HubSpot Inc (HUBS) Q4 2018 Earnings Conference Call Transcript

HubSpot, Inc. (HUBS -2.40%)
Q4 2018 Earnings Conference Call
Feb. 12, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, this is the operator. Today's conference call is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good afternoon. My name is Mike, and I will be your conference operator today. At this time I would like to welcome everyone to HubSpot's Fourth Quarter and Full Year 2018 Earnings 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. If you would like to ask a question during this time, press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key.

I will now turn the call over to Chuck MacGlashing, Director of Investor Relations. You may begin your conference.

Chuck MacGlashing -- Director of Investor Relations

Thanks, operator. Good afternoon, and welcome to HubSpot's Fourth Quarter and Full Year 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 Section 27a of the Securities Exchange Act of 1933 as amended in 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, operational expenditures, expected growth, and business outlook, including our financial guidance for the first fiscal quarter and full year 2019. 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 10Q, which was filed with the SCC on November 7, 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 fourth quarter 2018 earnings press release in the investor relations section of our website at hubspot.com.

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

Brian Halligan -- Chief Executive Officer and Chairman

Thanks, Chuck, and good afternoon, folks. Thank you for joining us today as we review HubSpot's fourth quarter and full year 2018 earnings results. We had a strong ending to 2018 and a really good year overall, so let's get right to it.

We grew revenue 37% for the full year and closed out Q4 with 35% revenue growth, which is 37% growth at constant currency. Our full year non-GAAP operating margins expanded four points to just over 6%, and total customers surpassed 56,000, up 36% year-over-year.

Honestly, 2018 was one of the best years in our history in many ways, but especially when you think about it from a product and customer value perspective. We started the year with a really strong marketing application business that helped our customers generate leads and a fast-growing sales enablement business that helped salespeople sell. We ended the year with a full suite of marketing, sales, and customer service product that helps our customers grow better by crafting a remarkable experience with their customers. In addition to that, we built out that suite in such a way that small start-ups can start with our starter layer, move into our professional layer as they grow, and ultimately purchase our entire enterprise-tier products.

In addition to improving our product portfolio and value proposition, we started evolving how we thought about how we grow better ourselves, speaking specifically about the flywheel growth model. In 2018 we started shifting from seeing our business as a traditional funnel to viewing it much more as a flywheel. The old funnel was great, but it tended to view customers as just an output, although more modern flywheel recognizes the central role customers play in driving growth through upgrades and especially word of mouth. Customers are not an output. They're the beating heart of your business. When you cut down the friction in your customer experience, you speed up the momentum of your business overall.

Let me give you an example of the flywheel in action. I met one of our customers, a company called Stella, on a recent trip to Europe. Stella has 800 employees. They provide home cleaning, child care, and healthcare services in Finland. We didn't need a major marketing push to get into Stella. We just needed my new friend Ville.

Ville was a HubSpot customer at his last company, and he had recently joined Stella. He enjoyed using HubSpot in his last role, so as soon as he got to his new job he led the effort to bring HubSpot on board. Ville and Stella get started with Marketing Hub in January of 2018. In June, they picked up Sales Hub Starter, and in September they added Service Hub Professional. And then in November they upgraded to the full enterprise growth suite across the board.

Now as they scale, the value they're getting from HubSpot is scaling up with them, but it's not just about scalability for a customer. It's all about creating a better experience for their customers. Now that Stella's using Marketing, Sales, and Service Hubs together, every team at their company is working off the same shared understanding of their customers, too, and that kind of alignment pays off in so many ways.

All these new products in our flywheel mentality is working all over, not just at Stella. At HubSpot we're seeing lots of new customers buying multiple products upfront, and our new products have improved our cross-sale motion, allowing us to reach nearly 20,000 multiple-product customers in Q4, up 90% year-over-year.

Customers are also responding to our new growth suite bundle pricing, with nearly 50% of our new triple product customers in the quarter buying all three products up front through the bundle. We think customers will find more value by using the full suite and multi-product customers carry better unit economics for HubSpot than single-product customers.

In addition, the relaunch marketing starter product continue to get great traction with customer on this product up 3x year-over-year. This, in turn, has helped drive a nearly twofold increase in upgrades from marketing starter to the professional and enterprise tiers over the last year. The nice thing about how these hubs and tiers work together is that they enable customers to grow and use more of HubSpot on their terms when they need it.

As excited as I am about the progress we've made transitioning HubSpot from an app company to a suite company in 2018, I'm even more excited about the momentum we have going into 2019. In 2019 we will again be focused on two parts of that flywheel equation. First, increasing the force supplied to our flywheel by word of mouth from existing customers. We're working on a long list of funded, high-return projects in 2019 that we think will make an existing suite even more valuable to our customers, particularly at that enterprise tier.

Second, decreasing the friction in our flywheel by making HubSpot easier to do business with for companies of all sizes, with a particular emphasis on our premium model. We wanna match the way we go to market with the way modern humans buy these days. There's lots of low hanging fruit left for us on both these flywheel initiatives in 2019. HubSpot's still in its very early innings in its development.

One more thing about 2019. We've used the Warren Buffett quote with you before that goes something like, "Someone is sitting in the shade today because a seed was planted several years ago." Several years ago we planted the suite seed, and it's starting to throw off some shade for us today, with much more shade to come in the future. In 2019, you'll start to see a new seed we're planting as we shift HubSpot from an all-in-one suite to much more of an all-on-one platform. We want to be able to help our customers grow better, and although we'd love for them to completely rely on HubSpot's applications to do so, the reality is that a modern business has lots of important applications. What we want to do over time is enable our customers to use all of their applications with HubSpot.

Today HubSpot manages its own applications' data, its own applications' workflow, and reports on all of its own data. In the future, we expect HubSpot to manage all of our customers' front office applications' data, all of their front office workflow, and report on that entire experience. You're starting to see the beginning of the shift. We announced the strategic partnership with our friends at AWBUS. We greatly expanded our API endpoint footprint and support. We built some killer integrations of our own to commonly used applications like Stripe and Flak, and we welcomed a couple hundred connect partners into our program who have integrated their applications into HubSpot. All this will further expand the value we can create for our customers that would open up new growth opportunities for us. So stay tuned for more on this front over time.

Okay, with that, I'll turn it over to Kate to run through our financials and our guidance.

Kate Buecker -- Chief Financial Officer

Thank you, Brian. Let's turn to our fourth quarter and full year financial results and our guidance for the first quarter and full year of 2019. Q4 was a very strong quarter for HubSpot. We delivered strong revenue growth, over $25 million of free cash flow, and $14 million of non-GAAP operating profit.

Fourth quarter revenue grew 35% year-over-year on an as-reported basis and 37% in constant currency, up nearly two points from Q3 2018 constant currency revenue growth. The sequential increase in the quarter is the result of continued traction from our 2018 product launches and strong and solid base sales.

Q4 subscription revenues grew 35% year-over-year as reported, while services revenue grew 49% year-over-year. Services revenue growth in Q4 benefited from a mixed shift toward our professional and enterprise skews and an uptick in classroom training. While we're pleased with this overall performance, keep in mind that services revenue represents a small percentage of our overall revenue, and we expect services revenue to grow more slowly than subscription revenue in 2019.

Full year 2018 revenue grew 37% as reported and 35% in constant currency. As Brian discussed, we had a really strong year of revenue growth overall in 2018, driven by several factors including strong lead generation, new product releases, and a seasons sales force that executed very well.

HubSpot ended 2018 with 56,628 total customers, which was up 36% year-over-year. Average subscription revenue per customer in Q4 was $10,012.00, down 2.4% year-over-year and up slightly compared to Q3. While we are encouraged by the sequential increase, we continue to expect this metric to bounce around depending on product mix and the amount of new versus install-based selling in any quarter.

International performance also continued to be strong in Q4, with international revenue growth at 48% year-over-year on an as-reported basis and 50% in constant currency. Domestic revenue growth reaccelerated in Q4 to 28%, up two points from Q3. International revenue represented 38% of total revenue in Q4, up three points from last year. During 2018, we opened a new office in Bogota and announced plans to open an office in Paris later this year. We continued to see lots of opportunity for more growth outside the United States.

Deferred revenue, as of the end of December, was $185.5 million, a 33% increase year-over-year, while calculated billings, defined as revenue plus the change in deferred revenue, was $166.9 million, up 33% year-over-year. Currency movements within quarter resulted in a headwind to calculated billings, which grew 35% in constant currency, up a point compared to Q3 constant currency billings growth.

The remainder of my comments will refer to non-GAAP measures.

Fourth quarter gross margin was 82.3%, up slightly sequentially and up a point year-over-year. Subscription gross margin was 86.5% [audio cut] margin was 81.6%, or of last year respectively. Full year operating margin was 6.3%, up four points versus 2017.

As we've talked about in prior quarters, the adoption of ASC-606 had a positive impact on operating margin for the year because we extended the period of time over which we recognized commissions expense. This contributed three points of margin expansion to our 2018 results, while the underlying business delivered one point of leverage. We continue to drive operating leverage in the business that is consistent with our long-term framework for growth and profitability, and we remain committed to the framework going forward.

At the end of the fourth quarter we had 2,638 employees, up 27% year-over-year. Attrition remained favorable throughout 2018, which positions us well to execute on our 2019 growth plan. Capex, including capitalized software development costs, was $8.1 million in the quarter and $33.5 million for the full year.

Moving on to earning. Net income in the fourth quarter was $15.8 million, or $0.37 per diluted share. Full year net income was $36.9 million, or $0.89 per diluted share.

With that, let's dive into guidance for the first quarter of 2019. Total revenue is expected to be in the range of $146.5 to $147.5 million. Non-GAAP operating income is expected to be between $9.5 and $10.5 million. Non-GAAP diluted net income per share is expected to be between $0.23 to $0.25. This assumes approximately 44.4 million fully diluted shares outstanding.

And for the full year of 2019, total revenue is expected to be in the range of $648 to $652 million. Non-GAAP operating profit is expected to be between $46 to $50 million. Non-GAAP diluted net income per share is expected to be between $1.08 and $1.16. This assumes approximately 45.6 million fully diluted shares outstanding. We expect full-year free cash flow to be about $60 million.

As you adjust your models, keep in mind the following. Currency movements created a four point positive impact on reported revenue growth in both Q1 and Q2 of 2018, was roughly neutral in Q3, and was a headwind of a little more than a point in Q4. Given the volatility in FX rates throughout 2018, we thought it would be helpful to provide some additional context for FX will impact our as-reported growth rates in 2019. At current spot rates, we're forecasting foreign exchange headwind of approximately $8 million to as-reported 2019 revenue, which would equate to a one to two point negative impact to as-reported growth. Substantially all of this currency impact will occur in the first two quarters of the year.

Our 2019 guidance implies two points of normal course operating margin improvement offset by one point of margin pressure from the amortization of sales commissions expense under ASC-606. This will result in one point of operating margin improvement on an as-reported basis. Furthermore, we expect to realize the majority of our operating leverage in the first and fourth quarters.

Capex as a percentage of revenue for 2018 was 6.5%, which is a couple of points below our historic average. We expect Capex as a percentage of revenue to return to 8% in 2019, primarily as a result of the buildout of our new Dublin facility.

To close, 2018 was an especially strong year of operational and financial performance, and we believe we are well-positioned to build on this momentum in 2019. With that, I'll hand the call back over to Brian for his closing remarks.

Brian Halligan -- Chief Executive Officer and Chairman

Thanks, Kate. 2018 was a great year for us, with the business performing well, and I'm bullish on the outlook for our business entering 2019. There's a lot that goes into driving the results we've gone over today, and the credit goes to the HubSpot team behind these results.

We've invested a lot of energy these days into making our HubSpot team a more diverse and inclusive place for employees to work. That investment's starting to pay off. In Q4 we were recognized again as a top company for diversity in women by Comparably, and we were recognized for the first time by Fortune as the best workplace for parents. We've a lot more work to do in 2019 on diversity, inclusion, and belonging at HubSpot, but I'm encouraged by our recent progress and excited about all the good stuff to come.

With that in mind, I wanna close by thanking all those Hub spars for the work they do and the different passions and perspectives they bring to their jobs. Thank all of our customers, partners, and investors for a really great year in 2018. I'm super excited about 2019.

Operator, could we please open the call for some questions?

Questions and Answers:

Operator

At this time I'd like to remind everyone in order to ask a question press *1 on your telephone keypad. To withdraw your question, press the # key. We will pause a moment to compile the Q&A roster.

Your first question comes from Mark Murphy from JP Morgan.

Mark Murphy -- JP Morgan -- Executive Director

Thank you very much. Congratulations on a great finish to the year. Kate, I was wondering how material of an uplift you think the premium marketing edition can be for you this year, if there's any way to pencil out some math on that? And, as well, Brian, I think you've hinted in the past that there are other things out there after marketing, sales, and service, and I was just curious how you feel about the bandwidth of your engineering team to go after that, just given all the product they've developed last year and just whether that's mostly a reference to this all-in-one platform or are you looking at other markets like commerce or content or anything else? Thank you.

Brian Halligan -- Chief Executive Officer and Chairman

Hey, Mark, it's Brian. I can take those. In terms of the, you called it the premium marketing edition. We call it the enterprise skew. So far, so good. We announced just the kind of, thinking through it, inbound we announced a new marketing hub, a bunch of new features in marketing hub and a new price point, and it sold pretty well in Q4. That product I think is priced well and will sell well throughout 2019. I think the introduction of the sales hub and service hub alongside that will make it a very powerful combination. So off to the races there feeling good.

That marketing hub product, on the enterprise side, got a lot better. It's gonna get even better over the course of this year. There's a couple of -- I dealt with the product folks today. There's a bunch of cool stuff coming in that throughout '19. So I'm psyched about that. In terms of new hub, yep, we get three now, and I guess I would say we're not done. We've got two, three -- We have really solid ideas for new hubs in our heads now. I guess I would give you guidance that over maybe the next three to five years we'll add a bunch more hubs. I wanna stay away from forecasting too short term on that, but there's more hubs coming, more opportunity there.

And at the same time we're investing in the platform side, and we're investing heavily in our APIs and the support of those APIs. We're enabling third parties to integrate really nicely into HubSpot. We're building some really nice integrations to HubSpot. So things are really hopping on the R&D side at HubSpot. The R&D team's really performing well. The recruiting's going well. I think the teams will manage feeling really good about that.

Mark Murphy -- JP Morgan -- Executive Director

Thank you very much.

Operator

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

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

Oh, thanks, guys. Just a question, please, on the ISV opportunity you were just speaking about there, Brian, with the work on the APIs. I mean, is the expectation that you are expecting more sale, custom sales apps from third parties? Or is this more of a marketing play? Where do you see the most opportunity for some of these third-party applications?

Brian Halligan -- Chief Executive Officer and Chairman

That's a really good question. I think it's across the board. It started when we first started opening things up a couple years ago on marketing, but we're starting to see a lot of activity on the sales app side. And it's early, but we're starting to see some on the service side, as well. So I think you're gonna see integrations across the platform. Some are cross-platform entirely, or some are department specific, but I -- It's starting to pop kind of everywhere.

Really psyched about that. It creates a lot of value with our customers. Like I think of the journey we've been on, and for the first really eight, nine years of HubSpot, we were in the business of selling an application that helped our customers generate leads, and then we moved to selling a suite of applications that help our customers really orchestrate their customer experience and try to improve that. And over time, we wanna let our customers not just use our applications but weave in many, many other applications that they're already using or could potentially use to really create beautiful end-to-end customer experiences that help them grow better.

So we're on journey here at HubSpot, still early, going quite well [audio cut].

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

Thanks, Brian. One more if I may, please, just on sales pro now that it's been some time since the product's been in the market, the new version. What are you seeing in terms of uptake there and what is the interplay with sales pro with existing CR applications? Is this more greenfield opportunity, or is it sales pro running alongside what these customers might already be running?

Brian Halligan -- Chief Executive Officer and Chairman

That's a good question. Just to remind everyone, we came out with the sales pro product last November, Chuck?

Kate Buecker -- Chief Financial Officer

Last inbound.

Chuck MacGlashing -- Director of Investor Relations

Yeah, last inbound.

Brian Halligan -- Chief Executive Officer and Chairman

Okay, last inbound. And -- No, no, no. Sales pro product, not the service pro product. So it was a year ago.

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

Yeah, sales pro.

Brian Halligan -- Chief Executive Officer and Chairman

And, yeah, year ago.

Chuck MacGlashing -- Director of Investor Relations

November of '17.

Brian Halligan -- Chief Executive Officer and Chairman

Yes, November of '17. That thing's gone really well, really well. The reps love on it. The customers are picking it up and running with it. That thing is a very popular product, and most of the time people are using Sales Hub Pro on top of our CRM. Sometimes people use Sales Hub Pro on top of other CRMs. More and more we're seeing a trend in our in-solvates, and I think this will happen industrywide, the kind of people pick up a platform or a hub, and then they use some of our apps and other applications and weave the whole thing together. In some cases, there's mixed environments, but I think the trend will be kind of one platform-level partner that you'll build around. So lots of Sales Hub Pro sold with our free CRM.

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

Great. Thanks, Brian.

Operator

Your next question comes from Samad Samana from Jeffreys.

Samad Samana -- Jeffreys -- Analyst

Hi, good evening. Thanks for taking my question. Brian, one for you, and then a follow-up for Kate. On the expanded AWS partnership, I think it was announced in mid 4Q, can you help us think about how we should think about that impacting the customer funnel in 2019? And can you expand on some of the joint go-to market efforts and how you think that's going to drive at new customers or if it's already driving new customers? How we should think about that opportunity? And then I have a follow-up for Kate.

Brian Halligan -- Chief Executive Officer and Chairman

I'm super psyched about that partnership. We're a big customer of theirs, of course, and we've designed some unique go-to-market things with them. You might have noticed, Samad, that they were a giant sponsor in down this year. They will be for the next couple years. They're particularly interested in our HubSpot for Startups track. That's a program inside of HubSpot that's gone really, really well, and our HubSpot for Startups team and their AWS for Startups program are working on a whole bunch of stuff that we're doing together that are really interesting and unique that are starting to get rolled out. So I think that's a pretty cool partnership, really, really excited about it.

Samad Samana -- Jeffreys -- Analyst

Great. And, Kate, ASRPC increased quarter-over-quarter for the first time since 3Q '17, and kind of conversely net adds was -- it was small, but it was down slightly year-over-year. I'm just wondering, can you just help us understand if that's just kind of timing related or just help us understand the seasonality of why if either one should be seen as an inflection? Obviously they're both doing well, but we're just trying to get some color as we think about modeling forward for 2019.

Kate Buecker -- Chief Financial Officer

Yeah, so, you know, we're obviously very happy with the customer growth this quarter. We saw continued strength in the growth of our customers from the marketing starter. But what we're probably more excited about is that you get sort of a positive impact on ASRPC from a sequential perspective on top of the continued robust growth of the net additions. I don't think we're gonna be able to do that every quarter, and as we've said in the past there'll be pushes and pulls at the high and low end of our customer base. I wouldn't view either result as an inflection point for us. I think over the next set of quarters we're gonna continue to see ebbs and flows.

Samad Samana -- Jeffreys -- Analyst

Great. That's really helpful. Thanks again for taking my questions, and congrats on a great quarter.

Brian Halligan -- Chief Executive Officer and Chairman

Thank you.

Operator

Your next question comes from Alex Zukin from Piper Jaffray.

Alex Zukin -- Piper Jaffray -- Managing Director

Hey, guys. Thanks for taking my question. Maybe just a question on the premium and low-touch hub that you talked about in the quarter and 2018, how you plan to expand on that in 2019, and how do you see that impacting margins in 2019 and beyond?

Brian Halligan -- Chief Executive Officer and Chairman

I can start with that.

Kate Buecker -- Chief Financial Officer

Sure.

Brian Halligan -- Chief Executive Officer and Chairman

Yeah, one of our big goals this year is to really just match the way sell with the way people buy, and part of that is the premium edition. If you roll back the clock, the premium edition got started three years ago, really on the sales hub side of the business. It worked real well, and so we rolled it out with the service hub product. Just now we're really getting quite serious about rolling that out within the marketing hub product. So it's still early days on it, but it seems it's working really well. Really happy with that shift to premium.

We wanna see this year more and more of our starter business come in with frankly no-touch, little-touch or no-touch, where people can start on the premium and play around with it and get a good feel with it and just buy that starter without having to talk to a sales rep. The company I really admire who's really good at this stuff is, you probably admire them, too, is Atlassian, and we got the president of Atlassian on our board, Jay Simons, and they've been very influential on us as we move our model closer to where they are.

Kate Buecker -- Chief Financial Officer

I think from a margins perspective --

Alex Zukin -- Piper Jaffray -- Managing Director

Got it, and just maybe a --

Kate Buecker -- Chief Financial Officer

I would say from a margin perspective, I think we're very bullish at the long-term benefits of the premium model. I think in the near term, we continue to talk. We talk and look at the unit economics, which remain robust for the company, and so these sort of returns on our investments, you know, we will continue to invest in our go-to-market on both the premium side and with our direct and partner ecosystems.

Alex Zukin -- Piper Jaffray -- Managing Director

Great, and then just if I could squeeze one in on the competitive environment, what are you seeing from both the larger vendors, Salesforce and Adobe with the recent acquisition of Marketo as well as any kind of co-op petition with vendors such as Zendesk and any other small direct competitors coming into the market, how you see that environment kind of playing out and win rates for 2019.

Brian Halligan -- Chief Executive Officer and Chairman

We haven't seen a whole lot of change, frankly. We see a fair amount of salesforce.com, and win our fair share of deals. We never see Adobe. They're pretty much upmarket. We see a little bit of Marketo, but they're very enterprise-y. The truth of it is, our products have gotten really good. We're well-positioned in the market. We're unique in the market. Our value properly pops. Our implementation does a nice job. And so buying HubSpot -- Like I remember the start of the company 13 years ago. It was pretty risky buying HubSpot. What is this HubSpot thing? Who are these HubSpot guys? And nowadays, man, the value prop is super strong. It's a no-brainer to buy HubSpot these days, so feeling good about our position in the market.

Operator

Your next question comes from Richard Davis from CG Financial.

Richard Davis -- CG Financial -- Analyst

Hey, thanks. Maybe just drilling a little bit on Mark Murphy's question, so do you guys just logically, do you draw a line, kind of a bright line, between kind of front office and back office? Because like when we talk to companies, they're like, "Man, you know, we'd like to be able to get paid," and so that's a financial app, which is oftentimes considered back office. Is that -- Do you guys say, "Listen, all we are is front office," or how do you think about that? Thanks.

Brian Halligan -- Chief Executive Officer and Chairman

Hi, Richard. It's -- Primarily we think of ourselves as front office. We have recently added an integration with Stripe. It's nascent, but it's pretty slick. And so it gets a little gray in there, but we consider ourselves a front office platform. And we consider ourselves a platform to help people really create remarkable go-to-market motions, but that's how I would think about it. It's a little bit of grayness there on the payment and the invoicing, a little bit of grayness on the payment and the proposal there, but we're a front office company.

Richard Davis -- CG Financial -- Analyst

Got it. And then quick question on the Capex, you improved that really nicely. Is there a component that we should think about that would improve with your partnership with AWS? Because generally you see that happen. That's something that, if so, is 8% kind of trend line? Should it go 6% over time or, you know, how do you think about that? Thanks.

Kate Buecker -- Chief Financial Officer

Yeah, if you think about our Capex specifically, there's really two components of our Capex. One is the spend on our facilities and the other is software capitalization associated with our internal development activities. I think underlying your question is really what -- We had a very strong free cash flow quarter. The operating performance of the company obviously drove that result, but we did have a one-time benefit in Q4 from the restructuring of the deal we signed with AWS.

In addition, 2018 was a light year for us, in terms of facilities buildouts, and I did not in my opening comment that there is a material buildout in Dublin in 2019 that will help to support our continued growth internationally.

Richard Davis -- CG Financial -- Analyst

Super. Thank you so much.

Operator

Your next question comes from Brian Peterson from Raymond James.

Brian Peterson -- Raymond James -- Vice President

Hi, guys. Thanks for taking the question. So I wanted to hit on the marketing starter product a bit. You mentioned that 2x the upgrades this year. How long are customers typically on the starter package before they upgrade to the higher tiers? And does that change at all if they're coming on from self-service?

Brian Halligan -- Chief Executive Officer and Chairman

Okay, Brian, I'll take that one. The reality of the starter product is a pretty small, the marketing starter product is pretty small business until I guess July of 2018, when we really shored it up. And the big thing we added was email marketing to it, and we dramatically increased the amount of people using it and the RQ of that's gone up. So that's a very -- in my mind, it's almost like a brand new business starting last summer. We're watching very carefully the trend of how long do they use starter before they go to pro and what not, but the reality is it's only, in my mind it's only a six-month-old business at this point. So it's hard to say.

Having said that, that is an initiative going on inside the marketing team. The general manager of our marketing hub, it's on his list to really figure out how to get that flow going from free to starter to pro and enterprise. That's not something we had focused on previously in the marketing side, and he's really focused on it this year. And I think he'll get that machine rolling.

Brian Peterson -- Raymond James -- Vice President

Got it. Thanks, Brian. And just wanted to hit on linearity. Anything that we should think about in terms of how the quarter developed through December, and then anything that's changed thus far in January? Thanks, guys.

Brian Halligan -- Chief Executive Officer and Chairman

Hmm. Do you wanna answer that?

Kate Buecker -- Chief Financial Officer

Yeah. I think Q4's probably a little bit unique in that sense because we rolled out some pricing increases as of November 1, so there was some positive benefit to October as a result of some of the pricing increases. But Q4 is generally a very strong quarter for the company.

Brian Peterson -- Raymond James -- Vice President

Thank you.

Operator

Your next question comes from Bhavan Suri from William Blair.

Bhavan Suri -- William Blair -- Analyst

Hey, guys. This is actually Arjen Bhatti on for Bhavan. Thanks for taking the question. Just wanted to touch on your customer profile a little bit. You know, you've talked about going after customers that have about 2,000 employees or in that range. Can you just talk about how your customer profile has changed over the past few quarters as you targeted this larger base?

Brian Halligan -- Chief Executive Officer and Chairman

Arjen, I'll take it. It's Brian. That's a good question.

Here's how, if I just step way back, how I think about is -- We have three segments inside of HubSpot. We have the small business segment, which is kind of between call it 2 employees and 20 employees; mid, which is 20 to 200; and enterprise, which is 200 to 2,000. And historically our sweet spot's been at that middle layer, the pro layer, 20 to 200, and I would say we've got of perfect product market fit in there or products that would give an A or go-to-market. Everything's really nice.

What we've done over the last 12 months is really invest below in that in the 2 to 20 and above that in the 200 to 2,000. So I would give our product market fit, for example, two years ago in those two layers maybe a C. And I don't know if we're an A yet, but we're getting closer and closer to an A on the starter layer and the enterprise layer.

In terms of the median in mean employee size, I haven't looked at it recently, but it hasn't changed materially. The products have gotten stronger up on both ends, and they kind of push and pull on the metric. And you see some of that in some of Kate's remarks.

Bhavan Suri -- William Blair -- Analyst

Yeah, that's helpful, and then just on customer expansion trends, how should we think about the dynamic between what's driving customer dollar expansion between increased usage, tier upgrades, and maybe multi-product adoption?

Kate Buecker -- Chief Financial Officer

Sure. Why don't I take that? I think what we have said about retention is that we think over the long term retention can stay above 100%. We did see that retention in Q4 was above 100%. Customer dollar retention remains in sort of the low to mid-80s for the company. I think the big contributors to the increased retention overall were the upsell, the addition upgrades that we've been seeing, as well as continued cross-sell into the install base.

Bhavan Suri -- William Blair -- Analyst

Very helpful. Thanks.

Operator

Your next question comes from James Rutherford from Stevens, Inc.

James Rutherford -- Stevens Inc. -- Analyst

Hey, good afternoon. I wanted to start and get at the omni go-to-market strategy around service hub. I know you're beginning to develop the channel partners there, but just curious if you lean more on direct selling into 2019 or if you kinda think you've gotten the channel to a place where that's gonna be a big sales motion for you all.

Brian Halligan -- Chief Executive Officer and Chairman

Yeah, I think the reality is when we come out with these new hubs, our direct sales force grabs and runs with them pretty, very fast. It takes us a little longer to get that into the partner channels. Some of the partners are selling full stack, and they sell sales and marketing and service, the whole thing together. Some of the partners are really marketing in season. They always wanna be marketing. So I think out of the box, probably in '19, little bit heavier push on the direct side, but over the long haul I think it will look pretty similar to the sales business and the marketing business.

James Rutherford -- Stevens Inc. -- Analyst

Okay, thanks, and then one more if I may on the market. I'm just curious your read on small business sentiment and the health of that market. Seems to be very positive based on the revenue guide, but just hope you'd provide some commentary on SNB appetite to invest in new software, both domestically but perhaps more importantly on your international markets. Thank you.

Brian Halligan -- Chief Executive Officer and Chairman

I think that's an excellent question. I haven't noticed any change. I sit on the sales floor here at HubSpot, and I talk to the reps a lot and I talk to prospects and customers a lot. I just haven't seen any pullback in demand or hedging with budgets that's unusual or we're worried about a recession. I mean, it doesn't mean it's not happening, but I haven't heard it really at all so far. Feels solid.

James Rutherford -- Stevens Inc. -- Analyst

Thank you. Very helpful.

Operator

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

Ross McMillan -- RBC Capital Markets -- Managing Director

Thank you, and my congratulations on the reacceleration of growth. Maybe I can start with some of the changes you made around pricing. I think there were three main ones: Marketing Hub Enterprise, there was a price increase; the growth bundle that you introduced, the growth suite bundle; and then the elimination of basic. Brian, I'm just curious, if you think about those three things, which ended up having the kind of biggest surprise to you in terms of impact on the business? And maybe you could explain why.

Brian Halligan -- Chief Executive Officer and Chairman

I don't know. They're all pretty similar. I mean the Marketing Hub, you know, had a good November because we were gonna raise the price, but we do that a lot in Q4 every year with a different product. I think we got to the price point that the market kind of expects in there. I think we're in good shape there.

I think the growth suite worked. We got a ton of -- We're getting a ton of growth suite business. It was really encouraging to see. It was like Ville I talked about in the opening remarks where he started with marketing and then he added sales and then he bought the full enterprise growth suite. Like I think we're gonna see a lot of that.

Eliminating the basic, I feel good about that. That basic product was a little awkward in there. It wasn't packaged quite right. There was a sort of a heavy touch sale involved with it. So I like the fact that we've got the starter in there, and the pro with the heavier touch.

So I wouldn't say any of them really caught us by surprise. Would you?

Kate Buecker -- Chief Financial Officer

No, I agree. Yeah.

Brian Halligan -- Chief Executive Officer and Chairman

Yeah. I think kind of as expected. Yeah.

Ross McMillan -- RBC Capital Markets -- Managing Director

Well, I guess, specifically on basic, did that -- did you see a good trade-up effect to pro versus a trade-down, if you will? Was that a good outcome in terms of that basic price point?

Brian Halligan -- Chief Executive Officer and Chairman

It's kind of a mix, you know. If you were using basic, we were pretty aggressive grandparents, so we'd grandparent people in pretty aggressively. But if you're coming in now and you normally would've bought basic, you're seeing some go to pro and some go to starter. It's sort of wash, frankly, when we peal back the numbers.

Ross McMillan -- RBC Capital Markets -- Managing Director

That's helpful. And can I just add one other one, just on platform?

Brian Halligan -- Chief Executive Officer and Chairman

Sure.

Ross McMillan -- RBC Capital Markets -- Managing Director

If I'm an existing customer and as we think about platform, is this just that I'm going to have access to a set of third-party application that I can plug in through APIs, or is there something else that I will experience as a customer as you make this journey from suite to platform?

Brian Halligan -- Chief Executive Officer and Chairman

Yeah, I think over time this will be a big change, Ross, where if you looked at HubSpot two years ago, pretty much people used HubSpot with HubSpot. They didn't really have it connected to anything else, and it was a pretty monolithic stand-alone application. If you look at our real good customers today, maybe somebody who's using the pro suite, man, they're plugging all sorts of other applications into HubSpot in a really cool way, whether it's they're pluging Flak in, they're plugging Advent Brite in, they're connect their Wordpress website. They've got all these different applications that they're plugging in. And the way they're gonna be able to do that is very powerful.

Like traditionally, HubSpot, we've managed the data inside of HubSpot. We've managed the workflow between your different HubSpot applications, and we've reported on all that stuff inside of HubSpot. Imagine in the future we'll manage the data from all your front office applications. You'd be surprised how many front office applications people use. We'll manage the workflow across all of those applications, and then we'll report on all the things happening in there. And so it's a non-trivial shift that's going on inside the company and the value prop for our customers, and it's already started. And I think it's gonna be a big tailwind for us over the long haul.

Operator

Your next question comes from Scott Berg from Needham and Company.

Scott Berg -- Needham and Company -- Analyst

Hi, this Aaron MacDonald on for Scott Berg. Talking more about the platform approach going forward, as you're looking at sort of net new customer opportunities, does there actually then have to be a shift in the selling motion at all for those customers to sell the platform approach? And if so is there a prioritization that goes into sort of the core modules given the existing selling motion?

Brian Halligan -- Chief Executive Officer and Chairman

Yeah, the selling motion hasn't dramatically changed yet. There's some small incentive tweaks we're making to try to encourage some folks in our organization to really encourage our customers to use HubSpot writ large, not just our applications but really use it to manage the whole customer experience. We'll probably lean into that harder in 2020 as the platform gets more developed, as our marketplace gets more developed, as our APIs get better.

The thing about the platform that's interesting is there's three ways it kinda comes to life. One way it comes to life is we'll build an integration, like we built an integration to Flak or Stripe, for example. The other way it comes to life is there's lots and lots of little applications out there, sales and marketing applications, where they're using our APIs, the same APIs, to integrate their product. And the third is there's lots and lots of our partners and customers who have relatively advanced use cases who wanna just build functionality using our APIs today. So it's really opening up a lot of opportunity to expand the value crop for us.

Scott Berg -- Needham and Company -- Analyst

Got it. And then just one quick follow-up on Sales Hub. I think last quarter you talked about that most of the adoption was really around net new customers, or that had been sort of the early trend there. Can you talk about if that's still sort of remained the trend or if you've been able to drive more upsells or if there's any initiatives in place to sort of switch that focus?

Brian Halligan -- Chief Executive Officer and Chairman

I think it's a nice combination of new and cross-sells. There's a lot of cross-sell going on with that. Oh, hey, I'm using the marketing pro product. I'm interested in that sales hub product. And there's definitely some upsell, too, where I'm using free CRM, and oh, I could use the sale starter. Oh, it looks sales pro might be a good fit. So it's kind of coming in from three different directions on it. That sales hub product is going remarkably well for us.

Operator

Your next question comes from Tom Roderick from Stifel.

Tom Roderick -- Stifel -- Analyst

Hello. It's actually Parker Lane in for Tom. Thanks for taking my question. So as we think about the move into new markets like Colombia and then the Paris office opening this year, is much of your early momentum in these markets sort of on the free and the starter program and then it starts to move upstream to professional and enterprise as your channel starts to grow and the awareness of HubSpot builds? Or is sort of whole hog early days?

And then has there been a substantial mix shift toward net customer growth in international markets? Has it held pretty steady between international and domestic? Thanks.

Brian Halligan -- Chief Executive Officer and Chairman

I can answer the first one. I would say Colombia and Paris, those are two markets. Colombia is really the hub for Latin America. We've been in Latin America for a long time with a very small direct sales organization and an agency partner organization. We've been selling into Paris from Dublin for a long time. It's sort of similar where we've got some direct sellers in there and some agencies. The way it typically goes when we enter a new office is that market is, let's say, and this is a rough number, 70% of the revenue coming out of that market is through partners' agencies and 30% is direct. When we open an office, they both grow, but the direct tends to grow a little bit faster. And the mix will shift a bit over time, and I think over time, you know, France and LatAm will get to 50/50-ish is my guess.

But yeah, I'm excited about both of those. We get a lot of business out of Paris and a lot of business out of Latin America. I think we can turn up the volume in both those markets.

Kate Buecker -- Chief Financial Officer

And on the mix of product in new versus install based selling, domestic versus internationally, they're actually pretty similar, which was a bit surprising to me at the beginning, but they track each other quite closely.

Operator

Your next question comes from Jennifer Lowe from UBS.

Jennifer Lowe -- UBS -- Analyst

Great. I actually wanted to ask a question to Kate, you know, just for pricing through the great margin guidance and the ASC-606 impact. And I think you had said that looking at '18, there was about a point of core expansion and three points benefit for ASC-606. Looking at '19 it sounded like there's sort of two points of core with the one point of offset from ASC-606, and so just sort of focusing on sort of that cash basis, the point of expansion last year versus the two points, assuming I understood that correctly, next year, how should we sort of think about that? Because there's still a lot of investment going into the business. Are you sort of managing around the optics of the ASC-606 number, and that's how we should be thinking about it? Or -- I guess I'm just trying to piece through -- It sounds like a bit less incremental cash investment once you pick through the pieces there.

Kate Buecker -- Chief Financial Officer

Yeah, I would say -- So two things. One, you have the dynamics of 606 correct. So when we adopted the 606 standard, we chose not to go back and restate our historical results, which means that, you know, when you look at 2018, there's about $16 million of commissions expense that we would have under the old standard expensed through the PNL that we capitalized and will amortize over a period of two to three years. In 2019, we will continue to capitalize commissions expense, but we'll start to see some of the expense from 2018 flow through the PNL.

So net versus like a status quo, there was some benefit, but there's a headwind to margins year-over-year. We aren't managing around 606 per se. We actually look at the financial framework that we've laid out around growth and profitability, and we invest to make sure that we're aligned to that framework over the long term.

Jennifer Lowe -- UBS -- Analyst

That's helpful. Thank you.

Operator

Your next question comes from Michael Tari from Deutsche Bank.

Michael Tari -- Deutsche Bank -- Director

Hey, great. Good afternoon. Thanks. I was hoping we could spend a minute on the upmarket opportunity and sum up your observations your observations around how having the broader suite of enterprise products could be influencing that opportunity set, as well as whether that's also adding the potential for you to maybe hold on to some of the existing customers even longer. Thanks.

Brian Halligan -- Chief Executive Officer and Chairman

I can take that, Michael. Thank you. I think the upmarket opportunity's interesting. I just kind of wanna caution when I say upmarket, I'm really talking about what most people would call midmarket, a company between 200 and 2,000 employees. There's a lot of them out there, and they're buying HubSpot. They're really seeing the value in it, and at Inbound we announced some new features in marketing hub that they liked. There's more new features coming there. We come with a sales hub enterprise, which is a good product, and that service hub enterprise. So we're expecting that segment, the 200 to 2,000, we're expecting it to perform well and to get some really nice traction over time.

We're closing some nice deals there, but we're not doing the traditional, "Hey, let's go upmarket and compete with Oracle and SAT and Salesforce and Adobe and a lot of those larger companies." We think the opportunity for HubSpot is in that midmarket to build a big, big, big company in the middle, where those companies are underserved, and we wanna bring really sophisticated, powerful technology to them and make it simple for them to adopt and grow their business.

Michael Tari -- Deutsche Bank -- Director

Yep, understood. That's great. Thanks, guys.

Operator

Your next question comes from Derrick Wood from Cowen and Company.

Derrick Wood -- Cowen and Company -- Analyst

Great, thanks. Kate, as you, I guess, dovetail in on that, as you guys focus more on selling your enterprise versions and going up into the midmarket, are you finding any shift in invoicing structure? And I guess specifically are more deals being invoiced annually, and if so how should we think about the impact on overall deferred revenue growth?

Kate Buecker -- Chief Financial Officer

Yeah, we haven't seen a material shift in the composition of our sort of install base of customers around contract or payment terms. I think that frankly stems from the fact that as we're going upmarket, we're also going down market, and so there's a balancing act that's happening.

Derrick Wood -- Cowen and Company -- Analyst

Okay. And then curious on your guidance for Q1, it implies about 2% sequential growth, and if you look historically it's typically been a decent amount higher than this. Are there some puts and takes you're considering for Q1 this year that may look different than past years?

Kate Buecker -- Chief Financial Officer

Yeah, I think there's probably a couple things to talk about. We're, obviously we're feeling good about our guidance coming off of a strong Q4, and we've taken a very similar approach to guidance as we have in the past. A couple of things from Q4 to Q1, one is currency, which we've talked about at length in the prepared remarks, but there's a headwind from Q4 to Q1 on the currency side. The other thing I've noticed, what's happening in the services business, we talked about Q4 as being a particularly strong quarter for our, not our service hub but our services business, and we do not expect that to repeat in Q1.

Derrick Wood -- Cowen and Company -- Analyst

Okay. Thank you.

Operator

Your next question comes from Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

Hi, this Hamza Fodderwala in for Stan Zlotsky. Thank you for taking my question. Just a couple quick ones from me. As you move into larger customers as you talked about earlier, are you seeing any material changes or elongation in your overall sale cycles?

Brian Halligan -- Chief Executive Officer and Chairman

I can take it. I think what you're seeing inside of HubSpot is up in that 200 to 2,000 segment, it's probably getting a hair longer, but in that 2 to 20 segment it's probably getting a hair shorter, and overall it's staying pretty similar.

Operator

Your next question comes from Terry Tillman from Suntrust.

Terry Tillman -- Suntrust -- Manging Director

Hey, this is Eric Linus on for Terry. Thanks for taking a question. Brian, I wanted to touch on something you said in your prepared remarks on an earlier question, talking about handling the workflow and reporting on the entire experience. So as a product suite starts to progress and you gain more customers, more in that enterprise market, now how important is it to have a deeper reporting or analytics type tool? And then as you look at the overall roadmap, how would you prioritize reporting and analytics in the future?

Brian Halligan -- Chief Executive Officer and Chairman

Eric, I think it's very important. In fact, we just had a meeting about that this morning. We were talking all about reporting and analytics. I would say we're good at it. I think there's an opportunity to get great at it and add a lot of value to our customers. We've got a good size team working on it, and we hope to make a bunch of progress in 2019 on it. I'm glad you asked about that.

Operator

Our next question comes from Kirk Materne from Evercore.

Kirk Materne -- Evercore ISI -- Analyst

Great, thanks. This is Peter Levine in for Kirk. Just one quick one, follow-up here. You know, on, you talked about the initiatives in your channel partner, can you maybe share with us any updates on any notable partners you've signed that are outside of your traditional marketing agency network? And then for Kate, if you can, can you tell us the percentage of revenue contribution that come from channel partners? Thanks.

Brian Halligan -- Chief Executive Officer and Chairman

I would say the mix has been shifting over time, and it used to be obviously 100% marketing agencies, website designers, SCO consultants, folks like that. More recently, we've signed up a lot of -- There's a whole slew of companies out there that all they do is implement CRM systems, so we signed up a bunch of those folks. I think we've signed up a bunch of folks who implement G-suite and Microsoft Office folks like that, a little more technical, and...

Let's see. And then we've signed up a lot of ISB partners. Partners that are building, integrating into our API and building extensions on HubSpot that are pretty interesting. So yeah, the partner profile's changed. Like HubSpot, you know, we said a few years ago on calls like this, we're shifting from an apps company to a suite company, and we're very much a suite company today. And the partner channels evolved alongside us, and they're probably a half step behind our direct org, but they're right there and doing quite well.

Operator

There are no further --

Kate Buecker -- Chief Financial Officer

Just to answer your second question, about 40% of our revenue comes from partners.

Brian Halligan -- Chief Executive Officer and Chairman

Yeah, which is flat with where it was in the third quarter.

Chuck MacGlashing -- Director of Investor Relations

All right, thanks, everybody, for joining the call. Talk to you soon.

Operator

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

Duration: 60 minutes

Call participants:

Chuck MacGlashing -- Director of Investor Relations

Brian Halligan -- Chief Executive Officer and Chairman

Kate Buecker -- Chief Financial Officer

Mark Murphy -- JP Morgan -- Executive Director

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

Samad Samana -- Jeffreys -- Analyst

Alex Zukin -- Piper Jaffray -- Managing Director

Richard Davis -- CG Financial -- Analyst

Brian Peterson -- Raymond James -- Vice President

Bhavan Suri -- William Blair -- Analyst

James Rutherford -- Stevens Inc. -- Analyst

Ross McMillan -- RBC Capital Markets -- Managing Director

Scott Berg -- Needham and Company -- Analyst

Tom Roderick -- Stifel -- Analyst

Jennifer Lowe -- UBS -- Analyst

Michael Tari -- Deutsche Bank -- Director

Derrick Wood -- Cowen and Company -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Terry Tillman -- Suntrust -- Manging Director

Kirk Materne -- Evercore ISI -- Analyst

More HUBS analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.