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HubSpot Inc  (NYSE:HUBS)
Q3 2018 Earnings Conference Call
Nov. 07, 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 Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Chuck MacGlashing, Director of Investor Relations for HubSpot. You may begin your conference.

Charles MacGlashing -- Director of Investor Relations

Thanks, operator. Good afternoon and welcome to HubSpot's Third Quarter 2018 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 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 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 fourth 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-Q, which was filed with the SEC on August 1, 2018, for a discussion of the risks and uncertainties that can 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 measures most directly comparable to each non-GAAP financial measures used to discuss, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our third quarter 2018 earnings press release in the Investor Relations section of our website at hubspot.com.

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

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Thanks, Chuck, and good afternoon, folks. Thank you for joining us today, as we review HubSpot's third quarter 2018 earnings results.

Let's get right to it. Q3 was another strong quarter for HubSpot with 35% revenue growth, 4% non-GAAP operating margins and over 52,000 customers growing 40% from the prior year. These very strong numbers are the result of two big plays HubSpot began investing in a couple of years ago that are starting to pay off. First, is our investment in growing HubSpot from a single app company to a full suite company, dramatically increasing the value we deliver to the customer. The second, is our move from a funnel to a flywheel model to operate our business. The old funnel model views customers as an output, while the flywheel model recognizes the central role customers themselves play in driving their growth through upgrades, and especially word of mouth.

The flywheel mentally also puts a lot more emphasis on reducing friction in the customer experience. Great news is that our performance of the last few quarters gives me more confidence than ever, that our investments in suite and our move toward the flywheel are paying off already, and will position us for the continued growth in years to come.

Let's dig into the suite play. Back in the spring, we further expanded our offering of products with the introduction of Service Hub. This move into the service segment was particularly exciting because it gave us an even better way to add value to our customers and help them to create their own remarkable customer experiences. A typical customer often starts with just one of our hub, usually marketing or sales, and then later adds a second and a third hub. A couple of years ago, about 20% of our revenue came from multi-product customer; since then that percentage has doubled with over 40% of our revenue now coming from multi-product with room to grow even much higher.

By the way, we refer to this type of hub expansion in HubSpot as East West expansion, our first of three recent product expansion factors. At our inbound event in September, we released several new and upgraded products that were a major part of our North and Southward expansion. To the North, we made a massive upgrade to our marketing of enterprise and also introduced enterprise additions of sales in Service Hub. To the south, we made very important enhancements to our marketing hubs starter product, and also released a new starter addition for Service Hub to complete the starter suite, really, really good stuff.

Let's dig into the Northern expansion of our suite. With the introduction of the robust enterprise here, we're better able to scale with customers as they grow. Now if you go back to 2015, HubSpot was a natural fit for customers in the, let's say, 20- to 200-employee range. That can give us an A, for selling into and delighting a 50-person company back then, we nailed that segment. But things used to get a little bit tougher when customers grew and scaled up to a couple of thousand employees for us. But now, our new enterprise suite positions us well to delight customers with 200 employees all the way up to companies over 10 times that size.

As we highlighted it in inbound, HubSpot with our 2,594 employees and eight offices around the world has recently swapped out our existing CRM and now runs almost everything entirely on HubSpot. We use our own CRM, marketing hub, sales hub, service hub in a wide range of integrations plugged in. We have a lot of headroom to grow and lockstep with all of our customers. In fact, this quarter, we landed our first multi-year contract with a total contract value of over $1 million. Now, I know some of you may be thinking, Brian's finally going to the enterprise, is moving upmarket into the enterprise, I knew it, but I'm here to tell you, that's not the case. This particular deal was struck with the customer with under 2000 employees, proving there's a whole lot of value to generate by serving the mid-market. To me, this deal is a strong signal that our Northern expansion is working. And as our mid-sized customers get their own flywheel spinning, our products can nicely scale alongside. We're also expanding at the southern end of the market; in inbound, we introduced in new starter version of Service Hub and made a key enhancement to marketing hub starter by adding email functional. The market has responded particularly well to this new marketing hub starter product. We've seen some really strong early demand. Now this starter tier is a big part of how we are implementing the flywheel. Friction is the enemy of any flywheel, so we are obsessively looking for ways to remove friction from the customer buying experience. Our starter products do just that. The majority of our starter products are now purchased touchlessely. This is great for customers, who increasingly want to self-serve, it's also great for HubSpot, because the cost of acquiring a starter customer touchlessely is materially lower than our average customer acquisition costs; removing friction from the customer buying process is fueling our flywheel. Okay, so that was a quick overview of the slew of new products we announced in 2018, the biggest year of new product announcements in HubSpot history. Our R&D investments, they are really starting to pay off. One of the things I still love about working in HubSpot is it still feels like the early innings of our business. We've made great progress over the last couple of years, but there is much work left to do to continue to further delight our customers and to reduce friction in our flywheel. We look forward to continuing to dig in on both these fronts in 2019. Another area of investment for us, it's nascent, but has high potential in 2019 and beyond, is opening HubSpot up and letting our customers connect all of their other applications through us, moving us from an all-in-one suite eventually to more all-on-one platform where customers use HubSpot to orchestrate their entire customer experience with our application and other vendors as well. Okay. Now, I'll turn it over to Kate take you through our financials and our guidance.

Kathryn Bueker -- Chief Financial Officer

Thank you, Brian. Let's turn to our third quarter financial results and our guidance for the fourth quarter. As Brian highlighted, Q3 was a very strong quarter for HubSpot. We delivered strong revenue growth over $3 million of free cash flow and $5.9 million of non-GAAP operating profit. Third quarter revenue grew 35% year-over-year driven by 35% subscription revenue growth and 39% services growth. Constant currency revenue growth was 35% in the quarter, up 1 point over Q2 levels. The sequential increase in constant currency revenue growth is the result of the strong early traction from our 2018 product launches and the benefit of a more seasoned sales team due to lower attrition rates throughout this year. HubSpot ended the quarter with 52,505 total customers, which was up 40% year-over-year, consistent with Q2 growth. Average subscription revenue per customer came in at $9,959, which was down 4% year-over-year and roughly flat with Q2 levels. As I've shared at our Investor Day in September, the largest driver of the decline and ASRPC is the significant customer growth from our relaunched marketing starter products. Average subscription revenue per customer, and our sales hub and our marketing hub ex-starter continue to have positive growth year-over-year. International performance also continued to be strong in Q3 with international revenue growth of 52% year-over-year on both an as reported basis and in constant currency. International revenue represented 38% of total revenue in Q3, up nearly 1 point from last quarter.

Deferred revenue as of the end of September was $162.6 million, a 35% increase year-over-year while calculated billings defined as revenue plus the change in deferred revenue was $140.7 million, up 32% from Q3 of last year. Currency movements within the quarter resulted in a headwind to deferred revenue and calculated billings. Calculated billings grew 34% in constant currency, flat to Q2 constant currency billings growth.

The remainder of my comments will refer to non-GAAP measures. Third quarter gross margin was 81.7%, up 1 point sequentially and up slightly year-over-year. Subscription gross margin was 86.5%, up 1 point sequentially and up slightly year-over-year while services gross margin was negative 13%, up 7 points year-over-year. Third quarter operating margin was 4.4%, down 1 point versus Q2 and up 4 points year-over-year. As a reminder, we hosted our inbound event in the beginning of September. If you exclude the impact of inbound, operating margins would have increased by points sequentially and three points year-over-year to 7.4%. As Brian mentioned, we have been investing a lot in R&D and we expect to continue to make investments that we believe will drive long-term growth for the business. At the end of the third quarter, we had 2,594 employees, up 32% year-over-year. We had another solid quarter of hiring and as we discussed in Q2, attrition continues to be favorable, which positions us well to execute on our growth plans. CapEx, including capitalized software was $8.3 million in the quarter. Moving on to earnings, net income was $7.4 million or $0.17 of earnings per diluted share.

With that let's dive into guidance for the fourth quarter of 2018. Total revenue is expected to be in the range of $136.5 million to $137.5 million. Non-GAAP operating income is expected to be between $11.5 million to $12.5 million. Non-GAAP diluted net income per share is expected to be between $0.29 to $0.31. This assumes approximately 43.2 million fully diluted shares outstanding. And for the full year of 2018, total revenue is expected to be in the range of $505.5 million to $506.5 million, up from our previous guidance of $496.8 million to $498.8 million. Non-GAAP operating profit is expected to be between $29.5 million to $30.5 million up from our previous guidance of 24.3 million to $26.3 million. Non-GAAP diluted net income per share is expected to be between $0.80 and $0.82. This assumes approximately 42.3 million fully diluted shares outstanding. We expect full-year free cash flow to be between $39 million and $40 million. As you adjust your models, keep in mind the following, currency movements created a 4-point positive impact on a reported revenue growth in both Q1 and Q2 of 2018 and was roughly neutral in Q3. At current spot rates, we expect a foreign exchange headwind of 1 to 2 points to revenue growth in Q4. In the quarter, we saw a 3-point benefit to non-GAAP operating margins from our adoption of the ASC 606 revenue recognition standard. While we anticipate a similar benefit to Q4 non-GAAP operating margins, the benefit from capitalizing sales commissions over a longer period of time under ASC 606 will diminish thereafter. We expect CapEx as a percentage of revenue for 2018 to be in the 6% to 7% range, which is 1 to 2 points below our historic average. We expect CapEx will return to historical levels next year, primarily as a result of a couple of international facility projects.

To close, we delivered another strong quarter of operational and financial performance and believe we are well positioned for a strong finish to 2018. With that, I'll hand the call back over to Brian for his closing remarks.

Brian Halligan -- Chief Executive Officer & Chairman

Thanks. Kate, one of the things that's critical to scaling a company in today's day and age is attracting and retaining great talent. This is an area we've invested tremendously in over time. We've won numerous awards in this front over the years, but I was particularly pleased to see last quarter, we were named the number one place to work for employee happiness in the US by comparably, thrilled about that. Another area of continued investment and focus is making HubSpot as diverse and inclusive workplace is possible. I was happy to see that Fortune magazine just raised as the 18th best place to work in the US for women. We have more work to do on diversity inclusion but as pleased to see some recognition on that. With that in mind, I want to close by thanking all the HubSpotters as well as all our customers, partners and investors. Operator, can we please open the call for some questions?

Questions and Answers:

Operator

(Operator Instruction) Your first question comes from Brad Sills from Bank of America Merrill.

Brad Sills -- Bank of America Merrill -- Analyst

Okay, great, thanks guys for taking my question. Congratulations on a nice quarter. Wanted to ask about just early traction with the enterprise addition, particularly for marketing. I know it's early, but any color you can provide on how just general pipeline and interest has been trending there.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Hey, Brad, it's Brian. I'll take this one. It's going really well. The marketing enterprise, in particular, the big upgrade actually happened on November 1st where we released a whole slew of new really compelling functionality. What I think this does for us is it positions us very well with the company between let's say 200 and 2000 employees to win a deal, it also positions us well as customers who sign that maybe when they had 50 employees as they scale that will be able to keep them longer and scale along with them. So early returns are good, the demand is good. As you know, we are raising the price of that product. I haven't really heard any push-back on it. It seems like that was a good move. So feeling great about the early traction on marketing enterprise.

Brad Sills -- Bank of America Merrill -- Analyst

Great, thanks. And one more if I may please, Brian. Any color on the addition of sales into the marketing base? I know in the past you've made comments that sales -- your customers are adding marketing, but the other way around, is an area where you have been focusing on potentially improving. Any commentary there would be helpful please? Thank you.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

It's actually going really well also. We're seeing lots of customers come in starting with marketing and buying sales, lots of customers come in starting with sales and buying marketing. I guess if there was a surprise, it's the number of customers who have come in and bought the whole suite upfront, that's ticked up, that's exceeded my expectations and really happy with that. So going well in that front.

Brad Sills -- Bank of America Merrill -- Analyst

Great. Thanks, Brian.

Operator

Your next question comes from Samad Samana from Jefferies.

Samad Samana -- Jefferies -- Analyst

Great quarter and thanks for taking my questions. Maybe one to start with, on the $1 million TCB deal (ph), I am sure that's going to standout for lot of people. Brian, can you double check maybe on some more characteristic about that customer, maybe what products that (inaudible), was the duration of that deal different than typical HubSpot deal with the customer of that size? And what convinced them maybe to commit that much of the company (inaudible)? Then I have a couple of follow ups.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Hey, Samad, how are you?

Samad Samana -- Jefferies -- Analyst

Fine thank you.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

I was very happy about that. I kind of put in the -- it's a kind of neat thing that happened, but I'm not going to start having sort of a checklist on my desk of the number million-dollar deal. So we're not going to start reporting the number million-dollar deals, it's not going to be a focus of ours. I thought it was just an interesting proof point to show and then you have these new enterprise products we came out with a really good and they deliver a ton of value. The company that made the purchase -- purchase marketing enterprise that actually wasn't a full suite deal, there has been lots of nice full suite deals. That was marketing enterprise deal. I don't think we would have won that deal had we not come out with all that new functionality in inbound that we're about to release. So the new features are really working for us. The company itself is only about 400 employees. While, I think this deal is a nice sign that even in the mid-market, we are delivering a tremendous amount of value for these customers. And there will likely be a lot more of these in the future, but we are sticking with our SMB focus, we're not moving into the enterprise. I don't think I would really over focus on the number million-dollar deals at HubSpot. But the product, works, the new features are working; people are getting value from it. The sales cycle on that deal is relatively short. And what was interesting about that sale, I was actually involved with that sale was, a lot of it was self-service, kind of like when I talked about on stage at inbound. They gave the product a good try on their own, they use our API quite about a bit in the trial and really got quite comfortable with it and then our sales org kicked, did a fantastic job. Now, one note I would give you on that, Samad, is this is a million-dollar deal, but it's a four-year deal. This isn't a one-year. I want to make sure we don't get over our skis on million-dollar deals at HubSpot.

Samad Samana -- Jefferies -- Analyst

Great. And may be just one follow-up on customer hub. We're now about six months into that release, maybe just high the ramp comparing to sales hub and a maybe help us understand how sales motion is going (inaudible) the product with all that bundled suite price changing, et cetera, and that's it for me. Thank you then.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yeah, Just to make sure everyone got the vernacular, it's called Service Hub, not customer hub. And just to refresh folks, we came out with Service Hub Pro addition back in the spring, and then in inbound, we came out with the starter in the enterprise addition. So far it's going really, really well. It's ramping faster -- whatever we are five months in, ramping a lot faster than the sales product did for five months in. The product's improving a lot, lot of people are buying it. I mean, it's still early kind of like the sales product. It's mostly, if I think of SMB, small-, medium-sized businesses, it's more S then M right now. I suspect six, nine, 12 months from now, it will a lot more M, but right now it's more S. But really good reception so far with some selling quite well. People seemed to like what we're up to and I feel like we got another hit product in our hand. Yeah, feeling really good about it.

Operator

And your next question comes from Mark Murphy from JPMorgan.

Mark Murphy -- JPMorgan -- Analyst

Yes, thank you and I'll add my congrats. Kate, I wanted to ask you regarding the calculated billings growth where you said it, I think it came in at 34% in constant currency, very consistent, very healthy. But is there any adjustment to be made there for the increasing mix of HubSpot sales bookings, which I think pulls through a shorter duration of a couple of months versus only six or seven months for marketing. So is there any -- even if it's something subtle, is there any upward adjustment to be made in that number?

Kathryn Bueker -- Chief Financial Officer

Yeah, sure. I think billings, I would characterize as relatively misunderstood metric in our business. I think, if you look at the composition of the calculated billings, 90% of calculated billings is revenue and so it's going to take a big swing in the months upfront or what we sell in order to move that away from revenue growth over time when you're looking at it on a constant currency basis. So, yes, we do see a slightly smaller duration for deals on the Sales Hub, but that's really not moving the needle tremendously in calculated billings growth.

Mark Murphy -- JPMorgan -- Analyst

Okay. And then a quick follow-up, maybe for Brian, was there any actual impact from the pricing changes? I think, as you had mentioned, the price of marketing enterprise went to $3,200 a month starting just a few days ago. Did that have any tangible impact on the tone of business either in Q3 or in the month of October?

Brian Halligan -- Chief Executive Officer & Chairman

Minimal pull forward. But, like Kate said, it -- in a SaaS business, the way we're set up, it's not a big swing in the numbers you're going to see. But it helped a little bit, but it's not life changing.

Mark Murphy -- JPMorgan -- Analyst

Thank you.

Operator

Your next question comes from Bhavan Suri from William Blair.

Arjun Bhatia -- William Blair -- Analyst

Hi, guys, it's actually Arjun Bhatia on for Bhavan. Thanks for taking my questions. Just wanted to touch on the growth suite a little bit. I know it's been introduced relatively recently here, but what can you share on the initial traction you're seeing from the growth suite and how much of a role that play in the quarter? And then, just wanted to get an understanding of, our customers actually landing at -- with the growth suite or you still seeing a single hub customer maybe transition over time into the multi-product and all three products suite?

Brian Halligan -- Chief Executive Officer & Chairman

Yeah, good question, Arjun. I'll take that. I guess, my reaction to that is, we came up with the growth suite offering in inbound, so first week in September. So in terms of the impact on the quarter itself, very, very minimal. Having said that, we got a nice uptick on it. People are quite interested in it. And I think what's going on in the world is more and more companies are going to kind of pick a platform and buy applications and that platform vendor and then glue other applications in around it. And I kind of think it's like the way you would buy either G Suite our Outlook or you're an Apple person or an Android person and it's a bit of an all-in-one play. And we want to insist people to buy that way. We think that's the right way to buy. If you buy it altogether from HubSpot and then you glue all these other third-party applications then that works so well with HubSpot. Boy, it's really, really nice platform to enable our customers to create a very nice end-to-end experience for their customers. So I guess at the high levels, we're going pretty well, had nice uptick on it and I think that will continue to go well. I think that's the way over the long haul, people end up buying this type of software.

Arjun Bhatia -- William Blair -- Analyst

Great, that's helpful. And then maybe just a follow-up on the customer count. It looks like customer count went up about 4,500 net new customers sequentially, it is generally higher than we're seeing. Just wanted to see if there is any impact from inbound there or there's anything else that's driving that change to be higher than it's been over the past few quarters here?

Kathryn Bueker -- Chief Financial Officer

Yeah. I think that the largest contributor there is the uptake in the new marketing starter product.

Arjun Bhatia -- William Blair -- Analyst

Okay, great. That's helpful. Thanks for taking my questions.

Operator

Your next question comes from Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

Hey guys, good afternoon and thank you for taking my questions. I wanted to keen on the US versus international growth. International is certainly growing very, very rapid clip. When you're thinking about the investments in international versus driving growth in the US, how are you thinking of balancing those two priorities? And then I have a quick follow-up.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Sure, I feel good about the growth on both sides. International is growing very, very fast and I think that's just a result of the investments we've made. We got going in international few years ago, we made big, big investments in opening new offices and hiring people as well as big investments in translating the product, translating, offering the product in the sales, in the service in different languages and I think those investments have largely worked and we're getting a nice return on those investments. So we expect to invest in both where we get better returns, we invested a little faster in international, but we are investing in both we feel like it's still early days for HubSpot lots and lots opportunity both domestically and international.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And then a quick question for Kate; I'm not sure I'm jumping between calls but did I miss the net revenue retention rate and where -- how trends are in the quarter ?

Kathryn Bueker -- Chief Financial Officer

Yes. You did not miss it, but you want to start it all it on.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Well, we had a little argument about this actually, Stan, because we had our best revenue retention quarter ever, but Kate reminded me that this metric would bounce around a little bit, and with all the product and packaging changes, they can go up and down over time, but we had a very, very solid revenue retention quarter, best quarter ever and really -- I'm personally very excited.

Stan Zlotsky -- Morgan Stanley -- Analyst

Is it fair to say that it was above 100%?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yes, those are 100%.

Kathryn Bueker -- Chief Financial Officer

It was over 100% and I would just add that when you look at the drivers of sort of the slight uptick in revenue retention over Q2, it's really the upgrade motion from the new enterprise products that we're seeing drive that up a little bit.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Perfect, thank you guys.

Operator

Your next question comes from Richard Davis from Canaccord.

Richard Davis -- Canaccord -- Analyst

Thanks very much. Maybe any kind of on that topic, as you, I mean, we always ask for more, but that's thinking about on the churn side, and if you think about good in inbound programs they take consistency and the question I have is, really have to imagine that high adopt inbound versus this moment in time, I don't know, if that six months or 12 months where I'm kind of like, I don't feel like I see a lot of traction yet and that moment is when you would get churn and stuff like that. There a way in other tools or strategies or actions that you could take to get people through that dark moment and I don't know if it's again, if it's three months or 12 months but you must see that to some degree I would think, at least that's what we've heard from talking to people. Thanks.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yeah. I mean, there's a whole slew of things we worked on to improve the value we deliver to our customers over time. First is just investing in the product to make it better and more relevant, second is just trying to stay very modern, so it's social media networks changes, search engine optimization changes, sales techniques changes; keeping up with those and pulling our customers into it; pulling them into enabling them to create a better customer experience and the end for them, and then we've moved our packaging around a little bit. What we tried to do in packaging is for a while, we thought well, let's shift to much longer payment terms on these folks, but we are actually not going to lock people in for a long time, we want to make it easier for them to buy and then offer a lot of value to them.

So we do all kinds of things, I would say, and are very, very focused as a company on delighting these customers and making sure they're getting as much value as possible. And if I think about it like over the course of HubSpot when first I started to (inaudible) we really just help people get more visitors to their site. And then we help them get more leads to their database and then we help them sell more leads and then we're helping them the like those those customers, like the value prop and the the value we deliver to customers as dramatically expanded over time and as a result of that you've seen that retention rate come up over time.

Richard Davis -- Canaccord -- Analyst

Got it. Thanks very much.

Operator

Your next question comes from Alex Zukin from Piper Jaffray.

Taylor Reiners -- Piper Jaffray & Co -- Analyst

Hi, this is Taylor Reiners on for Alex. I wanted to double-click on the Growth Suite Bundle. When we think about that being about a 25% discount relative to list price for purchasing of products individually, how does that compare to kind of typical discounts for individual product?s. And then you see that driving up subscription revenue per customer over time as multi-product adoption starts and continues to trend higher? Thanks.

Kathryn Bueker -- Chief Financial Officer

Yes, I mean, I'll take the pieces. I think that the idea and designing the grocery packaging was to get some benefit for our buying the whole thing and so that is typically a bit more of a discount than you would get on a regular product. I think there are other ways that you can get discounts including signing up for longer commitments et cetera. As it relates to ASRPC, yes, certainly adoption of enterprise products in Growth Suite should be a positive impact on that but as we've talked about historically over the last couple of quarters here, we have a bunch of competing factors that are going to move that number around and we talked about in my recorded remarks that -- my written remarks that the biggest driver of ASRPC in this quarter was actually at the low end of the products queue with the impact of the big customer additions from marketing starter.

Taylor Reiners -- Piper Jaffray & Co -- Analyst

Got it. Thanks and congrats on a good quarter.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Thanks, Taylor.

Operator

Your next question comes from Jennifer Lowe from UBS.

Jennifer Lowe -- UBS -- Analyst

Great, thank you. I wanted to ask about the enterprise products and through the early demand you've seen there and in particular on the net new retention, then the net revenue retention metric you mentioned there you're seeing a lot of strong upgrade activity within the existing base and I'm curious, at this point how much of the demand you're seeing is that that its existing customers looking to get more functionality for HubSpot -- with HubSpot and really interested in the enterprise offering is a bill in demand versus bringing new customers into the fold with enterprise where that is today and where you think your aspiration to see that goal over the next year or two is ?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Jennifer. I'll take that. Thank you for the question. I gave you again kind of a mix. We're definitely seeing with the new marketing enterprise functionality that people who had marketing professional are upgrading and with the new sales enterprise few people are upgrading their; the service business is so new, there's not a lot of upgrading there. We're also starting to see some net new demand from companies between, call it 200 and 2000 employees, like our first million-dollar deal, that was a net new customer at the enterprise level. So I kind of call it a wash, but the same of each so far. I think over the long, long-haul probably more from the outside as we work through the installed base of Pro customers. I think that demand will shift a bit to the outside. I also think we'll keep customers longer. One of the things has always bothered me about HubSpot is when customers get to a certain size, they have built churn off and go to another platform and I know that's kind of irritating and then I don't think we'll see much of that happening in the future. I think people will be very happy with one of the things, and existing about HubSpot is we ourselves have moved pretty much are all business on the HubSpot whole front office applications -- front office operation and we have lots of employees, 2,500 employees, eight offices, relatively complicated organization and we've got plenty of headroom to grow with the products. So we think our customers will scale rate alongside us with the new enterprise skews.

Jennifer Lowe -- UBS -- Analyst

Great. And as you think about opportunities to acquire new customers in this slightly larger bucket than where you've played historically, how are you thinking about that the sales investment behind that? Is it taking the existing team you have haven't and just giving them a broader scope of leads to pursue or is it has a little bit more of a dedicated effort given that the price points are significantly higher than what you've, sold traditionally ?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

We mind add -- so we break our direct sales organization into three segments of small business, which is I think 2 employees to 25 employees medium 25 to 200 and enterprise 200 to 2000, you might see a little bit of an increase in the size of the sales organization into that 200 to 2000. We put some things in place on the security side to help our customers understand how secure their data is with HubSpot and enable them to get out that information more easily.

We put some things in place on the legal side for contract review to make that more easy to do, and we're working on some cool stuff on the implementation side to enable that. And so there's been some investment on our side. There will be some continued investment to ensure that we're ready when they call on it. I think the reality of what happens is, we are on pretty much everyone's radar these days. If they're looking at a net new CRM system, I just think we're going to win a lot more of those deals when they dig in and really evaluate it.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from Kirk Materne from Evercore ISI.

Peter Levine -- Evercore ISI -- Analyst

Hi, thanks for taking my question. This is Peter Levine in for Kirk. So first question here is when you look at the adoption of the broader suite, is there any real difference in terms of what you're seeing in the US versus international market?

Kathryn Bueker -- Chief Financial Officer

No. It's generally similar.

Peter Levine -- Evercore ISI -- Analyst

Okay, fair enough. And then, I know its still kind of in the early innings, but you talked about a new kind of channel initiative targeting more IT implementation focused partners. Can you kind of tell us about where you are today and your expectations from these newer partners over the next 12 to 24 months?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Sure. Let's talk about partners, a little bit. We didn't talk about them in the prepared remarks. I'll give you my perspective on it. First eight years of HubSpot, we sold marketing software and we've built a marketing agency channel that has worked -- it's still working incredibly well. Now, when I look at those agencies, there is several thousand of them. Some of them are really excited about the opportunity to move from marketing to sales to service to expand their offering from just helping companies with their marketing and their website lead generation, to helping them create a full flywheel and grow their business. But not all of them are, and we're not going to force them to do it. Many of them come from website design businesses and they're just not that interested in doing it. So overall that marketing agency channel is performing well. Many of them are selling the full suite somewhere. At the same time, we have a new initiative under way that is going pretty well, it's still pretty new, but I'm bullish on it, where we've got new agencies coming in, sales agencies, CRM agencies, IT agencies and it's still pretty early; it's going to get some nice investment next year and I think that will grow nicely. And those agencies, I think will be much more likely to sell either CRM or sell that full suite of products.

So I think -- think what you'll see over time is our agency program will diversify much more in the future. One of the things I love about HubSpot, we actually have two channel that work very well. We have a direct channel. The unit economics are really good and our direct channel is growing very fast and we have this agency channel growing very fast, unit economics work that agency channel, I think we have a chance to innovate and really do some cool stuff with over the next year or two.

Peter Levine -- Evercore ISI -- Analyst

Great. Thanks, I appreciate it.

Operator

Your next question comes from Terry Tillman with SunTrust.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Yes, hey, thanks for taking my questions. Brian, maybe the first question just relates to one of your comments earlier around Service Hub, and seeing faster ramp than you saw five months plus with the sales products. I guess, could we just delve in there little bit more in terms of some of the drivers of the faster rate of success there. And also what I'm curious about is competition-wise, what you're seeing in terms of is it replacing something, because you've had months in the market now it replacing something or is it greenfield?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yes, a couple of thought. When we first came out with the sales product and I think you probably remember this, it was very light, it was -- we actually called it signals, we didn't call it sales hub and it was a couple of very light features for a sales rep really, and it did well. It was priced very low. Over time, we grew that thing into a full on sales force automation product that we call Sales Hub. What I would say about service hub is a little -- it started off far more robust than that sales product. In fact, we came out initially with that product in the spring at the professional offering because it was pretty robust. One of the -- you've all seen us increase our R&D investment over time -- one of the use of proceeds on that R&D investment was a big investment in what we call the HubSpot framework, which is an underlying platform underneath HubSpot where you can imagine there's workflows, there's email, there's social, there's web pages and then the hubs themselves we combine those different things and we add interesting functionality to it to bring it to life. So what we were able to do when we built the service hub, leverage that framework to build something relatively robust right out of the gate. That's the big difference. The second big difference obviously is we have a much larger installed base to sell-through than we have in the sales organization. So those two reasons I think are combining for faster growth and a bigger business more quickly with the service hubs and the sales hubs.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Okay, awesome. And my follow-up question just relates to the touchless sales motion. I know that's still evolving, but like any kind of quantification on how much of the business that is actually more of that approach and could that be a byproduct of this increased kind of touchless sales be faster leverage on sales and marketing, I mean, you're seeing leverage in the model, so not complaining, but maybe talk a little bit more about the touchless sales motion?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Sure, I can touch on and Kate can add. That is nascent (ph) going well. What's interesting about it is -- what are the most interesting things going. We talked a bunch about that enterprise layer product, just as interesting if not more is that marketing hubs starter product is going very, very well. We came out with the kind of Version 2.0 of that product in the end of July and the uptake has been excellent on that product, and over half of that is touchless. And I really like that motion, and what we expect over time is that to be a very large pool of customers in that they over time will buy starter and service starter, some will move from marketing started to marketing Pro. So we're investing in that. We're making good progress, and that'll be a big initiative for next year. I think you'll continue to see us move on that path. One of the people who really inspires that is a guy named Jay Simons, he is the President of Atlassian, and he is on our Board. And the reason we put him on our Board is, we really like the way Atlassian does business and goes to market. I don't know if we'll ever get all the way to where they are, but we kind of headed in that direction, and I really like that direction we're headed.

Operator

Your next question comes from Scott Berg from Needham.

Ryan MacDonald -- Needham -- Analyst

Hi, this is Ryan MacDonald on for Scott Berg. I guess, just starting out with the Sales Hub, that's -- it seems it appears to be have been accretive to subscription gross margins. When we're looking at service hub, what sort of impact would you expect to have there on the margin?

Kathryn Bueker -- Chief Financial Officer

I think that the subscription gross margin numbers have trended, sort of up a couple of points over the last few years. It all runs on the same infrastructure, and so teasing apart the margins of the individual products and hubs is frankly not something that is a very easy endeavor.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yes, Scott one of the things that we talked about last quarter is that moderated to a large extent this quarter was, we had some incremental COGS associated with GDPR through the first half of the year, that largely went away in the third quarter, they gave us some sequential benefit as well.

Ryan MacDonald -- Needham -- Analyst

Got it. And then just a quick follow-up. And regards to professional services, that line item continues to grow faster than software. Is there anything that's changed there in terms of the services you're providing or are customers consuming more for any particular reason?

Kathryn Bueker -- Chief Financial Officer

Yes, a couple of things on the services business. The first thing I would just remind you is that it's a very small part of the overall revenue for the company, and so small changes in that revenue stream generate big changes in the growth rates and profitability profile there. So just, I would first just keep that in mind. That said, I think there are couple of positive things that we've seen in the services, revenue stream this quarter. One is just a benefit from the mix of subscription products that we're selling. So as we sell more pro and enterprise products as we sell more marketing products that has a benefit flow through benefit to services revenue. The other thing is with the adoption of 606, there is a small amount of revenue that gets attributed over to the services business that was not there in 2017. And so that's going to show a little bit of benefit in terms of growth rates.

Brian Halligan -- Chief Executive Officer & Chairman

I'd add there is there is no strategy change there. And one of the things I've always liked about HubSpot is we give our customers two choices of implementation. Choice number one is, they can do it themselves and we teach them how to do it. Choice number two is, they can outsource a lot of it to an agency partner. We're sticking with that model. We really like that model. So there is little tweaks, little tiny changes in here, but there is no big strategy shift going on.

Ryan MacDonald -- Needham -- Analyst

Thanks.

Operator

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

Koji Ikeda -- Oppenheimer -- Analyst

Great, thanks for taking my questions and congratulations on the quarter. I'm going to throw this question out there for either Brian or Kate. Back at the Analyst Day, you gave a ton of great insight on ARR metrics for marketing, sales and service. And I know this is not something that you want to give out numerically on a quarterly basis, but I was wondering if you could just give some qualitative commentary on how ARR trended for the three segments here?

Kathryn Bueker -- Chief Financial Officer

That's sort of the backwards way and to trying to get us to tell you on a quarterly basis. I think the trends that we outlined at the Analyst Day were continuing to see in terms of the relative growth rates of the segments.

Koji Ikeda -- Oppenheimer -- Analyst

Okay, thanks, Kate. And I want to go back to that $1 million TCB (ph) deal, I mean that's an awesome, awesome win for you guys, congratulations. Just thinking about the installed base as a whole, I mean, is that really that big of an anomaly in deal size or other customers in the wheelhouse that are already somewhat near that zip code or you've been trending to sort of that level. I mean, any sort of commentary there would be great?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Yes, just a reminder, that's a four-year deal. So let's just say and I don't even know if this case, let's say, at 250k (ph) per year. We have other customers in that range at this point, I think you'll see customers -- the largest customer you have in per year revenue, I think we'll see that drift up over time as we get more enterprise deals and we get more of these suite deals, because really there is two growth factors going on. One is, the North factor and the other is the East-West. So there's room to move there I think will be more, but we are not moving the enterprise. One of the reasons we're not moving the enterprise is there's a lot of competition in the enterprise salesforce.com, Adobe, IBM, Oracle lots of interesting companies that are executing well. We like SMB. We like that the Internet kind of disproportionately benefits SMB versus the enterprise. Our genetic code is there. Our go-to-market is there. And so we're likely very, very likely to stay kind of in our swim lane of between a few employees up to a couple of thousand employees.

Koji Ikeda -- Oppenheimer -- Analyst

Great, thank you for the color. Congrats on a great quarter.

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Thanks, sir.

Operator

Your next question comes from Tom Roderick from Stifel.

Parker Lane -- Stifel -- Analyst

it's actually Parker Lane in for Tom, thanks for taking my question. Brian, if I look at HubSpot Connect, it's obviously a big priority for the company to land customers and then integrate with other enterprise and SMB apps out there, but when I look at the page, I see a lot of players like Salesforce and Zendesk that are sort of involved with businesses they be involved in your East-West expansion strategy. I'm just wondering how much disruption you're seeing in the HubSpot Connect ecosystem from the launch of your products, if any, and what kind of customer would be using Salesforce alongside of upside?

Brian Halligan -- Chief Executive Officer & Chairman

Really good -- really good question. Let me give a little color on that. We've been investing over the last couple of years, but we're aggressive little more this year in moving HubSpot to be more of a platform. We've invested in a lot in increasing the number of API endpoints we have, invested a lot in increasing the quality of those endpoints, we invested in a lot in building integrations ourselves and enabling third parties to build integrations to HubSpot. We've built integrations to really cool product like Shopify, Stripe, black (ph) and others that are really going well. And what we wanted to do over the long, long-haul is they pick HubSpot as a partner and we're not just all-in-one, we're all-on-one and if you want to use HubSpot service hub, that's great. If you want to use intercom or do you want to use Zendesk, that's great. We come out with service hub, and we still have lots and lots of happy customers that are using Zendesk for service and intercom for service; intercom recently improved their integration with HubSpot around that and so we have to grow up and we have to be a platform player just like all the other platform players and give them a choice and make sure they get a great customer experience. That's our philosophy around it.

Parker Lane -- Stifel -- Analyst

Great, thanks for the color.

Operator

Our next question comes from Brian Peterson from Raymond James.

Brian Peterson -- Raymond James -- Analyst

Hi, congrats on the quarter and thanks for taking the question. So, Brian maybe as we talked about this move north of little bit as you guys have phrased it, but what are the competitive dynamics like there now versus maybe when you were public back in 2013. We've seen some M&A in the space and you mentioned as customers had grown in the past, they migrated a different platforms. What are we seeing in that kind of up market movement now?

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

I mean, it's super early. No huge changes. I mean we, of course, see, salesforce.com, they're are a very good partner and competitor in deals and we win our fair share. The Adobe deal is interesting. We've always seen Marketo up in that space, and I think we'll see Marketo up in that space in the future. But so far, we're keeping an eye on it, but no, no huge changes so far in our competitive landscape. I think we're just going to win more deals in that 200 to 2000 segment and I think we're going to be able to hold on to more customers as we move up from 200 to 2000. What I'd like to see happening is, let's just say, you're using HubSpot for marketing and sales and service, and maybe for whatever reason, our service hub is answering the mail for you, you say, I want to continue to HubSpot, but I'm going to use Zendesk instead of service hub for whatever reason, there is functionality in there that's more enterprise. That's what I'd like to see happen over the long haul, pick HubSpot sort of as your hub and build around it.

Brian Peterson -- Raymond James -- Analyst

Got it. Thanks, Brian.

Operator

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

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks a lot and congrats from me as well. And Brian, in our field work when we think about sales adoption, I think, at least my perspective is that it is more skewed to net new customers as opposed to base customers and I'd love your perspective on that and whether you think over time there's mechanisms to get the base to adopt faster as well?

Brian Halligan -- Chief Executive Officer & Chairman

I think that the research is pretty good. We have done remarkably well in getting net new accounts, who don't use our marketing product to buy that sales product. I've been delighted with that. And I think we're pretty good at cross selling our marketing product to the sales customers, and I think we're pretty good at selling our sales product to the marketing customers. I think that's in the area we're going to continue to improve in and there is leverage and as as we go forward. But you're right that we have a lot of folks coming into HubSpot as net new customers buying sales starter and sales pro and I'm actually delighted about it. I think that's filling up our installed base so we can cross-sell to over time, but sales business, Ross, is really -- I mean, really well. Very, very happy with the way that things growing.

Ross MacMillan -- RBC Capital Markets -- Analyst

That's great and then just one for Kate. I know you don't guide to billing -- calculated billings and I know you say it's misunderstood metric, but I just want to make sure that we were thinking about Q4 because I think the comp is very hard. I think there was 5 points of FX tailwind inbound, timing is different, I know it wasn't big, but there was maybe a little bit of the price change impact in Q3. So maybe, I don't know -- what are the things that we should think about as we set up our models here for Q4?

Kathryn Bueker -- Chief Financial Officer

Yeah, I think for Q4, what we've said on the call is that there is a couple of 1 to 2 points of headwind on the revenue side. There's probably another 1 to 2 points of headwind on the deferred revenue side, so calculated billings will have more of a headwind than revenue.

Ross MacMillan -- RBC Capital Markets -- Analyst

Okay, that's helpful. Thank you. Congrats again.

Brian Halligan -- Chief Executive Officer & Chairman

Okay. Thanks everybody for joining the call. Look forward to talking to you soon.

Operator

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

Duration: 56 minutes

Call participants:

Charles MacGlashing -- Director of Investor Relations

Brian Halligan -- Chairman of the Board, Chief Executive Officer, Founder

Kathryn Bueker -- Chief Financial Officer

Brian Halligan -- Chief Executive Officer & Chairman

Brad Sills -- Bank of America Merrill -- Analyst

Samad Samana -- Jefferies -- Analyst

Mark Murphy -- JPMorgan -- Analyst

Arjun Bhatia -- William Blair -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Richard Davis -- Canaccord -- Analyst

Taylor Reiners -- Piper Jaffray & Co -- Analyst

Jennifer Lowe -- UBS -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Ryan MacDonald -- Needham -- Analyst

Koji Ikeda -- Oppenheimer -- Analyst

Parker Lane -- Stifel -- Analyst

Brian Peterson -- Raymond James -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

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