TechTarget Inc (TTGT) 2010 Q2 法說會逐字稿

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

My name is Melanie and I'll 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.

(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 Greg, I want to briefly 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.

00 PM 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 Investor 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 two most recently completed quarter, 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 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 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-K as well as 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 Greg's introductory remarks, in addition to Greg, the following members of our management team will be available to answer your questions, Don Hawk, President and Co-founder and Jeff Wakely, Chief Financial Officer and Treasurer.

I will now turn the call over to Greg.

Thank you, Rick.

We are proud to post the highest online quarterly revenues in the 11-year history of the company.

We are clearly executing well and gaining share.

The 63% adjusted EBITDA growth, and 25% adjusted EBITDA margin demonstrates a high operating leverage in our model.

When the economy fully recovers we expect online revenue growth rates to return to our historical norms of above 20%.

Our incremental adjusted EBITDA margin target remains 50%.

Despite the stubborn downturn we are reaffirming our annual guidance of mid-teens online revenue growth and 19% to 23% adjusted EBITDA margins.

I will now open up the call to questions.

(Operator Instructions)

Our first question comes from the line of Douglas Anmuth with Barclays Capital.

Go ahead.

Good day, thanks for taking the question.

So I was just hoping if you could give some more color back half of 2Q and in particular what the advertiser caution looks like there, it seems like it was more related to bigger advertisers.

But was this more of pulling things that were already planned, or just not adding as you expected?

And also in the back half in terms of the outlook, it is sort of 4Q-loaded, basically I guess implies 20% growth at the midpoint in online revenues in 4Q, and I think that's coming on a tougher comp.

So what gives you the confidence in being able to deliver that number, given the 3Q softness?

Thank you.

In terms of the Q4, if you look at our normal seasonality, historically in the business, that's kind of -- that's a normal Q4 for us with that much growth, and you know, Q3 seasonably, is also, you know, typically a little bit less than Q2, so this is kind of a return to normal seasonality.

So in terms of, you know, what gives us confidence in the Q4, is to just -- you know, we are very encouraged by the conversations we are currently having, you know, with advertisers right now about their plans for the end of Q3 and all of Q4.

So, you know, they're expecting to do a lot of activities, and so it's just really, we have, kind of, been expecting this for the second half of the year, to play out that way.

In terms of how that manifests itself at the end of Q2, we weren't seeing any cancellations, it wasn't that type of, you know, environment, I'd say we had the highest online revenues we've ever had in a quarter.

So it was just basically, you know, size of deals, how quick people renew, those typical type things when people are cautious, where they can, you know, just slow down a little bit.

Okay, that's great, thank you.

Our next question comes from the line Colin Sebastian with Lazard, go ahead.

Thanks, very much.

I guess, first, in terms of gross margins there, I'm curious what we should use as normalized rates in both the online segments as well as events.

And then turning to international business for a moment, you've had some site launches recently, and it sounds like you're getting some traction there.

Maybe you could put a little bit more color behind that in terms of number of accounts or other measures of growth, so just we can track that.

And then, lastly, in terms of following-up, I guess, on the first question regarding the slowdown, I don't know if you could put a more specific number on where Q3 is ending versus where you thought it would end up maybe a few months ago, or maybe just anecdotally, if you're hearing similar trends with other advertising companies in your segments?

Thanks.

Okay, why don't I answer them backward?

So in terms of Q3 we've never previously given guidance on Q3, so we -- so I don't think we are very surprised that it's going to be, that we are expecting a big Q4, that, like I said before, seasonally, that's, historically, what we've been used to, you know, July and August aren't typically very, you know, robust months.

People are doing a lot of product launches during the summer and a lot of our advertising is around new product launches.

So I don't think we are surprised by, you know, the distribution between Q3 and Q4, such that, if you take out the last two years, where there has been some anomalies, because of the economy, if you look back historically, through the company's history, that's a really normal distribution of revenue through the second half of the year.

So I don't think there's any, you know, huge surprise on our part there.

I'll let Don, answer the second part, and then we'll turn it over to Jeff Wakely on the margins.

Hi, Colin.

So your question was about site launches, and we don't generally break out state launch, and state launch performance specifically, but for example, in our release today we did talk about some of the progress we were making against our Healthcare launch, we are pleased with the progress we are making there, we are growing the number of advertisers, it's not at the size yet, where it was a material contributor to revenue within Q2, but as I said in the prepared comments, as we head into the latter half of this year and into 2011, we think that healthcare launch and some of the international launches that we've done can really be -- start to be material contributors to us as we head into next year.

But we are making good progress on all those launches, and advertisers are growing there.

When we break off these new sites, it's generally in response to demand.

Advertisers are coming to us and they're doing business with us in the context of sites that already exist, and they're telling us they'd like to do more business with us, which is generally what leads us to break off a particular segment of one of our sites into it's own dedicated site, and that has continued to be the trend that we've seen thus far with our recent launches.

I'll let Jeff take the gross margin question.

Yes, Colin, hi.

This is Jeff Wakely.

So for your -- for modeling on your gross profit margin percentages, you know, we are using 75/65 I think is a good benchmark for online versus events.

Okay, great.

Thanks very much.

Sure,

Our next question comes from the line of Jim Friedland with Cowen and Company; go ahead.

Thanks.

You mentioned in the script, with the prepared remarks, that valuations seem to be getting more reasonable and you've been making some tuck-in acquisitions.

For those valuations that you were referring to, are those for potentially larger acquisitions?

Maybe if you can quantify.

And then just a second question on working capital and receivables, looked like receivables jumped in the quarter, and I was just wondering if that was going to reverse out next quarter, is there anything there that caused that?

Thanks.

So in terms of the acquisitions, you know, one of the nice parts about our competitive landscape it's very favorable for us, we have a very dominant position, there's not a lot of, you know, sizeable acquisition targets out there, so in terms of acquisitions going forward, I think that they will continue to be of the tuck-in variety.

But even last year, on the small ones, there was definitely a disconnect between public and private valuations, and even on the ones that we quantify as tuck-in acquisitions.

Those people now, kind of, accepted what the realities of the valuations are, so this is a lot more conversations happening, than there was a year ago.

I'll let Jeff talk about the receivable question.

Yes, Jim, you did see that the [AR] jumped at the end of Q2, we certainly do expect that to reverse.

What happened, I guess, were a couple things.

We had some seasonal hockey-stick effect in June, that pushed billing out into June, and then also, the company has instituted in May, a new billing software package, and as part of that implementation, some May billings got pushed later into May, and into early June, so that's certainly an anomaly that will not happen in the future going forward.

So once that reverses in Q3, then it should go back to the normalized level that we have been seeing, pretty much, over the past few years.

That's correct.

Okay, great.

Thanks a lot.

Our next question comes from the line of Ross Sandler with RBC, go ahead.

Hi guys.

A couple questions; first the small advertiser bucket, you said growth accelerated in the second quarter, was the first time that you've seen a reacceleration, can you remind us kind of what that looks, like.

I know it's been a tough area, but is this the first quarter in the recovery that we've seen reacceleration?

And second, back to the large advertiser bucket of the top 10, you mentioned that there's been some consolidation that's impacting growth in one of your largest accounts, is that permanent budget that's been removed or is it going to come back at some point, do you think, once integration is in place?

And then do you have any other concentration, if you look across the big guys, where you could be potentially subject to more of these consolidation events?

And I've got one last follow-up.

Okay, this is Don Ross, so I'll take those.

So, on the small advertiser front, I'll remind you that last quarter we also said that we've seen growth with the smaller advertiser segment, that we saw more growth this quarter, so that ended -- the last two quarters ended the streak of probably seven consecutive quarters of either flatness or decline on that small advertiser base.

So we are encouraged by what we are seeing happen there.

I think we still have a road to hoe, if you will, with regard to these small advertisers so definitely not all the way back into the market, but we are making good progress there and we are encouraged by the fact that they are off the sidelines and they're starting to spend.

With regard to the large advertisers, the question was whether or not there's permanent budget that was lost with that one particular account that were just citing there, and the answer is no.

Generally what we see with the large acquisitions is that there's a period during which nothing happens, meaning like they kind of continue along with their marketing spend and as it was, and then there is a period where they try and take account of what's going on in the two formerly individual entities and try and bring some level of efficiency to that, generally, as it involves reorganization, sometimes they'll put marketing (inaudible) depends on hold or at lower levels while they do that evaluation.

And then once they get through that, then they're back to some sort of normalized spending type of situation and then going forward, we are in a good position to get those dollars.

So I think where were at with that particular account which is kind of in that middle phase right now.

They're going through and trying to figure out how exactly they bring some efficiency to what used to be two separate entities of marketing spend, but going forward we feel like we are well positioned there, because the initiatives that that company cares about, going forward, are initiatives that we are particularly strong on, so we would see that as being kind of temporary situation there, with that one particular account.

And then to your broader question about whether or not there are levels of concentration with particularly large accounts that could make us subject to this sort of dynamic going forward.

I mean, we've lived with consolidation in this space as long as we've had the company, and we've been dealing with this issue for 11 years and dealing with it successfully.

There are plenty of situations where acquisitions take place, where it's very good for TechTarget.

There are plenty of examples where we had a smaller company that was a good spender with us, bought by a bigger company, for example, where that smaller company spend represented kind of a total (inaudible) within the larger organization that really allowed us to grow -- larger organization spend very dramatically.

So, in general, it's not an issue that we are concerned about for sure, and in some cases it's actually an area of opportunity for us.

It really just depends on the particular circumstances.

Okay, and just the last one.

You mentioned in the prepared remarks, customer nurturing.

Yes.

It looks like you're providing those lead metrics to advertisers.

How are you guys charging for this product, or are you?

Or is there a monetization piece to it, how does it work?

There is a monetization piece to it, and it is a flat fee based upon size of the underlying program that we are doing that for.

So it's essentially like a services revenue stream for us, where we are going through and based on the underlying regeneration program, going back to the leads that were generated within the campaign, with additional media assets, either our own sponsored editorial or the vendors content assets and looking to elicit further response so we can better triage those leads for the vendor.

But it is a revenue opportunity for us, today it's a small revenue opportunity, it's relatively new as I alluded in the comments, but going forward, I think it could be something that gets more interesting and really, I cited it because it's evidenced of a broader trend that I was trying to draw out there was that our customers are really looking for us to become part of their marketing workflow, and by becoming part of that marketing workflow, just opens up a lot of new revenue opportunities for us, and that's one example.

But you can see us again, getting further and further into, not just handing over leads to our customers, but helping them triage those, prioritize those and cultivate those on a go-forward basis.

And this product is applicable to any size advertiser?

Is that a fair characterization, or is it more kind of the middle and big guys?

I would say it's more the middle and big guys because you have to have a certain level of critical mass with regard to the underlying regeneration program for this to be of interest to you -- right?

If you are only generating 100 leads over three months, for you to go through and re-message to those 100 leads probably don't make a lot of sense.

If you're generating 1,000 leads over three months, you need that much more help in trying to identify the highest priority prospects.

Alright, thanks guys.

Okay.

Our next question comes from the line of Sameet Sinha with JMP.

Go ahead.

Yes, thank you.

I have a couple of questions here.

So, Greg, in terms of the fourth quarter and the full year guidance, and you spoke about the level of confidence that you have when you speak to your advertisers.

I mean, how do you -- you know, is it body language, or can you help us quantify?

I mean, are there a number of product launches that's happening in the fourth quarter that will support your level of confidence?

And my second question was in terms of a weakness that you saw, I think you mentioned that back in March, that it's primarily the mid-sized vendors and can you help me to just think about when exactly did this happen during the quarter?

And my third question is, in terms of, you know, you spoke about geo-targeted campaigns.

Does that include, primarily, your international sites, or international visitors to your domestic sites?

And that if it was international visitors to domestic sites can you talk about the monetization efforts there?

Thank you.

Sure.

So in terms of the -- what gives us confidence.

We have on a regular basis, we are always having conversations with our customers about their future plans and their future product launches, so just talking to customers, do they want to -- you know, they want to know what type of inventory is available what types of programs we would recommend.

So we just know there's a lot of product launch activity in the Fall, and a lot of advertisers, you know, are indicating to us that they're going to be aggressive around those launches, which gives us, you know, good confidence about, you know, a strong end to Q3 -- and a strong Q4, and also having, you know, the team here and I have been doing this for over ten years, and it's kind of normal seasonality that we are used to in the business, so you know, it kind of feels normal, so that's how we can get comfortable reaffirming that guidance and it's really, you know, as I've said before, it's not really -- the kind of what we were expecting as we gave this guidance at the last call.

So in terms of your -- of the question about the weakness in the quarter when it showed up, it showed up, you know, when you expect when there was a lot of bad news coming out macro.

You know, there was a lot of news about what was going on in Europe, there was the oil spill, et cetera, so it was just a matter of, you know, customers just being cautious.

So you know, obviously we had a record Q2, so we've definitely had a lot of activity in the quarter.

So businesses, clearly, much, much better than it was a year ago, or a year-and-a-half ago, you know, people are still -- people are still cautious, I think.

You know, I don't think there's a lot of conviction that we are in a -- you know, in a full recovery yet, so, you know, we (inaudible) better than it is, but you know, it's still -- it's still choppy out there, and as everyone knows, advertising is very cyclical, and when people, you know, confidence gets crushed, it's a place where they can be cautious.

So I don't think we saw anything that a lot of other companies didn't see.

Advertising companies, at the end of the second quarter, and then in terms of the geo-targeted, we are having success in both places, so we are -- you know we have multiple Web sites outside the U.S.

that we are selling to more customers and more programs.

We also packaged those geo-targeted programs with international visitors to our U.S.

sites, so we typically put together a combined program, and we are gaining -- you know, that is growing very rapidly for us.

We are delivering very well against those programs, and that's, you know -- that's definitely, that this is the fastest-growing part of the business right now, is the international geo-targeted programs.

So we are very -- you know, very bullish on that going forward, we have such a really green field there, so there's -- very -- enormous growth opportunities.

Greg, thank you very much.

Ladies and gentlemen, that does conclude the time that we have available for Q&A today.

We thank you for your participation in today's conference.

That does conclude the presentation you may now disconnect.

Have a wonderful day.