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HubSpot (NYSE:HUBS)
Q1 2018 Earnings Conference Call
May. 10, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the HubSpot Q1 2018 earnings call. [Operator instructions] I will now turn the call over to you, Chuck MacGlashing, director of investor relations for HubSpot. You may begin your conference.

Charles MacGlashing -- Director of Investor Relations

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 Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than the statements of historical fact are forward-looking statements including statements regarding management's expectations of future financial and operational performance and operational expenditures, expected growth and business outlook, including our financial guidance for the second fiscal quarter and full year 2018. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements.

Please refer to the cautionary language in today's press release and to our Form 10-K, which was filed with the SEC on February 13, 2018, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our first-quarter 2018 earnings press release in the Investor Relations section of our website at www.hubspot.com.Now it's my pleasure to turn over the call to HubSpot's CEO and chairman, Brian Halligan.

Brian Halligan -- Co-Founder, Chief Executive Officer

Thanks, Chuck. Good afternoon, folks. Thank you to all of you for joining us today as we review HubSpot's first-quarter 2018 earnings results. We're off to a great start to the year overall with 39% revenue growth, 5% non-GAAP operating margins and a 44% customer growth, bringing our total to nearly 45,000 total customers.Now underneath those numbers, I'm happy with the traction we've gotten with our freemium model where about half of our new customers used our free product before they buy.

I'm happy with the Growth Stack adoption, which is over 10,000 total Growth Stack customers now. I am happy with the improvements we're making on the overall customer experience.Now one of the biggest ahas in the last year is that when I speak with our customers, I see that the reasons they're buying from us have really shifted over time in that word-of-mouth is increasingly becoming one of our biggest growth drivers. In fact, I stopped thinking about our business like a traditional sales and marketing funnel. It's more like a flywheel where the customers are the main driver that pull new prospects in.

That flywheel spins at the rate of our customer's delight. A funnel was a great way to think about our business, 10 years ago, when our sales and marketing was the loudest voice in the market. But in today's market, our customers voices, they are the loudest. This shift in the way humans make buying decisions is the first big reason why we're launching our Service Hub product line.

We want to enable our customers to grow better by matching the way they go to market with the way modern buyers actually evaluate and buy products today.We want to enable our customers to create a delightful end-to-end experience and start to get their own flywheel spinning. There is another shift afoot in human behavior, that's the second big reason why we're getting into the Service Hub business. People's expectations of service have dramatically changed over the last couple of years. Traditionally, if you had a problem, you'd call support, wait on the phone, spend 10 minutes describing yourself and your problem, not get your question answered, get transferred and do the whole thing over again until you gave up or you had your question answered.This was just the way things worked.

It's life in the big city for us humans, but not anymore. Today, if humans have a problem or a question for a vendor, well, they start with Google and they expect to find an answer. If not, they go to the vendor's website or Facebook and expect to chat with someone who will quickly find the answer. If it's not there, then they call and they expect that person to be clue-full and have all the context they need to answer your question quickly and completely.That leads me to the third reason why we get into this Service Hub business, building a modern system that enables a vendor to create that modern service experience is very complicated.

To do it right, you need a knowledge-based system, an SEO system so those knowledge articles could get found in Google, a chat system for your website and a messaging system for Facebook, a bot builder, a ticketing system, a Net Promoter Score System and a customer marketing system and all that would need to constantly sync with your CRM system. All very doable, if you'd like to buy eight systems, pay eight bills and learn eight user interfaces. But it's just too painful for a small or medium-sized business to pull this off today.You know, we spoke to Jay Perkins, he's Co-Founder of Kettlebell Kings, a fast-growing creator of kettlebell equipment and content from Austin, Texas, and we talked to him about the Service Hub, he nailed it. He said Service Hub is going to give our entire team quick access to what a customer's experience has been like, what they've purchased, what emails they've received and track all of that in one place, as opposed to flipping back and forth between different systems.

Jay gets it. He's talking about Kettle Kings' desire to create a modern service experience and how Service Hub is going to help him pull this off.As you can probably tell, I'm excited about the opportunity to help companies build a fantastic end-to-end experience for their customers and move from an old school funnel mentality to a new school flywheel mentality. Service Hub pro is available starting today and it's priced at $80 per seat, with a five-seat pro bundle required to get started.OK, moving on. I want to make a couple of quick comments on the EU General Data Protection Regulation, or GDPR, because I know it's in the top of people's mind.

As you probably know, GDPR is legislation the European Parliament adopted to give individuals a lot more control over their personal data. There's a lot in this legislation, but in spirit, I think the Europeans have it right. GDPR fits very well with HubSpot's Grow Better philosophy and methodology. At its core, GDPR is about using personal data fairly for those who have opted in and letting them know what you're doing with their personal data.

What it's not about is buying a cold-sourced list and spamming those contacts. We're very supportive of GDPR and its principles. We recently published our GDPR product road map, detailing the product features we have. We will also continue to help our customers be GDPR-compliant by May 25 and beyond as new legislation is adopted, such as the EU e-privacy regulation.

And while a sweeping regulation like this carries a risk of some headwinds for the overall industry. In the short run, as customers adjust to a post-GDPR era, we think helping our customers stay compliant with this legislation as well as other data protection best practices will pay off in the future as it aligns perfectly with our grow better philosophy.OK. With that, I'll turn it over to John now to take us through the financials and our guidance.

John Kinzer -- Chief Financial Officer

Thanks, Brian. I'm really pleased with the first-quarter results. We delivered strong revenue growth, nearly $18 million of free cash flow and $5.6 million of non-GAAP operating profit. First-quarter revenue grew 39%, driven by 40% subscription revenue growth and 25% services growth.

Subscription revenue continues to grow faster than services and now represents 95% of revenue. HubSpot ended the quarter with 44,894 total customers, which was up 44% year over year, while average subscription revenue per customer came in at $10,016 which was down 3%. As Brian mentioned, we continue to be pleased with the progress in our three big initiatives around growing our freemium customer base, improving the ways we can delight our customers, and growing our Growth Stack adoption across our nearly 45,000 customers. We continue to see a bunch of customers buying sales and marketing together upfront.

This helped us surpass 10,000 Growth Stack customers in the quarter. Another trend that continued in the quarter is that a majority of our new sales business is coming from our $400 five-seat Sales Professional product. All of this is good for our customers and our business. However, as I mentioned last quarter, these two trends and other factors will likely cause quarter-to-quarter variability into our upsell rates.

Deferred revenue came in at $150.8 million, growing 43% year over year, while calculated billings, defined as revenue plus the change in deferred revenue, came in at $126.2 million, up 38% versus the first quarter of 2018. Billings growth benefit from the Growth Stack and Sales Professional trends I just discussed, as well as a 4 point benefit from FX in the quarter. Please remember that billings growth can diverge from revenue growth in any quarter due to changes in billing terms, product mix, or the timing of revenue recognition versus billing. We continue to expect billings growth and revenue growth to generally track each other over the long run.

For the remainder of my commentary, I will discuss non-GAAP measures. Let's take a look at margins. First-quarter gross margin came in at 81.4%, up over 1 point year over year. Subscription gross margin came in at 86.3%, up about 1 point year over year, while services gross margin came in at negative 8.4%, up just over 1 point year over year.

First-quarter operating margin improved year over year to a 5% operating margin, even while R&D as a percentage of revenue moved up from 13% to 18%. Given the significant opportunity in front of us, we continue to believe that these investments in product will drive great ROI over time.International performance continued to be strong with revenue growing 67% year over year, representing 36% of revenue in the quarter. We continue to see a huge opportunity internationally and are excited to announce our newest office in Bogotá, Colombia. At the end of the first quarter, we had a total of 2,283 employees, up 37% year over year.

We had another strong quarter of hiring, coupled with lower-than-expected attrition, which sets us up well to execute on our growth plans. Capex, including capitalized software, was $8.9 million in the quarter, up from $7.4 million last year. We still expect capex as a percentage of revenue to average about 7% for the year.With that, let's dive into guidance for the second quarter of 2018. Total revenue is expected to be in the range of $117 million to $118 million.

Non-GAAP operating income is expected to be between a profit of $5.3 million to $6.3 million. Non-GAAP diluted net income per share is expected to be between a profit of $0.14 to $0.16. This assumes approximately $41.5 million fully diluted shares outstanding. And for the full year of 2018, total revenue is expected to be in the range of $489 million to $492 million.

Non-GAAP operating profit is expected to be between $22 million and $25 million. Non-GAAP diluted net income per share is expected to be between $0.59 and $0.65. This assumes approximately 42.3 million fully diluted shares outstanding. With the strong performance of first-quarter free cash flow, we now expect full-year free cash flow to be between $31 million and $32 million.

As you adjust your models for 2018, keep in mind the following: Our 2018 INBOUND event will be held in Q3 again this year, and will result in about a 3 point impact to third-quarter operating margins. Given the move higher in our stock price and some slight dilution from our convertible bond, we're now forecasting a fully diluted share count of 42.3 million shares for the year. With that said, we still expect our stock-based compensation expense to be about $76 million for the full year. The convertible debt we issued in 2017 will continue to impact noncash interest expense, which we expect to be about $5.1 million in Q2.

The expense will increase slightly each quarter as long as the debt is outstanding, but given it is a noncash expense, it will be excluded from our non-GAAP results. With that, I'll hand the call back over to Brian for his closing remarks. Brian?

Brian Halligan -- Co-Founder, Chief Executive Officer

Thanks, John. Today, with the launch of Service Hub, we now have three strong pillars in our suite, on top of the CRM that's scaling extremely well with our freemium entry point. John mentioned that we cranked up our R&D investment, and I think that you're really going to start seeing some of those investments pay off. Over the next year, I think we have the opportunity to make more progress on the suite vision than we have in the whole last four years.

I think we're coming up on some of the most interesting times in the HubSpot's history for our customers, for our partners, and for the HubSpot team. What's going on now from a product perspective is unlike anything I've seen during my entire time at HubSpot. OK, I want to close by thanking our customers, our partners, our investors and all the HubSpotters around the globe for helping us with our mission to help millions of organizations grow better. Operator, can we please open up the call for a few questions.

Questions and Answers:

Operator

[Operator instructions] Your first question comes from Tom Roderick with Stifel.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Hi, guys. Thanks for the chance to ask questions. So Brian, if I could, I'd like to ask the first question just on the Service Hub pro, a product you announced pricing today, and great start on that. You talked a little bit about what that offering might look like when you got back at the user conference, back last fall.

Curious if you could just sort of update us as to some of the key features, what customers have been interested in throughout the beta? And how we might think about where that product could go over time with additional features? Thanks.

Brian Halligan -- Co-Founder, Chief Executive Officer

Great. Nice to hear from you, Tom. Pumped up about the Service Hub product. I've been playing with it.

It's exciting. I think it's the best product we've ever launched. There's four key pieces of it out of the gate. There's a knowledge base in there that's really solid.

It's built on top of our content management system but slotted in here; a ticketing system; a surveying sort of Net Promoter Score system where you can do surveys of your customers and slice-and-dice that data and do good customer marketing; and then a conversations tool, so you can do really nice conversations on your website for support. And then that's all combined with all the goodness inside our free CRM system. It's included with automation. It's included with emails, included with all that other good stuff.

So out of the gate, I think it's pretty full-featured. The team has done an excellent job. And the feedback during the beta has been really solid. So feeling great about it.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Fantastic. Quick follow-up for you, just some thinking about the new product and the flywheel approach you talk about here, your customers being some of your best advocates. As you guys think about how to spend on sales and marketing, how does that impact the customer acquisition costs and maybe the profitability of the model longer term? Does that mean you can sort of rely more on your customers and word-of-mouth, and the channel becomes a little less important? How does it change the way you think about -- the way you build for sales and marketing?

Brian Halligan -- Co-Founder, Chief Executive Officer

That's an excellent question. Kind of the DNA of HubSpot has been shifting over time. I'm a sales guy by training, and we really invested aggressively in sales in the early days of HubSpot. The center of gravity, we're moving to be more of a customer-centric, product-centric company.

We sell our product now with a lot of help from our product. It's our freemium version. And so I think you'll see, and you're starting to see actually in the P&L this quarter, a bit of a shift where the year-over-year increase in the amount we're spending in sales and marketing, that's down a little bit, whereas the year-over-year increase in the amount we're spending on R&D is up a little bit. So that's starting to shift, and I think it's a really positive thing for us and for our customers and for our partners over the long haul.

Really bullish on what's going on there. Our products organization is on fire. The recruiting has been on fire, the retention. We built the Service Hub and it looks really good and there's a whole bunch of other exciting stuff that you'll see over the course of the next year.

So I think we're going to see a nice return on that R&D investment that's going on.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Excellent. Thank you. Nice job.

Operator

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

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Hey, thanks for taking my question. Just wanted to ask another one on Service Hub. With Sales, Starter and Pro, you started with a real nice installed base of already free users. Do you feel like with Service Hub, you already have that installed base already within your overall customer base from which you'd have a natural, kind of upsell motion to sell the premium version in?

Brian Halligan -- Co-Founder, Chief Executive Officer

Yeah, Brad. That's a good question. We've got 44,000 paying customers today, and I think that'll be the first target for us. They are already using us for marketing.

They're using us for sales. I think it'll be very natural for them to pick Service Hub up and buy it. Then the next big pool is the hundreds of thousands of companies that are using our free CRM product. I think that's a really good pool.

Maybe they haven't purchased the sales product or the marketing product. And I think we'll see some customers as their first step, pick up the service pro product. I think you'll see that going on. And so there's a big, big growing, fast-growing installed base of free users, fast-growing installed base of paid users that'll be fertile soil, I think, for us to go in to sell the Service Hub.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks, Brian. And then one also on Sales Pro. Now that pro has been out now for a couple of quarters, few quarters, are you starting to see that real departmental expansion take hold and the installed base going from one or two users, to now five with pro and then go from there? And also, kind of, if you could describe where those users are coming from? What are they -- what were they running, existing? Or are they running something alongside another solution?

Brian Halligan -- Co-Founder, Chief Executive Officer

Yup. Sales Pro has gone really well. We announced that product last quarter, and the uptake has been super strong. Very happy with the way that's gone.

What we've seen a lot of, frankly, is people right out of the gate, buying Sales Pro. They want the features in there. So they used to buy one or two seats of the sales starter. Now when they're kicking off a lot of our users are just starting off with the five seats of Sales Pro.

That's kind of the dynamic that's going on in the market. In terms of competition, there's a lot of little, small companies that sell CRM to really small businesses. So there's a lot of -- you probably wouldn't have heard of them, but there's a lot of private companies. And there's a lot of swapping out of those systems for HubSpot CRM and HubSpot Sales Pro.

There are some bigger systems that people may have put in place that they haven't fully implemented or integrated, and they haven't got their sales reps to start using it. So we're seeing a fair amount of people swapping that type of stuff out. And then just a lot of companies where it's their first CRM system they're buying, the first kind of grown-up one is the way I describe it, and they're buying HubSpot and Sales Pro. So it's kind of come in from a few different angles.

What is not coming from is going into a giant implementation of some other vendors, CRM system that has hundreds of seats and they've configured it and customized it and integrate it, and then we rip and replace it. That's not the game we're playing. It's more, we're growing kind of with the economy and staying in sort of our sweet spot. And it's going great, and I think there's a ton of upside left in that Sales Pro product line.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks, Brian.

Operator

Your next question comes from Terrell Tillman from SunTrust Robinson Humphrey.

Terrell Tillman -- SunTrust Robinson Humphrey -- Analyst

It's actually Terrell but -- or Terry. Thanks for taking my question. And actually, I'll make it easy. I'd first like to start with a remark or just a food for thought, and then just one question for you, Brian.

Since you opened up the Colombia office, it feels like maybe that could be an Investor Analyst Day or field trip down there, just saying.

Brian Halligan -- Co-Founder, Chief Executive Officer

That's a brilliant idea.

Terrell Tillman -- SunTrust Robinson Humphrey -- Analyst

All right. Thanks. So my question is, because of all the product innovation you've been putting out there, you've got these three main pillars now, and you talk about still continuing to innovate and kind of leaning into this kind of suite and Growth Stack approach. What I'm curious about is, you do have these three pillars.

How much more do you need to invest in the innovation there? Because I think if it's too much there could a risk of over-engineering and you're focused on mid-market. You don't want to over-engineer your products. So how much of your R&D and your innovations investments going forward will still be on these three pillars as opposed to maybe some other things we haven't contemplated or making the products work better together? Thank you.

Brian Halligan -- Co-Founder, Chief Executive Officer

That's a great question. So what we come out with today is the Service Hub. It's exciting. Well, we haven't been bragging about it because it's more of a niche audience, but a powerful important niche is a tremendous amount of progress we've made on the platform side of HubSpot over the last few months.

So today, we actually have our Partner Day. We have all our biggest North American partners in today and tomorrow, and I spend a bunch of time with them. And yesterday, we had all our connect partners, and we had our 100 largest connect partners, and those are software companies who build into HubSpot. But we announced today seven new APIs into HubSpot.

So an API into our analytics pipeline, an API into tickets, a whole bunch of these new APIs that enable our partners to build custom integrations to connect HubSpot to other systems, to extend the functionality of HubSpot and to really open up our ecosystem of partners and what you can do with HubSpot. In addition to that, over the last couple of months, we've announced a bunch of new integrations. Shopify integration, super psyched about that. New Instagram integration, deeper Facebook integration, Facebook for work integration.

Just today, we announced a new Stripe integration, which we think is really hot. And so lots and lots of room to innovate on the platform side, so we can build a big community of software developers and partners that can extend and integrate HubSpot in really dynamic and interesting ways. So when I look out -- I've been at HubSpot now for 12 years. It's been a really good run so far.

I feel like there's 12 more years of good run, lots of innovation left in our heads, lots of innovation that we can do in small and medium business. And I think one of the things we're good at, we're not good at everything, but one of the things we're good at it is not cluttering the app and cluttering the user interface. We're more on the Apple side of the world, we want to keep it simple. We're very opinionated about UI, and we want to continue to appeal to that SMB market.

And so that's a little bit less of a worry for us, but lots more to do. We got our three hubs. If you look at the three hubs, there's some gaps in there in terms of products. You can imagine where we might go there, lots of improvements needed in the marketing product, sales product, service product, lots of enhancements on the platform side coming.

So we're not nearly done, my friend.

Terrell Tillman -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you.

Operator

Your next question comes from Richard Davis from Canaccord.

Richard Davis -- Canaccord Genuity -- Analyst

Hey, thanks very much. Brian, so when you kind of think, like, I don't know, the next three to five years or so, is there a limit or in terms of average revenue per customer or per user per month that you can get to? I mean, about -- the reason I'm asking is that you and I saw what happened to Marketo, when they moved upmarket, they ended up looking like Sonny Corleone at the tollbooth. So I'm just trying to figure out where you kind of see, because it feels like you could go pretty wide, but not have to raise your prices to enormous levels. Thanks.

Brian Halligan -- Co-Founder, Chief Executive Officer

Yeah, I agree with that. If you think about it, the thing about that ARPU number, it's not a number I actually obsess over, Richard, because there are some things on that ARPU number, there are real tailwinds and some things that are headwinds. For example, we came out with our starter product line. That's kind of a headwind to how much we charge, but it creates an opportunity to bring more customers in that we can move up the stack later.

At the same time, there's lots of room to innovate, for example, on that marketing enterprise product and to build more functionality in there. And so the ARPU is -- it's actually a tough one even for us to put our finger on where that's going to go over time because there's room in the product. Like our Pro product line, I think, it's really solid. The marketing Pro Sales Pro, boy, there's lots of opportunity in the starter product lines and those enterprise product lines to build really awesome functionality and to really map our value across the entire SMB supply and demand curve.

I think there's room there, a little above us and a little below us, on the functionality side and the value side that we can create.

Richard Davis -- Canaccord Genuity -- Analyst

Got it. That's helpful. Thanks.

Operator

Your next question comes from Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

Thank you so much for taking my question. So the first one, for -- just going to come back to Service Hub for a second. How did you guys approach setting the price level for Service Hub, and the $400 per month for the minimum of five users, essentially implying $80 per user versus some of the other customer service software vendors that are out there? And then I have a quick follow-up.

Brian Halligan -- Co-Founder, Chief Executive Officer

Yes. Stan, it's Brian. I'll take that one. We looked at all the competitive offerings out there.

What we noticed when we talked to the end buyers of software, there's a couple of things going on. The first thing that we see that's going on is companies today are trying to transform the way they service their companies. From a model that's very telephone-intensive, information-intensive, long, you call in, you wait on hold, you talk to a support rep, you give him 10 pieces of information, you describe the problem, inevitably, they can't solve the problem. They transfer you, you wait on hold again, give the same 10 pieces of information, describe the problem, can't solve it, and so forth and so on.

That's just the way it's worked forever. And what companies are trying to do is modernize their approach so that -- first of all, you don't call, you start in Google and how do you get your question answered in Google first. If you can't find it in Google, actually, people get a little irritated if they can't find it in Google. Well, you go to the site and you expect to be able to chat and find the answer.

But if you can't find that, well, the last step is you pick up the phone and call, but when you call, you shouldn't be, have to ask 10 questions and go through that long laborious process. You expect to be connected to a really clueful rep who has context, he can solve it. And so we're in the business of helping companies modernize that. When we talk to people trying to modernize it, what we inevitably find out is they have to buy two, three, four, five, six, seven, eight different systems to try to pull that modern support motion off.

Very similar, frankly, to what happened when you first went into marketing. In marketing, people are trying to do modern marketing, but ended up buying a website, a blog, SEO, social, marketing automation, analytics. It was super complicated for mere mortals to do. And so when I look at that price point, I say, "Well, it's $80.

If you have to buy four, five different applications, it's probably $200." So I think it's priced -- I think the price point is going to work for us in there, and time will tell, of course, but I think we've nailed the price.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And then just a very high-level question on your infrastructure. we saw recently that you are going to be moving some infrastructure over Google Cloud, in addition to your, the core, which is built on AWS. How did your approach this -- the thinking around, I guess, diversifying into Google Cloud infrastructure, in addition to AWS? And as we think about this going forward, is this something that could have -- directly benefit your subscription gross margin in the future? Thank you.

Brian Halligan -- Co-Founder, Chief Executive Officer

OK. Thanks, Stan. I guess my first comment would be, we're a large and happy AWS customer. My second comment would be, I think it's prudent for us as stewards of the business and service providers to our customers, to diversify.

And you're relying a lot on these vendors so having both AWS and Google seem like a very good idea for us and for our customers. It just seems like the prudent move. And then the Google deal, we've got a really good relationship with Google. And the relationship extends way back where we're super tightly integrated and one of their best partners on the AdWords side.

And we have new interesting partnership, things we're doing with them on the G Suite side. We're deeply integrated to Gmail and to Calendar and to Drive, and there's a lot more we want to do with them. And so that's kind of -- that was kind of our thinking around it. We like the idea of having two different vendors for this kind of thing.

I don't know, John, do you want to comment on the margins?

John Kinzer -- Chief Financial Officer

Yeah. I mean, obviously, to Brian's point, we're always going to keep our vendors and partners honest. We'll do whatever we can on that price front, but we already have a really good deal with Amazon. But obviously, we'll do whatever we can on that front.

But we really like having two providers to really de-risk us and allow us to make sure we're keeping everybody honest.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

Your next question comes from Mark Murphy from J.P.Morgan.

Pinjalim Bora -- J.P.Morgan -- Analyst

Hey, guys. This is Pinjalim, sitting in for Mark. And congratulations for the quarter. I wanted to just dig a little bit deeper on the sales cloud.

We have seen a pretty rapid growth on that business, I mean, I guess, I don't know the user numbers, but if I look at the Growth Stack numbers that has probably tripled in the last 12 months or so. Is there a way to basically size that business? Has it hit kind of a milestone, if you don't want to give a number. I mean, is that a $50 million run rate at this point in time? And the second question is, do you think Service Hub would see a similar kind of a trajectory when you think out the next three years?

Brian Halligan -- Co-Founder, Chief Executive Officer

Those are good questions. We're not planning on announcing a milestone on this call. Maybe the amount I'm not sure our thinking on that. But yeah, you're right.

The business is growing really rapidly. When we first hatched the idea of building a sales hub product on top of our CRM product, it's grown faster than our expectations. We're really, really pleased with it. I think we hit the nail on the head on the product.

It fits what the market wants. The sales guys are selling it. The customers seem to really love it. In terms of the service product, we don't know yet.

We think it can grow very, very fast right out of the gate. There's really good interest from our partners and our customers on it. It was the No. 1 enhancement request from our customers. If you go on like the boards, where people request enhancement of HubSpot, it was the No. 1 thing on there.

So it's hard for me to say how fast this is going to grow, whether it's going to be faster or slower, but yes, I think it's going to be similar. I'm pretty hot on it.

Pinjalim Bora -- J.P.Morgan -- Analyst

OK. I just want to follow up on one comment that you had made on GDPR. I think you said it could be near-term headwind for the industry. Could you elaborate on that, please?

Brian Halligan -- Co-Founder, Chief Executive Officer

Again, we're not real sure. I would say on GDPR, we're ready for it. We've done a bunch of dev work and a bunch of marketing and evangelism around it. And we've -- particularly over in Europe, it's a real issue that people are talking about a lot.

We've been over there, evangelizing our perspective on it, and we're getting really good uptick on it. What I like about GDPR is it's inbound-y, it's very HubSpot-y. I think over the long haul, it'll be good for us because the way people have to go-to-market is going to have to be GDPR-compliant. And HubSpot's got a very GDPR-ish way of going to market.

We evangelized creating content, pulling people in through Google organic, doing social media in an organic way. We've got a very kind of, you know, user-first, the human way of doing it. And so over the long haul, I think GDPR is going to benefit us quite a bit. We don't know exactly what the impact will be.

We've done some analysis on it. We think it'll be minimal. It's not keeping me up at night, but there could be a tiny little impact from it. Anything you want to add to that, John?

John Kinzer -- Chief Financial Officer

No. I mean, I think that's right. I mean, our customers, from time to time, take out the contact that they're not using. So it's already something they do.

So I mean, to see a big change --

Brian Halligan -- Co-Founder, Chief Executive Officer

Haven't seen any change yet, but we're keeping an eye on it.

John Kinzer -- Chief Financial Officer

Absolutely.

Brian Halligan -- Co-Founder, Chief Executive Officer

Yeah.

Pinjalim Bora -- J.P.Morgan -- Analyst

Sounds good. Thank you.

Operator

Your next question comes from Alex Zukin from Piper Jaffray.

Taylor Reiners -- Piper Jaffray -- Analyst

This is Taylor Reiners, on for Alex. I wanted to follow up on the question related to Google Cloud. In the press release, you mentioned that it'll allow you to invest more on the current Google Cloud product integration and accelerate growth in your free CRM product. I was wondering if you can maybe comment on what is driving that incremental traction as a result of the partnership? And then maybe if there are any other partnership opportunities with public cloud vendors from a go-to-market standpoint.

Brian Halligan -- Co-Founder, Chief Executive Officer

It's an excellent question. Basically, it's just deepening the partnership with Google. We've got integration with Gmail and integration with Google Drive and integration with Google Calendar, and there's more we can do to make it slicker and easier and more deeply integrated. And so we're working on that.

We've got a really good relationship with those guys. We got a lot of respect for Google. And there's teams of folks on both sides talking about it, working on how do we make that integration richer? One of the things that's key about our CRM, and one of the reasons our CRM has done so well in the market, we sort of built it right in from scratch into that suite of Google products. And sales reps like that.

They live in G Suite or they live in Outlook. And we think we can do an even better job of that. And Google is up for helping us and partnering with us on it. So yeah, that's sort of what we're thinking about it.

In terms of another big partnership opportunity, with another big cloud opportunity, hard for me to say that at this point on this call. Google is sort of a natural partner when it comes to that, though.

Taylor Reiners -- Piper Jaffray -- Analyst

Got it. And then just a quick follow-up. You mentioned that the FX tailwind during the quarter was about 4 points to the top line. Could you give us what that looks like for guidance?

John Kinzer -- Chief Financial Officer

Yeah, I mean, we don't specifically give FX impact on guidance, but we obviously provide a range of outcomes and we would generally expect it to be around this range. If it increase or decrease rapidly, obviously, that would put us at the low end or the high-end of that range.

Taylor Reiners -- Piper Jaffray -- Analyst

Got it. Thank you.

Koji Ikeda -- Oppenheimer & Company -- Analyst

Thanks for taking my questions, and congrats on the quarter. Question on the product suite here. Now that you have marketing and CRM and sales, and with the service product announced today or going GA today. I'm just wondering, what's the right way to think about the pace of new product introductions over the -- say, the next three to five years?

Brian Halligan -- Co-Founder, Chief Executive Officer

Well, good question, Koji. I kind of think of HubSpot like this. When Dharmesh and I started 12 years ago, it was effectively a very fancy blogging tool with some search engine optimization and social capabilities on it. That's kind of step one.

Step two was build out kind of a full marketing suite with marketing automation and landing pages and all that stuff. That's step two, basically building that. Step three was well, let's build a CRM system in a sales hub, and step four is really building the Service Hub. And so we've kind of move when I think about HubSpot in my own head, is we move from an app company to a full suite company.

There's more opportunity in the front office for us to build more functionality. There's more opportunities for us to innovate within the marketing hub, sales hub, service hub and CRM to continue to evolve with the way humans actually shop and buy stuff, lots more innovation left. So we're not done with that. But I kind of think of our next step in the journey as becoming much more of a platform company.

We have this Connect Program and we have some APIs that people are building to. It's a vibrant community. We think that community can be far more vibrant. We can open up far more of the product and do much more there.

And so that's kind of how I think of it in my head. There's more we can do in the suite and a lot more we can do in the platform. When I think of HubSpot and the game we're playing today, it doesn't feel like we're in the seventh or eighth inning. It feels like we're still in the second or third inning of the HubSpot journey.

Lots more innovation, lots more ideas in Dharmesh's and my head for interesting things to build and more value to deliver.

Koji Ikeda -- Oppenheimer & Company -- Analyst

Great. And just as a follow-up question, I wanted to hit on the competitive landscape out there. Just segmenting the opportunity maybe between the 100 and 2,000 employees space. It appears that some of the competition out there may be heading down market, a little bit more aggressively in the past there's some lighter versions of their product suites.

Are you seeing any changes in the competitive dynamic in that customer segment, that 100 to, say, 2,000 employees?

Brian Halligan -- Co-Founder, Chief Executive Officer

Not really. We track all of the competitive dynamics, and we track sales cycle. I haven't seen a big change. We can -- you're probably referring to Salesforce.

They came out with their new Essentials product. And we're keeping an eye on it. We haven't seen -- honestly, we just haven't seen a ton of it. I'm not exactly sure why we haven't.

I have some theories on why that is, but there hasn't been a big shift on that. And I think genetically, Salesforce has done an unbelievable job in moving into the Fortune 500. They're killing it. They're doing nine-figure deals.

We have a lot of respect for those guys. Genetically, we're sort of programmed for the Fortune 5 million, and I think we're exceptionally well-positioned there. Our win rates are high. And our product value we deliver is high.

So honestly, no huge shift that we've seen.

Koji Ikeda -- Oppenheimer & Company -- Analyst

Great. Thanks for the color, and congrats again on the quarter.

Operator

Your next question comes from Jennifer Lowe from UBS.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you. Just looking at toward how the business has evolved with the marketing cloud, it was always focused on maybe not B2B, but on informed sales. The Salesforce automation products are sort of related to that where you have a very personal relationship with your customers, and it strikes me that with Service, you could potentially address a broader set of needs in scenarios where maybe it's not that same customer intimacy that you have or the inbound approach that you have with marketing and sales.

I'm just curious if you think about the service cloud and how that could potentially evolve over time. Do you see that as addressing a larger set of customers than maybe you were able to address with your first two product lines?

Brian Halligan -- Co-Founder, Chief Executive Officer

It's a really good question. Maybe. That's not sort of where my head's at for the next couple of years. So many B2B companies that are right in our sweet spot have support and service organizations.

They may have a support call center, and then they also have people who do services and serve their customers. There's just so much opportunity there to help them, and have it all in one platform is super beneficial to them. Maybe down the road, we could open things up to more B2C-type customers, but it just feels like there's so much untapped opportunity in the B2B world. We announced also that integration with Shopify.

It might lead you to a similar conclusion. I think we're going to get a lot of customers through that Shopify integration, the integration is slick. And the types of customers, Shopify customers, that are buying HubSpot are, of course, are e-commerce companies, but a lot of them are more considered purchases. For example, I just heard this morning that Airstream is that customer -- Airstream, builds those awesome...

Jennifer Lowe -- UBS -- Analyst

RVs.

Brian Halligan -- Co-Founder, Chief Executive Officer

Yes. Are they RVs? What do you call those things, they're awesome though, and they're a customer. And that's sort of typical. It's -- yes, a consumer will buy it, but it's more of a considered purchase.

So for now, we're kind of sticking in our swim lane and trying to drive value in there. And down the road, we may consider opening that up to a bigger TAM. I think the TAM for us is super interesting, though, in just the B2B world and the considers purchase B2C world, where we started in marketing, we moved into sales with CRM and now into service. So we've had a nice TAM expansion over the last couple of years, and we've got to get after it.

Jennifer Lowe -- UBS -- Analyst

And just one more for me. Looking at the Growth Stack customers you have now, is it still predominantly marketing customers at full-featured marketing customers that buy sales? Or are you starting to see more sales customers buying marketing or marketing starter edition customers becoming bigger? Is there being a shift there that we should be aware of?

Brian Halligan -- Co-Founder, Chief Executive Officer

It's both. A lot of people are starting with sales and then buying marketing. A lot of people who have been using marketing are buying sales. The only surprise, I think, we've had is the number of people who are buying both upfront.

The sales people are very effective in selling it. And I think it's -- I think what's going on in the market, it reminds me of people are either Apple -- people used to be either Apple people or Microsoft people. For me, I'm an Apple person. I have an iPhone, I have -- everything is Apple.

I think companies are going to be the same way. They're going to want a hub or a backbone that's one system. They're going to want to buy those applications. So they're going to partner with and connect in other applications that sync really well with that, and I just think we're starting to see more and more of that, particularly in the SMB market where they say, "You know what, we're not just going to buy marketing." We're going to run our front office on HubSpot.

And I think you've seen that with Salesforce upmarket in the enterprise. They've done a really nice job of selling their full suite to big companies. And I think that's -- my personal opinion is that's the way the world's going and we've been pleasantly surprised with the uptake on that Growth Stack particularly upfront.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from Brian Peterson from Raymond James.

Brian Peterson -- Raymond James -- Analyst

Hi, Brian. Thanks for taking the question. So Brian, I wanted to ask you and your agency partners, I'm curious what the uptake or receptivity has been to the Sales Pro product? And what role you think the agency partners may play in the go-to-market motion for the Service Hub?

Brian Halligan -- Co-Founder, Chief Executive Officer

That's an excellent question, Brian. Here, if I step back and think about the agency partners, when we started the program, we were a marketing company. And so all the agencies we signed up were marketing agencies. Most of them started as website development companies, frankly, and then we taught them how to do inbound and kind of turn them into Software-as-a-Service companies and it worked remarkably well.

As we moved into CRM and sales, well, of course, we evangelized this idea of you should offer more services and help them with sales and marketing. We don't force anyone to do it. We evangelize it. A lot of them have done it and a lot of those agencies are selling Sales Pro and putting in CRM, and really cranking out there with it and we're super proud of it.

A lot of them say, "We don't -- we're not interested in that. We're genetically designers, and we're website designers." And it was sort of stretch in the first place for us to get into marketing automation. I think the same thing will play out on the service side where all the folks who are selling sales and marketing together now, they're going to end up selling the full suite of product. They're going to actually go to market, I believe, with this new idea of you're not selling a funnel transformation project.

You're selling a flywheel transformation project. And if you really want to grow your business, you have to do all of these things well. And so that's kind of what's going on underneath the covers there. The one thing that's a little different, that's interesting that we started to see in the last year is there's a bunch of now CRM agencies that are more IT-centric, let's say, that are built on CRM, not starting from marketing.

They're starting to sell that sales product and then we introduce them the marketing product, the same type of thing is happening the other way. And so it's hard for me to predict exactly where it goes over the long haul, but it's going pretty well. That partner program is growing fast. It's super profitable.

For the most part, those partners are really happy. We've got most of our best ones in here today. And I'm bullish on the long-term prospects of it.

Brian Peterson -- Raymond James -- Analyst

Great. Thanks, Brian. And John, maybe a follow-up for you. You have a lot more that you're offering today versus a few years ago.

Any help on how we should be thinking about retention going forward?

John Kinzer -- Chief Financial Officer

Yeah. So we, again, in the quarter, we were in the high 90s and still the customer retention was still in the low 80s. So feeling good about that. We talked a bit about this dynamic Brian had brought up about -- we're seeing a ton of the Growth Stack coming upfront as well as the -- as well as we're seeing the sales professional, buying multiple seats.

And so all those dynamics play into that number. We think we can stay in high 90s, bump around 100, depending on how the cross-sell and upsell happen in the quarter. But longer term, we think that with the Customer Hub and some of the other products, we could get up above that. But the good thing, as you can see, even in the quarter, we were able to grow billings at 38%.

And so it's interesting because we actually have seen the percentage of our sales actually higher as a new sales percentage. So we're getting more of that new sales but then longer term, we can cross-sell people.

Brian Halligan -- Co-Founder, Chief Executive Officer

Yeah, I'm not too worried about it. I think over the long haul, we'll be well over 100. The customer dollar retention has been super steady. What's going on underneath the covers is people are buying more stuff upfront and that's the Sales Pro product, instead of buying a seat and then upgrading and upgrading, they're buying the whole thing upfront.

And that's the Growth Stack, and the lead flow has been fantastic. And so I think it'll bump -- I agree with John. I think it'll bump around a little bit. But over the long haul, I think it'll be well over 100.

Brian Peterson -- Raymond James -- Analyst

Thanks a lot, guys.

Operator

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

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. Brian, I was just curious on GDPR. Given your customer Cyviz, is GDPR mostly something that your European customers are thinking about just now? Or is it spreading into domestic customers as we think about sort of applying this type of legislation, sort of universally, I guess? I'm just curious as to kind of what you're seeing in your sort of adoption trends within your surveys, etc.?

Brian Halligan -- Co-Founder, Chief Executive Officer

Yeah. It's mostly Europe. There is some interested in the U.S. where people already have global companies, but all of the noise, all of the activity is out of the Dublin office and the Berlin office.

And they're super happy with what we're doing over there. I don't -- we haven't analyzed the numbers to try to predict what the impact will be. I just -- I don't think it's going to be a big impact, frankly. And I think over the long haul, like I said, I think it's going to make us more attractive to customers because inbound and GDPR are kind of synonymous as opposed to, we compete with some companies and their playbook really is, hey, buy our systems, buy a list, import it and spend the heck out of it.

That's not very GDPR-centric. So I think it'll be good. I'm feeling good about it over the long haul.

Ross MacMillan -- RBC Capital Markets -- Analyst

That makes sense. And then, maybe one for John. Can you just talk about the growth in the Americas? And is that -- one question, I've had is if that's a clean number now, in other words, is that truly just Americas location-based customers? Or is it possible that that is somehow muddled in terms of your own data tracking between customers that may have international operations and how they get counted in the revenue mix? Maybe just some clarification on that would be helpful.

John Kinzer -- Chief Financial Officer

Yeah, I mean, clearly, I guess if it's a global customer, if we sell them in the U.S., we'll count it as U.S. But I mean, it's a pretty clean number. Still growing in the high 20s, down a bit quarter over quarter. But we still are really, really pleased with that growth.

And we've talked a lot about the international versus domestic growth. We continue to look at our unit economics and international looks great. We've been adding a lot of sales reps there. We just talked about opening up the Bogotá office as well.

And so as long as that's better, we'll lean into it. As we think about domestic as well, the Customer Hub, probably more of a sell-in to the base at the beginning, that definitely could help out the U.S. as well. But we're happy.

We're growing fast and still think that there's a long runway there.

Brian Halligan -- Co-Founder, Chief Executive Officer

I think what's cool with what's going on internationally. We made two -- if you think about two huge bets, big bet on offices, Dublin office, Germany office, Singapore, Australia, we start opening these offices. And the second big bet was localizing the entire experience in Spanish, French, German, Portuguese and Japanese. And the ripping growth we're seeing is just -- we're starting to get a nice return on those investments.

I think there's a lot more growth to be had, particularly the Europeans are doing a fantastic job and that is growing really, really well. And the market is giant. And so I feel great about that. Unit economics are better over there.

And so when we're looking at -- when John and I sit down, and we're looking at the spreadsheet, we say, "Where should we put our reps?" We put them internationally because it's growing so fast, and that's where the investments are. And then we don't put as many in the U.S. So I'm comfortable with the way we do it. We look at profitability, we look at unit economics and we make -- we kind of pour gas on the hot fire.

So I'm delighted with the way some of those international investments are paying off.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks, Brian. Thanks, John.

Operator

Your next question comes from Kirk Materne from Evercore ISI.

Tom Mao -- Evercore ISI -- Analyst

This is Tom Mao on for Kirk. Can you just talk about which verticals you're seeing strong results for marketing in the growth cloud? And whether it's B2B or B2C industries? Also, are there ways that you'd consider creating a more vertically aligned sales effort?

Brian Halligan -- Co-Founder, Chief Executive Officer

Yup, good question. It's mostly B2B, Tom. Some B2C, but it's more considered purchase, the more expensive product. And it really has been since the early days of HubSpot.

In terms of verticalization, it's not really one vertical, like we do these pie charts internally of the verticals, and there's a lot of colors on the pie chart and other is by far the biggest segment of it. And so there's no real specialization in the vertical. HubSpot fundamentally is a horizontal company. It's a horizontal platform.

We see ourselves as an evolving platform. And to the extent that verticals would appear and there would be solutions for them, let's say there was a vertical for nonprofits or for universities or for manufacturing, we would like third-party partners and developers to build solutions on top of, around and integrate into HubSpot. So we could build really, really nice solutions there. We're unlikely to do that ourselves.

Tom Mao -- Evercore ISI -- Analyst

Great. Thanks.

Operator

Your next question comes from Scott Berg from Needham.

Scott Berg -- Needham & Company -- Analyst

Hi, guys. Congrats on a great quarter. On the essence of time, I'll just ask one question. Brian, I had a random chance to talk with a sales person from a competitive service test product today.

And he's telling me on how competitive pricing is in the space. How do you sell against that here, going forward, dealing with that -- would pricing pressure seeming to be a new element out there?

Brian Halligan -- Co-Founder, Chief Executive Officer

Yes. I mean, I think we're really well-positioned. I think what companies are going to want to do is, particularly in SMB, it's standardized on one platform and to leverage that platform to create a really awesome end-to-end gorgeous experience for their end users. And so I think we're uniquely positioned in that instead of buying a whole bunch of different applications and weaving them together, and paying a bunch of different bills, and having different user interfaces to learn and having all those applications, having to sync back and forth with your CRM, you buy one.

You buy Service Hub. There is no syncing. It's the same database as your CRM. And I think if you do the analysis, I think we're going to actually be a lot cheaper and you're going to be able to create a better experience for your customers if you use HubSpot.

That's what we've seen so far. People are psyched about it. And I think we're going to get a really good uptake on it.

Tom Mao -- Evercore ISI -- Analyst

Great. Thanks for taking the question.

Operator

Your next question comes from Bhavan Suri from William Blair.

Bhavan Suri -- William Blair & Company -- Analyst

Hey, guys. Thanks for taking the question. Just one that's probably a little broader here. But you sort of touched on this idea.

And Brian you've been talking about it at the user events and things like that. How about sort of making this a lower touch model and removing some of the friction and sort of shifting to a place where it's a little more self-service or the partners are doing more of the work? If you're thinking about this business, you're thinking about sort of automating this whole service marketing sales journey, where do you think that plays out? Not today, but three to five years, in terms of like do you think you have to retool the front end and how it's sold? Do you think you have to retool the buying process? Do you think you have to retool the partner process? Or do you think that it's just education and simplification? I'm just trying to understand so what investment would it take to become sort of a less frictionless, more self-service approach especially for the SMB-type guys?

Brian Halligan -- Co-Founder, Chief Executive Officer

That's a really good question. The process is kind of coming together. We've been working on that for a while. And gradually, the percentage of our business that's coming in touchlessly has gone up quite a bit, where they start using the free CRM, they're using it and enjoying it.

And without talking to a rep today, they can buy that sales product, they can buy the service product. So today, we've already got a bunch of orders come in for the Service Hub product. Most of them have come in touchlessly. And so that's been -- that ship's been sailing.

What I'd like to do is just get that percentage of our customers who are buying touchlessly up over time because that makes our model more profitable and more compelling. I also just think it matches the way people want to buy stuff. Just imagine yourself, Bhavan, if you're a marketer or a sales person, you've used HubSpot in your last two companies, you joined your new company, you want to buy it, and I just think you're going to go over to our site and buy it. I don't think you're going to have to want to talk to a sales rep and go through a sales process.

You're just going to buy it like you would buy Dropbox or Spotify or any other service. So that's kind of where we're headed. It's not going to happen overnight, of course. But gradually, the percentage of our business that's coming in super low friction, with no touch, is starting to tick up.

I like the way that's going.

Bhavan Suri -- William Blair & Company -- Analyst

Thanks, guys. Nice job.

Operator

That was our last question. At this time, I will now turn the call back over to Brian Halligan, CEO of HubSpot.

Brian Halligan -- Co-Founder, Chief Executive Officer

Thanks, everybody, for hopping on the call. It's been a pleasure talking to you. Our business is really good. I look forward to keeping the conversations going.

I look forward to seeing you all in person at September at our INBOUND conference. Thanks a lot.

Operator

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

Duration: 61 minutes

Call Participants:

Charles MacGlashing -- Director of Investor Relations

Brian Halligan -- Co-Founder, Chief Executive Officer

John Kinzer -- Chief Financial Officer

Tom Roderick -- Stifel Financial Corp. -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Terrell Tillman -- SunTrust Robinson Humphrey -- Analyst

Richard Davis -- Canaccord Genuity -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Pinjalim Bora -- J.P.Morgan -- Analyst

Taylor Reiners -- Piper Jaffray -- Analyst

Koji Ikeda -- Oppenheimer & Company -- Analyst

Jennifer Lowe -- UBS -- Analyst

Brian Peterson -- Raymond James -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Tom Mao -- Evercore ISI -- Analyst

Scott Berg -- Needham & Company -- Analyst

Bhavan Suri -- William Blair & Company -- Analyst

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