Good afternoon. My name is Mike, and I will be your conference operator today. At this time I would like to welcome everyone to HubSpot's Fourth Quarter and Full Year 2018 Earnings 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] I will now turn the call over to Chuck MacGlashing, Director of Investor Relations. You may begin your conference..

Thanks, operator. Good afternoon, and welcome to HubSpot's fourth quarter and full year 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 Exchange Act of 1933 as amended and Section 21E of 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 first fiscal quarter and full year 2019.

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 SCC on November 7, 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 and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter 2018 earnings press release in the Investor Relations section of our website at hubspot.com.

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

first, increasing the force applied to our flywheel by word of mouth from existing customers. We're working on a long list of funded high-return projects in 2019 that we think will make an existing suite even more valuable to our customers, particularly at the enterprise tier.

Second, decreasing the friction in our flywheel by making HubSpot easier to do business with for companies of all sizes, with a particular emphasis on our premium model. We want to match the way we go to market with the way modern humans buy these things. There's lots of low-hanging fruit left for us on both these flywheel initiatives in 2019.

HubSpot's still in its very early innings in its development. One more thing about 2019. We've used the Warren Buffett quote with you before that goes something like, someone is sitting in the shade today because the seed was planted several years ago.

Several years ago, we planted the suite seeds, and it's starting to throw off some shade for us today, but much more shade to come in the future. In 2019, you'll start to see a new seed we're planting as we shift HubSpot from an all-in-one suite to a much more of an all-on-one platform. We want to be able to help our customers grow better.

And although we'd love for them to completely rely on HubSpot's applications to do so, the reality is that a modern business has lots of important applications. What we want to do over time is enable our customers to use all of their applications with HubSpot.

Today, HubSpot manages its own applications data, its own applications workflow and reports on all of its own data. In the future, we expect HubSpot to manage all of our customers' front office application data, all of their front office workflow and report on that entire experience. You're starting to see the beginning of the shift.

We announced a strategic partnership with our friends at AWS. We greatly expanded our API endpoint footprint and support. We built some killer integrations of our own to commonly used applications like Stripe and Slack And we welcomed a couple hundred connect partners into our program with integrated [indiscernible] applications into HubSpot.

All of this will further expand the value we can create for our customers who would open up new growth opportunities for us. So stay tuned for more in this front over time. Okay. With that, I'll turn it over to Kate to run through our financials and our guidance..

Currency movements created a four point positive impact on reported revenue growth in both Q1 and Q2 of 2018, was roughly neutral in Q3 and was a headwind of a little more than one point in Q4.

Given the volatility and FX rates throughout 2018, we thought it would be helpful to provide some additional context for how FX will impact our as-reported growth rates in 2019.

At current spot rates, we're forecasting foreign exchange headwind of approximately $8 million to as-reported 2019 revenue, which would equate to a 1- to 2-point negative impact to as-reported growth. Substantially, all of these currency impacts will occur in the first two quarters of the year.

Our 2019 guidance implies two points of normal course operating margin improvement, offset by one point of margin pressure from the amortization of sales commission's expense under ASC 606. This will result in one point of operating margin improvement on an as-reported basis.

Furthermore, we expect to realize the majority of our operating leverage in the first and fourth quarters. CapEx as a percentage of revenue for 2018 was 6.5%, which is a couple of points below our historic average. We expect CapEx as a percentage of revenue to return to 8% in 2019, primarily as a result of the build-out of our new Dublin facility.

To close, 2018 was an especially strong year of operational and financial performance, and we believe we are well positioned to build on this momentum in 2019. With that, I'll hand the call back over to Brian for his closing remarks..

Thanks, Kate. 2018 was a great year for us with the business performing well, and I'm bullish on the outlook for our business entering 2019. There's a lot that goes into driving the results we've gone over today, and the credit goes to the HubSpot team behind these results.

We've invested a lot of energy these days into making our HubSpot team a more diverse and inclusive place for employees to work. That investment is starting to pay off. In Q4, we were recognized again as a top company for diversity and women by Comparably. We are recognized for the first time by Fortune as the best workplace for parents.

We have a lot more work to do in 2019 on diversity, inclusion and belonging in HubSpot, but I'm encouraged by our recent progress and excited about all the good stuff to come. With that in mind, I want to close by thanking all the HubSpotters for the work they do and the different passions and perspectives they bring to their jobs.

I thank all of our customers, partners and investors for a really great year in 2018. I'm super excited about 2019.

Operator, could we please open the call for some questions?.

[Operator Instructions] Your first question comes from Mark Murphy from JPMorgan..

Thank you very much. Congratulations on a great finish to the year.

Kate, I was wondering how material of an uplift you think the premium marketing addition can be for you this year, if there's any way to pencil out some math on that? And as well, Brian, I think you've hinted in the past that there are other things out there after marketing sales and service.

I was just curious how you feel about that bandwidth of your engineering team to go after that, just given all the product they developed last year. And just whether that's mostly a reference this all-in-one platform, or are you looking at other markets like commerce or content or anything else? Thank you..

Mark, it's Brian. I can take those. In terms of - you called it the premium marketing addition, we call it the enterprise SKU. So far, so good. We announced, just to kind of take you through it, at INBOUND, we announced a new Marketing Hub, a bunch of new features in Marketing Hub at a new price point, and it's sold pretty well in Q4.

That product, I think, is priced well and will sell well throughout 2019. I think the introduction of the Sales Hub and the Service Hub alongside that will make it a very powerful combination. So off to the races there, feeling good. That Marketing Hub product on the enterprise side got a lot better.

It's going to get even better over the course of this year. There's a couple - I sat with the product folks today. There's a bunch of cool stuff coming in that throughout '19, so I'm psyched about that. In terms of new hub, yes, we got three now, and I guess, I would say we're not done. We got two, three.

We have really solid ideas for new hubs in our heads now. I guess I would give you guidance at over maybe the next three to five years, we'll add a bunch more hubs. I want to stay away from forecasting too short term on that. But there's more hubs coming, more opportunity there.

And at the same time we're investing in the platform side, and we're investing heavily in our APIs and the support of those APIs. We're enabling third parties to integrate really nicely in HubSpot. We're building some really nice integration to HubSpot. So things are really hopping on the R&D side at HubSpot.

Our R&D team is really performing well, the recruiting is going well, and I think the team's well-managed, feeling really good about that..

Thank you very much..

Your next question comes from Brad Sills from Bank of America Merrill Lynch..

Thanks, guys. Just a question, please, on the ISV opportunity you were just speaking about there, Brian.

With the work on the APIs, I mean, is the expectation that you are expecting more sale - cost of sales apps from third parties? Or is this more as a marketing play? Where do you see the most opportunity for some of these third-party applications?.

That's a really good question. I think it's across the board. It started when we first started opening things up a couple of years ago on marketing, but we're starting to see a lot of activity on the sales app side, and it's early, but we're starting to see on the service side as well.

So I think you're going to see integrations across the platforms, some are cross-platform entirely or some are department-specific. But it's starting to pop kind of everywhere. Really excited about that. It creates a lot of value with our customers.

I could think of the journey we've been on for the first really eight, nine years of HubSpot, we were in the business of selling an application that help our customers generate leads. And then we moved to selling a suite of applications that help our customers really orchestrate their customer experience and try to improve that.

And over time, we won't let our customer's not just use our applications, but we've been in many, many other applications that they're already using or could potentially use to really create beautiful end-to-end customer experiences that help them grow better. So we're on a journey here at HubSpot, still early, going quite well.

I think you're going to see that partner program really pop up in the next year or two..

Great. Thanks. One more if I may, please, just on Sales Pro, now that it's been some time since the product's been in the market, the new version.

What are you seeing in terms of uptake there? And what is the interplay with Sales Pro with existing CRM applications? Is this more greenfield opportunity? Or is it Sales Pro running alongside what these customers might already be running?.

That's a good question.

We - just to remind everyone, we came out with a Sales Pro product last November, Chuck?.

Last INBOUND..

Yes, last INBOUND..

Okay. Last INBOUND. And - no, no, no, Sales Pro product - not the service pro product - so a year ago..

Yes, sales product. A year ago..

Yes, that's a year ago..

November of '17..

Yes, November of '17. That's gone well. The reps love selling it. The customers are picking it up and running with it. That thing is a very popular product. And most of the time, people are using Sales Hub Pro on top of our CRM. Sometimes people use Sales Hub Pro on top of other CRM.

More and more, we're seeing trend in our installed base, and I think this will happen industry-wide. They kind of - people pick up a platform or a hub, and then they use some of our apps and other applications and weave the whole thing together.

In some cases, there is mixed environments, but I think the trend will be kind of one platform level partner that you'll build around. So lots of Sales Hub Pros sold with our free CRM..

Great. Thanks, Brian..

Your next question comes from Samad Samana from Jefferies..

Hi, good evening. Thanks for taking my question. Brian, one for you and a follow-up for Kate. On the expanded AWS partnership, I think it was announced in mid-4Q.

Can help us think about how we should think about impacting the customer funnel in 2019? And could you expound on some of the joint go-to-market efforts and how you think that's going to drive the new customers? Or if it's already driving new customers, how should we think about that opportunity? And then I have a follow-up for Kate..

I'm super psyched about that partnership. We're a big customer of theirs, of course, and we've designed some unique go-to-market things with them. You might have noticed, Samad, that they were a giant sponsor at INBOUND this year, and they will be for the next couple of years. They're particularly interested in our HubSpot for Startups track.

That's a program inside of HubSpot that's going really, really well. And our HubSpot for Startups team and their AWS for start-ups program are working on a whole bunch of stuff that we're doing together that are really interesting and unique that we're starting to get rolled out.

So I think that's a pretty cool partnership, really, really excited about it..

Okay. And then, Kate, ASRPC increased quarter-over-quarter for the first time since 3Q '17. And kind of conversely, net adds was small, but it was down slightly year-over-year.

I'm just wondering, can you just help us understand if that's just kind of timing-related? Or just help us understand the seasonality of why it's either one should be seen as an inflection. Obviously they're both doing well. But we're just trying to get some color as we think of modeling forward for 2019..

Yes. So we're obviously very happy with the customer growth this quarter. We saw continued strength in the growth of our customers from the Marketing Starter. But what we're probably more excited about is that you get sort of a positive impact on ASRPC from a sequential perspective on top of the continued robust growth of the net additions.

I don't think we're going to be able to do that every quarter. And as we've said in the past, there will be pushes and pulls at the high and low end of our customer base. I wouldn't view either result as an inflection point for us, I think. Over the next set of quarters, we're going to continue to see ebbs and flows..

Great. That's really helpful. Thanks again for taking my questions and congrats on a great quarter..

Thank you..

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

Hey, guys. Thanks for taking my question. Maybe just a question on that freemium and low touch customer acquisition strategy that you've talked about it before in 2018.

How do you plan to expand on that in 2019? And how do you see that impacting margins in 2019 and beyond?.

I can start with that..

Sure..

Yes, one of our big goals this year is really just mast away, we sell with the way people buy, and part of that is the freemium edition. If you roll back the clock, the freemium edition got started three years ago really on the Sales Hub side of the business and worked real well. And so we rolled it out with the Service Hub product.

Just now, we're really getting quite serious about rolling that out within the Marketing Hub product. So it's still early days on it, but it seems it's working really well, really happy with that shift to freemium.

We want to see this year more and more of our starter business come in with frankly no touch or a little touch or no touch where people can start on the freemium and play around when they get a good feel with it, and just buy that starter without having to talk with sales reps.

The company I've really admired who's really good at this stuff is - you probably admire them too, is Atlassian. And we've got their president of Atlassian on our board, Jay Simons, who had been very influential on us as we move our model closer to where they are..

I think from a margin perspective....

Can you just maybe....

Yes, I would just say from a margin perspective, I think we're very bullish at the long-term benefits of the freemium model. I think in the near term, we continue to talk and look at the unit economics, which remains robust for the company.

And so these sort of returns on our investments, we will continue to invest in our go to market on both the freemium side and with our direct and partner ecosystem..

Great, and then just if I could squeeze one on the competitive environment.

What are you seeing from both the larger vendors, Salesforce, Adobe [indiscernible] Marketo as well as any kind of coopetition with vendors such as Zendesk and any other small direct competitors coming into the market? How do you see that the environment kind of playing out and win rates for 2019?.

We haven't seen a whole lot of change, frankly. We see a fair amount of Salesforce.com and win our fair share of deals. We never see Adobe. They're pretty much upmarket. We see a little bit of Marketo, but they're very enterprisey [ph]. The truth of it is our products have gotten really good. We're well positioned in the market. We're unique in the market.

Our value prop really pops. Our implementation team does a nice job. And so buying HubSpot, like I remember I started the company 13 years ago, it was pretty risky buying HubSpot. What is this HubSpot thing? Who are these HubSpot guys? And nowadays, man, the value prop is super strong. It's a no-brainer to buy HubSpot these days.

So feeling good about our position in the market..

Your next question comes from Richard Davis from CG Financial..

Thanks. Maybe just drilling a little bit on Mark Murphy's question. So do you guys just, logically, do you draw a line, kind of a bright line between kind of front office and back office? Because like when we talk to companies, they're like, man, we'd like to be able to get paid. And so that's a financial app which is oftentimes considered back office.

Is that - do you guys say, listen, all we are is front office, or how do you think about that?.

Richard, it's primarily we think of ourselves as front office. We have recently added an integration with Stripe. It's nascent, but it's pretty slick. And so it gets a little gray in there, but we consider ourselves a front office platform. And we consider ourselves a platform to help people really create remarkable go-to-market motions.

So that's how I would think about it. It's a little bit of grayness on the payment and the invoicing. A little bit of grayness on the payment and the proposal layer, but we're a front office company..

Got it. And quick question on the CapEx. You improved that really nicely. Is there a component that we should think about that would improve with your partnership with AWS could generally you see that happen? Is that something that - is 8% kind of a trend line? Should they go to six over time? Or how do you think about that? Thanks..

Yes. If you think about our CapEx specifically, there's really two components of our CapEx. One is the spend on our facilities, and the other is software capitalization associated with our internal development activities. I think underlying your question is really what - we had a very strong free cash flow quarter.

The operating performance of the company obviously drove that result, but we did have a onetime benefit in Q4 from the restructuring of the deal we signed with AWS. In addition, 2018 was a light year for us in terms of facilities build-outs.

And I did note in my opening comments that there is a material build-out in Dublin in 2019 that will help to support our continued growth internationally..

Super. Thank you so much..

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

Hi, guys. Thanks for taking the question. And so I want to dig on the Marketing Starter product a bit.

You mentioned that two-x the upgrades this year, how are customers typically on the starter package before they upgrade to the higher tiers? And does that change at all if they're coming on from self-service?.

Okay, Brian, I'll take that one. The reality of the starter product is pretty small - the Marketing Starter product is a pretty small business until, I guess, July of 2018 when we really shored it up. And the big thing we added was e-mail marketing to it. And it dramatically increased the amount of people using it and the ARPU of that has gone up.

So that's - in my mind, it's almost like a brand-new business starting last summer. We're watching very carefully the trend of how long do they use starter before they go to pro and whatnot. But the reality is there's only, in my mind, it's only a 6-month-old business at this point, so it's hard to say.

Having said that, that is an initiative going on inside the marketing team, the general manager of our Marketing Hub. It's on his list to really figure out how to get that flow going from free to starter to pro and enterprise. It's not something we had focused on previously on the marketing side.

He needs real focus on it this year, and I think he'll get that machine rolling..

Got it. Thanks, Brian. And I just wanted to hit on linearity. Anything that we should think about in terms of how the quarter developed through December? And anything that's changed thus far in January? Thanks..

Do you want to answer that?.

Yes. I think Q4 is probably a little bit unique in that sense because we rolled out some pricing increases as of November 1. So there was some positive benefit to October as a result of some of the pricing increases. But Q4 is generally a very strong quarter for the company..

Thank you..

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

Hey, guys. This is actually Arjun Bhatia on for Bhavan. Thanks for taking the question. Just wanted to touch on you customer profile a little bit. You've talked about going after customers that have about 2,000 employees or in that range.

Can you just talk about how your customer profile has changed over the past few quarters as you targeted this larger base?.

Arjun, I'll take it. This is Brian. That's a good question. Here's how I - I'll just step away back how I think about it is we have three segments inside of HubSpot. We have the small business segment, which is kind of between, call it, two employees and 20 employees; mid, which is 20 to 200; and enterprise, which is 200 to 2,000.

And historically, our sweet spot has been in that middle layer, the pro layer, 20 to 200. And I would say we've got kind of perfect product market fit in there, products that we give an A or go to market, everything is really nice. What we've done over the last 12 months is really invest below that in the two to 20 and above that in the 200 to 2,000.

So I would give our product market fit, for example, two years ago when those two layers maybe a C. And I don't know if we're an A yet, but we're getting closer and closer to an A on the starter layer and on the enterprise layer. In terms of the median and mean employees, I haven't looked at that recently, but that hasn't changed materially.

The products have gotten stronger up on both ends. And they kind of push and pull on the metric and you see some of that in some of Kate's remarks..

Yes, that's helpful.

And then just on customer expansion trends, how should we think about the dynamic between what's driving customer dollar expansion between increased usage, tier upgrades and multiproduct adoption?.

Sure. Why don't I take that? I think what we have said about retention is that we think over the long term, retention can stay above 100%. We did see that retention in Q4 was above 100%. Customer dollar retention remains in sort of low to mid-80s for the company.

I think the big contributors to the increased retention overall were the up-sell, the addition upgrades that we've been seeing as well as continued cross-sell into the installed base..

Very helpful. Thanks..

Your next question comes from James Rutherford from Stephens Inc..

Hey, good afternoon. I wanted to start and get on the go-to-market strategy around Service Hub. I know you're beginning to develop the channel partners there. But just curious if you lean more on direct selling into 2019, or if you kind of think you've gotten the channel to a place where that's going to be a big sales motion for you all..

Yes. I think the reality is when we come out with these new hubs, our direct sales force grabs and runs with them pretty - very fast. It takes us a little longer to get that into the partner channel. Some of the partners are selling full stack and they sell sales and marketing and service, the whole thing together.

Some of the partners are really marketing agencies and they always want to do marketing agencies. So I think out of the box, probably in '19, a little bit heavier push on the direct side, but over the long haul, I think it will look pretty similar to the sales business and the marketing business..

Okay. Thank you. And then one more if I may on the market. I was just curious, your read on small business sentiment and health of that market, it seems to be very positive based in the revenue guide.

But just hoping you could provide some commentary on SMB appetite to invest in new software, both domestically but perhaps more importantly on your international markets. Thank you..

I think that's an excellent question. I haven't noticed any change. I said on the sales floor here at HubSpot and I talk to the reps a lot and I talk to prospects and customers a lot. I just haven't seen any pullback in demand or hedging with budgets that's unusual or were worried about recession.

I mean it doesn't mean it's not happening, but I haven't heard it really at all so far. It feels solid..

Thank you. Very helpful,.

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

Marketing Hub Enterprise, there's a price increase; but the growth bundle that you introduced, the growth suite bundle, and then the elimination of basic. Brian, I'm just curious, if you think about those three things, which ended up having the kind of biggest surprise to you in terms of impact on the business? And maybe you could explain why..

I don't know. They're all pretty similar. I mean the Marketing Hub, we had - you had a good November because we're going to raise the price. But we do that a lot in Q4 every year with the different products. I think that will - I think we got to the price point that the market kind of expects in there. I think for - I think we're in good shape there.

I think the growth suite work, we got a ton of - we're getting a ton of growth suite business. It's really encouraging to see. It was like, Ville I talked about in the opening remarks where he started with marketing and then he added sales and then he bought the full enterprise growth suite. I think we're going to see a lot of that.

Eliminating the basic, I feel good about that. That basic product is a little awkward in there. It wasn't packaged quite right. There was sort of a heavy touch sale involved with it. So I like the fact that we've got the starter in there and our pro with a heavier touch. So I wouldn't say any of them really kind of surprise with you..

No, I agree. Yes..

Yes, they're kind of as expected..

I guess specifically on basic, did that - did you see a good trade-up effect to pro versus a trade-down, if you will? Was that a good outcome in terms of that basic price point?.

Kind of a mix. If you're using basic, we were pretty aggressive grandparents. So we grandparent people in pretty aggressively. But if you're coming in now and you normally would have bought basic, you're seeing some go to pro and some go to starter. It's sort of awashed [ph] frankly when we peel back the numbers..

That's helpful. And can I just add one other one just on platform..

Sure..

If I'm an existing customer, and as we think about platform, is this just that I'm going to have access to a set of third-party applications that I can plug into APIs? Or is there something else that I will experience as a customer as you make this journey from suite to platform?.

Yes. I think over time, this will be a big change, Ross, where if you look at HubSpot two years ago, pretty much people used HubSpot with HubSpot. They didn't really have it connected to anything else. And it was a pretty monolithic, stand-alone application.

If you look at our real good customers today, maybe someone who's using the pro suite, man, they're plugging all sorts of other applications into HubSpot in a really cool way, whether it's they're plugging Slack in, they're plugging Eventbrite in, they're connecting their WordPress website.

They've got all these different applications that they're plugging in. And the way they're going to able to do that is very powerful. Like traditionally, HubSpot, we manage the data inside of HubSpot, we manage the workflow between your different HubSpot applications, and we report it on all that stuff inside of HubSpot.

Imagine in the future, we'll manage the data from all your front-office applications. You'd be surprised, front office applications people use. We'll manage the workflow across all of those applications and then will report on all the things happening in there.

And so it's a nontrivial shift that's going on inside the company and the value prop for our customers and it's already started and I think it's going to be a big tailwind for us over the long haul..

Your next question comes from Scott Berg from Needham & Company..

This is Ryan MacDonald on for Scott Berg.

Talking more about the platform approach going forward, as you're looking at sort of net new customer opportunities, does there actually then have to be a shift in the selling motion at all for those customers to sell the platform approach? And if so, is there a prioritization that goes into sort of the three core modules, given the existing selling motion?.

Yes, the selling motion hasn't dramatically changed yet. There's some small incentive tweaks we're making to try to encourage some folks at our organization to really encourage our customers to use HubSpot large, not just our applications, but really use it to manage the whole customer experience.

We'll probably lean into that harder in 2020 as the platform gets more developed, as the marketplace gets more developed, as our APIs get better. The thing about the platform that's interesting is there's three ways that kind of comes to life.

One way it comes to life is we'll build an integration, like we built an integration to Slack or Stripe, for example. The other way it comes to life is there's lots and lots of little applications out there, sales and marketing applications where they're using our API, the same API to integrate their product.

And the third is there's lots and lots of our partners and customers who are relatively advanced use cases who want to just build functionality using our APIs today. So it's really opening up a lot of opportunity to expand the value prop for us..

Got it. And then just one quick follow-up on Sales Hub. I think last call, you talked about that most of the adoption was really around net new customers or that had been sort of the early trend there.

Can you talk about if that's still sort of remained the trend there, if you've been able to drive more up-sells? Or if there's any initiatives in place to sort of switch that focus?.

I think it's a nice combination of new and cross-sell. There's a lot of cross-sell going on with that, okay? I'm using the Marketing Pro product. I'm interested in that Sales Hub product and there's definitely some up-sell, too, where I'm using the free CRM and all I could use is sales starter, looks like Sales Pro might be a good fit.

So it's kind of coming in from three different directions on it. That Sales Hub product is doing remarkably well for us..

Your next question comes from Tom Roderick from Stifel..

Hi. It's actually Parker Lane in for Tom. Thanks for taking my question.

So as you think about the move into new markets like Colombia and then the Paris office opening this year, is much of your early momentum in these markets sort of in the free and the starter program, and then it starts to move upstream to professional and enterprise, as your channels starts to grow and the awareness of HubSpot builds? Or is it sort of a whole hog early days? And then has there been a substantial mix shift towards net customer growth in international markets? Has it held pretty steady between international and domestic? Thanks..

I can answer the first one..

Yes..

I would say Colombia and Paris, those are two markets. Colombia's really the hub for Latin America. We've been in Latin America for a long time with a very small direct sales organization and an agency part organization. We've been selling into Paris from Dublin for a long time.

It's sort of similar where we've got some direct sellers in there and some agencies. The way that they typically go is when we enter a new office is that market is, let's say and this is a rough number, 70% of the revenue coming out of that market is through partners, agencies, and 30% is direct.

When we open an office, they both grow, but the direct tends to grow a little bit faster and the mix will shift a bit over time. And I think over time, for instance, in LatAm, we'll get to 50-50-ish, is my guess. But yes, I'm excited about both of those. We get a lot of business out of Paris and a lot of business out of Latin America.

I think we can turn up the volume in both those markets..

And on the mix of product and new versus installed base selling, domestic versus internationally, they're actually pretty similar, which was a bit surprising to me at the beginning, but they track each other quite closely..

Your next question comes from Jennifer Lowe from UBS..

I actually wanted to ask a question to Kate about just repricing through the operating margin guidance and the ASC 606 impacts. And I think you had said that looking at '18, there was about one point of core expansion and then three points benefit for ASC 606.

Looking at '19, it sounded like there's sort of two points of core with the one point of offset from ASC 606.

And so just focusing on sort of the cash basis, the point of expansion last year versus the two points, assuming I understood that correctly, next year, how should we sort of think about that, because clearly there's still a lot of investment going into the business.

Are you sort of managing around the uptick of the ASC 606 number, and that's how we should think about it? Or I guess I'm just trying to piece through what sounds like a bit less incremental cash investment once you pick through the pieces there..

I would say - so two things. One, you have the dynamics of 606 correct.

So when we adopted the 606 standard, we chose not to go back and restate our historical results, which means that when you look at 2018, there's about $16 million of commissions expense that we would have, under the old standard, expensed through the P&L that we capitalized and we'll amortize over a period of two to three years.

In 2019, we will continue to capitalize commissions expense, but we'll start to see some of the expense from 2018 flow through the P&L. So net versus like a status quo, there's some benefit, but there's a headwind to margins year-over-year.

We aren't managing around 606 per se, we actually look at the financial framework that we laid out around growth and profitability. And we invest to make sure that we're aligned to that framework over the long term..

Thank you..

Your next question comes from Michael Turrin from Deutsche Bank..

Good afternoon. Thanks. I was hoping we could spend a minute on the upmarket opportunity and some about your observations around how having a broader suite of enterprise products could be influencing that opportunity set, as well as whether that's also adding a potential for you to maybe hold onto some of the existing customers even longer. Thanks..

I can take that, Michael. Thank you. I think the upmarket opportunity is interesting. I just kind of want to caution, when I say upmarket, I'm really talking about what most people call mid market, a company between 200 and 2,000 employees. There's a lot of them out there, and they're buying HubSpot. They're really seeing the value in it.

And at INBOUND, we announced new features in Marketing Hub that they like. There's more new features coming there. Recall with the Sales Hub Enterprise, which is a good product, and that Service Hub Enterprise. So we're expecting that segment, the 200 to 2,000. We're expecting it to perform well and to get some really nice traction over time.

We closed this nice deal there. But we're not doing the traditional, hey, let's go up market and compete with Oracle and SAP and Salesforce and Adobe, a lot of those larger companies. We think the opportunity for HubSpot is in that mid-market building, big, big, big company in the middle where those companies are underserved.

And we want to bring really sophisticated powerful technology to them and make it simple for them to adopt and grow their business..

Understood. That's great. Thanks, guys..

Your next question comes from Derrick Wood from Cowen and Company..

Great, thanks. Kate, as you - I guess dovetailing on that.

As you guys focus more on selling your enterprise versions and gone up into the mid-market, are you finding any shift in invoicing structure? And I guess specifically, are more deals being invoiced annually? And how - if so, how should we think about the impact on overall deferred revenue growth?.

Yes, we haven't seen a material shift in the composition of our sort of installed base of customers around contractor payment terms. I think that frankly stems from the fact that as we're going upmarket, we're also going downmarket. And so there's a balancing act that's happening..

Okay. And then curious on your guidance for Q1, it implies about 2% sequential growth. And if you look historically, it's typically been a decent amount higher than this.

Are there some puts and takes your considering for Q1 this year that may look different than past years?.

Yes. I think there's probably a couple of things to talk about. We're obviously feeling good about our guidance coming off of a strong Q4. And we have taken a very similar approach to guidance as we have in the past.

A couple of things from Q1 - from Q4 to Q1, one is currency, which we've talked about at length in the prepared remarks, but there is - there's a headwind from Q4 to Q1 on the currency side. The other thing I've noted is what's happening in the services business.

We talked about Q4 as being a particularly strong quarter for our - not our Service Hub, but our services business, and we do not expect that to repeat in Q1..

Okay. Thank you..

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

Hi. This is Hamza Fodderwala in for Stan Zlotsky. Thank you for taking my question. Just a couple of quick ones for me.

As you move into larger customers, as you talked about earlier, are you seeing any material changes or elongation in your overall sales cycles?.

I can take it. I think what you're seeing inside the HubSpot is up in that 200 to 2,000 segment. It's probably getting a hair longer, but in that two to 20 segment, it's probably getting a hair shorter, and overall, it's staying pretty similar..

Your next question comes from Terry Tillman from SunTrust..

It is Eric Lemus on for Terry. Thanks for taking the question. Brian, I wanted to touch on something you said in your prepared remarks on an earlier question, talking about handling the workflow and reporting on the entire experience.

So as the product suite starts to progress and gain more customers, more in the enterprise market, how important is to have a deeper reporting or analytics types tool? And then as you look at the overall road map, how would you prioritize reporting and analytics in the future?.

Eric, I think it's very important. In fact we just had a meeting about that this morning where we're talking all about reporting to analytics. I would say we're good at it. I think there's an opportunity to get great at it and add a lot of value to our customers.

We've got our good sized team working on it and we hope to make a bunch of progress in 2019. I'm glad you asked about that..

The next question comes from Kirk Materne from Evercore..

Great, thanks. This is Peter Levine in for Kirk. Just one quick one follow up here. You talk about the initiatives in your channel partner.

Can you maybe share with us any updates on any notable partners you've signed that are outside of your traditional marketing agency network? And then for Kate, if you can, can you tell us the percentage of revenue contribution that comes from the channel partners?.

I would say the mix has been shifting over time, and it used to be obviously 100% marketing agencies, website designers, that field consultants, folks like that. More recently, we've signed up a lot of - there's a whole slew of companies out there that only do is implement CRM systems. So we signed up a bunch of those folks.

I think we signed up a bunch of folks who implement G Suite and Microsoft Office, folks like that, a little more technical. And let's see, then we signed up a lot of ISV partner, partners that are building, integrating into our API and building extensions on HubSpot that are pretty interesting. So you have the partner profile changed.

Like HubSpot, we said a few years ago on calls like this, we're shifting from an apps company to a suite company. And we're very much a suite company today. And partner channels evolved alongside us, and they're probably a half-step behind or direct, but they're right there and doing quite well..

There are no further....

So just to answer your second question, about 40% of our revenue comes from partners..

Yes, which is flat with where it was in the third quarter..

All right. Thanks, everybody, for joining the call. Talk to you soon..

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