Charles MacGlashing - IR Brian Halligan - Co-Founder, Chairman and CEO John Kinzer - CFO

Terrell Tillman - Raymond James & Associates Thomas Roderick - Stifel, Nicolaus & Company Bradley Sills - Bank of America Merrill Lynch Stan Zlotsky - Morgan Stanley Aleksandr Zukin - Piper Jaffray Companies Derrick Wood - Cowen & Company Albert Chi - JP Morgan Chase & Co Jesse Hulsing - Goldman Sachs Group Inc. Ian Strgar - UBS Investment Bank Ross MacMillan - RBC Capital Markets Koji Ikeda - Oppenheimer Samad Samana - Stephens Inc.

Peter Levine - Needham & Company Abhinav Kapur - BTIG

Thanks, operator. Good afternoon and welcome to HubSpot's First Quarter 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 John Kinzer, 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, including statements concerning our financial guidance for the second fiscal quarter 2017; and our position to execute on our growth strategy, including development and adoption of our sales platform; and our ability to maintain existing and acquire new customers and partners.

These statements reflect our views only as of today and should not be considered our views as of any later date. Please refer to the cautionary language in today's press release and our Form 10-K which was filed with the SEC on February 16, 2017, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

During today's call, we'll refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release announcing financial results for the first quarter ended March 31, 2017 which is located on our Investor Relations website at hubspot.com.

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

Thanks, Chuck. And good afternoon, folks.

Thanks for joining us today as we review HubSpot's first quarter results. Let's jump right in and get to it.

HubSpot kicked off 2017 on a strong note. First quarter revenue increased 40%.

Non-GAAP operating profits improved by 8 points year-over-year and we achieved non-GAAP operating profitability several quarters ahead of our own expectations. I really love to see us growing this fast and profitable now.

In fact, we're off to a good start to the year overall, with total sales and marketing customers having surpassed 31,000 and revenue retention, up above 100%. Our move towards One HubSpot was a pretty big shift for us.

Naturally, we expected to find some bumps in the road and we did, but the team has really stepped up to the challenge. I'm personally very happy with our first quarter results and the progress we've made in evolving HubSpot from a single-product company toward a multiproduct company with the goal of becoming the mid-market growth platform, something, we're calling One HubSpot.

We're making some great progress. You might remember us talking about One HubSpot and you might still be wondering what's up with this One HubSpot thing anyway?

Why change anything at all? Well, it's really simple.

Our customers are looking for a platform for growth. You've heard the same story repeatedly.

Businesses are just spread out too thin. Internally they've got too many different software solutions and they've got their most important customer information in a bunch of different places.

This creates data silos within their team which is really difficult to manage as businesses scale. And all this is affecting one important thing for them, growth.

Now we've offered a combined solution to address this problem for a while. But until recently, folks had to assemble their growth stack from 2 different sides of HubSpot.

This caused friction, frustration and, frankly, just made no sense. What our customers want is one user interface to learn, one number to call if they get stuck, one bill to pay every month and one database for all their customer data.

Putting all this together in one single platform is both incredibly powerful and valuable for our customers. So at the beginning of the year, we took a big step.

We combined our sales business with our marketing business to deliver one consistent and truly remarkable customer experience. That's One HubSpot.

Before we started One HubSpot, we kept the sales product separate from our marketing products and that was for good reason. It helped us learn some incredibly important things we couldn't have learned any other way.

Most important thing we learned was how effective the freemium acquisition model can be. We learned that our customers want to find solutions on their own, roll up their sleeves and actually use it before they buy.

That was a pretty big insight. It means that our products need to be useful and user-friendly, so people can learn the ins and outs on their own, increase their aptitude and appetite for more advanced features and eventually upgrade when they're ready.

As I mentioned in my keynote at INBOUND, we want to match the way we sell with the way customers shop and buy in 2017. And our freemium products, HubSpot Marketing Free, HubSpot Sales Free and HubSpot CRM free, allow us to do exactly that.

So how's it going? Well, I think you can see it in the 31,000 total customers growing in excess of 40%.

While our average selling price on the total base of customers is lower compared to our marketing business, our customer acquisition cost is lower as well. And the beauty of it all, is that these customers have the ability to upgrade over time which leads to higher revenue retention and happier, more valuable customers to HubSpot.

When I look at companies I admire like Shopify and Atlassian, I see a common denominator. And that's that they have this super light-touch business model and a lot of their business happens without much human interaction at all.

This is one of the main challenges we set out for ourselves when we were developing the HubSpot Sales product line. We asked ourselves, how do we build a 2017 go-to-market model that really matches the way we sell to the way humans actually want to shop and buy?

In that respect, I think we're all on our way, especially when you think about the thousands and thousands of free users we're bringing to our freemium channel, who are adopting HubSpot Marketing, Sales and CRM products with significantly less human touch. Lastly, I'm excited about the momentum we're seeing from our Growth Stack customers, those that have adopted both our marketing and sales products.

That's important because our Growth Stack customers get even more value from us than our marketing standalone customers. And that means it translates into a much higher total lifetime value per customer.

Speaking of valuable Growth Stack customers, the team recently had a conversation with Renee Smith, President and CTO of Parking BOXX, about the beginning of their journey with HubSpot. Parking BOXX has a really unique business that leverages advanced software to make smart parking meters even smarter.

Imagine that. Renee talked to us about the benefits of freemium and what it meant to her when she came across HubSpot.

Here's what she said, "When we originally came across HubSpot, we had 2 fundamental business challenges. First, we need to improve our top-of-the-funnel marketing activities to drive growth and optimize every step of the buyer's journey to improve our bottom-of-the-funnel conversion rates.

While researching a number of different options, we came across HubSpot and read tons and tons of great information about you guys. Quite honestly though, we couldn't quite figure out exactly how the HubSpot Marketing platform is going to help us achieve our goals."

Renee continued, "We really wanted to sign up for a HubSpot Marketing product, but decided instead to start out with your free CRM to kind of get our feet wet. And the fact that HubSpot had these free products available without their traditional 30-day limit was key for us.

It allowed us to adopt an important tool like CRM on a time line that was comfortable for our team and allowed us to dig deeper into how we would implement and integrate the entire HubSpot solution across our business over time." Renee goes on to talk about how much they value an intuitive CRM that doesn't require a dedicated employee to manage it, doesn't need additional customization or require a complex installation.

She says, "After using your free CRM for about 9 months, we continued to learn more and more about HubSpot. We reached a point where we could see a compelling value prop for adding both the HubSpot Marketing and Sales product.

And this value prop was grounded in the ability to be able to clearly track the ROI of our sales and marketing efforts across our campaigns from a lead to a proposal down to a sale, having all our sales and marketing assets, frankly, all of our information in one single contact record from our chat logs to our phone calls to our website forms and being able to quantify the metrics and run advance reporting against it is absolutely huge to us." While I'm excited to see Renee's journey from free to paid customer and that HubSpot was able to provide some value upfront before asking for anything in return, there's one thing that stuck out for me with her journey.

The real power of the Growth Stack, sales plus marketing, plus CRM lies in the fact that our customer can have one single contact record as a source of truth. Marketing sees -- can see exactly where a lead is in the sales cycle and sales can see all the marketing activities and behaviors they're engaging in.

And together, they're all helping Renee's business grow. I want to thank Renee and the Parking BOXX team for sharing their journey and for so powerfully articulating what HubSpot means to them.

We've been talking for awhile about the investments we've been making to be the growth platform for the mid-market and I think those investments are just beginning to bear fruit. The goal in 2017 is to build on this momentum and make it as simple as humanly possible for someone to begin using our platform and grow into the full Growth Stack.

Okay. With that, I'll turn it over to John now to take us through the financials and our guidance.

Thanks, Brian. The first quarter got us off to a good start to the year here at HubSpot.

We delivered strong revenue growth, delivered almost $12 million of free cash flow and achieved positive non-GAAP operating profitability, several quarters ahead of our own expectations. First quarter revenue grew 40%, driven by 41% subscription revenue growth and 18% services revenue growth.

As Brian mentioned, there are couple of initiatives that you'll hear more and more about from us. First, we're using the freemium model where it makes sense for certain customers.

This helped us surpass over 31,000 total paid customers in the quarter and it will help us scale the business going forward. Second, we're actively selling customers on the Growth Stack which helped drive our revenue retention to 100% in the quarter.

Please note, now that we have combined the sales business with the marketing business, we have added Sales Pro-only customers and their retention into the revenue retention calculation. HubSpot ended the quarter with 31,262 total customers which was up over 40% year-over-year while total average subscription revenue per customer came in at $10,357.

We ended the quarter with 24,775 marketing customers, up 28% year-over-year while marketing average subscription revenue per customer grew 10% to $12,598. The significant growth we're seeing from our $50 per month Marketing Starter product once again boosted our customer growth.

But that, combined with FX headwinds, weighed on average subscription revenue per customer. While this lowers our average subscription revenue per customer metric, we believe there will be significant opportunity for Marketing Starter customers to upgrade over time.

Deferred revenue came in at $106 million, growing 43% year-over-year. While calculated billings, defined as revenue plus the change in deferred revenue, came in at $91 million, up 35% versus the first quarter of 2016.

Please remember that the billings growth will vary from revenue growth due to changes in billing terms as well as product mix and the timing of revenue recognition versus billing. For the remainder of my commentary, I will discuss non-GAAP results.

Now let's take a look at our margins. First quarter gross margin came in at 80%, up 3 points year-over-year and up 1 point versus the prior quarter.

First quarter subscription revenue gross margin came in at 85%, up 1.5 points year-over-year and over 1 point sequentially. First quarter services gross margin came in at a negative 10%, up over 10 points sequentially.

We continue to expect services margins to improve to breakeven levels over time and this quarter's margins took a step in the right direction of achieving that goal. First quarter operating margins improved 8 points year-over-year to a positive 2% margin.

This improvement was driven by leverage across all cost line items, including a full point from G&A and more than 3 points of leverage from sales and marketing. Sales and marketing expenses beginning to see the benefit from the One HubSpot transition as a percentage of near touchless revenue is increasing.

International revenue performance continued to be strong, growing 64% year-over-year and now represents 30% of our total revenue in the quarter. At the end of the first quarter, we had a total of 1,663 employees at HubSpot, up 27% year-over-year.

CapEx, including capitalized software was $7.4 million in the quarter, slightly down from $8.1 million last year due to the timing of buildups. We still expect CapEx as a percentage of revenue to average 8% for the year.

With that, let's dive into guidance for the second quarter of 2017. Total revenue is expected to be in the range of $85 million to $86 million.

Non-GAAP operating income is expected to be between a loss of $1 million to breakeven. Non-GAAP basic and diluted net income per share is expected to be between a loss of $0.02 to breakeven.

This assumes approximately 36.7 million basic shares outstanding. And for the full year of 2017, total revenue is expected to be in the range of $355.5 million to $359.5 million.

Non-GAAP operating loss is expected to be between a loss of $5 million to a loss of $3 million. Non-GAAP net loss per share is expected to be between a loss of $0.10 to a loss of $0.04.

This assumes approximately 36.9 million basic shares outstanding. With the strong performance in first quarter free cash flow, we now expect full year free cash flow to be between $13 million and $14 million, up from our original annual expectation of a couple of million dollars.

As you adjust your models for 2017, keep in mind the following: on the operating margin front, in the second quarter, we expect slight headwinds from annual compensation adjustments as well as from the impact of some early INBOUND expenses; third quarter operating margins will be negatively impacted by our INBOUND event by about 5 points; and then we still expect fourth quarter to be profitable. As I spoke about earlier, we're raising our free cash flow expectations for the year.

As you think about the quarterly linearity, we anticipate strong free cash flow again in the fourth quarter, but the second and third to be negative, given material vendor payments in the second quarter and our INBOUND event in the third quarter. With that, I'll hand the call back over to Brian for his closing remarks.

Brian?

Thanks, John. Historically, our industry has always admired the great success of Enterprise software platforms.

I personally think the success of companies like Shopify and Atlassian and now HubSpot has a lot to do with having much lighter, more consumer style, more modern acquisition go-to-market approaches. It's what today's customers and businesses want and demand.

It's just another example of this enormous shift that's going on, on how people want to shop and buy. We're in the business of helping our customers make that shift too.

It's a huge ripple effect and it's pretty darn exciting. You sometimes hear folks talking about the good old days of SaaS software and heck of HubSpot, for that matter.

But frankly, I think the good -- no, I'll say the greatest days are firmly in front of us because One HubSpot is all about achieving one shared goal with our customers, partners and investors alike, growth. We're on our way.

Here's to a remarkable future together. We want to close by thanking HubSpot's employees, all our customers, our great partners and investors, HubSpot's a team sport and we have a great team.

Operator, you can open up the call for questions.

Just a couple of questions. And I jumped on a little late, so if these questions have already been addressed, I apologize.

Just first starting with the marketing business, seeing the segmentation of the 2 sides, I think, is very helpful. I think you all talked about 28% growth.

Do you foresee over a sustained period growing well in excess of digital marketing with your marketing automation platform? I think the industry is pegged at, call it, high-teens to about 20%.

Do you think you can sustain that kind of growth in your original product or better?

Yes. So Terry, it's John.

Clearly, we care about growth both in the marketing and sales side. More and more, we're going to talk about total customer growth and that was growing over 40% in the quarter.

It's still very underpenetrated. What we're really thinking about is customers should come in the way they want, whether they come in with sales or they come in with marketing, whatever makes sense and then we'll upsell and cross-sell them over time.

So lots of opportunity for growth, very underpenetrated, so we think we have a long runway here.

Okay. And just the follow-up question relates to, I think, John, you mentioned in the past, you guys can have opportunities for being more dynamic and fluid in terms of pricing and packaging strategies as you roll out a billing system.

Could you update us on how that's coming along and how we could think about opportunities to maybe add more SKUs, change pricing, et cetera, in the back half of the year?

Yes. So yes, so we're going through a whole implementation of a billing system.

That's ongoing. We're making progress on that front.

Probably get through that by the end of the year and then I think that there will be more opportunities. We look at pricing from time to time.

We look at it the low end, the high end and we just make sure we're meeting the -- all sectors of the customer needs. That's part of the reason we came out with the Marketing Starter product, so we were capturing those smaller customers that we'll grow with us over time.

And so we do like the flexibility this new system will allow us to make some of those tweaks going forward.

So I'm interested in the feedback that you might have from the partner channel community as you rolled out the One HubSpot approach here. What are you hearing from that community, both domestic and internationally?

What kind of feedback are they getting from their customers? And how do you see this sort of rippling through as you've been successful early on in introducing sales as a separate SKU to your sales force, how is that going with the channel?

Tom, it's Brian. That's a great question.

We just had all our top-tier partners in North America in last week. It was great.

It was great to see them all. They've all grown up with us and most of them have grown up with us on the marketing side and built nice businesses right alongside us.

And what we're seeing is they are fired up about the sales product. And many of them, I would say most of them have already sold the sales product and many of them are looking to build the sales practice and extend their way down the funnel.

When they do that, their customers are stickier for them, they add more value, the retainers are bigger. So I would say we're off -- off to the races, they're feeling really good.

And listen, I'm sure I'm getting ahead myself on this. But you guys have kind of cleared this hurdle in terms of some of the concerns around what it would mean to roll this out as a separate product.

It sounds like you're having some success with the feedback on CRM. It's early there.

At what point would it start to make sense? Is it any time in the next year or 2, where you could take a similar approach on that, roll out, pricing.

I know its freemium today, but curious how you're thinking about that product. Is that still more lead gen and keep it off the side as freemium or could you see someday that actually becoming its own separate product in the same way that sales has become?

Yes, for now, we like where we're positioned there. We offer the CRM product for free.

It turns out it's an ideal product to be free. The COGS are quite low on CRM and it's going well.

Lots and lots of people are using it. A lot of people using that product and liking it.

And we see it as an engine of growth, not just for the sales product, but for the marketing product. We're starting to figure out how to pull CRM users, then get them to be active and then they buy that sales product.

And that's all we need leads and a user marketing product and the next thing you know, they're using all 3 and really running their whole business on HubSpot or at lease their whole Growth Stack on HubSpot. So for now, just no plans to change it in the short term, very happy with the way it's going so far.

I wanted to ask about the add-on products, particularly reports. Some of the feedback from the channels coming back that customers that are running sales have a higher propensity to add on reports and analytics.

It seems like that could potentially be a good play for you guys. Just curious if that's what you're seeing.

Any commentary on what these Growth Stack customers could mean to potential upsell opportunity for some of the add-on products?

It's a great question. The reporting add-on is going well.

It's growing. We're pretty happy with it.

The nice thing about that reporting add-on is it does work with both the marketing and sales product as you've astutely noticed. As that Sales product gets better and CRM gets better, I think more and more companies will use it.

Bigger companies will use it and they'll want that reporting add-on. So over the long haul, I think that will be good.

The reporting product is still pretty new and lots and lots of opportunities to enhance it, improve it and I think it can be a really valuable piece of the puzzle over the long haul to both sides of our business.

Great. Then one more, if I may, please.

On the Sales-only customers, you mentioned good traction upselling those folks to marketing. What is the sales cycle like there?

I mean, what is the typical sales cycle versus, I guess, the cold lead, if you will, coming in kind of do to HubSpot?

Yes. Almost all of the sales revenue that's coming in is really through that super light touch.

They start using the CRM and they play around with some of the sales features and then they buy the sales product. So that's working out really well.

Frankly, we're just getting started. I would say we're starting to really crank on selling the sales product to the marketing customers.

We're just starting on selling the marketing product to the sales customers, that's a pretty new motion for us. But what I like about HubSpot is we sort of this growing marketing business that we can sell our sales product to.

We have this growing sales business we can sell our marketing product to. It's going to be the gift that keeps on giving for us for many, many years to come.

So maybe just at a high-level. Clearly, very strong results that you guys put up this quarter.

What did you see behind the scenes from a sales force productivity now that sales have been introduced into the full sales force?

It's Brian. I'm feeling pretty good about it.

I mean, there's a lot of change we put our sales org through last year. They really just did sold the marketing product for the first 10 years of HubSpot.

And on Jan 1, we flipped it and now they could sell not only the marketing product, but they could sell the sales product. But the other change is also this lighter touch model.

We moved from kind of a classic inside sales model to much more of a freemium lighter touch model. So we put them through a lot of change and a lot of system change and training changes and overall, I think they handled it pretty well and did quite well.

Wasn't perfect. We skinned our knees a little bit as we expected, but I think we're on a good path and feeling good about where the reps are and where PPR is.

Got it. And maybe just one for John.

John, as we -- as we head through this year, how do you think billings shape as we go through the year? What kind of seasonality do we think we need to keep in mind as we're adjusting our models?

Yes, Stan, so when you think about billings, it's different from the metrics we guide to. Just given the things that can impact it, product mix, billing terms, timing.

All those different things weigh into that, the billings number and that's why it's not a number that we guide to. But I think, in general, the billings and revenue are somewhat tied.

Obviously billings preceded a little bit, but I think that as you look at our guidance, I think that's one indicator. The one thing is INBOUND being in third quarter could help third quarter, but it is the last week of third quarter.

So probably that spills into fourth quarter. So I don't see a real difference in seasonality in the billings growth from last year.

I wanted to ask Brian, you've kind of seen Sales Pro really take off, it sounds like, in this quarter. And if we think about what kind of contribution you would expect from Sales Pro of either revenue or bookings by the end of the year, what's the right way for us to think about and judge your success on that product?

And then separately for John, as you -- you mentioned that part of the outperformance on profitability and cash flow was the result of this lighter touch model. I'm guess I'm curious longer term if you are successful and continue to execute on this model, how does that change your longer term operating model in terms of what percentage sales and marketing ultimately has to represent as a percentage of revenue with this lighter touch model?

I'll take the first one. It's Brian.

The Sales Pro business is going well, really happy with it. The product is good.

The customers seem to really like it. It's getting nice traction.

I still consider it very, very early. Compared to the marketing business, very underpenetrated, lots and lots and lots of opportunity there.

So I'm not sure the percentage by the end of the year. I'm not sure we give that number out, but feeling very, very good about the traction we're getting there, the go-to-market model.

I think our sales organization is figuring out how to sell it. I think the prop is getting better, so feeling good.

Yes, Alex. So as we think about it, we're encouraged on how the freemium model can help our long term model.

Getting those customers in at a very low-cost and then upselling them. Obviously upselling is much lower cost to us than brand-new customers.

We think it should have a positive impact and if anything, we should get that leverage in sales and marketing. We started to see some of that in the quarter.

If anything, we'll lean into R&D a little bit more. It could get up.

We had said 15% is our long term model. I think it went down to about 13% in the quarter.

So I think you could see us continuing to invest in R&D to really make that freemium model work and get more and more leverage on sales and marketing. So we feel good about what it means to the long term model.

Got it. And John, maybe just piggyback on Stan's question on billings, did you see -- were there any headwinds that you saw on billings in the quarter?

And then any way for us to think about potential headwinds as a result of the mix shifting it for 2Q?

Yes, I mean, the one thing is, that sales business, I think we talked a lot about it. We get about 1 to 2 months upfront on those.

They're really credit card billed customers. It's a much faster motion and I think that works versus the marketing that's more like 6 to 7 months upfront.

So yes, that can have a bit of a pressure on billings, but the revenue will flesh out. So from that standpoint, not a problem, but could put a little bit pressure on billings.

But as I said to Stan, I think that thinking about revenue growth and the billings fairly tied is a good way to think about it. And then one last thing is, Alex, is that there is a little bit of pressure on FX.

We're seeing about a point or so on that, just based on where the euro has been.

And I guess staying on that FX topic, we heard you guys may have taken prices up in international maybe U.K. to adjust for the big hit in foreign currency and the pound, is that true?

And is that something material enough that may have impacted your guidance for the year?

Yes -- no, it was something that we did, but it wasn't material. No, just making that adjustment, trying to keep up with that.

But so far, it's been received fine. And that was really -- just, Derrick, just to be clear, that was just on the pound.

Okay. Just in the U.K., okay.

And John, you mentioned and I may not have heard this right, but changes in revenue recognition could impact billing. So it could be one of the factors in creating kind of noise in the billings number.

I don't know if that -- if I heard that right, but just wondering.

Yes, I'm sorry if -- I don't know if I said -- I don't think I said changes. It's just the difference between revenue recognition and billings will cause differences in the growth rate from a revenue and billings standpoint because billings happens right up front.

You get that revenue over 12 months. And so they're not perfectly correlated, but they're definitely correlated.

Got it. And any -- with ASC 606 coming, anything to expect there that would impact 2018?

Yes -- no, we started looking at that so far and it looks pretty immaterial to us, but more to come on that in the future. But yes, we don't expect a material impact from 606.

This is actually Albert Chi on for Mark. I had a question about competition and I think we're aware the usual players on the marketing side.

But now that you're kind of evolving into sales and when you're out in the field for the paid sales products, can you talk about who you're typically seeing or who you anticipate seeing in the future?

Yes. I mean, on the sale side there's a lot of kind of smaller sales CRM products have been out there in the market.

A lot of companies that use spreadsheet to track what's going on and it's a lot of that, frankly. People moving from spreadsheets to their first adult CRM system and moving from kind of a smaller point solution to something a little bit more powerful and integrated with marketing.

That's most of the competition we're seeing today and I think we're very well positioned. The product is sort of -- have a very consumer feel to it, very easy-to-use and set up.

We have to get it in such a way because we're using a freemium model, so it's just very, very intuitive and easy-to-use. At the same time, its powerful.

It does a lot of things and it's really well matched with the way salespeople sell today. They'll -- right into the way they do e-mail.

I think we really hit the nail in the ahead with that CRM product. We're feeling good about it.

So that's sort of the competitive set that we certainly compete with Salesforce.com, from time to time. It's an interesting relationship with them.

It's -- we cooperate a lot with them and we compete a little bit with them and I feel like we're doing pretty well there.

Great. And just one follow-up, actually.

So I wanted to ask about the Marketing Starter packages that you talked about last quarter and how that -- what that means for marketing customer growth. And so can you talk about the dynamic between the marketing ARPU that -- we saw kind of a little bit flattish in terms of growth or -- from quarter-to quarter and how that plays into marketing customer growth.

Do you think that number could accelerate from here?

So on the Marketing Starter, clearly, that was great for the customer count. You saw that play out.

And those are -- those 2 come in at a smaller level, so we'll take that trade-off on ASRPC in the short term for the upsell we can get later. And so you will see that continue to benefit our customers -- customer count as we go forward and we'll endeavored up, so that's where we come in.

So we think -- we like how the Marketing Starter is working right now.

I had a question about retention and you guys have a lot of interesting things going on with the freemium product and the sales product. You have customers that are evolving from single-product customers to kind of platform customers.

And I'm wondering, what you think that does to churn on a customer basis and on a dollar basis? And I know it's early, but what are kind of the early findings that you're seeing in the data on that front?

Yes. Jesse, I think it's early, of course, but intuitively, it just makes sense when somebody is using the marketing product alone.

It has a certain value proposition. It is super valuable and it's sticky in its own right and we've got an interesting pricing model there where we can grow with them.

But boy, when they're using that marketing product, coupled with the CRM and coupled with that sales product, it's -- intuitively, it is stickier. The early signs are those are going to be stickier.

The word-of-mouth will be better. Those customers will just get more value from us.

So we're hoping. The bet is that over time, as this business develops and as the percentage of our installed base of Growth Stack customers versus standalone expands, that we can incrementally improve our retention rates over time.

Okay. And then, John, a quick follow-up on the marketing customer question from before.

What was the tailwind from adding freemium year-over-year? I think last quarter, it was 100 basis points.

Was it something similar? Can you quantify that?

Yes. I think that's probably about right, about a similar impact on that.

But as we continue to add those marketing customers, especially those lower-price Marketing Starter customers, you'll see it in ASRPC, but we'll take that trade-off. It gives us a chance to upsell those customers.

But more and more, you're going to have us talk more about total customers because really, we're fine with people coming in at marketing, fine with people coming in at sales, getting them in and getting them in at a lower cost because ultimately, we get them in and then we can upsell them. It's really good for our economics.

Nice job on the quarter. So if I could just kind of add on to a prior question.

I wanted to dig in on the upselling motion of selling a sales customer the marketing product. Can you just give us any more detail on kind of where you're at with that specific selling motion?

And if there's any catalyst or any time this year that you think that, that sales funnel of just sales customers might really kind of crystallize into a repeatable funnel to sell more marketing?

Okay. Ian, that's a good question.

I don't have the exact number at my fingertips, but I think the number of sales customers that bought marketing was in about the 200 range. So it's definitely starting and we have many thousands of sales customers adding a lot of sales customers per month.

And so that's the potential -- you're asking about a real interesting potential growth engine for us and it's starting to run and it's starting to work. It really helps with economics because we bring that sales customer and the cost required of that customer is so low.

They're using the product then they buy the marketing product. The total lifetime value of that customer is very high over time.

We're very, very early though in teaching our sales organization how to do it and getting learnings and really baking it in. I would stay tuned on it, but it's a nice opportunity for us.

Okay, great. And the revenue retention over 100% was really impressive this quarter.

Is there anything in particular? You guys have mentioned Growth Stack as a tailwind for that.

Is there anything else or anything in particular that could keep the strength in that metric going? Or anything that could keep leading to increases in that metric?

Yes and I'm glad you asked that. So yes, we're happy to have it over 100%.

The one thing -- I do want to be careful -- I don't know if you heard it in the script, as we move to more focusing on total customers, we wanted to align the revenue retention definition to that. Obviously, it makes perfect sense.

In the past, since revenue retention was just based on marketing customers, the only benefit we're getting from the sales business is when marketing customers bought the sales product. So now that we're recording all of our customers in that total customer count, we're defining revenue retention as total customers.

And if sales customers upsell, that counts, if marketing customers, that counts or if marketing sells -- buy sales or sales buys marketing. So all of that is now in that definition.

So a little bit of that benefit was just that new definition, but we feel like if we can really get that motion down, as Brian said, if we can really get those sales customers to buy the marketing product, we think there's opportunity to continue to improve from here on the retention front.

I think many of mine have been answered, but I did want to just ask a couple of clarifications. Number one, is -- the total customer number, I -- that has to include both full stack and standalone Sales Pro customers.

Is that a true statement? And then second, if I back out marketing and think about ASRPC for, call it, total less marketing and then think about the implied Sales Pro product price, I was getting to about 3 Sales Pro users per customer and I wanted to see if that ballpark was about right.

Yes. So the total customer number is total customers that have marketing or sales.

And so yes, the Growth Stack's in there, but they wouldn't be double counted. We'd only count them once.

So just clarifying that. The number of sales seats per customer, I haven't looked at the exact number, but it's been around the 1 to 2 range, probably now slightly above the 2.

So your 2 to 3 might be a little high, but probably in the ballpark.

Just one quick one from me and kind of a big picture question here. Now that the company has been executing on the One HubSpot go-to-market strategy for a couple of months, have you noticed any changes in the conversations or sales cycle with potential customers?

I mean, I guess what I'm getting at is, have the conversations at prospects may be moved up the food chain a little bit, away from business unit managers maybe up to the C suite or the presidents at these companies and the conversations are more on digital transformation?

Koji, that's a good question. It's definitely changing -- the change I am seeing is companies are kind of making a stack decision.

They're saying, "We're going to be a HubSpot stack or a decentralized stack or even a Salesforce stack." And more and more, we're seeing that unified stack and that's part of the conversation.

If we already got the marketing product in there, gosh, that makes the stack decision easier. If we get them -- the sales product in there, that makes that stack decision easier.

And I think that will continue. It's just like, for example, for myself, I use a Macintosh and I use an iPhone and I'm kind of an Apple guy and I think companies will become HubSpot companies or home front office will be HubSpot's.

So I think that's a trend we're starting to see. We're pushing, but the customers are also pulling on it.

First, now that you guys have had the cheaper marketings you have for about 4, 5 months, can you give us any data around that cohort in terms of how many were able to move to a higher tier versus what the churn looks like for that lower-dollar tier and then I have a follow-up question.

I think that's you.

Yes, so it's still early days, Samad, on the Marketing Starter. We have seen probably 15 or 20 upgrade to the Pro products which is pretty exciting, starting at 15 going up to something, 8 to 10x of that.

So it's still early days, but it's good to see that early progress on the Marketing Starter customers.

And then maybe one more follow-up, John, in that same vein. If you think about -- what is the growth rate for marketing customers look like if you look at it across the SKUs, right?

Maybe directionally, what is year-over-year growth and units for Pro look like versus Enterprise? I think that will help us in terms of our models and how we think about it excluding the lower-dollar SKU.

Yes, Samad, I don't have that number right in front of me. I think it's been fairly consistent.

I don't see a big change in those -- in the mix of Basic Pro and Enterprise.

Great. This is Peter Levine in for Scott.

So I know -- so you reached 80% non-GAAP gross margin in the quarter. Quicker than we expected, so congrats on that.

[indiscernible] names. So how should we view gross margins longer term?

Any color on what you think you can attain?

Yes, so I think we've really been able to capitalize on getting our product gross margins up to the mid-80s, pretty, pretty exciting to see that happen, really leveraging the AWS infrastructure and really making sure we fine-tune that. We probably got product gross margins about to where we can get them.

As we think about the services gross margins, we actually made some progress this quarter, got that latched down. We might see a little bit of a headwind in the second quarter as we go through our annual raise process as well as just hiring for the rest of the year, but we feel like we can continue to get some leverage on that services margin, ultimately getting it to breakeven.

So I think the leverage, if any, on the gross margins going forward is really going to be a mix as well as some improvement on the services side. But we'll still see leverage on the G&A side.

And as I talked about before with the freemium model, we really are starting to get some leverage on sales and marketing. So we're really excited to hit profitability in the quarter and we'll continue to improve that over time.

Final question here is any special service programs or incentives you put in place for the quarter? And if not this quarter, do you expect to put any of these promotions in play for the year?

I guess similar to what you guys did back in the third quarter of '16.

So no plans right now. But obviously, we wouldn't tip our hat.

If we're going to use it, it's obviously from a sales execution standpoint, but nothing, nothing planned right now.

Two quick ones from me, could you give the Growth Stack customer count? I think it was about 10% of the total installed base last quarter.

And second one is also a partner count for the quarter.

Yes, so let me answer that first question. On the Growth Stack.

Growth Stack was up nicely in the quarter. But as we said for the past, we're going to give numbers when we hit milestones on that Growth Stack.

Pleased with how it came in, in the quarter but not a specific number there.

On the partner count, we don't -- I don't, at least obsess about that number anymore. Kind of started making a shift in the partner program back in Q4.

Really just a little bit less focused on the number of partners and more focused on the quality of partners. How we bring a great partner in that's really motivated to deeply engage with us and grow alongside us and really resell the products.

So there's been a little bit of a shift in our thinking. I think that partner number is up.

It's a big number. Over time, I want more partners that are more deeply engaged with us, selling the full suite of products.

And partner program is going well here in the U.S. I'm going over to the Celtic nation of Ireland next week and meeting with all the European partners and really excited about that.

If any of the European partners are on, looking forward to seeing you all.