Good afternoon. My name is Connor, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the HubSpot First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. Charles MacGlashing, Director of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon and welcome to HubSpot’s first quarter 2016 earnings call. Today, we’ll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman, 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 quarter of 2016 and the full-year 2016, 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 to our Form 10-Q, which was filed with the SEC on May 4, 2016, 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. There is a reconciliation schedule showing GAAP versus non-GAAP results, currently available in our press release announcing financial results for the first quarter ended March 31, 2016, which is located on our Investor Relations website at HubSpot.com. Now, it’s my pleasure to turn the call over to HubSpot CEO and Chairman, Brian Halligan.

Thanks, Chuck. Hi, everyone and welcome to our first quarter earnings conference call. Let's jump in and get straight to our results. HubSpot kicked of 2016 a very strong no. First quarter total revenue grew 54% and subscription revenue grew 57%. In addition to that outstanding growth we delivered 10 points of non-GAAP operating margin improvement and 7.5 points of operating cash flow improvement over last year, really good start. Underneath these results we're seeing some exciting progress with our serum product in the sale side of our business but before we dive into that let's take a moment to talk about our marketing business. The HubSpot core marketing platform is growing strong and I believe we're still in the early innings for our marketing product. We had 1206 customers in the quarter bringing us up to 19,322 total marketing customers. Our average subscription revenue per customer grew an impressive 18% year-over-year. Our customers are spending more with this upfront and then succeeding in moving into higher contact tiers and purchasing second URLs in our new add-ons. Our revenue retention was just a hair under 100% in the quarter as those up-sells nearly completely offset customer trend. Those are all great financial results but even more rewarding the opportunity here have a combination of HubSpot software, our service in our inbound methodology continues to just work for our customers. It's not just here in the U.S. we're doing it all over the world. Our international business continues to see phenomenal growth. In fact HubSpot international revenue accelerated to 80% year-over-year revenue growth in the first quarter of 2016 and now represents 26% of HubSpot's total business overall. Our Dublin and Sydney offices are cranking. Our news office in Singapore is ramping up fast. And our Japanese office is on track…

Thanks, Brian. First quarter was a great start to the year for HubSpot. As Brian mentioned, first quarter revenue grew 54%, driven by 57% subscription revenue growth while services grew 25%. Keep in mind that 1Q and 2Q 2015 benefited from one time large services engagement. HubSpot ended the quarter with 19,322 marketing customers, up 31% year-over-year. Customer growth remains robust even as we have seen the anniversary of the improvements we saw in the underlying customer retention. Average subscription revenue per customer continue to grow rapidly, increasing to a $11,494, up 18% from the first quarter of last year. Subscription revenue per customer continues to benefit from customers adding contacts to their database, upgrades to our add-on products and an improving mix within our install base, as our smaller customers tend to churn at a higher rate than those that stick with us. Deferred revenue continue to grow strongly at 57% in the quarter. Calculated billings defined as revenue plus the change in deferred revenue for 1Q 2016 came in at $67.8 million, up 55% versus the first quarter of 2015. Similar to the benefit that average subscription revenue per customer is seeing, calculated billings continues to benefit from our smallest customers with shorter billing terms turning at a faster rate than our larger customers. As we have discussed in the past, billings growth will vary from revenue growth due to factors such as billing terms and the timing of revenue recognition versus billing. Given this dynamic, investors should be careful relying on billings growth as the direct predictor of the port revenue growth. Now, let's take a look at margins. Non-GAAP gross margins improved 200 basis points sequentially to 77% in the first quarter, driven primarily by a 270 basis point improvement and subscription gross margin to 84%.…

Another month HubSpot will reach an interesting milestone we will celebrate our 10th anniversary as a company. When Dharmesh and I started down this path we have big ambitions. Somebody told us back end we would have a publicly traded company with 1,300 employees, nearly 20,000 customers worldwide. Well, I am pretty sure we would say we thought they were crazy. For all 10 years, we basically have the same mission. Help transform the way people market and sell to match the way modern humans actually shop and buy. Every year at our inbound conference we get to meet these folks and see how we have impacted there lives for the better. It's a noble mission and we're very proud of it. Along the way we have accomplished something else I'm incredibly proud of. Along with the entire HubSpot team we've created a remarkable place to work in an enduring culture that inspires and enables people to do their best work. It’s the secret of our success and success of our employees, of our partners and our customers speaks far, far louder than words. So, thank you to our customers, thank you to our partners and employees and thank you to our investors. And we hope you'll stick around to see what the next 10 years will bring for HubSpot. Thank you, operator you can open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Brad Sills with Bank of America. Your line is open.

Well thanks guys and congratulations on the nice quarter. I wanted to ask a little bit about ASP, you said contacts and upgrades were good, our channel checks are telling us from partners that ads and the websites in particular are also ramping nicely. I wonder if you could comment a little bit on how those two ramped during the quarter.

Brad, it is Brian, thanks for the question. The add-ons are going well. We announced the reporting add-on at inbound version 1 reporting add-on and we announced the ads add-on which was embedded inbound and that is in addition to the website add-on. So, those three add-ons and sort of the technical add-on we have as well have gone pretty well. The reporting add-on has gone very well, the website add-ons continue to do well. We have added a bunch of functionality there and have made a very solid, very happy with the website add-on. We just added to the ads add-on the ability not only to buy advertisements on LinkedIn but also Google AdWords and we really just did that a couple of weeks ago so we expect that to really pick up. So, overall feeling pretty good about the add-ons, it is going pretty well and we expect a bright future there.

Great, thanks. And then one if I may also on the sales business, you mentioned that about 60% of those customers weren’t running anything prior. How easy is it for you to make that pivot from marketing into sales, is there a different selling motion there, if you can comment a little bit about how you're kind of go into market with sales versus your traditional marketing? Thank you.

Yeah, that is a really good question. It is a different sales motion and it’s a very exciting sales motion. So on the marketing side, there’s really two channels. We have a direct inside sales model that works very well and we have an indirect reseller model that works really well. On the sales business, we have a lighter touch model and a much lower cost to acquire a customer and a large percentage of those sales customers are coming in with little or no touch. So it’s very exciting for us in we sort of developed a third go-to-market highly scalable model to bring to market. I think one of HubSpot's real keys to success so far has been that we are very good at matching our go-to-market strategy with our target market. We're focused on that mid-market and we've got a really fine tune, nearly perfect sort of new type of go-to-market to match it. So, stay tuned, I think a lot of exciting things are going to come out of that sales product.

Great. Thanks Brian.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open.

Great. Good afternoon guys and thank you so much for taking my question. Two questions if I may. First one, for Brian, maybe, we all saw the momentum around subscription revenue for customer but maybe just qualitatively characterize first the momentum you're seeing within the size of the customers that you’re bring on board now versus maybe a year ago? And then a question on renewal rates, very impressive just a hair under 100% on renewal rates, what are your expectations of as we go through the rest of the year and that's obviously not for Brian. So, thank you very much.

I'll take the first one. Good question, Stan. In terms of the target market, still similar sized companies and they're just buying more products from us and they're buying a little bit more upfront and then they're buying more as they go along. As they grow, their contact database grows, they pace a little bit more money. We come out with some additional compelling products like our reporting add-on, or ads add-on in our sales products. So, its more we're getting a larger share of wallet and delivering more value and the pricing has come up to kind of match that. I'll hand it to you to completely that.

Yeah. So, Stan, its John. So, on the retention side, we had just over 100% in the fourth quarter just under 100% in the first quarter. We feel comfortable in that high 90s around 100% for the foreseeable future. I think if you think about it at longer-term, what it would take to get it up above those it would be a couple of things. One, continuing to add new products, we've just come out with add-ons; it's the first time we've really had new things to sell into. We're starting to sell the sales product back into the marketing business, that's a nice lever for us going forward. And finally, there could be new products, we could bring out in the future as well. But I think in the high 90s around the 100%, we can grow really fast and we don't have to replace that part of the business that’s its leaking out when your base can be neutral, everything you sell just leads to growth.

Perfect. Thank you very much guys.

Yes.

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is open.

Thanks so much, guys. Brian, I want to follow up on the comment you had on sales. You said, I had my notes here mid to high teens percentage, is that the target of where it will be in terms of sales?

Sorry, can you clarify the question?

Yeah. You had mentioned about your goal of getting to a $1 billion and in that, I think you said something about the sales product as a percentage of that sales was -- and I had like mid to high teens. Is that what you were referencing? Or is that that's not a portion of the install base your current revenue that's coming from the sales product, correct?

Correct.

Yeah. So…

This is Chuck.

This is Chuck. We didn't mention anything about a $1 billion run rate in sales or what sales would be as a percentage of that pace to the extent that we do reach at, or else maybe you misheard the prepared commentary.

Yeah. No, I must have misheard it because I – that’s what I have here in my notes and I have to see the transcript and see where I confused. So, sorry about that. John, when we look at Q2 billings, I know you're not guiding to that, but given some of your commentary any reason at all that wouldn’t continue to grow sequentially?

Yes. Sequentially, yeah, obviously, we do not guide to billings as a number. It takes – there is a bunch of things that go into that. I think that the underlying business is still growing strong, we've seen nice uplift to the revenue per customer, customers are still growing strong and we feel good about where that is, but we don't give a specific guidance to billings growth.

Lastly then lastly John on Professional Services margin those were a little bit weaker this quarter anything going on there that we should be aware of?

Yeah. So that’s -- Brendan we obviously are mostly focused on our subscription revenue growth and the subscription margins and it was really great to see the up-tick on the subscription margins given some of the things we are able to do on the hosting side. So we are pretty encouraged on that front. On the services margins, we talked about breakeven to a slight loss, a little higher this quarter on the loss side. There is a couple of things ramping up for international, some of the, we did invest a little bit on the services side for the sales business as well. But we expect those margins to improve throughout the year but we are never going to maximize those margins. Our services business is really to make sure that our customers get up, get running and are successfully on boarded, so that they can continue to be really successful with inbound marketing.

And Brendan this is Brian.

Terrific.

I think what you may have -- maybe miss heard was what we said was a mid- to high-teens percentage of our marketing customer base has already purchased the sales product, that might have been the mid- to high-teens.

Yeah. That’s what I was looking for. Perfect, thank you.

You got it.

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

Thanks. Brian just back to the annual subscriber revenue, that 18% was the highest you have had in two years. And I think when you look at more buying, more clients buying more add-ons but also have the mix shift from Pro to Enterprise was the -- are you seeing any difference between those up taking Enterprise or is it just the same proportion taking Pro but they're starting to add-on a few of these new solutions around the fringe?

I'm not sure the answer. Do you have the answer to that?

Yeah, the mix of the people buying the product is pretty similar. It is Brent, it is more people just buying more of our products, as well as Brent we do have that phenomenon where our smallest customers churn which from a mix standpoint helps that revenue per customer as well.

Okay. And just in terms of your go-to-market this year I know the partner channel has been hugely influential and helping you as say create more shade for the business. When you think of any changes you made in Q1 and the go-to-market, were there any fine tunes or tweaks outside your normal playbook or is the existing playbook that you have been using for the last year?

Yeah. On the margins little tweaks, nothing major or notable on the partner channel, really happy with it, we signed up 180 new partners in Q1. A lot of our partners are getting big. They have 50, 60, 70 account with us and we are really growing well together. So, very, very pleased with the progress we are making on the partner side and we will continue to innovate and continue to tweak it as the time goes on.

Okay. Just really quick Brian I know you love all your products equally, but if you had to pick one or two that were jumping out, you think this could be bigger needle mover for you during the year what would you highlight in terms of that one or two names in the portfolio?

In terms of products?

Yeah, in terms of the add-ons which ones do you think could be the most meaningful that maybe you haven't seen that are ramping nicely right now?

Sure. So, let's just go to them. The website add-on has been around a while. It’s going well. We love it when customers host their whole website on HubSpot. They are far happier and stickier when that happens it's really great. The reporting add-on for inbound, gone really, really well, the products is getting better receptions has been good. The ads product is still in beta but we just made a huge improvement by including Google Adwords that's going to be really key because you are going to be able to create your ad inside of HubSpot, advertise within HubSpot then track the results and do closed loop ROI reporting on your ads inside of HubSpot so that will be really nice and that's just starting. But the biggest one is likely the ads business – sorry the sales business, that's going to be a large business for us over time. Still early stage we are running it like a startup and then start up in an economics are looking pretty good and it's growing very fast. So that's the most meaningful one over the next couple of years and that's the one to really keep an eye on.

Thank you.

Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open.

Hi. Good afternoon. This is Matt Coss calling in for Mark Murphy. So your new customers that are adopting your tools they're replacing existing tools or in some cases they’ve never even had a solution in the case of a lot of your CRM customers. So how do you ensure they adopt the new processes and workflows and best practices that will ultimately strengthen the products stickiness, so basically how are you driving the change in behavior new customers that will make them successful with inbound marketing? Thanks.

Yeah. Hi, Matt, that's a good question. We try to do as much of it as we can with software and rather than put a lot of humans in there and I kind of think of it as let's say you want to get money out of the bank, 10 years 15 years go. You would walk into the bank and you talk to the teller and you wait in line to get your money out and it was sort of bad for the customer, bad for the bank. Now you've go to your ATM. It's over 24 hours a day, it's very good for the bank and it's good for the customer. I like, like in the sales businesses more like an ATM. Very easy to do business with this, much of it is automated and so we take them to a very structured work flow to try to bring them up to speed. Each customer that purchases our sales product gets a very small amount of consulting and handholding while we try to get them perfectly set up and on the right path. So it's a very light touch model, it's largely done with software it's a very modern approach and seems to be working. People who – we noticed that people who install the CRM and start using it and get multiple users on it, its sticks with them and they really enjoyed the product and they end up buying the sales product from us so, so far so good. Very early though, it's kind of startup within a startup but making very good progress on that front.

Got it. Thank you.

[Operator Instructions] Your next question comes from the line of Eric Lemus with Raymond James. Your line is open.

Hey, guys. Thanks for taking the question. Nice job in the quarter. Question for you John as far as the business mix for prepaid for the annual prepay versus quarterly, where does that sit now and how does that progress over the next couple of quarters or next couple of years?

Yeah. So, on the number of months we are getting up front that's what we look at. We – it's a combination of monthly, quarterly, semiannual and annual. We're still continuing to get about 6 months to 7 months upfront but what's actually happening is we do once again I was talking about from our retention standpoint that we end up having our smallest customers churn out. We also have our monthly customer or our small customers more likely our monthly build and it doesn't take a rocket surgeon to understand that once those people churn out, you actually get a little uplift on the billing side. So it’s not huge, but it is a nice little uplift to cash flow where the base is coming up a little bit which cites for cash flow, helps us to get a little bit more up front, but we always balance that. We don’t want to slowdown velocity from a sales standpoint, but obviously we want to get as much cash up front as we can.

Got it. Thanks for color. And then one last question, as far as ARPU is concerned for new customers, you have a lot more products and more add-ons, how is that ARPU for new customers trending versus the overall company average?

The ARPU of the new customers has trended up a little bit. As Brian said, where people are bracing inbound. They are buying more of our products upfront and then ongoing. So that’s been a nice trend for us, and that is helping both the new ARPU, but also ongoing. Those customers are about the same size as overall ARPU, but as they grow over time that has been a nice lift as our revenue per customer trends up.

Got it. Thanks guys.

There are no further questions at this time. I will turn the call back over to HubSpot's CEO and Chairman, Brian Halligan for closing remarks.

Thank you all for joining the call. And mark on your calendars for inbound in November. We look forward to seeing you all live in person. Thank you again. Bye.

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