. So there’s room to move there I think will be more, but we’re not moving the enterprise.

One of the reasons we don’t move to the enterprise is, there’s a lot of competition in the enterprise salesforce.com, Adobe, IBM, Oracle, lot’s of interesting companies that are executing well. We like SMB, we liked that the internet kind of disproportionately benefits SMB versus the enterprise.

Our genetic code is there, our go to market is there and so we’re likely very, very likely to say kind of in our swim lane of between a few employees up to a couple thousand employees ..

Great. Thank you for the color. Congrats on a great quarter..

Thanks..

Your next question comes from tom from Tom Roderick from Stifel..

It’s actually Parker Lane in for Tom. Thanks for taking my question. Brian, if I look at HubSpot Connect, It’s obviously a big priority for the company to land customers and then integrate with other enterprise and SMB apps out there.

But when I look at the page, I see a lot of players like salesforce and then this, they’re sort of involved with businesses they’ve involved in your east-west expansion strategy.

I’m just wondering how much disruption you’re seeing in the HubSpot Connect ecosystem from the launch of your products, if any, and what kind of customer would be using salesforce alongside of HubSpot?.

Really good question. Let me give a little color on that. We’ve been investing over the last couple of years, but we regress a little more this year. We’re moving HubSpot to be more of a platform that’s a lot in increasing the number of API end points we have invested a lot in increasing the quality of those endpoints.

We invested a lot in building integrations ourselves and enabling third parties to build integrations to HubSpot. We built integrations to really cool product by Shopify, Stripe, Slack and others that are really going well. And what we want to do over the long, long haul.

As you say you pick HubSpot as a partner and we’re not just all in one, we’re all on one, and if you want to use HubSpot Service Hub, that’s great. If you want to use Intercom or do you want to use ZenDesk that’s great.

We come out with Service Hub and we still have lots and lots of happy customers that are using ZenDesk for service and Intercom for service.

Intercom recently improved their integration with HubSpot around that and so we have to grow up, and we have to be a platform player, just like all the other platform players and give them a choice and make sure they get a great customer experience, that’s kind of how that’s our philosophy around it..

Great. Thanks for the color..

Your next question comes from Brian Peterson from Raymond James..

Hi, congrats on the quarter. And thanks for taking the question. So, Brian, maybe as we – can we talk about this move north a little bit as you guys phrased it, but what are the competitive dynamics like they are now versus maybe when you went public back in 2013.

We’ve seen some M&A in this space and you mentioned, as customers had grown in the past, they migrated a different platforms.

What are we seeing in that kind of up market movement now?.

I mean, it’s super early. No huge changes. I mean, we of course see salesforce.com. They’re a very good partner in competitor in deals. And we win our fair share.

The Adobe deals interesting, we’ve always seen Marketo up in that space and I think we’ll see Marketoup in that space in the future, but so far we’re keeping an eye on it, but no huge changes so far in our competitive landscape.

I think we’re just going to win more deals in that 200 to 2,000 segment and I think we’re going to be able to hold on to more customers as we move on from 200 to 2,000.

What I’d like to see happening is, let’s just say you’re using HubSpot for marketing and sales and service and maybe for whatever reason, our Service Hub is answering the mail for you, I want to continue to use HubSpot, but I’m going to use Zendesk instead of Service Hub for whatever reason there’s functionality in there that’s more enterprise.

That’s what I’d like to see happen over the long haul. Take HubSpot sort of as your – as your hub and build around it..

Got it. Thanks, Brian..

Your next question comes from Ross Macmillan from RBC Capital Markets..

Well, thanks a lot and congrats from me as well. Brian in our field work, let me think about sales adoption, I think it, at least my perspective is it’s more skewed to net new customers as opposed to base customers.

I’d love your perspective on that and whether you think over time there’s mechanisms to get the base to adopt faster as well?.

I think that the research is pretty good. We have done remarkably well in getting net new accounts who don’t use our marketing product to buy that sales product.

I’ve been delighted with that and I think we’re pretty good at cross selling or marketing products of the sales customers and I think we’re pretty good at selling or sales product to the marking customers. I think that’s an area where we’re going to continue to improve in. And there’s leverage in as we go forward.

But you’re right that we have a lot of folks coming into HubSpot as net new customers buying sales, a starter in sales pro and I’m actually delighted about it. I think that’s filling up our install base that we can, we can cross sell to over time. At sales business Ross is really humming really, really well.

Very, very happy with the way that things growing..

That’s great. And then just one for Kate. I know you don’t guide to billing, calculated billings and I know you say it’s a misunderstood metric, but I did just want to make sure that we were thinking about Q4, because I think the comp is very hard. I think there were five points – there was five points of FX tailwind, INBOUND timing is different.

I know it wasn’t big, but there was maybe a little bit of the price change impact in Q3.

So maybe I don’t know, what are the things that we should think about as we set up our models here for Q4?.

Yes. I think for Q4, what you said on the call is that there was a couple, one to two points of headwind on the revenue side. There’s probably another one to two points of headwind on the deferred revenue side. So calculated billings will have more of a headwind than revenue..

Okay. That’s helpful. Thank you. Congrats again..

Okay. Thanks, everybody for joining the call. Look forward to talking to you soon..

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