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HubSpot Inc (NYSE:HUBS)
Q1 2019 Earnings Call
May. 7, 2019, 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 HubSpot Q1 2019 Earnings Conference Call. All line 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, Head of Investor Relations. You may begin your conference.

Charles MacGlashing -- Director of Investor Relations

Thanks, operator. Good afternoon, and welcome to HubSpot's First Quarter Earnings Conference Call. Today, we'll be discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon is Brian Halligan, our Chief Executive Officer and Chairman and Kate Bueker, our Chief Financial Officer.

Before we start, I'd like to draw your attention to the safe harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

All statements other than statements of historical fact are forward-looking statements, including statements regarding management's expectations of future financial and operational performance and operational expenditures, expected growth and business outlook, including our financial guidance for the second fiscal quarter of 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 10-K, which was filed with the SEC on February 12th, 2019, for a discussion of the risks and uncertainties that could cause actual results to differ materially from expectations.

During the course of today's call, we'll refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our first quarter 2019 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's CEO and Chairman, Brian Halligan.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Thanks, Chuck. Good afternoon folks. Thank you for joining us today as we review HubSpot's first quarter 2019 earnings results. We're off to a strong start to the year overall; 35% revenue growth in constant currency, 9% non-GAAP operating margins and 35% customer growth, bringing our total customers to over 60,000. Great quarter.

Now, I'd like to step back for a moment and give you a view into how we're seeing the world these days. We feel like the real arbitrage opportunity in business these days is the ability for companies to create remarkable customer experiences.

Business schools used to teach that to win you need to create a 10x better product. But in the future, I believe they'll teach that to win, you need to create a 10x better experience. You may have heard this before, but I'll remind you of my morning routine as an example of what I'm talking about.

So you see, I wake up every morning on a Purple mattress, and then I reach over onto my dresser and I put on my Warby Parker glasses and then they pick up my iPhone and I put on Spotify and I listen to the Grateful Dead and dance my way into the bathroom and I shave with my Dollar Shave Club razor and then I put on my Stitch Fix outfit and I take a lift to work.

Now why do I tell you about my morning routine? Well, those companies that I'm doing business with, they're fascinating. They're all start-ups. All of those companies, those start-ups they're growing like a weed. All of those companies won my business not by selling me a better product, by they crip (ph) up creating a better and lighter customer experience fueled by word of mouth.

It's the new arbitrage opportunity that motivated us to build the slate of new products over the last couple of years. Those new products enable us to move from a Company that helped its customer to generate leads to a Company that helps its customers to create these remarkable buying experiences.

Those new products enable us to move from a Company that sold a single application to a Company that sells a full suite of software. This shift is going very well. We're getting major multi-product adoption across our customer base in large numbers of new customers that are buying our whole gross suite up front.

This is great news as it signals to me that our value proposition or products are working and our flywheel is spinning. Really proud of the progress we made in that shift.

One thing I'm not proud of is the recent product outage that we had that inconvenienced our customers and given we run HubSpot on HubSpot, inconvenience us. Here's what I'd say about that outage. It only serve to strengthen our resolve to delight our customers. Since the outage we've already doubled down on HubSpot's stability, security and reliability across the board.

We've already built a new reliability team with some of our best engineers and they've made great progress already. Now, the next phase of HubSpot is shifting from a suite to more of a platform. You might ask, why would we do that.

Well, the reality is that there has been an explosion of valuable SaaS applications created over the last decade and most of our customers use scores of them rather than fight gravity, we want to enable our customers to plug all those applications into HubSpot and help them orchestrate all of them to create an even more remarkable experience for their customers.

This shift is in its early days for us, but there has been nice progress. If you're a HubSpot customer, you have nearly 300 integrations to choose from that were built by our integration partners. That's on top of ten integrations that are natively built for our top use cases by ourselves and then almost endless array of integrations you can create through our partnerships with iPass companies.

This shift is really starting to work. The average HubSpot customer already integrates five different applications into HubSpot. This year we're adding fuel to our platform by opening up even more API endpoints and cranking up our investments in the developer experience.

In fact, last week we had 150 of these developer partners into HubSpot for a meeting and I was delighted to chat with many of them who are growing better together with us. The health of any platform basically depends on two things. You have to invest in the supply of top notch integrations and you need a steady growing stream of new users to use them.

Our premium motion is a major source of new users, and our commitment to developers is a major source of new applications. More users we get, the more developers there are who want to build on the platform. The more apps the developers build, the more valuable our platform gets for hundreds of thousands of HubSpot users, all of which spins our flywheel even faster.

Now, we don't only want to enable our customers to create remarkable experiences to their customers, we want to leverage our own platform to create a delightful low friction experience for our own customers. You see our customers expect consumer grade experience when they come to us.

Specifically, they expect to be able to try a product before buying them. To that end, we introduced a premium set of products a couple of years back. That decision alone removed a great deal of friction in getting started with HubSpot, and it's been going really well.

Nowadays, we're working on making the buying process a better one for these users by relying heavily on HubSpot software to increase the amount of the process we can automate, meaning harden (ph) into chat and bots, arming our sales hub (ph) with the information they need to have conversations that help customers grow better and making our software more intuitive for our users.

We're just starting on this initiative and I suspect we'll be able to make some nice progress here. Already, we are laser focused on our customers in HubSpot. We evolved our value proposition for them from an application to a suite to help them grow better over the last few years. We are evolving and again from a suite to a platform to help them grow even better.

We're also focused on applying HubSpot technology on our own opportunity to make our own buying process light and delightful.

With that, I'll hand it over to Kate.

Kathryn Bueker -- Chief Financial Officer

Thanks, Brian. Let's turn to our first quarter financial results and our guidance for the second quarter. 2019 is off to a strong start. I'm pleased with the growth in revenue, free cash flow and non-GAAP operating profit we delivered in Q1.

First quarter revenue grew 35% year-over-year in constant currency and 33% as reported. Q1 subscription revenues grew 33% year-over-year, while services revenue grew 27% year-over-year, both on an as reported basis. Hubspot ended Q1 with 60,814 total customers, which was up 35% year-over-year.

Average subscription revenue per customer in Q1 was $9,811 down 2% year-over-year as reported and flat in constant currency. We continue to expect this metric to bounce around depending on product mix and the amount of new versus installed base selling in any quarter.

Domestic revenue grew 27%, while international revenue growth was 50% year-over-year in constant currency and 42% on an as reported basis. International revenue represented 39% of total revenue in Q1, up 3 points year-over-year.

We continue to see significant opportunity for growth domestically, as well as around the world. Deferred revenue as of the end of March was $193 million, a 28% increase year-over-year. Calculated billings was $160 million, up over 31% year-over-year in constant currency and 27% as reported given an almost 5 point FX headwind to calculate the billings in the quarter.

The remainder of my comments will refer to non-GAAP measures. First quarter gross margin was 82%, up slightly less than a point year-over-year. Subscription gross margin was flat at 86%, while services gross margin was 4%, up 12 points year-over-year.

First quarter operating margin was 8.6%, up almost 4 points from Q1 of last year. The adoption of ASC 606 had a minimal impact to operating leverage in Q1. But as a reminder, we still anticipate that ASC 606 will be a one point headwind to operating leverage for the full year.

Net income in the first quarter was $16 million or $0.36 per diluted share. At the end of the first quarter, we had 2,745 employees, up 20% year-over-year. CapEx, including capitalized software development costs were $7 million or 4.7% of revenue in the quarter.

CapEx was lower in Q1 due to the timing of our facilities, build-out plans throughout the year as well as some planned spending that pushed into the second quarter. We still expect CapEx as a percentage of revenue to be about 8% in 2019, primarily as a result of the build out of our new Dublin facility in the second half of the year.

Finally, our cash, cash equivalents and marketable securities totaled $984 million at the end of March. The substantial quarter-over-quarter increase was largely due to the $343 million in proceeds we received from the $2.15 million share common stock offering we completed in February.

With that, let's dive into guidance for the second quarter of 2019. Total revenue is expected to be in the range of $156.5 million to $157.5 million. Non-GAAP operating income is expected to be between $9.2 million to $10.2 million. Non-GAAP diluted net income per share is expected to be between $0.24 and $0.26.

This assumes approximately $47.6 million fully diluted shares outstanding. And for the full year of 2019, total revenue is expected to be in the range of $655.5 million to $658.5 million. Non-GAAP operating profit is expected to be between $50 million and $52 million. Non-GAAP diluted net income per share is expected to be between $1.26 and $1.30. This assumes approximately $47.5 million fully diluted shares outstanding.

We now expect full year free cash flow to be about $62 million, up from our prior forecast of about $60 million. As you adjust your models, keep in mind the following. The recent strength of the US dollar creates an incremental headwind to as reported revenue growth in the second quarter and the full year. We are now anticipating a foreign exchange headwind of approximately $10 million to as reported 2019 revenue, which is up from our prior forecast of an $8 million impact.

This revised forecast equates to a full two point negative impact to as reported revenue growth in 2019, up from our prior forecast of one to two points. In Q2, we anticipate a full three point FX headwind to as reported revenue growth. As we indicated on our last call, we expect the majority of our 2019 operating leverage in the first and fourth quarters.

Given the strong leverage, we delivered in Q1, we still expect the remainder of our operating leverage to occur in Q4. Similarly, we saw strong free cash flow in Q1. Q2 and Q3 will be lower free cash flow quarters as a result of ramping CapEx spend and our annual inbound event in September.

As a result, we anticipate the majority of our remaining 2019 free cash flow to come in the fourth quarter. To close, the first quarter represented a strong start to the year and we believe we are well positioned to build on this momentum throughout 2019.

With that, I'll hand the call back over to Brian for his closing remarks.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Thanks Kate. We're off to a really strong start in 2019. Our suite product play is paying dividends as our customers are investing in HubSpot as their marketing, sales and service, full front office and our flywheel play is reducing friction. So it's even easier for our customers to try, buy and get up and running with HubSpot.

And our platform player is gaining serious momentum as our customers and partners are finding it easier and more valuable than ever to extend, build on and get more leverage than ever from their Hubspot investment.

Okay. I want to close by thanking our customers, our partners, our investors in all the Hubspots around the globe for helping us with their mission to help millions of organizations grow better.

Operator, can we please open up the call for a few questions?

Questions and Answers:

Operator

(Operator Instructions). Your first question comes from Tom Roderick with Stifel. Tom Roderick, your line is open.

Tom Roderick -- Stifel Nicolaus -- Analyst

Hi guys, good afternoon and thanks for taking my questions. So I wanted to just kind of hit on the FX headwind here that I think it's up five points on bookings and was curious if you could just speak to that a little bit more in terms of how much the deferred revenue versus the revenue on a year-on-year basis got hit versus say deferred on a quarter-on-quarter basis. And also, is there any particular geographies that are doing particularly well internationally that you'd highlight that you saw the strongest FX hit from, that would be great.

And then, sort of modeling forward, any thoughts on how we should attempt to sort of think about the headwinds yet (ph) deferred in our models going forward? Thanks.

Kathryn Bueker -- Chief Financial Officer

Yeah, thanks. There -- as we talked about in the past, there are bunch of different things that impacts billings, which is why we don't point to billings as one of the primary metrics that we focus on internally. The story in Q1 was clearly an FX story, and there's really two components of FX headwinds as it relates to calculated billings.

The first one is around revenue. So you will recall that we define calculated billings as revenue plus the change in deferred. There was about a 2.5 point headwind to revenue growth year-over-year in the quarter. About the same frankly with the revaluation of the deferred revenue.

So we -- as you know, we calculate the value in US dollars of the deferred revenue balance on the balance sheet at the end of March and the difference between the starting and ending point FX rates impacts that -- and that is another 2.5 points of headwind for us.

Tom Roderick -- Stifel Nicolaus -- Analyst

Excellent, excellent. That's great. And then sort of turning to the product side, looking at the customer growth here, fantastic growth again, the 36% and I know, Brian and Kate, you both talked about the ARPU bouncing around a little bit, but we'd love to hear about some of the new SKUs that you introduced last fall at inbound, how they're starting to have an impact relative to ARPU? Perhaps you could talk about the Sales Hub Pro and some of the other SKUs that might be starting to move that needle on ARPU a little bit? Thanks.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Sure, Tom, thanks for the question. Just to get everyone on the same page. If you roll the clock back to inbound last year, last September, we announced a whole bunch of new products there and a bunch of new products on the enterprise side. And for us enterprise is really mid market, but we call it enterprise and then a bunch of new products on the starter SKU, which is really for start-ups of small businesses.

Overall, I'd say it's gone pretty well. I'm pretty happy with the performance of all the new products. All our products are -- we're never done, you know, it's not like a sculpture where we craft it and it's done, but man they're doing well and those products are all going to get better and feeling good about it.

The tricky thing for investors is that ARPU number, because it's -- we've got some customers that are definitely moving it up, and we got some customers that are definitely moving it down. And that Starter product line, particularly the marketing starter product line is doing really well and that's pulling it a bit.

But overall, I feel really good about all those new products. Anything you want to add to that, Kate?

Kathryn Bueker -- Chief Financial Officer

No, I think the trend in Q1 is very similar to what we've been seeing over the last few quarters, which is the product mix really being the thing that impacts both the customer account growth and the ASRPC, and we see it again in Q1. That said, if you look at the individual hubs, we are seeing growth or expansion in ASRPC. So on a stand-alone basis, the sales hub and the marketing ex-starter are both showing positive trends.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

That's good point, marketing and starters growing nicely.

Tom Roderick -- Stifel Nicolaus -- Analyst

Outstanding. That's great. Thank you, guys. I'll jump back in queue.

Operator

Your next question comes from Brian Peterson from Raymond James.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks for taking the question. So maybe just a follow-up to Tom's question, but just on the international strength (ph), could you expand a bit on where you're seeing some success and if I think about what products are resonating internationally, any difference from what you're seeing domestically?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

How're you doing, Brian? It's Brian. International is going great. We've made lots of investments in international over the last five years, a big office in Dublin, then we did, you know, we've done Australia, we've done Japan, we've done Singapore, Bogota. We're just announcing in opening our Paris offices. So some big investments. I think we're seeing a really nice return on those investments.

We also made some IT language and the localization investments and those investments are going well and I think we're seeing nice, nice growth out of there.

What's interesting about the growth internationally is that it looks a lot like the domestic market, the mix between products is nearly identical. You think there'd some slight difference in there, but it's pretty close to the same across all the different product lines.

That was a really good question. Thanks.

Brian Peterson -- Raymond James -- Analyst

And maybe just one quick follow-up for Kate, just on the retention of -- Brian, I'm sorry if I had missed that during the call. But anything you could share on the net revenue retention. Thanks guys.

Kathryn Bueker -- Chief Financial Officer

Yeah. So we don't actually disclose the specific number on retention. Q1 revenue retention was in the high '90s, which was expected. We said that this number is going to move around up and down. We tend to see a bit of strength in Q3 and Q4 in the -- call it, heavier bookings quarters and we tend to see it moderate a little bit in Q1. We still think that we can do a 100-plus retention over the long term.

Brian Peterson -- Raymond James -- Analyst

Great. Thank you.

Operator

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

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

Hey, thanks guys. Wanted to ask about sales and how that's been ramping in the ad agency channel, and within your direct sales force. Any color on how these two channels are getting up to speed and moving up the learning curve on selling sales?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Brad, it's Brian. I'll take that. If I just kind of step back and describe what's going on at HubSpot with the channel when we -- we really early on when we first started HubSpot, HubSpot was a market -- only a marketing software company. We helped people generate leads and we started pretty early in agency channels.

So it was a lot of search engine optimization agencies and website building agencies and PR agencies and it went great. And basically what happened was both had a choice if they're going to HubSpot. If they wanted to do it themselves, they would buy directly from us. If they wanted to do it through an agency, they would buy through an agency it's going really well.

Over the last couple of years we've been shipping our value prop from a lead generation business to certainly full flywheel business helping people not to generate leads, by creating this whole process. What's been happening underneath behind the scenes is, a lot of our best marketing agencies have transformed themselves into customer experienced agencies, flywheel agencies.

Agencies that really help people with that entire experience and then we started a new effort to pull in different types of agencies, and we've got a lot of these agencies signing up a lot of boutique sales agency, sales coaching, sales implementation, CRM implementation and we're starting to sign up some more IT implementation types of agencies.

And now it's an initiative we started probably a year ago and it's tracking, it's going pretty well. Now, in the next couple of weeks, we're having all of our top-tier agency partners into HubSpot. And I get to meet with them all, I'm having them all over my house for dinner. I really look forward to meeting them. That group and overall the agency program is performing really well in HubSpot. I'm really happy with the progress that all (ph) groups are making and I'm bullish on the new sales and IT partners over the mid and long term.

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

That's great. Thanks, Brian. And then one more if I may. You made some comments earlier on the outage disrupting your own sales operation. Could you elaborate a little bit, did you see deals push in the partner channel and in your direct channel as a result into Q2 or are you more speaking to the impact being more just on your own sales operations given that you're running HubSpot yourself? Thank you.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Sure. If you'd allow me, I'd like to comment a little bit more broadly on the outage. The folks are super interested in and we published a bunch of step out there that point to our -- to our blog, JV or CLO publishing article while the outage was going on, and then our Chief Architect did a post on our blog, like a post-mortem of what happened in there. If you really want to dig in, those are good places to look.

Around the outage that happened right at the end of March, I have talked to a lot of our customers who were hit by it. And if any of those customers are listening on the call, I just would apologize for it. It was disruptive for you, it was disruptive for us and that was a long day on HubSpot. So we're kind of disappointed in ourselves frankly about that outage.

And since then, we've been very, very active. We built a new reliability team, built around -- we took our top engineer and built a reliability team. We've changed some of the process by which we built product, and we're only a few weeks and we're already making some really nice progress.

So, I'm pleased with the effort and it's like the Dalai Lama likes to say when you make a mistake, don't lose the lesson. I think we'll lose the lesson. I think we're going to learn our lesson and make sure we change our processes, change our works, so we can be even better in the future.

In terms of us, yes, we use HubSpot, there wasn't a major impact. It was one day out of a quarter. It wasn't a huge, huge impact maybe very, very slight impact there on the last day of the quarter, but nothing that I lost sleep over, I lost a lot more sleep over the disruption we gave to our customers.

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

Thanks, Brian.

Operator

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

Mark Murphy -- J.P. Morgan -- Analyst

Yes. Thank you, Brian. If you continue to succeed in the very long run, what percent of your customers do you think are going to end up using all three parts of the Growth Stack? In other words, marketing, sales and service or essentially viewing HubSpot as the core front office system.

And I'm also just curious, what do you think that you can do for retention and stickiness? If there -- if they do end up integrating many apps into HubSpot, I think you said they are also integrating five apps?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Yeah. How're you doing, Mark? Thanks for the question.

Mark Murphy -- J.P. Morgan -- Analyst

Good.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

I don't know what the number is, but it's going to be high and I just -- I go in tons (ph) of sales calls and talk to tons (ph) of customers. And what I'm seeing happening in the market is, people, it's a little bit like I myself, I'm for better or worse I am an Apple person. I have an iPhone, I have a couple of Macs, I have the ear buds, I even use Apple TV. I don't mix them. I don't have a Windows machine that's mixed in with my iPhone.

I think companies are kind of doing the same thing where they're picking a core platform provider for the front office, buying some applications from that platform provider and then plugging lots of other applications in. That's kind of what I see in the market in the two primary ones I see everyday, obviously I see HubSpot every day and we see Saleforce every day, it's a very good competitor for us.

And I think we compete quite well. Our offering is really good and I think our offering is getting stronger and stronger every day. So but I think over the long haul, a very high percentage of our customers will pick us as the platform. They may not use us for all three, they may plug in something different in the different part of our product, but I think they'll consider us as sort of their system of record and they'll plug in a couple of our apps, and they'll plug-in tens of other applications into that.

Now over the long haul what will that do to retention? I think our retention can be a lot higher than it is today. I don't know what that can be. I think Kate is steering me a hole in the side of my hand right now, so I wouldn't dare to reveal (ph) what that is. But I think it'll give me a lot (inaudible). But there is a mix problem like, why was that we're getting a lot of our existing customers to buy all three of our products and really commit to our platform, there's lots of people just buying the marketing starters.

So that's why we say over the long haul, because in the short-haul -- as JD likes to say, we've got a kind of a -- what does he call it, I think (multiple speaker) do we get a humidifier and a de-humidifier going on, and (inaudible) and growing on retention inside HubSpot in that there is great thing going on with lots of new customers on this point solution, and there's lots of, lots of people upgrading. But over the long haul, I think we'll have a much better retention rates than we have today.

Kathryn Bueker -- Chief Financial Officer

Yeah, I think Mark your instinct is right. We do see for our multi-product customers a meaningfully higher retention rate than we see for single product customers. But Brian is right in that journey has a long way to go.

Mark Murphy -- J.P. Morgan -- Analyst

Okay, OK great. And then Kate, just a very quick follow-up, I think you said billings grew 31% in constant currency. Nice to see. You had adjusted that for currency. Did you also adjust that for duration as I believe you had -- you had done that in the prior quarters or was that just for currency?

Kathryn Bueker -- Chief Financial Officer

So that's the actual result in constant currency. But as you point out, there are bunch of different things that play into billings. Again, that's why we don't obsess about it internally. There is some seasonality to billings in Q1. There is a bit of push and pull on billing terms and we probably had a little bit of impact here from that question (ph) as well. So a lot of stuff happening in billings this quarter.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Overall there, like I would get all the leading, and we look at a million numbers, leading indicators of the business is very good. I feel good about -- really I feel fine about where the business is at, a little bit of currency headwind, but well, I feel like really good just like healthy (ph) year ago.

Mark Murphy -- J.P. Morgan -- Analyst

Okay. That's a reference to the forward pipeline and just the tone and tenor of the sales feedback and whatever else comes across your dashboard is that what you're talking about, Brian?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Yeah. We look at a million numbers, a lot of them are backward looking, some are kind of forward-looking. Everything looks good, generally, compared to where we are. Nothing is that really perfect, but like if I look at today versus a year ago, I was bullish a year ago, I'm still bullish today like sales reps are making their numbers, our win rates are good, our competitive positioning is good like I'm still feeling good. A little currency headwind there and that starts gets by control at, but the business is good.

Charles MacGlashing -- Director of Investor Relations

Which of course is captured in our guidance, Mark.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you, Chuck for clarifying. All right. Have a good night.

Operator

Your next question comes from Samad Samana from Jefferies.

Samad Saleem Samana -- Jefferies -- Analyst

Hi, good evening. Thanks for taking my questions. I just wanted to make sure, I think you said the head count was up 20% year-over-year. Now as we're looking back, I think that's pretty, pretty decent slowdown in terms of the employee headcount growth rate. I'm just curious how you guys view maybe hiring? Is that just a seasonal effect? Should we expect higher growth?

I just -- as I think about some of the other companies that we look at that are even larger and they're still growing heads faster. So I'm just curious what the Company's headcount investments are and then I have a follow-up question as well.

Kathryn Bueker -- Chief Financial Officer

Yeah. So, Q1 headcount was frankly a very hard compare for us. 2018 Q1 was a really notable strong hiring quarter. That said, I think January we got off to a little bit of a slower start coming out of the holidays. We're really encouraged by the hiring trends that we're seeing in March and April, and we also continue to see a relatively low levels of attrition, which is great.

Samad Saleem Samana -- Jefferies -- Analyst

Got you. And then Kate maybe just one follow-up on the -- on the outage, I know, it happens to other companies as well. Was there any type of -- just any change in maybe churn rates? Or any impact there, or is there any financial remediation for customers? Just want to make sure if there's any one-time items that we kind of adjust accordingly?

Kathryn Bueker -- Chief Financial Officer

Yeah, I mean, it's obviously hard to quantify the specific impact of that outage, but I think there's probably a small impact on a bunch of different things, including churn, including billings, including revenue.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

(inaudible) I might just add to that. One of the million metrics we look at is customer net promoter score, customer happiness referral rates. As you might imagine, they really dipped. And we look at it, I look at it weekly. It really dipped down that week to a low since I've been looking at it, and it steadily climbed back up and it's all the way back up to where it was pre-outage.

So I think it's very unfortunate and we apologize for it. But I don't think it's going to change the game for us.

Samad Saleem Samana -- Jefferies -- Analyst

We definitely appreciate the amount of information just on the blog, I think it was very helpful. I just wanted to ask you Brian just one maybe big picture question, I think we're about a year into the customer service offering being out. I'm curious, maybe how you feel the ramp of that's going and how that's impacting the overall suite adoption? And that's it from me. Thanks again for indulging the extra question.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

That's OK, Samad. Service offering is going great. We came up with that, I think we started that in May of last year. Historically, the way we released products is we released kind of a small footprint of a product and then it continually gets better and better and we've seen that with that service product, it's getting a lot better, and a year from now, it's going to be even better.

We're seeing people adopt it and enjoy it. So feeling good. It's growing. One of the things I think we said in last quarter, the quarter before as we compare the growth rate of the service offering from the day we released the service offering relative to what we did on the sales offering, it continues to grow a lot faster than that net sales business did.

And we're seeing a lots of customers buy the whole suite upfront, which is really heartening.

Operator

Your next question comes from Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thank you so much for taking my question. Brian, maybe if I could just chime in on that, on what you mentioned as far as your multi-product adoption. Any metrics that you guys can share with us on how adoption of that is going versus like that $20,000 that you mentioned on the Q4 call?

Kathryn Bueker -- Chief Financial Officer

I can take that. I think what we've said is, we will give you some milestone numbers. And we have passed that 20,000 milestone of multi-product customers were sort of comfortably above that now. We're tracking in the mid 30% of our customer base who has more than one Hubspot product.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And maybe if I could just go back to the average subscription revenue per customer metric. In Q1, it dipped -- I think 2% quarter-on-quarter, and I understand there is some FX headwind, but we saw a similar dynamic in the over the last two years where in Q1 it dips fairly significantly compared to all the other quarters.

Is there some kind of a phenomenon that happens in Q1 from a mix shift, or some kind of a customer dynamic that takes place in Q1 that really hits the average revenue per subscriber? Thank you.

Kathryn Bueker -- Chief Financial Officer

Yeah. I think we announced a lot of products in Q4. We announced new enterprise suite, we announced a price increase, there is a lot of attention on that side of the -- I guess, I'm going to call that the humidifier side of the equation. The Q1 was a particularly strong quarter for the sales and service hub side of the equation.

And so depending on sort of the composition of selling in any quarter, you're going to continue to see that bounce around.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. All right. Thank you so much.

Operator

Your next question comes from Bhavan Suri from William Blair.

Arjun Bhatia -- William Blair -- Analyst

Hi. This is actually Arjun on for Bhavan. I just wanted to touch on the multi-product customers a little bit more. I know you're seeing more customers land at Hubspot with more than one product. But just curious if you're seeing any impact on the sales cycle and how long customers are staying in the funnel before they make a purchasing decision.

And also is there a greater proportion of these customer -- multi-product customers that are landing at HubSpot through the channel? Or is that -- is it fairly consistent in terms of a single product customers.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

I guess we'll continue that humidifier/de-humidifier theme, if you look overall at the sales cycle, it really hasn't changed much at all. Some of the deals are faster, particularly if they're buying the growth suite or appoint starter solution. If they're buying the Enterprise Growth suite, it might be a little longer, but net-net, it really hasn't moved much.

In terms of -- and I haven't looked at this carefully, but I believe it's pretty similarly -- I don't know if you have to say, a pretty similar processes of direct and indirect channel in terms of the...

Kathryn Bueker -- Chief Financial Officer

I actually don't know the answer, but I'm happy to follow up.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Yeah.

Arjun Bhatia -- William Blair -- Analyst

Okay, that's better. And then I know the international growth has been -- has been pretty phenomenal, 50%. Just curious if there is -- if you see any difference in the competitive environment abroad versus what you're seeing at home from a competitor presence perspective or anything else?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Pretty similar dynamic going on internationally in the US. It is that companies like HubSpot and Salesforce and others, it's a lot easier to go international. So we do business in over a 100 countries now, and so you don't need an office in Tanzania to have a bunch of companies down there, and the same goes for our competitors.

So unlike, maybe 10 or 15 years ago, the competitive landscape looks pretty similar.

Arjun Bhatia -- William Blair -- Analyst

Okay. Thanks for taking my questions.

Operator

Your next question comes from Terry Tillman from SunTrust Bank.

Eric Lemus -- SunTrust Bank -- Analyst

Hey guys, this is Eric Lemus on for Terry. Thanks for taking the question. I just had one for you. We talked about in the past about reducing friction in the buying process. Have you guys seen any sort of outcomes with the strategies you guys have been doing to reduce friction of buying process? And more so on that, anything around the in-app purchasing?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

I'll take that. Eric, one of our big initiatives is around this idea of premium and lowering the touch and if I just think about HubSpot written large, we have two channels that generate leads and opportunities for us inside of Hubspot.

The traditional channel we use as we create lots of content and that pulls people into search through links to the blog, through things like that. And I would say we're pretty good at that, we have room to improve, there is opportunities there.

But we're pretty good at that. The premium is pretty new. We're kind of in the first inning of that initiative. And I would say, I'm very pleased with the way it's gone. Lots of opportunity left in the premium model and you know, what I draw, I'd draw this thing on the whiteboard around here all the time where I draw on one side of the whiteboard, Atlassian which is my favorite company. And on the other side of the whiteboard, I'll draw Oracle Salesforce, a company with a longer sales cycle enterprise sales force.

And we're kind of in the middle of that and we're moving toward the left closer to Atlassian's model. We're not all the way there. Lots of opportunity between here and there. I don't know if I'll ever get all the way there. But that's kind of where we're heading. So far, so good on it. Lots and lots of opportunity left (ph).

Eric Lemus -- SunTrust Bank -- Analyst

Great. Thanks, Brian.

Operator

Your next question comes from Jennifer Lowe from UBS.

Jennifer Swanson Lowe -- UBS -- Analyst

Great, thank you. I wanted to touch a bit on the enterprise success that you're seeing and I guess sort of the first question there is, how much of that is customers who were at other price tiers growing into that versus you starting to land a customer that sort of sits sort of the upper echelon of the segments that you traditionally targeted?

Kathryn Bueker -- Chief Financial Officer

You know, it's relatively similar, I think it's like 60-40 but we can get you an exact number.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Generally, what's going on in the market is, people will buy HubSpot and they will grow with us and that is a really good model for us. And we learn that model from a lot of other companies like Slack, like AWS who get in when you're in the start-up phase with five people and the next thing you'll get 50, next thing you really get 500 people and we are the platform of choice. That's kind of the game we're playing.

We'll certainly go into a 500 person company and if they haven't settled on a platform yet we do quite well in there, but they're already on a competing platform and get it completely setup and customized and everyone's trained, that's a bit of a tougher compete for us.

Jennifer Swanson Lowe -- UBS -- Analyst

Okay. And that was -- that was little bit where it's going, the question, you know, as people start to embrace having a more, I think in the past, a lot of the opportunity was greenfield, customers don't have anything and you can think about how very fragmented tools and HubSpot can go in and kind of replace that or push it out.

Now, as you start to have this suite and you start to have maybe a bit larger of a customer that you're able to target, are you starting to see more replacement of technology versus greenfield? What's sort of the landscape like from that perspective?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

It's a good question like if I think of let's just take a five-person company, a 50 person company and a 500 person company, a five person company hasn't picked the platform yet, a 50-person company, 50-50 chance that they picked the platform.

So half of them let's say have picked the platform, half of those are unhappy with their choice and having completely set it up and trained everyone so they're kind of loosing the socket, and then the other half of those, haven't got a platform. It's a bunch of point, let's say 75% of those are really good fit.

500 person company and this is a total swag, more of them have picked the platform, you could imagine and more of them have got it set up and so certainly there's plenty left here, we're winning those deals and people will replace the existing platform. But we compete extremely well in that 50. Where I think the business will go and where all disruptors go over time as they get in early and they grow with their customers and that played -- plays and plays for a while now and is working really well.

Jennifer Swanson Lowe -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from Kirk Materne from Evercore.

Peter Levine -- Evercore ISI -- Analyst

Great, thank you. This is Peter Levine in for Kirk. So most of my questions have been answered, but I guess one that kind of sticks out is means roughly $950 million, $960 million cash and cash equivalents. So just any comments on how you plan on deploying that capital. I don't believe -- I believe in prior calls, you kind of discussed the potential for the top (ph). So maybe discuss how you -- what you feel about M&A evaluations today versus kind of organic development? Thank you.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Sure. Let's talk about M&A. We do have some cash on the balance sheet. I would say that cash doesn't increase our urgency to do a deal, but it increases our flexibility to get a deal done. I just -- I just spent a month in San Francisco, I rented an apartment Airbnb in San Francisco for the month of March. And while I was out there, I did sort of a learning tour and met with the heads of Corp Dev and met lots of CEOs of companies that have successfully done M&A and so I learned a lot and we've got a little team of people who looks at deals.

But overall, I think you'd see our approaches, we're prudent -- we're prudent about it. If we're going to buy something, you are going to enable it, have it enabled, our customers to grow better. So really fits in with the story and helps with our grow better story. We want to buy a team that's a good culture fit, that's something we learned a lot about it, you buy a company without a team that really fits in nicely, you know, that can be dangerous.

Tech stack is going to matter, but it's fully different tech stack that makes it much more difficult to integrate. And then evaluation, you know, everything you look at multiples are relatively high today. And so we're going to be careful. We are going to be prudent, and we're going to be good stewards of that cash is how I would think about it.

Peter Levine -- Evercore ISI -- Analyst

Thank you.

Operator

Your next question comes from Michael Turrin from Deutsche Bank.

Michael Turrin -- Deutsche Bank -- Analyst

Great, thanks. Just quickly, I wanted to follow up on the channel. Apologies if I missed it, but can you add how much of a contributor that was during the quarter? And then longer term, is there an optimal mix for us to think about? Is the 40% we've seen more recently also a good marker to use going forward or as you move more toward this Atlassian type of motion does that in anyway change your influence of that mix? Thanks.

Kathryn Bueker -- Chief Financial Officer

So, the -- I can start with the performance in the quarter. So 40% of our revenue came from the channel.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

And then just long term what percent from the channel, it's been 40% for a while. And if you look at the way we make our investments inside of HubSpot, we've invested a lot of indirect and channel (ph), the unit economics are quite similar, sort of get similar level of investment and we're continuing to invest. We're going to have our partners there in a couple of weeks and we're going to talk about some investments we're making, to make it easier to become a partner, make it easier to be happy profitable partner of growth.

So, pretty similar investment. I don't know exactly what it will be long-term, but I would just say we're paying close attention to both, or investing in both, both of them work. And so steady as she goes as far as I'm concerned.

Michael Turrin -- Deutsche Bank -- Analyst

Got it. That's helpful. Thanks.

Operator

Your next question comes from James Rutherford from Stephens.

James Rutherford -- Stephens -- Analyst

Hey, good afternoon. Just one from me and thanks for taking the question. You mentioned Kate, that net revenue retention was in the high '90s, and that seems similar to what you were saying in the first quarter of last year. I'm just curious if you can comment on what you're seeing with retention to enterprise tier, now that you've rebuilt that marketing product in the enterprise, are you seeing any benefit from those product investments start to hit the retention line at that tier yet?

Kathryn Bueker -- Chief Financial Officer

Yeah, I mean we don't tend to share information beyond sort of that top level number, but we do, I think your gut instinct around the relative retention of the enterprise versus the starter product is right.

James Rutherford -- Stephens -- Analyst

Great. Thanks. That's it from me.

Operator

Your next question comes from Ken Wang from Guggenheim Securities.

Ken Wang -- Guggenheim Securities -- Analyst

Great. Thanks for taking my question, guys. Brian, I believe last quarter you mentioned a lot of high return projects in 2019, specifically around enterprise that could be valuable to customers. I'm just wondering, any update on that and how you think that might impact the upward migration of your customers toward enterprise and potentially multi-product attach?

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Yeah, I think we made a lots and lots of investments last year and over -- I think we've done a pretty good job of making investments in the product and we've seen nice returns on them over time.

The way I kind of think about our product, I'm not sure I got your question exactly, but the way I think about the product and the way I think about a modern software company is, you kind of want it make the front-end, so it's consumer grade, you want it to be fast, you want it to be highly usable. You want the uptime to be really good.

And at the same time, you want the back end to the enterprise grade, again you want the uptime to be high, you want to be able to scale as people grow, you want to have open APIs that people use. That's sort of the way we think about it. And to that extent, and to the extent we can continue to deliver value for our customers and get that word of mouth out, we're going to continue to invest.

We are good at hiring developers. We think we can build more product and we think we can make our existing products a lot better.

Ken Wang -- Guggenheim Securities -- Analyst

Got it. Appreciate the answer. Thanks.

Operator

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

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. I had two maybe one for Brian, one for Kate. So Brian, the net customer adds was really strong again this quarter. Was there anything specific you did on like the freemium funnel or the top of the funnel for that low-tier that maybe drove -- I don't know outsized performance in net customer adds? And then for Kate, just on the calculated billings you obviously mentioned FX. So I was just curious, were there any impacts from average duration on that number at all this quarter? Thanks so much.

Kathryn Bueker -- Chief Financial Officer

Yes. Maybe I'll start and then Brian you can add in. As it relates to the billings, I think the main player in the billings story in Q1 was definitely FX. But yes, you're right, there are a bunch of other things that impacts billings. We talked about seasonality, we talked about billings, billing terms, we talked a little bit about the (inaudible) impacts. So all of those things also impact. But really, FX was the main driver.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Ross, it's Brian. Nothing, we didn't really do anything special I would say in Q1. Our freemium motion, our free CRM all that stuff is a key to continuing to innovate the product focus are continuing to deliver functionality, try to make the product faster and more usable and for performing all those kinds of things, there was no team (ph) for running special campaign or something. It was steady as she goes.

Kathryn Bueker -- Chief Financial Officer

Yeah. And the customer count growth in Q1 continues to show the same trends that we've been seeing over the last couple of quarters. The marketing hub starter, customer adds continue to be really strong. But as Brian talked about, we have a balance there with also strong trends in multi-product adoptions.

Ross MacMillan -- RBC Capital Markets -- Analyst

Yeah, that's great. Thank you so much. Congrats.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Thank you.

Operator

And that was our last question. At this time, I will now turn the call back over to Brian Halligan, Chief Executive Officer of HubSpot.

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Thanks everyone for joining the call. Look forward to talking to you again soon.

Operator

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

Duration: 52 minutes

Call participants:

Charles MacGlashing -- Director of Investor Relations

Brian Halligan -- Co-Founder, Chairman and Chief Executive Officer

Kathryn Bueker -- Chief Financial Officer

Tom Roderick -- Stifel Nicolaus -- Analyst

Brian Peterson -- Raymond James -- Analyst

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

Mark Murphy -- J.P. Morgan -- Analyst

Samad Saleem Samana -- Jefferies -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Arjun Bhatia -- William Blair -- Analyst

Eric Lemus -- SunTrust Bank -- Analyst

Jennifer Swanson Lowe -- UBS -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Michael Turrin -- Deutsche Bank -- Analyst

James Rutherford -- Stephens -- Analyst

Ken Wang -- Guggenheim Securities -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

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