TechTarget Inc (TTGT) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to the TechTarget third quarter 2014 earnings conference call. (Operator Instructions)

Joining us today is Bob Kellegrew, General Counsel, who will begin with a forward-looking statement. He will then turn the call over to Greg Strakosch, CEO, who will make some opening remarks. (Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Bob Kellegrew. Please go ahead, sir.

Thank you, Laura.

Before turning the call over to Greg, I want to remind everyone on the call of our earnings release process. As you saw, we issued our press release at 4:00 p.m. today.

As previously announced, in order to provide you the usual update on the business ahead of the call, we have posted a letter to the stockholders from Greg on the Investor Information section of our website. We have also furnished it with our 8-K filing. This stockholder letter is intended to provide supplemental information about the quarter ended September 30th, 2014.

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

Additionally, I'd 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 guidance as to future financial results. Investors are cautioned that any such forward-looking statements are not guarantees of our future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

These risks, along with other items, including market acceptance of our products and services, relationship with customers, strategic partners and our employees, difficulties in integrating acquired businesses and changes in economic or regulatory conditions, and other trends affecting the internet, internet advertising and information technology industries. For a description of these and other risks, we encourage you to read the section entitled Risk Factors in our Annual Report filed on Form 10-K, as well as our other filings we have made.

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 available to answer your questions -- Mike Cotoia, our Chief Operating Officer; Janice Kelleher, our Chief Financial Officer; and Kevin Beam, our President.

And I'll now turn the call over to Greg.

Great. Thanks, Bob.

We are pleased that our online revenues were up 29% in the quarter. We continue to see strength in our two major areas of investment, direct international operations and IT Deal Alert.

Based on our results for the first nine months, combined with our Q4 guidance that we are issuing today, we are revising our [2004] revenue forecasts to be between $104 million and $105 million. We are raising our adjusted EBITDA forecast to be between $19 million and $20 million for 2014.

I will now open the call to questions.

(Operator Instructions) Kerry Rice, Needham.

Thanks a lot, great quarter.

Maybe just some more details around IT Deal Alert. I know that you said in your press release 175 customers; I think that's up from 150 last quarter. Can you talk maybe a little bit on renewal rate, and if you're seeing customers come back and order multiple segments on those renewal rate? That's the first question.

The second question is maybe more color around international growth outside IT Deal Alert, particularly as it relates to your launch in continental Europe and Asia Pacific.

Sure. Thanks, Kerry.

Yes, renewal rate, as it says in the letter, for the top 100 customers, continue to be in the neighborhood of 75%, which we think is very good for a new product that customers are continuing to test. The customers that are renewing -- we are having good success with that. And the revenue renewal rate was in excess of 200% again in the quarter. So we continue to get very positive feedback from our customers about IT Deal Alert. And that's reflected in the revenue growth.

In terms of international non-IT Deal Alert -- that continues to go very well. And the biggest growth, as you would expect, is coming from our newest geographies. So in Europe, we've been direct in France for about two years, and less than two years in Germany. And we're seeing very good growth in both of those areas, as well as APAC.

We do a lot of regional sales out of our Singapore office that covers Australia and China, where we have direct operations as well. So we continue to see good growth in all of those geographies, and good growth in the UK as well, where we've been the longest. And we still believe we have a lot of runway there. It's approximately 32% of revenues right now. But it represents more than 50% of the IT spend. So we expect to continue to see that share of international revenues grow.

Thanks. And maybe just to follow up with that -- the question, I think, is a little confusing. I know you launched IT Deal Alert, I think, in continental Europe and Asia just recently. Any kind of early indications of uptake there?

Yes. We launched IT Deal Alert in Asia this quarter. The continental Europe will be -- we've been selling it in English-speaking in Europe. But the new launch this quarter was APAC. And yes, we had good uptake, we had -- many customers are testing it right now. So we started really selling that in mid-quarter. But we're definitely happy with the number of customers that tried it, and we'll expect to see that grow each quarter as we go forward.

Thank you.

You're welcome.

Brian Fitzgerald, Jefferies.

A couple questions. Greg, on Account Watch, we're hoping you could give us a little color on the progress you're seeing in terms of the rollout there. Are you seeing customers using both QSOs and Account Watch? And then, I'll have a couple follow-ups, too.

Yes. So Account Watch is still very early days in our rollout. And I would say most of the customers that are using Account Watch or using qualified sales opportunities were happy with it and wanted to get more depth with that. So we're pleased with how that's going.

Most of the revenue is IT Deal Alert at this point. But we think that Account Watch will be a meaningful contributor to revenue in 2015.

Great.

Then, maybe a bit of a follow-up to the previous question on the revenue renewal -- was curious, how many of your IT Deal Alert's clients are paying for multiple categories? Are the larger clients, the guys who are exposed to 60-plus categories -- are they ramping up to 10 categories plus? Or is the renewal rate -- you mentioned it's good. Is it more they're expanding into -- more into the current categories they're using?

Yes. So the way it works is we have -- within IT Deal Alert, we have 60 specific categories. So most of the growth on the revenue renewal rate is customers adding additional categories.

Got it.

And then, one quick one on IT Deal Alert -- thinking about this, and being used in the reseller channel -- how big is the opportunity there on the timing here? When should we start to see resellers really start ramping in terms of using Deal Alerts?

That's a gradual process. We're seeing good progress with it. We started a dedicated sales team into the reseller community over the summer. And so, that's a place that we've done some business with historically. But a lot of those relationships that we're developing now are newer than the relationships we've had with software developers and hardware manufacturers.

So we're seeing that in two different places. We're seeing some of our OEM customers buy IT Deal Alert and distribute them to their channel partners. And then, we're also seeing channel partners buy them directly from us. And the nice dynamic in both those situations is they're being paid with MVF dollars, which -- from the OEM perspective, those are already committed dollars. So they're happy to spend them on something that provides good ROI. And from the resellers, they get reimbursed within VFL. And so obviously, that's a good thing that they like to do as well.

So we continue to think that that's a new budget opportunity for us that we haven't previously penetrated very much. And we're on plan where we expect to be with that.

Great. Thanks a lot, Greg.

You're welcome.

Mike Malouf; Craig-Hallum Capital Group.

Thanks for taking my question. Great quarter.

I'm wondering, can you talk a little bit about the domestic online revenue? I know that it seems to be pretty stable there. But where was it kind of relative to last year, when you just look specifically domestic? And I know that if you take a look at, say, IBM's results recently, they were pretty weak. And I'm wondering if you can comment a little bit on that -- how business is. Right now, does it feel like it's still stable, like it has been for the last couple of quarters?

Yes. In terms of the domestic core revenue, taking out IT Deal Alert in North America -- that was up 1% in the quarter versus last year. So obviously, modest growth, but it's a return to growth, which is nice compared to what we've been seeing.

And then, when you add in IT Deal Alert revenues in our North America, our North America revenue was up 28%. So very good performance by our North American sales team.

In terms of the macro -- a lot of our customers continue to be revenue-challenged. As everyone knows, CapEx spending continues to be depressed, and that obviously affects IT spending, and that affects our customers.

So I would say that we haven't really seen any near-term change. We've kind of been operating in this kind of environment where customers are revenue-challenged, they're very conservative with their marketing budgets. But it's been that way for several quarters. So I wouldn't say that we've really seen any sort of material change there.

Okay.

And then, just a kind of granular question -- sales and marketing were up quite a bit sequentially. Is that just a number that kind of bounces around a bit, or is that 41.5% that we're (inaudible) a normal level?

I'll let Janice comment on the percentages. But the one thing I'll say is in the quarter, in June, we added a new sales training class of 20 people. And so that is a Q3 expense; it wasn't a Q2 expense.

Yes. And then, the additional piece is really the variable cost piece relating to the additional revenue.

Okay, great. Thanks. Appreciate it.

Okay.

Marco Rodriguez, Stonegate Securities.

I wanted to kind of talk a little bit more here about IT Deal Alert and your answer to one of the first questions on the renewal rates. Seem like pretty healthy renewal rates here for your top 100. Just wondering if there's some things that you've learned through the process here thus far that maybe you weren't doing, or certain few things correct from a sales standpoint, and how you might've adjusted that.

Yes. One of the factors is how our customers execute on the opportunities that we're delivering. And so the best practices that we've seen is where our customers take these opportunities, and they either give them to their channel partners to follow up on, they give it to outside field sales reps to follow up on, or they give it to a dedicated inside team of people that have been specifically trained to understand how these opportunities are unique from anything else that they're being provided.

And then, in turn, what we've seen as kind of not a great practice is when these opportunities are just turned over to the normal inside sales teams and are treated similar to other leads that they might get, the whitepaper downloads or webcast downloads, or someone that visited a trade show booth, et cetera.

So what we have changed is our whole kickoff process, where before we'll deliver the opportunities to a customer, we have a kickoff call. And the sales manager that's responsible for following up on the opportunities is present in that call. So we can really coach them on what the best practices are and how important it is that these get put into the right hand. And they're very open to that, because these are premium-priced, and they want to get a good ROI on them.

But that's definitely something that we've learned during the course of this year, and it's something that we continue to work on. And our success is really reliant on how well our customers execute on the opportunities that we give them. So we have a very significant vested interest in making sure that goes as well as it can.

Got it, that's helpful.

And then, kind of in the same line, on Account Watch -- I understand, obviously it's still pretty early days, maybe seven to eight months of sales share. But can you kind of share some sort of color on the feedback you're receiving from customers?

And then, also, what sort of success have you had on upselling, if you will, the QoS guys to the Account Watch?

So feedback on Account Watch is customers really like the integration with Salesforce.com. They like that we can show the activity on any accounts, any prospects that they have in their prospect and customer database. So very positive with the concept. And the early customers that have used it have had good success. And there's definitely a lot of learning going on there -- how marketing teams can use this data, how sales teams can use this data. Our customers are doing a lot of different innovative things once they get their hands on the data.

So we are primarily selling Account Watch to customers who've already used qualified sales opportunities, because they already understand that -- hey, this data's highly accurate, it's very predictive, and we can really get our hands around active opportunities that we didn't know about or get more information about opportunities that we did know about.

So where qualified sales opportunities could be somewhere between 75 and 150 opportunities per quarter in a specific segment, Account Watch will give data anywhere from 2,000 to 5,000 accounts in a quarter. So definitely, value proposition is very strong.

On Account Watch, definitely the sales cycle is longer than qualified sales opportunities. Because you have the Salesforce.com integration, which takes time, as there's extra people that we need to talk to.

And also, there's a use case for marketing, there's a use case for sales. So we're having a lot of conversations with sales and marketing departments about where it should reside, who the owner should be, what budget it comes out of; where qualified sales opportunities is a quicker sales cycle, because it's very cut-and-dried, it's very clearly -- it's coming out of the -- the sales enablement budget's coming out of the channel budgets -- it's very sales-orientated.

Got it.

And last quick question here, if I might -- from a gross margin perspective over the last three quarters, you've been trending much better than last year's performance. Can you talk a little bit about the drivers that are behind that year-over-year improvement?

Yes. I mean, the main driver is revenue. Because basically, there's very little cost to sales. It doesn't cost us more money to sell another additional segment of IT Deal Alert or to put up more banner ads or to post more whitepapers. So basically, the way to think about it is really a fixed-cost expense model, and then revenue above that is profit. So as we grow the revenue, expenses are growing slower than revenue. So it increases gross margin.

Thanks, guys.

And you see that also with the EBITDA margin, you see it with the high incremental margin. So that's why, as you know, we have a target incremental EBITDA margin on an annual basis of 50% to 60% of revenue.

Got it. Thanks a lot, guys.

You're welcome.

Thanks.

Arieh Coll, Coll Capital.

Good afternoon, and continued best of luck going forward.

Just a quick question about the -- in the IT Deal Alert space, you have over 175 customers. Just trying to better understand the makeup of those customers. So the question is, of those customers, how many would you put in a category of diversified technology companies, where they have seven or more segments you could sell into in the future (inaudible) companies that are smaller that might only have one or a handful segments?

Yes. It's a mix. So we have -- the way we think about how we segment the market, we've got about 12 to 15 customers that compete in most of the segments that we operate in. And then we have another approximately 150 customers that operate, compete in maybe five to 10 segments, and then another 700 or 800 customers that would be one or two segments.

Overall, in general, about 40% of our revenue is from those 12 to 15 very large customers. About 40% of our revenue is from midmarket customers, and then 20% is the other [vishi-backed] customers. So I think that our revenue for IT Deal Alert would be similar to our overall revenue mix.

Got it. Okay, fine. You're not 100% sure, but you're just surmising that. Fair enough.

Yes. I mean, it's generally -- it's not a way that I -- I haven't analyzed the revenue from that specific way. But generally, I'm confident that it falls in those types of buckets.

Okay.

And just to get, hopefully, better traction going forward with the new customers, to what degree have you been able to get customers to agree to give you enough information so that you'd actually have more case studies that you can publicize to really make the ROI that much more clear to prospects?

Yes. That's always challenging. I mean, that's the thing [we] always strive for. But the IT industry is so competitive -- customers don't really want to get up on the mountaintop and shout about what strategies are working best for them. So we do that, but more of it is more under the covers, where people will take a reference call from two or three customers, versus having a public case study that gets posted for everyone to see. Although we do have some customers that are willing to do that, and it's obviously an effort that we'll continue working on.

Great. Well, thank you again.

You're welcome.

This concludes our question-and-answer session.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.