HubSpot Inc (HUBS) Q3 2020 Earnings Call Transcript

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HubSpot Inc (NYSE:HUBS)
Q3 2020 Earnings Call
Nov 5, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HubSpot Q3 2020 Earnings Conference Call. [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.

Charles MacGlashingHead of Investor Relations

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 fact 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 views only as of today and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today’s press release and 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 website.

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

Brian HalliganChairman & Chief Executive Officer

Thanks, Chuck. Good afternoon, folks. Thank you for joining us today. Well, 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 who have grown through it with us. Now despite this challenging environment, HubSpot has grown very nicely. Demand trends have continued to strengthen in the third quarter as more companies digitize their end-to-end customer experience and build modern flywheels. Revenue growth was 32% in Q3. And non-GAAP operating margin was 7% with a record total customer growth at 39% year-over-year, surpassing 95,000. While monthly product adoption has also continued to grow nicely, representing over 45,000 customers, these customers have also become more embedded in the HubSpot ecosystem as we’ve reached nearly two 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 teams to 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 front end. This is a rare combination in the software industry and is unique to us in the CRM industry. That rare combination is a result of a few things. First, we handcrafted 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 cobbled together through acquisitions.

Second, we have a large multiyear 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. Now 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 accounting integrations like NetSuite, QuickBooks and Xero to our CRM. This was a huge release for our customers and partners.

In particular, the addition of custom objects changes the game for a lot of our customers. Custom objects was a very large investment for us that took over — well over a year to develop. Prior to this release, our customers had to fit their business model into our relatively rigid object model. Now our customers can fit our object model around their business model. This was a big blocker 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 100% user adoption and couldn’t be happier.” Now it’s still early days, but we’ve had a strong start with Sales Hub Enterprise net new ARR hitting a record high in October. There’s 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 is going to keep paying off. I want to thank you for your time so far today. We’re proud of the momentum we saw 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.

Kathryn BuekerChief Financial Officer

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 reaccelerated 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 24% in Q3, while international revenue growth was 39% year-over-year in constant currency and 42% as reported. International revenue represented 44% of total revenue in Q3, up three points year-over-year.

Deferred revenue as of the end of September was $259 million, a 27% increase year-over-year. Calculated billings was $246 million in Q3, up 33% in constant currency and 38% year-over-year on an as-reported basis. Early in the year, we introduced proactive measures to provide customers and partners the flexibility needed to remain productive and engage parts of the HubSpot 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 these 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 of 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 continued 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 discounts, 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 one point 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 24% year-over-year. Net income in the third quarter was $14 million or $0.28 per diluted share. capex, including capitalized software development cost, was $13 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, 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 $0.21 and $0.23. 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 two-point FX tailwind to Q4 reported revenue and now expect 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.

Brian HalliganChairman & Chief Executive Officer

I’d like to close by thanking my leadership team and all of 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.

Questions and Answers:

Operator

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

Mark MurphyJPMorgan — Analyst

Yes. Thank you very much. And congrats on a very special performance. Brian, I was thinking back to INBOUND that 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?

Brian HalliganChairman & Chief Executive Officer

Hey, Mark. Thanks for the question. I read your report, your report that came out. That was great. I’m not that surprised. There’s been a lot of hard work that’s gone in kind of on the platform level on our — custom objects 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 product, the product that we sell into like 200- to 2,000-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’ve got this evolving business model, but we have to kind of jam our business model into a relatively fixed object model into your contact company’s deals in sort of rigid, the way we structured it. And what custom object gives them the ability to do is wrap HubSpot in our object model around an evolving or more complicated business model. And 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 a manufacturing company, inventory could be an object. So it 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 on it. It’s been a loud noise from that tier of customer for us for a number of years. And so we undertook that project as part of last year, and it came out great. The nice thing about Sales Hub Enterprise and about those custom objects is they’re part and parcel of HubSpot. So they inherit all the great automation and all other great reporting. They’re not kind of bolted in there. It’s sort of like an Apple-like feel to them. They’re really powerful and really easy to use. So I guess I’m not shocked.

Mark MurphyJPMorgan — Analyst

Okay. Great. Now, Kate, I had a mathematical question for you. I was trying to run the math at the Analyst Day. I think you had said Marketing Hub was over $600 million, growing at least 20%, and Sales Hub, I think, over $160 million, growing 60%. And so — yes, so I ran the math on that. It looks like you’re almost booking as much of new business with Sales Hub now as you are with Marketing Hub, or 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 crossover there in the next couple of years? Because I was also considering — I think Brian just said that October, actually, I thought he said October, not September, was the highest level you’ve hit for Sales Hub Enterprise net new ARR. So I’m trying to kind of tie all that together and see what you think.

Kathryn BuekerChief Financial Officer

Yes. Yes. Look, I think you’re going to see and have seen ebbs and 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.

Mark MurphyJPMorgan — Analyst

Thank you.

Operator

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

Alex ZukinRBC — Analyst

Hey, guys. Thanks for taking my question. Maybe just the first one on just what you’re seeing with respect to sales cycles, the demand environment, and 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 you’re posting, the billings numbers, it does feel like there’s a bit of acceleration in terms of the priority set that you’re solving for customers. So just any high-level comments there, and then I’ve got a quick follow-up on everybody’s favorite topic of billings.

Brian HalliganChairman & Chief Executive Officer

Alex, I’ll take it. It’s Brian. It’s been an interesting year. Like if I think about this year, the year started really strong, January and February. We were very bullish about this year internally. We have done a lot of hard work last year to kind of get ready. So started with the kind of the tailwind feel end of March to early June, huge headwind. And starting at the end of June, that headwind turned into a tailwind, and that tailwind blew all through Q3. It blew through October, too. And so I’m pretty happy with where we’re sitting at the moment. Things are going really well.

And I give — I think we’re very well-positioned to help our customers through that, and I give some credit to that. I also give some credit to just a lot of hard work from the team and 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 what — with the election and the shutdowns like, yes, I’m not sure what’s going to happen over the next six months. But I’m pretty optimistic. Like the pipeline looks good. Customers are quite happy. Our value prop is quite strong. Our products are getting better.

Customers need to move from an outbound model to an inbound model, from outside selling to inside selling, from off-line to online. Our product is a really, really, really good fit for that type of thing. And so I’m feeling quite positive these days, actually.

Alex ZukinRBC — Analyst

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 guys, 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 can actually accelerate as we look at next year? Or 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?

Brian HalliganChairman & Chief Executive Officer

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 try to really think a lot about what I can control and what I can influence, and 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, I’m just feeling really very solid about where we sit.

And I think — I just think it’s really — think way back, like when we first went public, years — 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 multiyear arc, and we’ve made huge investments. It’s still pretty early in that arc, like our vision for what a modern CRM value prop is to companies relative to what we’ve built. We’ve made a lot of progress on it, but there’s a lot more progress to come. So in general, I’m feeling quite good these days.

Alex ZukinRBC — Analyst

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

Kathryn BuekerChief Financial Officer

Yes. I guess last time, we talked about a compression in the upfront duration of billings. I think we have a different conversation to have this quarter. Just — I would just start frankly with a 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’s a couple of things that I would point out. One is just 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 the mix, where we saw some strength in Marketing Hub and in the Pro and Enterprise SKUs. But we also saw a bit of a tailwind, just like we saw with retention, to the return to normal billing for some of the customers that were under these short-term COVID discounts as they came out the other side. So I would advise, just long term, the right anchor point really still is constant currency revenue and constant currency billings tracking one another.

Charles MacGlashingHead of Investor Relations

Alex, we’re getting some feedback there. So we had to mute your line. Thanks for the question. Operator, if we could take the next one.

Operator

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

Samad SamanaJefferies — Analyst

Hi. Good evening. Thanks for taking my question. Let me echo the very strong results were great to see. Kate, maybe first, a question for you. It was a really impressive performance in that net adds was 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 3Q? Or was that a function of something else?

Kathryn BuekerChief Financial Officer

Yes. 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. 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. So 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 adds.

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’s also a little bit of help there from the customers coming off of the short-term discounts and going back to more normal pricing.

Samad SamanaJefferies — Analyst

Great. Very helpful. And then Brian — sorry.

Kathryn BuekerChief Financial Officer

Go ahead, Samad.

Samad SamanaJefferies — Analyst

No. No. Again, please — sorry, finish your thought.

Kathryn BuekerChief Financial Officer

I would just finish — we talked about expecting that 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.

Samad SamanaJefferies — Analyst

Okay. Great. And that’s helpful for modeling. And then, Brian, maybe just a follow-up for you. If we maybe zoom out, we’ve now been kind of all stuck at home for almost 7, eight months. But what we’ve seen for you guys is even ex the upgrades off of discounted pricing, that — a pretty strong net retention. So it seems like existing customers are buying again and adding additional products. Could you maybe help us, just stepping back, what are customers prioritizing as they adjust to kind of our new reality, particularly heading into 2021? And how that’s translating into selling back into the base?

Brian HalliganChairman & Chief Executive Officer

Yes. I think that everybody now — so many companies, Samad, had on their to-do list to really digitize their go-to-market. There’s very few people in the world today that are like, “That’s a bad idea.” Whereas 10 years ago, early start in HubSpot, people thought we were crazy with all of this inbound digitization. But it’s become pretty mainstream. And I think COVID might have sped up some of the plans on this, that people are — they’re at home, and their prospects are at home and their customers at home. And it sort of — it was kind of a compelling event to speed people up to really digitize their go-to-market, and HubSpot was very well positioned for that.

And we are — we’ve done it. We’ve built a platform to help people digitize their entire go-to-market to create a modern flywheel, to create a really terrific customer experience. So I don’t think it should be that surprising that we’ve done really well. I do think we were very well positioned. I think we’re very well-positioned going forward, too. Like the advances we’ve made on the products and the improvements we made in the go-to-market have been substantial over the last year, and I think we’re getting nice returns on those.

Samad SamanaJefferies — Analyst

Great. Thanks. And it’s good to see all of the investments paying off. Have a great night, guys.

Operator

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

Stan ZlotskyMorgan Stanley — Analyst

Perfect. Thank you so much, guys. When I was reading the press release, one thing that really kind of stuck out at me was that some of the benefits that you’re seeing right now is — the way you guys put it was from the ongoing digital transformation of the mid-market. I mean, that particular mid-market is a statement, right? Is that the way that you guys are viewing yourselves now as an — yes, you definitely have a very strong solution for the — I mean, for the SMB and that’s — your roots are certainly in that space. But the mid-market, is that really where you guys have been focusing? And that’s where you’re seeing the most traction these days as far as the kind of the incremental bookings, billings that are coming into the company?

Brian HalliganChairman & Chief Executive Officer

That’s a good question, Stan. We break our — we roughly break our segments out, Stan, of 2- to 20-employee companies, we call that small; 20 to 200 employees, that’s mid; 200 to 2,000, we call that enterprise. We have perfect product-market fit and perfect product go-to-market fit in that middle, that 20 to 200. We do extremely well in there. I think what you’re seeing this year is nice improvement on product-market fit and go-to-market fit in the small and the enterprise.

On the small side, we did that — we repackaged basically that Starter Suite. So it’s $50 per month. And boy, that’s done really well. We’re very happy with what’s going on here. Customers are signing up. They’re being 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 us as kind of this, we’re for start-ups and scale-ups. And what I don’t like to describe HubSpot as for is small business. I don’t think that’s really us. It’s not sort of like little tiny companies, little shops. Maybe it’s — I have a flower shop near my house and they make smoothies, and it’s like two people. It’s not for them. It’s for a real business that’s going to grow.

We want to be the number one CRM for scaling companies. And so that’s kind of where we sit in the market. It’s a little bit similar — and Chuck when I use this analogy, but it’s a little bit similar to where NetSuite used to sit in the market. I think NetSuite’s TAM is a lot smaller in the grand scheme of things than our TAM, but it’s for that start-up and scale-up companies between two and 2,000 employees.

Stan ZlotskyMorgan Stanley — Analyst

Perfect. 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 the summer and then into — all the way through October. But then at the same time, we are seeing COVID cases are spiking. And you guys 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.

Kathryn BuekerChief Financial Officer

Yes. I mean, 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 in month-end, 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.

Stan ZlotskyMorgan Stanley — Analyst

Got it. Thank you so much.

Operator

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

Drew FosterCitigroup — Analyst

Hi. This is Drew Foster. Thank you for taking my questions. I have 2. During your Analyst Day, you highlighted some customers where a key factor in deciding to go with HubSpot was that they were able to consolidate systems with you. So to what extent is the desire to consolidate front-office technologies going to reliably be a growth driver for you, Brian? And wondering if you’ve noticed that trend in any specific demographics of customers as a common theme and whether you’ve drawn up any specific plays around addressing that opportunity across different combinations of your hubs. And I have a follow-up.

Brian HalliganChairman & Chief Executive Officer

That’s a really good question. Drew, there’s a great tweet, and there’s been a bunch of articles about it. But there’s this ad cutout of like a 1998 newspaper. It’s an ad for RadioShack. And in the ad, there’s like 50 different devices in there, from an alarm clock and a compass. You name it, they’re in there. 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 stuff that they’ve kind of cobbled together over time. It doesn’t weave together very well.

And so we’re seeing people just kind of consolidating their whole tech stack 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 in there, particularly as we move from marketing to full CRM platform. The CRM platform, that’s a very broad thing. We’re 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 us, and I was like, “All right, here’s the 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 whole RadioShack ad.

Drew FosterCitigroup — Analyst

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, each of 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 — on their own merits, so what evidence or trends give you confidence that you’re sort of shaking things up in those markets the same way that you did with Marketing?

Brian HalliganChairman & Chief Executive Officer

That’s a good question. I kind of — I think back when we released our Sales Hub product several years ago now, it started with a product called Signals. And man, it’s just been getting better and better and sort of got a lot better a month ago with the Sales Hub Enterprise release. And if I look at that product, like most of the early sales were really cross-sell sales. But if I look at that product now, it’s as much a front door to HubSpot as it is the side door for Marketing Hub. So it’s a lot — people come in on Sales Hub and then they buy Marketing Hub.

Or if they’re an existing Marketing Hub customer, then they buy Sales Hub. And that took a while to develop. But that’s humming right now, and it’s a good-sized business and is 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 it to your existing customers, but those products are getting a lot better. And I think those will become front doors over time as well.

Drew FosterCitigroup — Analyst

Very helpful. Thank you.

Operator

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

Parker LaneStifel — Analyst

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 retention 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 retention and engagement with the platform? Thanks.

Brian HalliganChairman & Chief Executive Officer

Parker, that’s a great question. We have a terrific Board member, Parker, named Jay Simons. And he was President for a long, long time at a company called Atlassian that we admire a lot. At Atlassian, they track bugs in their product, and they strive to fix bugs. They also track bugs in their entire go-to-market, in the entire of buying and using experience, including their pricing model. So 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 that’s caused customers to cringe is marketing contacts. 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 your database of contacts, 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 contacts into that hub. And the bill for the marketer is going through the roof. There is a lot of complaints about this so for 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 bid it off, and we did it over the summer. And it’s come out really well, very happy with the way we’ve implemented it. We’re getting terrific feedback from it. And I think that change will increase customer happiness, and I think it will also make it easier for people to buy HubSpot. They’ll 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, that will be a driver of growth.

Parker LaneStifel — Analyst

Yes. That’s great feedback. And then on the Sales Hub front, one of the things you announced at 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 if that’s mostly an enterprise play, do you think, or if that’s really broad-based to the customer set. Thanks again.

Brian HalliganChairman & Chief Executive Officer

Yes. We announced some early CPQ products with Sales Hub Enterprise. We’re getting nice uptick on them. And this is just sort of — I think of HubSpot as we want to be a very legit CRM company. 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. And so part of the edge is, there’s people who want to do a proposal and they’d want to do a quote, and they want to 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 with Sales Hub Enterprise getting really, really good adoption. And keep your eye on that channel. There’s more to come on that front. Customers really like that area that we’re investing in, and we’re going to invest more.

Operator

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

Arjun BhatiaWilliam Blair — Analyst

Hey, guys. Thanks. I’ll echo my congrats on the quarter. Kate, if I can start off, I know we touched on this a little bit last quarter. But is there anything — any update that you can give us on this COVID cohort of sort 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 removed from when we last had this conversation.

Kathryn BuekerChief Financial Officer

Yes. And I think the trends are very much the same as the ones that we talked about at Analyst 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 and/or moving from another SKU. They are, on balance, similar in size to the customers that we saw signing up for our other starter SKUs before this package was introduced. And they are upgrading at a rate that’s 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.

Arjun BhatiaWilliam Blair — Analyst

Great. 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 an odd year. 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 this elevated focus on digitizing marketing strategies, go-to-market continues? Or do you think we see that moderate a little bit going into next year?

Brian HalliganChairman & Chief Executive Officer

It’s hard — predicting the future is a very hard thing these days. I would just say, in connecting with my sales leaders and service leaders just over the last couple of days, people are feeling pretty good. Demand is strong. Customers are happy and buying more, and new accounts are coming in. I feel like our products are more and more competitive. So feeling pretty good, yes, I’m feeling pretty good. It’s hard to know what happens, if there’s a giant lockdown or, God forbid, something really bad happens with this election. But feeling pretty good as we sit right here.

Arjun BhatiaWilliam Blair — Analyst

Okay. Thank you.

Operator

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

Ryan MacDonaldNeedham — Analyst

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 you’re processing and going through sort of the responses and feedback from INBOUND, what you’re hearing in terms of interest and 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?

Brian HalliganChairman & Chief Executive Officer

Hey, Ryan, hearing great things about CMS Hub. It’s an interesting industry, the content management system industry. And people probably — investors talk a lot about Wix and GoDaddy and Squarespace given that they advertise a lot. But really, the dominant players in our part of the market and even up from us are open-sourced projects. And they’re not as well known to investors because there’s no public company comp, and they don’t really advertise it much. But we — that’s where we continue to kind of compete in the mid-market with a large open-source product called WordPress.

I think where we really win over the long arc of this thing is there’s tremendous power when you combine a content management system with this customer relationship management system, not being one plus one equals three experienced builder for your business. And those things are combined and really cool with HubSpot. But if you watch the arc of how those things will come together over time of the development environment to the content management system, the development environment, and the CRM come in together, it’s going to be fantastic.

It’s going to be really, really cool. So reception on CMS has been really solid. Business is growing nicely. Our partners, in particular, are really excited about it. But over the long haul, there’s a kaleidoscope of opportunities that will be created for our customers by really combining those two applications.

Ryan MacDonaldNeedham — Analyst

Got it. Thanks. And as a follow-up, obviously, the environment we’re in, things evolving pretty quickly, but any sense — or are you hearing anything recently internationally with sort of — over the past few weeks with Europe seemingly going back into lockdown or any impact to the business at all?

Brian HalliganChairman & Chief Executive Officer

Yes. Brian, we’re asking the same thing. I just checked in with my European leaders. It seems all right. It’s hard to say what happens 2, 3, 4 weeks from now, but the demand seems pretty solid over there. The execution has been really solid. Again, I just think our value prop is super strong. And so it’s hard to predict what will happen in the future, but feeling pretty good right now.

Operator

Your next question comes from Ken Wong from Guggenheim Securities.

Nancy LiuGuggenheim Securities — Analyst

Hi. This is Nancy Liu on for Ken. Thanks for taking my question. Just two questions. First, on retention, do you see a risk for that to track back down after — if lockdowns 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 discounts?

Kathryn BuekerChief Financial Officer

Yes. I mean, Q3 was a very strong retention quarter for us. We said — or I said in the prepared remarks that our revenue retention was comfortably north of 100%. I also said that absent the tailwinds that we see from customers coming off of those short-term discounts, 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 and dollar retention basis. So this is sort of that gross retention number. More of our customers are sticking around with HubSpot.

Nancy LiuGuggenheim Securities — Analyst

Great. That’s helpful. And just adding on to that, so have the customers that previously might have contracted, did — or maybe downgraded SKUs, have they expanded back up yet?

Kathryn BuekerChief Financial Officer

It’s hard to say. I think when you look at the overall net upgrade rate 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.

Operator

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

Kirk MaterneEvercore ISI — Analyst

Thanks very much. Brian, when 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 have 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 that balance? Because I would imagine the sales cycles are very different with those two conversations.

Brian HalliganChairman & Chief Executive Officer

Yes. There’s a few layers to it. I think the lowest layer on the cake is retaining those customers longer. We have customers that outgrow us, and there’s reasons they outgrowth us. Things like custom objects is a big reason why someone would outgrow us. And so retaining them as they go from 200 to 2,000 is a good one. Then just winning more deals, people hesitate to buy HubSpot if they think they’re going to really scale up. They’re worried HubSpot is 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 with custom objects, which is much, 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 that happens, 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 conversations.

Kirk MaterneEvercore ISI — Analyst

That’s helpful. And then one for — more maybe a higher-level question for you. When you talk to others in the sort of broader CRM space and maybe at the enterprise level, this concept of the 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, I don’t know why a small company wouldn’t want another customer’s 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?

Brian HalliganChairman & Chief Executive Officer

People do think of HubSpot as their — that’s where they — the central repository for all of their data. And over time, we want to make it as attractive as possible to integrate all your systems into HubSpot. Things come back and forth, but that’s one of the reasons we acquired PieSync a while back. And then we will have them report on all of that. So yes, I see HubSpot over the long haul, if you want to use the term CDP, as the CDP for their customers. And I want HubSpot to be their center of gravity to enable them to really create off some experiences, whether it’s through our tools or other tools that they use that they’re plugging in, anything from Zoom to Google AdWords to little start-ups building stuff on top of HubSpot.

Kirk MaterneEvercore ISI — Analyst

That’s helpful. Thanks. And congrats on the quarter.

Brian HalliganChairman & Chief Executive Officer

Thank you.

Operator

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

Koji IkedaOppenheimer — Analyst

Great. Thanks for taking my questions. Congratulations on a really great quarter. First off, I wanted to thank Brian for bringing up that RadioShack ad. I can picture that ad in my head right now. So that was definitely nostalgic, so thank you for bringing that up. I wanted to ask you about the Sales Enterprise version, especially — more specifically on the custom objects.

It sounds like it’s a real game-changer for that version. I guess could you talk a little bit about what customs objects means from a customer lens? Does it enable them to maybe replace any existing applications? Or does it enable 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?

Brian HalliganChairman & Chief Executive Officer

The way I would describe it is, let’s just say you are a university coach and — university of coaches, and you’re using HubSpot. You’re just kind of shoehorning your — you call your prospective students leads inside the system, and then you call your students that are paying you, you call them customers. And it’s just as unnatural that you’re kind of jamming your business model into HubSpot, a pretty rigid object model. What you want to do with those universities is to match the way your whole front office system works, your CRM system works with the way your business works. And that means you’ve got a student, and that student is an unusual model. It’s different than a typical customer because the student comes in and lasts for four years. So it’s a custom object inside of HubSpot.

You want to report on that in certain ways. You want to create workflows around that in certain ways. So it just enables you to do a whole heck of a lot more. And what we’ve noticed is when a company comes in — so gee, let’s say there’s a 20-person company comes in. They buy HubSpot Sales product, Marketing product. And they’re super happy with it because like, all right, it’s out of the — it’s perfect out of the box. I’m just going to use everything they got here and just plug it in and run. But as that company moves, and it’s 500 employees now or 600 employees, their business model gets complicated, and they get irritated because they have to kind of jam it in a HubSpot. And so as their business model evolves, HubSpot will evolve with them and scale with them. That’s sort of the way it works. Does that make sense?

Koji IkedaOppenheimer — Analyst

Yes. Yes. No, totally makes sense. Thank you for that. And I wanted to just ask you one more follow-up here. On the CMS Hub, you mentioned open source and WordPress. But what about Drupal? Can you compete with Drupal right now? Or is maybe the longer-term vision for the CMS Hub to be competitive against Drupal deployments?

Brian HalliganChairman & Chief Executive Officer

No problem. WordPress and Drupal are both like big open-source projects. They’ve been around awhile, and they’re powerful products. But they kind of line with each other. We took a very different approach where it was pure out of the box, which is a very modern approach to building it. I kind of in my head position Drupal pretty far upmarket, like the White House, runs on Drupal and huge 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 and ops 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.

Koji IkedaOppenheimer — Analyst

Got it. Thanks for taking my questions.

Brian HalliganChairman & Chief Executive Officer

Sure.

Operator

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

Michael BergMizuho — Analyst

Hey. This is Michael Berg on for Siti Panigrahi. Congrats on a great quarter once again. I want to dive in quickly on international. You saw a net acceleration in the quarter. Can you point to anything in particular that is driving success abroad? And moving forward, can we expect international to maintain the type of strength even with the ongoing shutdown?

Kathryn BuekerChief Financial Officer

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

Operator

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

Clarke JeffriesPiper Sandler — Analyst

Hi. This is Clarke Jeffries on for Brent. I was wondering, in terms of the traction in the Enterprise and Professional customers this quarter, on that higher-end sort of customer, how long were they in the funnel? Wondering whether these customers were looking at a digital engagement product for — even since the early pandemic and they finally converted in Q3.

Or are these new customers that are — you’re engaging with — in the quarter and converting in Q3 alone? Just trying to understand if 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 now kind of entering the back half of the year.

Brian HalliganChairman & Chief Executive Officer

Honestly, it’s a little bit of both. There’s a lot of people who have been looking at — people — a lot of people have looked at HubSpot for a long time when they finally bought. And there’s some — we call it short-cycle MRR here. The short-cycle MRR is up. By short cycle, I mean it came into our funnel within the month that they purchased 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 that’s going on in the world is really — people are thinking about digitizing their go-to-market. I also just think even with all the — if this was a normal year, nice, with nothing happening in the world and we’re just bringing it, I think we’ll be having a really good year. We were really set up well. So I think it’s a little bit of both, that would be might take time.

Operator

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

Brian HalliganChairman & Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Charles MacGlashingHead of Investor Relations

Brian HalliganChairman & Chief Executive Officer

Kathryn BuekerChief Financial Officer

Mark MurphyJPMorgan — Analyst

Alex ZukinRBC — Analyst

Samad SamanaJefferies — Analyst

Stan ZlotskyMorgan Stanley — Analyst

Drew FosterCitigroup — Analyst

Parker LaneStifel — Analyst

Arjun BhatiaWilliam Blair — Analyst

Ryan MacDonaldNeedham — Analyst

Nancy LiuGuggenheim Securities — Analyst

Kirk MaterneEvercore ISI — Analyst

Koji IkedaOppenheimer — Analyst

Michael BergMizuho — Analyst

Clarke JeffriesPiper Sandler — Analyst

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