TechTarget Inc (TTGT) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechTarget First Quarter 2010 Conference Call and Webcast.

My name is Tamina and I will 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 will now turn the call over to Rick Olin, Vice President and General Counsel.

Please proceed.

Thank you, Operator.

Before turning the call over to Don, Greg has landed but detained on a flight, so he'll be joining us momentarily.

So Don Hawk, our President, will give the introductory remarks.

I want to remind everyone on the call of the earnings release process that we began using last year, are using today, and plan on using going forward.

As you saw, we issued our press release at 4.00 p.m.

today.

And, as 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 website 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, Don will provide a brief financial summary and then management will devote the rest of the call to answering your questions.

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 of our products and services; relationships with customers, strategic partners, and our employees; difficulties in integrating acquired businesses; and changes in economic and 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-K as well as our other filings that we have made with the Securities and Exchange Commission.

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

Following Don's introductory remarks, in addition to Don, Greg will hopefully be joining us and Eric Sockol, our Chief Financial Officer and Treasurer, will also be available to answer questions.

I'll now turn the call over to Don.

Thanks, Rick, and thanks, everybody, for joining us today.

Just a couple of quick comments before we take your questions.

We're very encouraged by our first quarter results and by our outlook for the second quarter.

It's too early to declare victory, but our 14% growth in online revenues in Q1 demonstrated to us that the investments that we're making are making a difference.

The overall IT environment is seeing at least moderate improvement, and we think that our business will benefit as it comes back even more.

Tamina, are there any questions queued up?

+++ q-and-a

Just one second, please.

(Operator Instructions)

Okay, our first question comes from the line of Colin Sebastian with Lazard Capital Markets.

Please proceed.

Okay, great.

Thanks.

So I guess first of all, it's obviously very good to see business getting back on track.

So my first question is regarding the online segments, whether the mid-teen's growth in your guidance reflects what you think is a normalized level of business or could we expect even faster growth in the segment down the road?

And then secondly, in the online segments, whether you could describe the pace of activity, how that's picking up among existing customers or are you seeing an influx of new customers as well as the economy improves?

And I have one follow-up.

Thanks.

Okay.

With regard to whether 15% -- the mid-teen-type percentage --.

I'm sorry, I think my phone was on mute there.

Can you hear me okay?

Yes, I can hear you.

Okay, sorry about that.

So with regard to the first part of the question, whether the mid-teen's growth is kind of a normalized growth rate for online, I would say that we actually think we have some upside on that going into the future.

Certainly, this year, as we said on previous discussions, the online growth rate is going to be heavily influenced by the pace of an overall recovery.

And the point that we're trying to make in our prepared remarks is that we think that the 14% growth that we saw in Q1 is actually really outpacing the overall recovery that we're seeing in the market.

Certainly, we're in a better budget situation than we had been previously, but I would say that budgets for sure are not up 14% in the market.

So once we start to see an overall recovery that starts to kind of quicken up its pace a bit, I think we're going to be able to see growth rates beyond what we're putting forth here as the potential growth rates for 2010.

The second part of your question had to do with whether we're seeing more new customers or if we're just getting business from existing customers.

And I would say it's certainly a bit of both, as you would expect, but we're very encouraged by the fact that core spenders from TechTarget who maybe sat on the sidelines in 2010, or dramatically decreased their spend in 2010, are really starting to come back for us.

That was really evident in the prepared comments, in my prepared comments, when you look at the various customer segments that we talked about.

That middle market customer, the kind of bread-and-butter account, if you will, for TechTarget over the years is an account that in 2009 was really sitting on the sidelines quite a bit.

Their overall marketing budgets got very much curtailed.

And because online was a big part of their overall marketing mix, certainly their spend with us was impacted.

What we're seeing from those guys in 2010 is a return to more normal spending patterns, and we think that over time their budgets are going to continue to increase.

And because we have a disproportionate share of their marketing budgets, their spend with us is going to benefit dramatically.

So we're very encouraged by the spend from our core spenders.

We always bring on new advertisers for sure, and this Q1 results that we're talking about today is no exception to that.

But if I had to talk about the real driver on our growth that you're seeing so far, it's more with the core spenders.

And I would say as the economy picks up we're going to start to see even more contribution from the new guys.

Did you have a follow-up question?

Yes, one quick one for Eric.

In terms of the increase to EBITDA guidance and margins for the full year, is that based on operating leverage or product mix or is there another driver behind the better profitability?

Thanks.

Well, the majority of that growth is due to revenue growth.

As we have said in the past, we have very strong leverage in our business and the majority of our costs are fixed in nature in the sense they're already into our cost structure in the first half of the year.

So that is primarily revenue growth, and the events business should be generating the same type of percentage margin as it's done so far.

Great.

Thank you very much.

Our following question comes from the line of Ross Sandler with RBC.

Please proceed.

Hi, guys.

Don, the call cut out earlier, so I don't know if you guys were continuing to talk, but we missed the second half the prepared remarks.

If you guys said anything important there that wasn't in the press release, can you just repeat that?

And then the questions would be, first is we've talked in the past about the revenue mix from -- the revenue run rate from a book business basis versus a reported revenue basis.

Is there a catch up that's going to start happening?

Can you remind us of which quarter that comp gets easier?

I think it's potentially the third quarter of 2010.

Just when do you guys lap that comp issue?

And then can you just -- I know you made some small acquisitions.

Can you help us with organic growth versus any potential revenue that came from these small tuck-ins?

Thanks.

Sure, Ross, I've got to ask you a follow-up on the first part there.

So, when you said we cut out on the prepared remarks, we didn't actually read the prepared remarks.

Were you referring to the answer that I had given to the previous question?

It was before the Q&A started.

You were talking and I don't know if it was just our lines or what, but it went blank for about 30 seconds before the Q&A started.

Got it.

Okay, sorry about that.

So yes, you didn't miss much there that wouldn't have been in the press release or in the prepared comments.

I was just talking about the fact that online revenues were up 14% and I went through what the guidance was for Q2.

Okay?

With regard to your questions, the first question was on booked revenue versus what we'll call recognized revenue, and there's basically an issue we've talked about in the past where booked revenue is actually running ahead of what we're actually recognizing.

So that continues in the first half of the year, and you're correct, that's really a second half of the year issue.

So our bookings in Q1 were higher on a year-over-year basis than the revenue growth that we're reporting, and that starts to normalize as we head into the second half of the year.

With regard to organic revenue growth versus any contribution from the acquisitions, I think it's important to note that these acquisitions are not, I'll call them, material contributors certainly to our Q1 results.

As you'll recall, we did a very small acquisition early in Q1 and then toward the end of the quarter we did ebizQ, but it only had a contribution in March, and then the Bitpipe acquisition that we announced wasn't announced until April.

But the nature of these types of acquisitions is we like to go out and find properties that are essentially under-monetized, but that have very good traffic profiles, very good content profiles, and something that we can plug into our sales force.

So by their nature they tend to be a little bit more back-loaded in terms of their revenue contribution.

So that's certainly the case with the two that we've done so far this year, so any type of revenue growth that you're looking at for us in certainly the first half of 2010 is going to be entirely organic.

And as we move into the second half, again, these are smaller acquisition, so I would say that even in the second half of the year their revenue contribution, while important, is not going to be a sizeable percentage of our overall revenue growth.

I think we start to get really excited about these type of acquisitions as they head into their first full year after we acquire them.

Right.

And just one last question on the international side, there's some pretty upbeat commentary, four times the number of advertisers year-over-year.

Can you just talk a little bit about trends you're seeing in the UK through your own operations versus the JV in Germany?

Thanks.

Okay.

In the UK, specifically, what we're seeing there is a result of feet we're putting on the street.

We've talked about this previously; we've upped our investment in terms of sale resources on the ground in the UK.

And the UK sales resources that we've deployed are really designed to help us sell, not just against our UK-specific offerings, but even to help out the partnerships that have.

So there are cases, for example, where our sales force is selling programs that combine our wholly-owned UK offerings with offerings from, for example, our partnership in Germany.

So we think we have a lot of runway there; that's why we increased our sales investment in that area and certainly the early results there are very encouraging.

If the second part of the question is what are we seeing through the JV in Germany?

Again, that's been an encouraging story there as well.

We've seen very good growth in that partnership.

We're pleased with the progress that our partner there has been making and we're working closely with them on that.

And just to kind of close out the story, the overall investment that we make in international generally, and then specifically in international sales, has the effect of helping the partnerships that we have.

So we're looking to grow our direct revenues and we're looking to grow our licensed revenues as well through those types of investments.

Great.

Thanks, guys.

Thanks.

Thanks, Ross.

Our following question comes from the line of Jim Friedland with Cowen and Company.

Please proceed.

Thanks.

First, on the EBITDA.

In '06 and '07 you guys hit roughly mid 20s EBITDA.

Assuming we continue to see this recovery, is that where we should think about EBITDA margins looking out to 2011?

And then the second thing is on Q4 seasonality, if you look at Q4 '09, you had incremental improvement in Q over Q, but historically in the online business you've actually seen a bigger uptick.

And if we do return to a more normalized environment, Q3, Q4, should we expect a bigger seasonal uptick this year?

Thanks.

Sure.

So, on the EBITDA question, yes, I think that the mid 20s types of range for 2011 is not an unrealistic expectation.

We're not here to call any sort of recovery and we're trying to be somewhat cautious about any kind of long-term outlook that we might be giving here because it really is still an uncertain spending environment, and I don't want to underestimate or understate how uncertain that spending environment is.

I think one of the things we're really encouraged about is that we're showing a decent growth rate in this type of environment, and anecdotally what we're hearing is that our customers are moving around budget to make that happen.

It's not so much that their budgets are increasing dramatically.

So the EBITDA question that you're asking is -- we kind of alluded to in an earlier question -- our EBITDA story is really a revenue story.

The costs are pretty much fixed and when we have revenue growth it tends to go to the bottom line.

So I wouldn't say that a mid 20s type of EBITDA range for next year is unrealistic.

And frankly, we have our sights set on something even bigger than that over a number of years here.

We think this is a great EBITDA story and we're very much on track to hit that and we're making great progress against it.

And once the economy starts working with us instead of against it, I think we can make very quick progress against that.

So that's on the EBITDA side.

On your Q4 seasonality question, I think what you're asking there is are we going to see a big uptick from Q3 to Q4 as we have seen in some previous years.

And again, it's a little early for us to talk about what the end of the year is going to be looking like here.

In terms of us tweaking up our 2010 annual guidance on online, we're certainly making an assumption that the progress we've made so far this year is something we can keep up in the second half of the year and would imply a pretty consistent growth rate from quarter to quarter over the course of the year.

And if we see something that's a more dramatic sequential quarter -- Q3 to Q4 -- increase sort of consistent with what we've seen in the past, maybe we'd have some upside on that, but I think it's a little early to say at this point.

Yes, that's definitely very fair.

Well, thanks for that.

Okay.

Our following question comes from the line of Doug Anmuth with Barclays.

Please proceed.

Great.

Thanks for taking the questions.

Just a couple of things.

First, can you just talk about the drivers in terms of gross margin expansion on the online business?

Obviously, I know a good amount is fixed here, just as you're seeing dollars and spending come back.

But is there anything else in particular, because we obviously saw pretty high gross margins in the online revenues?

And then secondly, the top ten customers, I think, accounted for 39% of revenue, which I think is a nicely higher number than what we've seen in the past.

I need to check that, but I guess the question is how much is that a function of anything in particular in terms of larger projects and the stuff you talked about on the last call a few months ago versus just like a near-term disconnect, just the larger advertisers coming back faster than some of the smaller ones?

Where should we think that trends when things get more normalized later in the year and into 2011?

Thanks.

Sure.

Let me take the second question first and I'll turn it over to Eric for the margin question.

So, with regard to our top customers, Doug, as you alluded to, we've been talking a lot about the fact that we've put a lot of investment into offerings against our largest customers.

And on the last call I talked a little bit about in my prepared comments and actually got some questions on this custom media group that we built, which is really designed to help us increase our budget penetration even further within those biggest customers.

The custom media group, as I said in my current prepared comments, is off to a great start, but it's pretty early there.

So any growth that we're seeing in those large accounts is really them doing more of the core things that we've always done with them and always have done a good job with them on.

I would say that as -- in terms of what their percentage of our overall revenues will be as we trend out over future quarters, it's tough to call on that front because, again, our bread and butter historically -- historically, our bread-and-butter accounts have been these mid-size spenders, and we're seeing some pretty dramatic growth from those guys on a year-over-year basis.

So the overall percentage made up of our top ten is really also dependent not just on their growth, but what's happening underneath of them.

As opposed to answering your question quantitatively, I think what I'd say is we see a lot of upside, continued upside, for those largest accounts.

Again, I'm particularly optimistic with what we're doing on the custom media front and the overall shift in spending that we're seeing from those accounts, from their traditional budgets and their traditional expenditures to online.

So I think that's going to give us a lot of runway with those large accounts for quite some time, and we can continue to drive very good growth there.

We haven't seen that slowing down at all.

And just as a closing comment there, you'll remember back to last year when every other customer segment was down with us, so those guys continued to grow and continued to spend very strongly.

So any increase that we're seeing from those biggest customers is on a pretty good comp, actually, from last year.

It's not like the top ten customers had a weak comp in Q1 of 2009, so we're very encouraged in what's going on in that front.

I'll let Eric take the margin question.

Hey, Doug, this is Eric.

As far as the margin of 76% for the quarter, that's just demonstrating the leverage in the business.

We have -- in Q4, we were pretty close to that margin also.

So we're operating, from a cost structure, very effectively and that high margin is just leveraged in the business.

There isn't anything unusual during the quarter other than just getting good leverage on the business.

Okay, great.

Thank you, guys.

(Operator Instructions)

Okay, I'm showing no questions at this time.

Okay, great.

Well, thank you very much to everybody for joining us and we look forward to talking with you again next quarter.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect, and have a wonderful day.