Ladies and gentlemen, thank you for standing by, and welcome to the HubSpot Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Chuck MacGlashing, Head of Investor Relations. Thank you. Please go ahead..

Thanks, operator. Good afternoon, and welcome to HubSpot's third quarter 2020 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 statements of historical facts are forward-looking statements, including those 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 2020.

Forward-looking statements reflect our view 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 our Form 10-Q, which will be filed with the SEC this afternoon for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G.

The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between such measures, can be found within our third quarter 2020 earnings press release in the Investor Relations section of our Web site.

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

Thanks, Chuck. Good afternoon, folks. Thank you for joining us today. While none of us could have foreseen the difficult path this year would take, as we enter the final quarter of 2020, I'm grateful for our customers, partners and employees that have grown through it with us. Despite this challenging environment, HubSpot has grown very nicely.

Demand trends have continued to strengthen in the third quarter as more companies digitized their end-to-end customer experience and built modern flywheels. Revenue growth was 32% in Q3 and non-GAAP operating margin was 7%.

We had a record total customer growth of 39% year-over-year, surpassing 95,000, while multi-product adoption is also continued to grow nicely representing over 45,000 customers. These customers have also become more embedded in the HubSpot ecosystem, as we reached nearly 2 million cumulative platform integrations.

The year is not over, but I believe the growth we've seen in the third quarter is both a story of digital transformation tailwind combined with excellent execution by our team's build and deliver a terrific product for our customers.

A big focus for 2020 is on building a CRM platform, that couples an increasingly powerful enterprise back-end with an intuitive consumer grade in front it. This is a rare combination that software industry is unique to us in the CRM industry. That rare combination is a result of a few things.

First, we hand crafted HubSpot on a set of internal primary colors reporting content, messaging, data and automation. These primary colors are combined to create our Hub which all work the same intuitive way. This is in contrast to traditional CRMs, which are coupled together through acquisition.

Second, we have a large multi-year investment in user research and design that gives HubSpot that consumer-like feel. Third, our entire company is laser-focused on delighting our customers.

Culturally over the last few years, we've moved from a funnel mindset to a flywheel mindset, where our growth rate is heavily influenced by the values our customers are getting from our offering.

The really exciting thing that happened since we spoke last was the release of Sales Hub Enterprise which leverages these primary colors as custom objects, as proposal, as advanced sales automation, and as the economic integrations, like NetSuite, QuickBooks and Xero to our CRM.

This was the huge release for our customers and partners, in particular, the addition of custom object changes the game for a lot of our customers. Custom objects was the very large investment for us that took well over a year to develop. Prior to this release, our customers had to set their business model into a relatively rigid object model.

Now, our customers can set our object model around their business model. This was a big block for us with scale businesses that we've knocked down. One customer, LegalZoom, an early sales Hub Enterprise adopter, praised this intersection of power and ease we provide by saying - - we have had a 100% user adoption and we couldn't be happier.

Now, it's still early days, but we had a strong start with sales of enterprise net new AOR, giving a record high in October. There is still a lot of uncertainty in the world today, so it's hard to predict the future. But one thing I'm certain of, is our approach to building products that delight customers, it's going to keep paying off.

I want to thank you for your time so far today. We're proud of the momentum we've done in Q3 and remain optimistic and focused on closing out the year strong. Now, I'll hand things over to Kate to take you through our Q3 financial and operating results in more detail..

Thanks, Brian. Let's turn to our third quarter financial results and our guidance for the fourth quarter and full year 2020. Third quarter revenue growth re-accelerated to 30% year-over-year in constant currency and 32% as reported.

Q3 subscription revenue grew 32% year-over-year, while services revenue increased 12% year-over-year on an as-reported basis. Domestic revenue grew 20% in Q3, while international revenue growth was 39% year-over-year in constant currency and 40% as reported. International revenue represented 44% of total revenue in Q3, up 3 points year-over-year.

Deferred revenue as of the end of September was $259 million, a 27% increase year-over-year. Calculated billings were $246 million in Q3, up 33% in constant currency and 38% year-over-year on an as-reported basis.

Earlier in the year, we introduced proactive measures to provide customers and partners the flexibility needed to remain productive and engaged parts of the HubSpot's ecosystem. As I shared at the Analyst Day, we saw the vast majority of these COVID customer relief requests in the first half of the year.

Overall, we continue to see a small number of new requests and the retention of our customers at the end of the short-term plays remains strong. We continue to watch these trends carefully, particularly given the recent uptick in global COVID cases. We also saw continued strength in demand from new customers during the quarter.

We ended Q3 with over 95,000 total customers, up 39% year-over-year. Net customer additions were nearly 9,000 and set another company record, driven by broad strength across the business, although we continue to see notable growth in our starter growth suite customers.

Average subscription revenue per customer of roughly $9,700 was up a few points sequentially, but down year-over-year, as a result of the strength that we've seen at the low end of the portfolio. Total revenue retention was greater than 100% in Q3.

While retention benefited from the performance of customers upgrading at the end of short-term discount, revenue retention would have remained above 100% without this benefit. The remainder of my comments will refer to non-GAAP measures. Third quarter gross margin was 82%, flat year-over-year.

Subscription gross margin was 86% while services gross margin was negative 20%. Third quarter operating margin was 7%, up 1.0 compared to the same period last year. Operating margin in the quarter exceeded our expectations, primarily as a result of strong revenue performance.

At the end of the third quarter, we had nearly 4,000 employees, up 20% year-over-year. Net income in the third quarter was $40 million or $0.28 per diluted share. CapEx, including capitalized software development costs, was $30 million or 6% of revenue in the quarter. We expect CapEx, as a percentage of revenue, to be 6% to 7% in 2020.

Free cash flow in the third quarter was $25 million, driven by strong business performance. As a result we're increasing our expectations for full year 2020 free cash flow to approximately $60 million. HubSpot ended the quarter with $1.2 billion of cash and marketable securities.

We remain confident that our strong balance sheet will provide us with the financial flexibility to invest for the long term. And with that let's dive into guidance for the fourth quarter and full year of 2020.

For the fourth quarter, total revenue is expected to be in the range of $235 million to $237 million dollars, up 27% year-over-year at the midpoint. Non-GAAP operating income is expected to be between $13 million and $15 million. Non-GAAP diluted net income per share is expected to be between 21% and 23%.

This assumes 49.6 million fully diluted shares outstanding and for the full year of 2020 total revenue is expected to be in the range of $866 million to $868 million, up 28% year-over-year. Non-GAAP operating income is expected to be in the range of $63.5 million and $65.5 million.

Non-GAAP diluted net income per share is expected to be between $1.13 and $1.15. This assumes 48.7 million fully diluted shares outstanding. As you adjust your models, keep in mind the following.

At current spot rates, we expect a 2 point FX tailwind to Q4 reported revenue and now expect a neutral FX impact to reported revenue for the full year of 2020. We have delivered modest operating margin leverage in 2020 as a result of our strong business performance, coupled with some cost savings from our shift to remote work.

At our Analyst Day, I reiterated our commitment to investing for the long term and indicated that we expect to increase our R&D spending as a percentage of revenue. As a result of this increase, coupled with a return to a more normal level of employee spend over the next year, we do not expect to deliver operating margin leverage in 2021.

We are still early in our planning process, so we will share a more detailed outlook for profitability when we report our Q4 results. The investments we're making in both our product and go-to-market teams are paying off and will position us well to grow in 2021 and beyond. And with that, I'll hand the call back over to Brian for his closing remarks..

I'd like to close by thanking my leadership team and all the HubSpotters out there who are listening tonight. It's been an exceptionally challenging year. You all have stepped up during these tough times, with great execution and terrific resilience. I feel lucky to be on your team. Okay, operator, let's open it up to some questions..

[Operator Instructions] Your first question comes from Mark Murphy from JP Morgan. Please go ahead..

Yes, thank you very much and congrats on a very special performance. Brian, I was thinking back to inbound, you had commented that this is the year that you started adding legitimate power to the platform and now we're hearing so much discussion of custom objects.

Are you surprised at how quickly the enterprise functionality has resonated in this kind of environment? And do you see more activity at the upper bound of your target market in terms of company size?.

Hey Mark, I read your report when it came out, I thought it was great. I'm not that surprised.

There's been a lot of hard work that's gone in on the platform level or custom object side of things and it's been really going on for a long period of time and this was the year we really wanted to strengthen that enterprise tier of our products, the products that we sell into like 200 to 2000 level.

Customers -- and we knew for customers of that size a major objection from existing customers who were graduating and new potential customers was -- gosh, we get this evolving business model, but we have to jam our business model into your relatively fixed object model, into your contacts, companies, deals.

It's sort of rigid the way we structured it, and what custom object gives the ability to do is wrap HubSpot in our object model around an evolving a more complicated business model. So this makes us a better fit, for example for a university, there can be a student object, for a SaaS company, there can be a subscription object.

There can be for manufacturing company, inventory could be an object, so just gives you a ton more flexibility if you're a scaling company. And so I'm not shocked that we're getting good adoption. It's a loud noise from that to your customer for us for a number of years and so we undertook that project in part of last year and it came out great.

The nice thing about Sales Hub Enterprise and about the custom object is they're part and parcel of HubSpot, so they inherit all the great automation and all other great reporting, and I'm kind of bolted in there, it's sort of like an apple-like field and they are really powerful and really easy to use. So, I guess I'm not shocked..

Okay, great. Now, Kate, I had a mathematical question for you, I was trying to run the math at the Analyst Day. I think it said Marketing Hub was over $600 million growing at least 20% and Sales Hub I think over $160 million growing 60%.

I ran the math on that, it looks like you're almost booking as much new business with Sales Hub now as you are with Marketing Hub; it's getting close, kind of this twin-engine situation.

Is it fair to start thinking of it that way already this soon or is it possible we'd see a crossover there in the next couple of years? Because I was also considering, I think Brian just said that October actually -- I thought you said October not September, was the highest level you've hit for Sales Hub Enterprise net new IRR.

I'm trying to kind of tie all that together and see what you think?.

I think you're going to see enhancing of the flows across the Marketing Hub and the Sales Hub over time. I think they're both great engines for the company and I think they're both going to be big growth drivers to come..

Your next question comes from Alex Zukin from RBC. Please go ahead..

Hey guys, thanks for taking the question.

Maybe the first one on what you're seeing with respect to sales cycles, the demand environment in the pipeline, how is that different from, call it, 90 days ago and even since inbound, what you saw come out of inbound? Because it does feel like some of the results are posting the billings numbers, it does feel like there is a bit of acceleration in terms of the priority set that you're solving for customers.

So just any high-level comments, and then I've got a quick follow-up on everybody's favourite topic of billings..

hard work last year to kind of get ready, so starting with the kind of the deal end of March to early June, huge headwind and in starting at the end of June, that headwind turned into a tailwind, and that tailwind blew all through Q3, it blew through October too.

I'm pretty happy with where we're sitting at the moment, things are going really well and again, I think we're very well-positioned to help our customers through and get some credit for that.

I also want to give some credit to a lot of hard work from the team in execution over the last couple of years to put us in this position, so it's a little bit of both. It's hard to say with the election and the shutdown, I'm not sure what's going to happen over the next 6 months.

I'm pretty optimistic, like the pipeline looks good, customers are quite happier, value prop is quite stronger, products are getting better. Customers need to move from an outbound model to an inbound model, from outside selling to inside selling, from offline to online. Our product is a really, really good fit for that type of thing.

And so, I'm feeling quite positive these days actually..

And Brian, I guess when you think about -- as you look to next year, you're clearly going to invest to take advantage of the growth. A lot of investors and companies start thinking about comps for -- some comps are easing, some comps are getting tougher depending on what kind of software you're selling.

But for you, it feels like because of the way you're coming out of it and the sales cycles are working and everything is resonating, is it possible that if we do get stimulus you could actually accelerate as we look at next year? What's the right way for us to think about that and any tie in with the puts and takes around billings that we should keep in mind, both next quarter and just in general from here?.

I don't know, is the honest answer, I don't know if the stimulus is coming and I don't know what the impact will be on HubSpot. I can say -- I really think a lot about what I can control and what I can influence.

I can influence our employees and our customers and our partners and I think we're in very good shape, like you've been tracking our company for a long time, just feeling really very solid about where we sit. And I think -- really think way back, like when we first went public it seems like 100 years ago.

We were just making the transition from a marketing app to a CRM platform and we're making great progress on that. It's a multi-year arc and we made huge investments, it's still pretty early in that arc, like our vision for what a modern CRM value prop is, the company's relative to what we've built.

We made a lot of progress, there's a lot more progress to come. So in general, feeling quite good these days. .

And then Kate, anything on billings that we should be aware of, given the different terms for some of your products now in the market?.

I guess last time we talked about a compression and the upfront duration of billings. I think we have a different conversation to have this quarter. I would to start frankly with the reminder that the FX is different on billings than it is on revenue. And so, there was a 5 point benefit to billings in Q3.

So the number I would really focus on is that constant currency billings growth of 33% and there is a couple of things I would point out.

One is, strong business performance is going to drive strong revenue growth and strong billings growth, but quarter-over-quarter, we did see an improvement to the billing duration and some of that is a mix where we saw some strengths in Marketing Hub and the Pro and Enterprise skews, but we also saw a bit of a tailwind just like we saw with to retention to the return to normal billing or some of the customers that we're under these short-term COVID discounts as they came out the other side.

I would advise just long-term the great anchor point really still is constant currency revenue and constant currency billing tracking..

Alex, we're getting some feedback there so we had to mute your line. Thanks for the questions. Operator, if we could take the next one..

Your next question comes from Samad Samana from Jefferies. Please go ahead..

Hi, good evening. Thanks for taking my question. Let me echo, the very strong results were great to see. Kate, maybe first question for you. It was a really impressive performance in that net adds is up quite a bit quarter-over-quarter, but ASRPC also increased quarter-over-quarter.

So is it fair to assume that the company either had more Pro and Enterprise signings as a percentage of the mix in Q3 or was that a function of something else?.

Thanks for the question. We are obviously really happy with the new customer adds for the quarter. I would say starter growth suite was another quarter of really strong adds and so that was a big driver of the customer count growth in Q3.

But one of the things that I liked about the quarter was that we also had really strong adds in the Professional and Enterprise additions and frankly, both in Marketing and in Sales. I would caution us not to expect 8,000 or 9,000 new customers every quarter, but it was a great quarter for new customer add.

As far as ASRPC, some of the sequential uptick is going to be attributed exactly as you expected to a bit more in the Professional and Enterprise customer adds. I think there is also a little bit of help there from the customer coming off of the short-term discounts and going back to more normal pricing.

I would just finish, we talked about how we're expecting the ASRPC was going to be under pressure for the next few quarters at least, as the customer mix shifts to that starter tier. I think that still holds true..

Okay, great. That's helpful for modeling. And then, Brian, maybe just a follow-up for you, if we may be zoom out, we've now been stuck at home for almost 7 to 8 months. But what we've seen for you guys is even ex the upgrades off of discount or pricing, that a pretty strong net retention.

So it seems like existing customers are buying again and adding additional products.

Could you may be help us just as stepping back, what are customers prioritizing as they adjust our new reality particularly heading into 2021 and how that's translating into selling back into the base?.

I think everybody now -- so many companies had on their to-do lists to really digitize their go-to market. There's very few people in the world today that say that's a bad idea. Ten years ago we were early starting up; people though we were crazy with all of inbound.

It becomes pretty mainstream and I think COVID might have sped up the plans on there, people add vols in their prospects at home and their customers at home in all and -- works kind of a compelling event to see people up to really digitize their go-to market and HubSpot was very well-positioned for that.

And we built a platform to help people digitize their entire go-to market to create new modern flywheel, to create a really terrific customer experience. I don't think it should be that surprising that we've done really well. I do think we are very well-positioned.

I think we're very well-positioned going forward too, like the advances we've made on the product and the improvements we've made as the go-to-market have been substantial over the last year and I think we're getting nice returns on those..

Great, thanks for that. It's good to see all the investments paying off. Have a great night..

Your next question comes from the line of Stan Zlotsky from Morgan Stanley. Please go ahead..

Perfect, thank you so much. When I was reading the press release, one thing that really kind of stuck out was that the some of the benefits that you're seeing right now is, the way you guys put it, from the ongoing digital transformation of the mid-market. That particular mid-market is a statement.

Is that the way that you are viewing yourselves now as in -- yes, you definitely have a very strong solution for the SMB and that's your router certainly in that space, but the mid-market, is that really where you have been focusing and that's where you're seeing the most traction these days, as far as the incremental bookings, billings that are coming into the company?.

That's a good question. We roughly break our segment stand of 2 to 20-employee company we call it small, 20 to 200 employees, that's mid, 200 to 2000, we call that enterprise. We have perfect product market fit and perfect product go-to market fit in that middle 20 to 200, we do extremely well in there.

I think what you've seeing this year is nice encouragement on product market fit and go-to market and non-go to market a bit in the small ME [ph] enterprise. On the small side, we did that, we repackaged basically that starter suite. So $50 per month and -- boy, that sounds really well. We're very happy with what's going on there.

Customers are signing up, they have been retained nicely, they're upgrading and at the same time, we've seen a lot of improvements to our product line up in that 200 to 2,000. And so, I see at this time of this, we're per start up scale up. What I don't like to describe HubSpot as for a small business.

I don't think that's really us, we're not like little tiny company, little shop. I have a flower shop near my house and they make smoothies, it's like two people, it's not for them, it's for real business that's going to grow. We want to be the number one CRM for scaling companies, so that's kind of where we fit in the market.

It's a little bit similar and just based on using this analogy, but it's a little -- just a little bit similar to where NetSuite used to sit in the market. I think NetSuite's ham [ph] is a lot smaller, in the grand scheme of things than our CM [ph] but it's for that start-up and scale up company between 2 and 2,000 employees..

Perfect, thank you. And then if I could sneak in a quick follow-up. So, the -- help us kind of better understand how you guys are thinking about Q4 guidance because on one hand, we're very clearly seeing extremely strong results in Q3.

And Brian, you talked about the tailwinds that you've been seeing through this -- through the summer and then into all the way through October, but at the same time, we are seeing COVID cases are spiking and you guys, you mentioned in your prepared remarks that is a consideration.

So, how did you guys reflect that in your Q4 guide? Maybe that's a question for, Kate. Thank you..

Yes, I think we've been trying to take a very consistent approach for many years in terms of how we think about guidance. In the short-term, our model is pretty predictable and we're providing guidance now, just for the next three months. And so we -- well, I mean, we're a month in, so the next two months.

And so to us, it's a bit of a balance just looking at business performance and then looking at potential outcomes. And we're confident in the numbers that we put forward..

Got it. Thank you so much..

Your next question comes from the line of Walter Pritchard from Citigroup. Please go ahead..

Hi, this is Drew Foster, and thanks for taking the questions.

I have two; your Analyst Day, you highlighted some customers were a key factor in deciding to go with HubSpot was that they able to consolidate systems with you, so, to what extent is the desire to consolidate front office technology is going to reliably be a growth driver for you, Brian? And I'm wondering if you've noticed that trend in any specific demographics of customers in the common theme and whether you've drawn out any specific plays around addressing that opportunity across different combinations of your hubs and I will follow up..

That's a really good question. There is a great suite and there has been a bunch of [indiscernible] about it, but there is an ad cut out of like a 1998 newspaper. It's an ad for Radio Shack. And in the ad, there's like 50 different devices in there from an alarm clock, to a compass, to -- you name it.

And then next to it is an iPhone, and the iPhone does all that stuff now. And I think that really -- that ad is really good. And that's sort of like HubSpot. People have all this stops that they've kind of come together overtime, it doesn't weave together very well, and so we're seeing people just kind of consolidating their whole set back on HubSpot.

And then plugging -- our integrations are very elegant. They're kind of like Apple's integrations. They're much tighter, and so it's a little bit similar to that. We're seeing a fair amount of that here. Particularly as we move from marketing to pull CRM platform.

The platform, that's a very broad thing for managing -- from a total stranger that's never heard of you all the way to a delighted customer, people can have hundreds of applications dealing with that. And then they come to HubSpot, like, all right, here's a Hub.

We'll manage this experience through HubSpot, we'll plug a few applications into it and get it to really roll. So that's kind of how we think about that. That old Radio Shack ad..

Okay, got it. And as I'm thinking about ARR growth for your newer hubs, Brian, and compare that to the growth curve of where marketing was at this time. Obviously, to the newer hubs, has had the benefit of the cross-sell vector that marketing didn't have for some period of time.

So if we kind of do a qualitative exercise and back out the benefit of cross-sells for those newer hubs and observe the success of those hubs in their own -- on their own merits, what evidence or trend gives you confidence that you're sort of shaking things up in those markets the same way that you did with marketing?.

That's a -- no, it's a good question. I think back when we released our Sales Hub products, several years ago now and started the product called Signal. And, man, it's just been getting better and better and sort of got a lot better a month ago as the Sales Hub Enterprise released.

And if I look at that product, like most of the early sales are really cross-sell sales.

And I look at that product now, it's as much a front door to HubSpot as it is the side door from Marketing Hub, so it's a lot -- people come in on Sales Hub and then they buy Marketing Hub or if there's an existing Marketing Hub, that's when then they buy Sales Hub. That took a while to develop, but that's humming right now.

It's a good-sized business, growing fast. I think we're going to see the same thing on Service Hub and the same thing on CMS Hub. Where a lot of it now is, you're selling into your existing customers, but those products are getting a lot better and I think those will become front doors over time as well..

Really helpful. Thank you..

Your next question comes from the line of Tom Roderick from Stifel. Please go ahead..

Hi, it's actually Parker Lane in for Tom, thanks for taking my question. So, Brian, you just launched marketing contacts during the quarter. I'm just wondering how much of that was in response to sort of feedback, I guess, from your customers.

And what do you think that means for attention going forward if customers really don't have that upper bound on how many contacts they can store in the platform? What does that mean for attention and engagement with the platform? Thanks..

Hey, Parker, that's a great question. We have a terrific Board member partner named Jay Simons, he was President for a long, long time. The company called it lasting, and he was admired a lot. In his last CMV, they tracked bugs in their product and they strive to fix bugs.

They also track bugs in their entire go-to-market in the entire buying and using experience, including their pricing model. Whenever they find a bug that creates some friction or creates a cringe in that process, they file it and they try to fix it. We have completely borrowed that idea here at HubSpot.

And one of the bugs in the buying experience for HubSpot that's been going on for a fairly long period of time, it's caused customers to cringe [ph]; it is marketing content. And you can imagine how this might happen.

When we first started HubSpot, we priced it like a lot of other marketing vendors where you buy the SKU, and then the larger database and contact, the more you pay, of course, that works great.

But then you add Sales Hub and all of a sudden, salespeople are adding thousands and tens of thousands of contact into that hub and the field for the marketer is going through the roof. There is a lot of complaints about this over many years.

This was something we wanted to fix for a long time, it was actually a large project that took -- probably took a year to do it and we bidded up and we did it over the summer and it's come out really well. Very happy with the way we've implemented. We're getting terrific feedback from it and I think that change will increase customer happiness.

And I think will also make it easier for people to buy HubSpot. It will also make it easier, more predictable to scale your pricing of HubSpot. So that's a big, big win for our customers and for HubSpot itself, and I think for investors over the long haul. And it'll be a driver for us..

Yes, it's great feedback. And then on the Sales Hub front and one of the things you announced in inbound was the addition of some new tools there including CPQ. I was wondering if you could talk about the initial interest in the CPQ tools you have out there.

Is that mostly enterprise play you think, or if that's really broad-based in the customer stats? Thanks again..

Yes, we announced some early CPQ product, the Sales Hub Enterprise is getting nice uptick on them. And this is just sort of I think of HubSpot as we want to be a very legit CRM something. We want to be the number one CRM for scaling companies. And that means you kind of go all the way to the edges of the problem in.

And so part of the edge is if people want to do proposal and they want to do quote and they want connect it to their accounting system and have all that stuff closed off and close the loop, and we came out with an early version of that. We've built an enterprise getting really, really good adoption. And keep your eye on that channel.

There's more to come on that front. If customers really like that area that we're investing in, we're going to invest more..

Your next question comes from the line of Arjun Bhatia from William Blair..

Hi, guys, thanks. And I'll echo my congrats on the quarter.

Kate, if I can start off, I know we've touched on this a little bit last quarter, but is there anything, any update that you can give us on this COVID cohort of customers that are coming in on starter in terms of upgrade rates, churn, landing point, anything on that front would be helpful now that we're 90 days from when we last had this conversation..

Yes. And I think the trends are very much the same as the ones that we talked about in odd day, and frankly, on the last earnings call. We continue to see those big starter cohorts. They are the vast majority of those starter cohorts are new to HubSpot versus customers that are downgrading or moving from another skew.

They are on balance similar in size to the customers that we saw signing up for our other starter skews before this package was introduced. And they are upgrading at a rate that similar. I would say, maybe a little bit lower than what we had seen historically, but at a rate that's healthy enough that we're excited about the opportunity there. .

Okay, that's very helpful.

And Brian, maybe one for you not to beat a dead horse on 2021, but just curious, obviously this has been in audio, curious on what you're hearing from your customers in terms of how they're thinking about marketing budgets and how those might change next year? Do you think it was elevated focus on digitizing marketing strategy as go to market continues? Or do you think we see that moderate a little bit going into next year?.

It's hard to predict in the future is a very hard thing. I would just say and connecting with my sales leaders and service leader just over the last couple of days. People are feeling pretty good, demand is strong and customers are happy and buying more in new accounts are coming in. Feel like our products are more and more competitive.

So feeling pretty good yes, feeling pretty good it's hard to know what happens if design locked down or something really bad happens with this election, but feeling pretty good. I think they are great here [ph]..

Okay. Thank you. .

Your next question comes from the line of Ryan Macdonald from Needham..

Hi, thanks for taking my question and congrats on an excellent quarter.

I guess, Brian first one for you given that CMS Hub sort of fully launched sort of in the midst of the pandemic, it feels like inbound was a bit of a coming-out party for the new product, but just curious to see sort of as your processing in going through sort of the responses and feedback from inbound what you're hearing in terms of interest in adoption for CMS Hub and what sort of the mix you're seeing in terms of existing customers that may have been using the add-on functionality to Marketing Hub initially wanting to upgrade versus net new customers into the platform.

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Hey Ryan. Hearing great things about CMS hub.

So it's an interesting industry, the content management system industry, and people probably -- investor talk a lot about with the GoDaddy and we're facing in the advertise a lot, but that really the dominant players in our part of the market even up from us are open-source project and they're not as well known to investors, because there is no public company comp and they don't really advertise much but we definitely compete, we are going t to compete in the mid-market with the large open source product called work-brand [ph].

I think when we really win over the long arc of this thing is there is tremendous power when you combine the content management system with that customer relationship management systems that's a one plus one equals to three experience builder for your business. And those things are combined and really cool with HubSpot.

But if you watch the [indiscernible] overtime on the development environment for the content management system. The development environment in CRM come in together, it's going to be an asset. It's going to be really, really cool.

So reduction on CMS is been really solid, business is growing nicely, our partners in particular are really excited about it, but over the long haul there is a collided scope of opportunities, that will be great for our customers are nearly combined with those two applications..

Got it, thanks.

And then the follow up, obviously the environment we're things evolving pretty quickly, but any sense, are you hearing anything recently internationally with sort of over the past few weeks with Europe seemingly going back in the locked down or any impact to the business at all?.

Yes, Brian, we're asking the same thing and checked with my European leaders. It seems, all right now, it's hard to say what happens, two, three, four weeks from now, but the demand seems pretty solid over there.

The execution has been really solid again to think our value prop super strong and so it's hard to predict what will happen in future but feeling pretty good right now. .

Your next question comes from Ken Wong from Guggenheim Securities. .

Hi this is Nancy [ph] for Ken. Thanks for taking the question. Just two questions, first on retention.

Do you see a risk for that to track back down after if locked down start again or have your customers been able to figure out how to kind of work through the new normal or I guess on the flip side, is there more headroom to this number to improve as we get further out from the short-term discount?.

Yes, I mean Q3 was a very strong retention quarter for us. So I said in the prepared remarks that I mean retention rate comfortably north of 100. I also said that absent the tailwinds that we see from customers coming off of those short term discount, we still would have been comfortably above 100.

We are through the majority of those and so I think that the retention that we're seeing, we're excited about that and I would particularly note that one point that we're excited about is actually the really strong retention that we're seeing on a customer dollar retention basis. So this is sort of that gross retention number.

More of our customers are sticking around with HubSpot. .

Great that's helpful. And just hang on to that. So have their customers that previously might have contracted seat or maybe downgraded skews have the expanded back up yet. .

Yes. It's hard to say I think know when you look at the overall net upgrade rates that we're seeing in Q3. It is dramatically larger than what we saw in Q2, which would lead you to believe that as a whole population. Our customers are on net upgrading more..

Your next question comes from the line of Kirk Materne from Evercore ISI..

Thanks very much, Brian, what do you think about sort of just the opportunity with the Sales Hub, the Enterprise Sales Hub. I would expect that the easier land is to sort of continue to grow with your customers that might has historically grown sort of out of your technology versus going after sort of net new customers, but that might be wrong.

So just kind of thinking about when you talk to your sales leaders is it about trying to go and rip and replace.

Is it about expanding with existing customers already with you? I guess how are you thinking about the balance because I imagine the sales cycles are very different with those two conversations?.

Yes, there is few layers to it. I think that lowest layer on the case here, John; retaining those customers longer. We have customers that outgrow us and the reason to our grow us; things like custom project, the big reason why somebody would growth it and so, retaining them as they go from 200 to 2000 is a good one.

Then just winning more deals people hesitate to buy HubSpot if they're going to really scale up, they are vary, HubSpot for scaling companies and I think the answer is yes now between what we're doing on the functionality side and what we're doing in the business model side we got the market [ph], which is much more attractive.

And then maybe the third layer on that cake is ripping and replacing that's a harder thing to do. It's certainly happening and I hear about them when they happen it's exciting when will happen. But it's probably the third layer on the cake. But it's going really well.

People are really excited about our customers, our partners and sales reps, it's getting us in a lot more conversation..

That's helpful. And then one sort of more maybe higher level question for you, when you talk to others in the sort of broader CRM space and maybe at the enterprise level via this concept of a customer data platform continues to come up and we've seen M&A around this.

Does sort of CMS plus your marketing technology sort of solve the customer data sort of centricity discussion for you all meaning, and know why a small company when it want another customers just as well as a big company.

So is that conversation coming up and do you guys, are you able to kind of get at that with your existing technology now or is that something that you're willing to partner with others on?.

People do you think of HubSpot as there, central stores all their data and over time, we wanted to get it back [ph] it is the possible to integrate all your systems in the HubSpot, take them back and forth. That's one of the reasons we acquired by [indiscernible] and then you will have them report on all that.

So yes, I see HubSpot over the long haul, if you want to use the term for their customers, and I want HubSpot to be their center of gravity is what enable us to really create off experiences, whether it's on our tool or other tools that they use that they're plugging in anything from XOOM to Google AdWords too little start building itself on top of that stuff..

That's helpful. Thanks and congrats on the quarter..

Thank you..

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

Great, thanks for taking my questions. Congratulations on a really great quarter. First off, I wanted to thank Brian for bringing up that that Radio Shack ad picture that added my head right now. So that was just methodology. Thank you for bringing that up.

I wanted to ask you about the sales Enterprise version especially work, specifically on the custom object.

It sounds like it's the real game-changer for that version, I guess look at -- could you talk a little bit about what customs object means from a customer lens? Does it enables us to maybe replace any existing applications or does it enables the customer to maybe stay within the HubSpot ecosystem longer as the business scales before they have to maybe look outside the HubSpot box for additional features?.

The way I would describe it is let's just say you are University and you're using HubSpot you're just warning you call your prospective student leads impact that and when you call your students that are paying year you call them customers. Just this is unnatural. You're going jamming your business model into HubSpot pretty rigid object month.

What you want to do is go to university is to match the way your whole front office system or CRM system works with the way your business works. That means you've got a student and a student is an unusual model. It's different than a typical customer because the student convenes and lasts four years. So it's custom object inside of HubSpot.

You want to report on that in certain ways you want to create workloads around that in certain ways, so it just enables you to do a whole heck of a lot more.

What we noticed is when a company comes in let's say there is a person company comes in, they buy HubSpot sales product marketing product and they're super happy with it because the firm starts talking about on the going to use everything they got here just plug it in and run.

But as the company moves in a 500 employees now 600 employees, their business model gets complicated and they get irritated because they have the kind of jam in the HubSpot. As their business model evolves HubSpot will evolve with them and scale with them. That's sort of the way it works.

That makes sense?.

Yes, totally makes sense. Thank you for that. I wanted to just ask you one more follow-up here on the CMS Hub, you mentioned open source and word trust, but what about Drupal? Can you compete with Drupal right now whereas maybe the longer-term vision for the CMS Hub to be competitive against Drupal deployments? Thanks for taking my question..

No problem. We're pressing Drupal both like big open source projects. They've been around a while and they're powerful products but they kind of line that in general. We took a very different approach where we're pure out of the box to do a very modern approach to building it.

It's not have been my head to vision Drupal pretty far upmarket like the White House runs on Drupal. A few enterprises run on Drupal more where we live in kind of the mid-market is more WordPress and we integrate really nicely with WordPress.

If somebody loves WordPress they can keep it, but I do think that power of having the CRM and having the CMS together is going to enable developers enough people to do amazing stuff over the next couple of years. So I think that's where our core competitive advantage is going to come from..

Got it. Thanks for taking my questions..

Your next question comes from Siti Panigrahi from Mizuho. Please go ahead..

Hey, this is our Michael on for Siti Panigrahi. Congrats on a great quarter once again. I want to dive in quickly on International. You saw a nice acceleration in the quarter.

Can you point anything in particular that is driving success abroad? Moving forward, can we expect that they are now to maintain the type of strength even with the ongoing shutdown?.

Thanks so much for the question, it's interesting that you called that out. I actually think that the performance is pretty broad-based. Yes, we saw some acceleration or reacceleration in the international growth. We also saw a reacceleration in domestic growth. So I think it's across Hubs, across geographies we saw really strong performance..

Your next question comes from the line of Brent Bracelin from Piper Sandler. Please go ahead..

This is our Jefferies on for Brent.

I was wondering in terms of the traction in the enterprise and professional our customers this quarter on the higher end sort of customer, how long were they in the funnel? I'm wondering whether these customers were looking at digital engagement products more even since the early pandemic and kind of finally converted in Q3 or are these new customers that you're engaging with in the quarter and converting in Q3 alone? Just trying to understand that there are customers out there that are kind of enduring the pain of a traditional go to market and then they have to make the change in the back half of the year..

Honestly, it's a little bit of both. There's a lot of people who have then -- a lot of people are looking at that for a long time. Finally, bought and there is some short we caught short cycle MRR year. The short cycle MRR is up by short cycle on they came into our funnel within the month of that purchase within the month. It's not up a lot.

I think it's a little bit more broad-based than -- like I kind of said earlier I think part of our momentum is certainly all the stuff going on in the world is really particular thinking about digitizing their go to market. I also just think, even with all that -- if this is that normal year. We have the night with nothing happening in the world.

I think we'll be having a really good year. We are really set up well. So I think it's a little bit of both. That would be my take on it..

That was our last question. At this time, I will turn the call over to Brian Halligan, CEO and Chairman for closing comments..

Thanks to all of you for joining us today. Look forward to talking to you soon..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..