TechTarget Inc (TTGT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechTarget Third Quarter 2009 Conference Call and Webcast.

My name is Ken and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

Following introductory remarks by Greg Strakosch, TechTarget's CEO, Chairman and Co-founder, we will be facilitating a question-and-answer session for today's conference call.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would now turn the call over to Rick Olin, Vice President and General Counsel.

Please proceed.

Thank you, operator.

Before turning the call over to Greg, I want to briefly remind everyone on the call of the new earnings release process that we began using last quarter, are using today, and plan on using going forward.

As you saw, we issued our press release earlier today and we previously announced, in order to provide the usual update on the business ahead of this call and hopefully save you all some time and effort, we have posted on the Investors section of our Web site and furnished with our 8-K filing today management's prepared remarks.

These remarks are meant to function as the script otherwise would for this call.

On the call today, Greg will provide a brief summary of our financial results for the most recently completed quarter, and then management will devote the rest of the call to answering your questions.

We've seen some other companies use variations of this format and given that it provides both an opportunity for all of you to read the prepared remarks prior to the call and a more meaningful interchange on any follow-up questions, we've decided to adopt this process.

We hope that you find this helpful and look forward to your feedback on it.

Additionally, I would like to remind everyone that during the course of this conference call and the Q&A session, TechTarget will make certain statements that may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including particularly its guidance as to future financial results.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

These risks include market acceptance for our products and services, relationship with customers, strategic partners and our employees, difficulties in integrating acquired business and changes in economic or regulatory conditions, or other trends affecting the Internet, Internet advertising and information technology industries.

For a description of these and other risks, the Company encourages you to read the section entitled Risk Factors in our Annual Report filed on Form 10-Ka, as well as our other filings we have made with the Securities and Exchange Commission.

In addition, the forward-looking statements speak only as of the day of this call, and the Company undertakes no obligation to update these forward-looking statements.

Following Greg's introductory remarks, in addition to Greg, the following members of our management will be available to answer your questions -- Don Hawk, President and Co-founder and Eric Sockol, Chief Financial Officer and Treasurer.

I'll now turn the call over to Greg.

Thank you, Rick.

The market has stabilized and our results reflect that.

While customer psychology has improved from a year ago, the mood is till cautious.

Our strategy through this downturn has been to invest aggressively to gain market share while maintaining 15% to 20% adjusted EBITDA margins and to generate healthy free cash flow.

So far, we have been successful on these accounts.

Before I open up the call to questions, I want to make a comment on the accounting issue.

We are disappointed by it and take it very seriously.

At this time, we have nothing further to add from what has been disclosed in our press release and prepared comments.

So, we will not be taking any questions on this matter during this call.

With that said, I will now open the call up to questions.

(Operator Instructions).

Our first question comes from the line of Colin Sebastian with Lazard Capital.

Please proceed.

Hi, this is Paul Bieber for Colin.

Thanks for taking my question.

I apologize; I had trouble downloading the prepared remarks off the website and I'm only just looking at it on EDGAR.

So, I apologize if you answered this in the prepared remarks.

But I was hoping you give us some color on what advertisers are saying about budgets for next year.

And also, if you could give us some color on just the general ad market, display, lead gen, also paid search costs?

Well, in terms of the general market, customers are still cautious.

But I would definitely say that the worst is behind us.

So, in terms of -- if you go back to beginning of this year, there was a lot of fear in the marketplace and customers, it was hard even to get meetings with customers; they don't want to waste our time.

Now, from an activity standpoint, there's a lot of activity.

There's a lot of discussions about 2010.

But in terms of what's happening right now, customers are still very cautious.

So, I would say we're basically at this point where the market has stabilized, the worst is behind us.

But it's before I can say -- it's too early to say, hey, recovery is definitely here.

But in terms of, if you think about the budget process, which most companies do during this time period, a year ago, you were dealing with Lehman Brothers and AIG and there was a lot of fear in the market and that was reflected very much in 2009 budgets.

Customers are definitely much more optimistic about their business today and I think that will be reflected in their budgets next year.

Although we are not expecting there to be a huge increase, we definitely expect a better operating environment.

And this is Don.

Was the second part of that question about display versus lead gen versus paid search costs?

Yes.

Okay.

I'll take that piece.

So, our business is maybe a little different than consumer businesses you may follow in that we are on the online side of our business, primarily lead gen, and we have a lot of programs that combine both lead gen and display.

So, the trends that we're seeing with regard to display, for example, might be different than what you are seeing in the overall consumer market.

Display has been strong for us throughout this year and that's powered primarily by the fact that it's our largest accounts that tend to buy a lot of our display inventory.

And as we've talked about on previous calls, those large accounts have been a source of strength for us in 2009.

Lead gen, which makes up the bulk of our online revenues, we see that as being pretty consistent, and heading into next year, we're definitely seeing, as Greg just talked about, an uptick in interest, particularly from the small to mid-sized segment of our account base.

The small to mid-sized accounts tend to do primarily lead gen business with us.

So during this downturn, those accounts had pulled back a little bit on that spend.

But heading into next year, we're definitely seeing some renewed signs of optimism on that.

I think the last part of your question was about paid search costs, that's not really a driver to our business.

We don't buy virtually any of our traffic.

98% of the members in the traffic that we bring into the network are from organic sources.

So, really can't comment on that piece.

And can you give us a sense of how many new vertical sites you plan on launching next year?

Yes.

So, part of our strategy during the downturn is to invest aggressively and site launch is one of the primary places.

So during the downturn, during '08 and '09, we've launched about 20 new websites.

And we're still doing planning for next year.

But I would think it would be in the neighborhood of about eight new websites next year.

Okay, thank you.

Our next question comes from the line of Jim Friedland with Cowen & Company.

Please proceed.

Thanks and I also have not been able to go through the prepared comments completely yet, so you may have covered this in there.

But first, wanted to ask on the segment breakout.

In terms of your customer base, it seems like the larger customers are still continuing to spend and the smaller customers haven't come back yet.

Just wondering if you could give some more color on what you're seeing there in terms of same customer sales basis and what you see going into Q4?

And then, maybe if you could talk about the Windows 7 cycle, if you think that's going to help you out at all in Q4, Q1?

Thanks.

Jim, I'll take the first piece of that at least.

So, with regard to the customer segments, when you get a chance to review the prepared comments, we did talk a little bit about this in that.

In Q3, what we saw actually was a better contribution than we've seen previously with regard to the small to mid-sized segment.

So, one of the stats that we had in the prepared comments was if you backed out the 12 largest vendors that we kind of talked about as an illustrative benchmark in previous calls, if you back those guys out of the top 100, we actually saw 18% growth on a year-over-year basis from the remainder of the top 100 customer base.

And you may remember during the last earnings call, we talked about the fact that the top 100 is a group that has been flat on a year-over-year basis.

That's the first time we've seen some signals of growth from that segment of the customer base.

With regard to those top 12 that we talked about as the benchmark, we actually saw them be down a little bit in Q3.

Now, we did spend some time there in the prepared comments and I'd be happy to answer any follow-up questions on this, on the fact that the year-over-year comparables that we're dealing with here are a little misleading, because if you look at the impact of the change in revenue recognition methodology that we employed at the beginning of this year, that means retroactively.

The impact of that in 2008 was actually to move a decent amount of revenue from the first half of the year to the latter half of the year.

That's particularly true on larger accounts because larger accounts tend to buy multi-element offerings from us.

They tend to buy contracts that we sell them multiple pieces to their promotional program.

So in those types of programs, the impact of that rev-rec change was to shift revenue to the back half of the year.

So, it creates an unfavorable comp force when we're talking about a very small sample of accounts there, kind of the larger I guess trends with regard to that account base though, we feel pretty good.

We're seeing normal spending patterns from them.

We're having good conversations as we are elsewhere in the customer base as we head into 2010.

So, we continue to think that the meta trends that we talked about there stay constant.

That is the migration from traditional to online for those guys and as we are in this space, we stand well positioned to take advantage of that as it proceeds.

And Windows 7 helping you?

Yes.

Well, on Windows 7, I think eventually that will help us.

But I don't know how immediate it will be because typically, Microsoft upgrades are adopted by consumers first and enterprises generally delay to make sure that it's stable.

Well, my sense is that a lot of organizations are two releases behind on the desktop.

So, we think this one is probably going to get some pretty good traction eventually.

And when that happens, that's good for us because whenever there's change, that's good for us.

A lot of -- Microsoft will have a push behind on it on the corporate side and then all of the software that is tied in with Microsoft and especially the servers, people will be doing upgrades to take into account Windows 7.

So, any kind of a big Microsoft refresh, it tends to be good for us.

But in terms of it, in the next quarter or two, it's probably longer term than that for us.

Okay.

And so, maybe we see it in the back half of 2010, but we just have to keep an eye on how -- what enterprise adoption is?

Yes.

Enterprise adoption is what will really drive people to do a lot of advertising around their upgrade options.

And then, just a quick question on events.

Just looking at your guidance for Q4 and your statement about doing fewer but more profitable events.

As we think about our models for next year, should we just expect that trend to continue kind of on a year-over-year basis in terms of number of events held versus the previous year, that kind of thing?

Yes.

Well, I think it's sort of the target revenue mix.

We're targeting 90% online, 10% events.

That's our long-term target.

But we're going to be pretty close to that next year.

And then, I think you can see the type of -- we've had improvement in gross margin this year and I think that gross margin will hold through next year, as we continue to be very selective which events we hold.

Okay, great.

Thank you.

Our next question comes from the line of Ross Sandler with RBC Capital Markets.

Please proceed.

Hey, guys.

Just a couple of questions.

First, on the 4Q revenue guidance.

Sorry if you already talked about this.

But I was hopping around on a couple of calls, but it looks like you're calling for year-over-year kind of flat to slightly down -- or actually, I'm sorry, for flattish for the online piece.

Any reason why that shouldn't start to accelerate in 4Q, given the easier comps?

And then, if you think -- if we look at 2010 and just take a step back without giving any kind of formal comments, why would TechTarget now revert back to kind of the above 20% growth rate that you've been consistently delivering in online, given that you've got fairly easy comps and we should get some sort of a recovery?

And then lastly, the new healthcare IT and government IT verticals that you're working on rolling out, at what point does that take six or 12 months or longer before it becomes a more meaningful driver of online revenue?

Thanks.

This is Don.

I'll take the first of those with regard to the Q4 guidance.

So, Q4 actually is not one of the easier comps for us, which is somewhat counterintuitive, because certainly the sales reality of what we were dealing with last year was that [volumes] had really taken a turn for the worse in Q3 and then things really took a decided turn for the worse in Q4.

As I was talking about on the previous question, I'd refer you to our prepared comments on this.

I'll spend just a moment on it and then certainly can answer any follow-up questions that you have.

But when we implemented this new revenue recognition, the impact on the revenue as a whole for last year was to shift revenue from the first half of the year into the second half of the year.

So, if you look at it, actually Q3 of 2008 restated was our highest online revenue quarter and Q4 was our second highest quarter.

And as I just said, that really doesn't reflect the sales reality of what was going on.

Actually what's going on there with regard to the revenue recognition change is that applying it retroactively essentially had the impact of extending revenue recognition on large programs.

So, I'll give you an example I think, that might make this a little bit more clear in the context of a single contract.

So, for example, had we sold a contract to an individual customer that had three different elements to it, banner advertising, a white paper and a webcast, okay, our old revenue recognition policy on that would have been to recognize revenue against each one of those elements separately based on whatever its delivery period was.

The new revenue recognition methodology takes the earlier starting point of any of those elements and the latest ending points of any of those elements and spreads the revenue equally between them.

So, if you had a situation last year where there was a Webcast, one of those three elements, it was the last thing that we delivered.

When we retroactively apply that policy, it would have spread out the revenue over a much longer period of time based on the fact solely that the Webcast is the last thing that we delivered there.

So, that's what you're seeing last year.

That's why you're seeing all that revenue shift from the first half of the year into the second half of the year.

This year, knowing what this revenue recognition policy is going forward, we've structured our program delivery to provide a delivery over terms that are kind of closer to what we've done historically.

So, instead of revenue being elongated over extended periods, in the example I just gave you, for example, we might take that webcast and run that early in the program instead of late.

So, when you talk about year-over-year comps, again, that's why I am spending some time on this, it actually makes it a little misleading from a directional standpoint with regard to what's going on there.

You would expect Q4 has been our easiest comp last year and that's actually not the case.

Does that help?

Yes.

It definitely helps.

And on the 2010?

Yes.

So in terms of 2010, what I -- our view is that with all the investments that we've been making and we're very confident that we've been gaining market share, when there's an upturn, we're going to have -- we're going to be a main beneficiary of that and we'll have very, very healthy growth again, like we did before the downturn.

What's just not clear to us is when is that.

So, if the recovery starts in 2010, then, yes, we will participate then.

We just don't have visibility at this point to say, yes, that's -- the recovery is definitely starting next year.

So, it's definitely -- as I said before, definitely it feels like the worst is behind us.

But we're kind of in that stage where the worst is behind us, but we're not yet in full recovery.

Things have definitely stabilized.

So, it's really just a matter of when that recovery starts.

So, we just don't have clear visibility when that is.

In terms of healthcare and government, we're very optimistic about both those segments.

But there's ramp-up time started.

So, I think we will see some benefit in 2010, but I think it's more likely to be in the second half of next year than the first half.

Great.

Thanks, guys.

(Operator Instructions).

Our next question comes from the line of Mark May with Needham.

Please proceed.

Okay, thanks, thanks.

I think this is just another question along the lines of what Don was just speaking about regarding the comparisons given the accounting restatement and how you've sort of addressed your deals since then.

Would -- based on the comparisons going forward sort of thinking Q1 of '09 on a year ago basis, they start to get a little more favorable from that regard?

And then, you've sort of been changing your contracts and how you deliver them now for a while.

Would you -- and based on that plus your early conversations with clients, which it sounds like that you're doing, would you anticipate that starting in Q1 that you'd start to more likely posting year-over-year growth in revenue?

And I have one other question.

The anticipation is, yes.

I mean, just to reiterate what Greg just said, we're not calling the upturn yet.

But, certainly the issue about year-over-year comps that I just spent some time on, that really starts to go away in Q1 of 2010 based on the fact, as you just pointed out, that we've been structuring our contracts cognizant of this new revenue recognition policy.

So again, going forward and assuming a reasonable level of return to normalcy in the environment, yes, there's no reason why we shouldn't start seeing growth on that particular metric.

Okay.

And then on the events, I think you addressed it, but I'll ask in another way because you tried to reconcile the 90/10 mix with the guidance for Q4.

It looks like if you annualize Q4, it's kind of 12 million a year kind of events business.

I know it's lumpy from quarter-to-quarter.

But is it fair to say that that is kind of the new floor or do you have plans to exit some other events into the New Year?

So, this is Don; I'll speak on that one as well.

We're not going to commit certainly at this point to an events number for next year.

In terms of how you think about it, I would say that most of the corrective steps that we took with regard to right-sizing that business, we were able to take this year.

We're currently going through our 2010 planning process.

So, we're finalizing decisions about what exactly we're going to run next year.

You really can't take the Q4 and annualize it because, as you pointed out, it is kind of a lumpy business.

We don't manage that business to produce smooth revenues from quarter-to-quarter.

I wouldn't expect as I guess in terms of giving you some directional guidance on this, the drop off from 2008 to 2009 with regard to the events business I would say it's much larger than what you would see from 2009 to 2010.

So, I wouldn't expect any sort of decline approaching what we did this year.

We're still finalizing those decisions kind of as we speak here.

Okay.

And my last thing, I respect your position not to discuss the accounting issue, but I feel like I wouldn't be doing my fiduciary duty if I didn't at least ask one question.

And if I don't convince you to answer it then, maybe you'll just know kind of one thing that's in my head.

I guess one question would be has the single individual that you identified in the press release been terminated?

I don't know if you care to comment on that.

Yes.

Mark, we're just in a position that we just can't give anymore details than we've already discussed.

But at the appropriate time, we will disclose what is necessary, but just we can't -

Okay.

-- for obvious reasons.

This is just too soon for us to make any comments.

Okay.

That's what I figured.

Thanks.

There are no further questions at this time.

So, I will turn the call back to TechTarget management for closing comments.

Great.

Well, thank you everyone for calling in.

We appreciate it and we look forward to talking to you again next quarter.

Good night.

This concludes the presentation for today.

Thank you for your participation.

You may now disconnect.