TechTarget Inc (TTGT) 2014 Q4 法說會逐字稿

Good day, and welcome to the TechTarget full-year and fourth-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jane Freedman, Vice President, General Counsel.

Thank you, Andrew. Before turning the call over to Greg, I want to remind everyone on the call of our earnings release process. As previously announced, in order to provide you the usual update on the business ahead of the call, we have posted our letter to shareholders from Greg on the investor relations section of our website. We have also released it on an 8-K filing. On the call today, Greg will briefly summarize our financial results for the most recently completed quarter and full-year 2014, and then management will respond to your questions.

During this call, TechTarget may make certain statements that may be considered forward-looking statements within the SEC rule, including guidance as to future financial results. Any such forward-looking statements are not guarantees of our future performance, and involve risks and uncertainties. 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 employees, difficulties in integrating acquired businesses and changes in economic or regulatory conditions, and other trends affecting the Internet, advertising and information technology industries. For a full description of risks affecting our business, you should read the section entitled Risk Factors in our annual report filed on Form 10-K. In addition, forward-looking statements speak only as of the date of this call, and the Company undertakes no obligation to update these statements.

Following Greg's introductory remarks, in addition to Greg, the following members of our management team are available to answer your questions -- Kevin Beam, our President; Mike Cotoia, our Chief Operating Officer; and Janice Kelliher, our Chief Financial Officer. With that, I will turn call over to Greg.

Thank you, Jane. We are very pleased with our Q4 and 2014 results. We finished the year very strongly, which gives us good momentum for 2015. We're very optimistic about the two new IT Deal Alert products that we recently launched -- Deal Data for data scientists, and Priority Engine for marketing and inside sales. This joins our existing IT Deal Alert product of qualified sales opportunities for field and channel sales.

In regards to our international revenues in 2015, we believe that we can grow them in the neighborhood of 20% again. We're confident that Core North American revenues will return to growth in 2015, and we believe it will grow IT Deal Alert revenues at least 50%.

Our full-year guidance for 2015 is for revenues to be between $120 million and $124 million, and adjusted EBITDA to be between $28 million and $30 million. I will now open the call up for questions.

(Operator Instructions)

Kerry Rice, Needham.

Greg, there was some unexpected seasonality on IT Deal Alert growth. Can you talk -- add some context around that? And if there was anything else there? Was Europe weaker than you expected, or any other thing to cause that the slowdown?

And then the second question is, international was a little bit stronger than we expected. Where would you highlight the pockets of strength, if not more broadly, for the international business?

Yes. In terms of the seasonality on IT Deal Alert, for the year and for the second half, the revenue came out where we thought it would, just kind of the revenue numbers for Q3 and Q4 were inverted. And basically what happened, at the end of Q3 in September, we had some large customers that wanted accelerated delivery of Qualified Sales Opportunities.

So we took some revenues that we thought would be in Q4 and pushed it into Q3. And then when we got to the end of the year, that pattern didn't repeat itself, and customers weren't asking for accelerated deliveries at the end of the year because of the holidays, and sales teams we're focused on closing existing business. So I think it was just -- it was only a few hundred thousand dollars, and it's just a slight timing difference.

In terms of international, I'd say we saw strength across the board. We saw strength in all regions. Very strong in Europe, very strong in Asia. And we saw good strength with all product lines.

I wouldn't say there was one specific thing internationally that stands out. It was just very strong across the board.

Thank you.

Brian Pitz, Jefferies.

Greg, a couple more questions on IT Deal Alert. As you continue to roll out IT Deal Alert to more customers, just curious what type of pricing power you actually see? Or perhaps if you might be willing to lower the price in order to drive sales? Basically what are clients saying regarding price when you speak to them?

And just separately, I'm wondering if you can give us a sense for the IT spending outlook based on discussions with clients into 2015 and beyond? Are you seeing any major changes? Thanks.

Sure. Talk about the macro environment, IT spending. Our budget and our guidance is assuming that the IT environment in 2015 is similar to 2014.

So if there is increase in IT spending, there could be upside to that, to those numbers. And of course, there would be risk if we saw a decrease.

As far as what our customers are saying, our customers are feeling that CapEx spending should improve in 2015. I think there's been some false starts the past couple years. I think people are in a wait-and-see mode. But I think that the environment -- people are hopeful that it's going to be better this year.

In terms of pricing on IT Deal Alert, pricing has been very stable. We're very disciplined on our pricing. And so I think in the long-term, we could have some pricing power.

There's certainly some evidence of that, when we have some customers that want to put a filter on Qualified Sales Opportunities, for example. They say -- we only want to sell to companies with more than 5,000 employees -- or less than 1,000 employees. When they put that type of filter in, there's usually a 50% up-charge that we've been successful in getting.

So the strategy now, because the product is still so new, is to keep the pricing where it is and get as many people using it as possible. Obviously part of the strategy with Priority Engine and Deal Data is to get IT Deal Alert integrated with our customers who are (technical difficulty), and I think those types of things happen. There's potential for pricing power in the future.

Got it. And just a quick follow-on to the first question that was asked, regarding the shortfall. Should we assume that there's going to be some slip into Q1, as well? Because if I look at the guidance, it looks a little lighter than some of the numbers than are out there. Just to wanted to clarify for sure.

Well, Q1 seasonally is always the smallest quarter of the year for us. And Q4 seasonally is always the largest quarter of the year. So we tend not to get too tied up in the specific quarters, and look more of it on an annual basis.

I think that the annual guidance that we are releasing today is probably higher than most of the analysts' forecast. So that's what we're looking at.

Thanks.

Eric Martinuzzi, Lake Street Capital Markets.

I've heard you talk in a past about international growth in a range of a two- to three-year 20%-to-25% range. You said specifically 20% coming in 2015. Is that just conservatism that there is, in fact, that potential for the higher end of that previous range that you had talked about?

Yes. I mean, we have been pretty consistent that our target is 20% revenue growth. And obviously, it's not an exact number. Some years, it can be higher than that.

So that's our long-term target. And basically, what we're affirming with our guidance today is that we feel good that we will reach that long-term target again in 2015. Obviously, upside to that is good. But that's what we're guiding towards today.

Okay. And then, if I look at the Q1 guidance, where my own models probably overshot was on the event site. I looked at the last couple years, saw 900,000 to 1 million (technical difficulty) in Q1, and you're looking for 500,000 to 600,000. Can you take me a layer deeper there?

Yes. That's just basic timing of events. So part of our events business is custom events that are -- we schedule them when we sell them. It's not as predictable as an editorial event that we schedule a year ahead of time.

So that's just basically a timing issue. In terms of our event number for the year, what we're guiding to is what we've been telling people we were going to do, so it's just timing.

Okay, all right. And then, IT Deal Alert -- it's interesting to me how you and your customers are going through this iterative process about how best to use the Qualified Sales Opportunities. Do you have anything, just anecdotally, somebody who maybe fired away and then stopped and [is changing] and really is making good use of this? Or is this kind of a multi-core process -- they have to redo processes internally to take full advantage?

Well, the best practice is with Qualified Sales Opportunities, is that you give these opportunities to either your field sales team or your channel sales team. Because the way these opportunities are fleshed out, those are the best people to follow-up on them. So with these new products -- Priority Engine, we have -- a lot of our customers are very focused on getting leads for their inside sales team. That's really where Priority Engine comes in, where that product will generate prioritized call lists for the inside sales team.

So it's really just a matter -- the purchase intent data that we have is extremely powerful and very accurate and very predictive, and our customers recognize that. It's just a matter of them being able to use the data in the most effective way to win deals and generate revenue and generate market share.

So now we have three products, one for data scientists, one for marketing inside sales, and one for field sales and channel sales. So the key is for our customers is to use this data in the way that they can get the most ROI.

But back to my question about any example where somebody was pressing the gas and then let up, and is now re-pressing the gas?

No. We've had many customers that have just continued to invest more in it. I don't think we've seen customers that have come in, stopped, and come in. We may have some of that, but that's certainly not the norm.

And then, Janice, it may have been in the shareholder letter somewhere, but I missed it if it was. I think you said around $8 million of cash from ops. What was the cash from ops number in the quarter, as well as the CapEx?

Yes. We haven't disclosed the statement of cash flows, but the CapEx number was somewhere around 0.8.

Okay. All right, thanks for taking my questions.

Okay, thank you.

Mike Malouf, Craig-Hallum Capital Group.

Greg, can you talk a little bit about the strength in the domestic side? You talked, I think, in the letter about IT Deal Alert having a positive effect. And you commented on the macro side earlier. Are you seeing that resurgence in that quarter, or was that a surprise to as you as look out into 2015?

No. It wasn't a surprise. I mean, we've got a lot of questions from investors -- is IT Deal Alert going to be cannibalistic to the core? And we were pretty consistent saying no, that it wasn't. It's a different service.

And in Q3 we saw a return to growth on Core North American of 1%. Actually it was 19% this quarter, so another significant increase. And we think that, that will carry into growth for 2015.

But basically what is happening is, is we go into our customers and we explain to them the IT Deal Alert, and how we're able to collect this data. It really enforces the value proposition that we're the place where IT buyers go to do their research.

And one of the questions that people ask us -- our customers ask us is -- how can I am improve my purchase consideration versus my competitors? And the answer is -- early in the process. When people are doing their initial research, that's when you need to be in front of them and influence them with branding and white papers and webcasts.

And so that's a very virtuous circle -- our branding products are lead-generation products, and our IT Deal Alert products. I think we're seeing good success with that, and I think the marketing teams that we're selling the Core North American products to are getting really good feedback from their sales teams about the IT Deal Alert products. Which, again, it reinforces the value proposition that we're the place where this research is happening, and if we want to give our sales team a better chance of success, we need to be influencing them there early.

Because there's all this research that is out there that shows that 70% of IT buyers' research is done before they contact vendors. Lots of vendors are getting eliminated without ever speaking to their prospects.

So the dynamic has changed, where you need to have a lot of content on the Internet in front of these buyers when they are doing that initial research. And we're the best place on the market to advertise those vehicles. So I think that's what we're seeing.

Great. And then on the Deal Data product, what kind of pricing are you using on that? And then on the Priority Engine side, are you still thinking about entering new verticals, like for instance, financial analyst and things like that?

Yes. So on the Deal Data, that pricing is custom, because basically it's based on which geographies people want and how many segments they want. So there's not really any set pricing. It depends on what the customers are looking for.

And then in terms of the market research business, we are collecting post-Deal Data, in addition to the pre-Deal Data. And we think by collecting this post-Deal Data, we'll be out to figure out things like realtime market share, that there'll be opportunity to generate revenue off of that post-Deal Data. So that's something I think that we would be introducing later on this year.

Okay, great. Thanks a lot for that help.

Marco Rodriguez, Stonegate Capital.

Just a quick follow-up here in regard to the new IT Deal Alert products. Perhaps you can give a little color here.

These new product generations that you're rolling out with, are these being driven by an internal team there at TechTarget that is interacting with the clients? Or is it more just the clients coming back you guys and saying -- we wish we had this?

Yes. We spent a lot of time talking to our customers about how they're interacting with the product and what success they're having and what challenges they're having. So based on those numerous conversations with our customers, we came up with these two new products.

Basically, the Deal Data -- some of our customers have these data scientists teams, and they just want the raw data. We run our own set of algorithms, and we weight certain buying signals, but some customers have their own algorithms and their own buying signals that they want to weigh. They just want the raw purchase intent data to do their own analysis on. So we came up with that product.

And then the Priority Engine, as I alluded to a little before, the Qualified Sales Opportunities is a great product for field sales and for channel sales. But a lot of our customers want to have a big investment in inside sales, and want to try to make those inside sales teams more productive and more efficient.

So the Priority Engine is 100% integrated with salesforce.com and can create daily prioritized call lists for inside sales teams. So they can call, in order, the very best opportunities within their assigned territories. And then when they do call them, they'll also have some intelligence about that.

Furthermore, a lot of our customers that are marketing teams that have very specific tasks, we're saying -- how can we use this data to run some of these marketing campaigns? So within salesforce.com, we have built some tools to make it very easy to generate those campaigns.

An example would be -- a lot of our customers do seminars. So say if one of our storage customers wanted to do a cloud storage seminar in Chicago, they could go into Priority Engine and say -- we want the names of anyone that's researched cloud storage content in the past 90 days, within driving distance of Chicago. And that would pop up a list of people that they could then gear that marketing campaign for.

So we're basically just giving our customers the tools to make it very easy to organize and use the data to help them complete their jobs, whether you're field sales, whether you're inside sales, whether you're marketing, or whether you're a data scientist.

Got it. That's helpful.

And then last quick question. On the guidance for IT Deal Alert, obviously you've got the annual numbers out there, and next quarter. Just wondering if you could put a little more color in terms of how you expect that to ramp, and if there are any other seasonal effects that we should be thinking about, aside from the Q3, Q4? Thanks.

The Priority Engine is sold as an annual subscription. And we're selling it at 80 different segments, and there's $90,000 per year for an annual subscription per segment. And then for customers that can only buy quarterly, it's $30,000 per quarter.

So just as you know, with subscription revenue, we will be recognizing the revenue pro rata monthly. So that revenue -- any of the subscription revenue that we sell, will build over the course of the year.

Thanks a lot.

You're welcome.

(Operator Instructions)

Kyle Evans, Stephens.

If I think about the IT Deal Alert product suite by the number of categories -- so I've got Deal Data, Priority Engine and QSO along one axis, and all 80 segments on the other. Are there some places where some of your vertical markets, your tech end-markets are intersecting with those products, and lighting up and hitting big results for you guys? I'm asking because we're looking for places to look for channel checks.

And I was wondering if, for instance, you guys are having notable success with Priority Engine in virtualization? Or you are doing a really good job with Deal Data and security. Are there some places in the matrix where it's kind of lighting up?

Yes. I think where the most customer interest is, is in the topics you would expect, the hot topics where there's healthy spending. So anything around cloud, anything around virtualization, anything around data analytics, around security. As you would expect, those are the most popular topics, because those are the most competitive topics where vendors are active right now.

But do you see a particular appetite for one of the products over the other, by vertical?

No. And most of the revenue at this point is Qualified Sales Opportunities, because we just announced the Deal Data and Priority Engine products in January.

So I think over time, what we expect is that customers will use both. Or all three products, if you have data scientists teams. So we think most of our customers that are using Qualified Sales Opportunities are excellent prospects for Priority Engine, because they already know how good the data is.

Got you. And you addressed some of this in talking about the brand awareness capabilities and the value of being high up than the funnel for your client base. But just specifically, looking at the 19% growth that you put up in the quarter and the mid-single-digit guidance that you have for North American Core, can help reconcile those two?

I would say the 19% was one quarter. So I don't think that off of -- we're not going to say -- okay, one quarter is 19%, so it's 19% forever now. 19% was a great number, and obviously we're going to try to exceed the mid-single digits. But in terms of looking at where it was coming from last year, which was flat, and down the year before, we think that mid-single digits growth is the appropriate benchmark at this point of the year.

Okay. Lastly, any change in the competitive landscape?

No. I would say what we've been saying for the past several quarters is still the same.

Thank you.

You're welcome.

Aria Cole, Cole Capital.

A question regarding the Qualified Sales Opportunities. Can you give some frame of reference -- do you have any -- in which customers have you been most successful with possibly -- you currently have four, five, six, seven different segments inside these large companies that are all purchasing from you.

And the question is, why were you so effective at cross-selling across this large enterprise? And what are you trying to show your other salespeople so they can duplicate that same success, where you have maybe beachheads with only one segment of another larger company?

Yes. I think that how fast we have roll-outs somewhat is a function of how their sales teams are organized and how they go to market. So thinking of one customer that has rolled it out in multiple categories, they have a centralized sales team. They have a centralized sales channel that gives them a lot of Qualified Sales Opportunities, so they're channel partners.

But some of our other large customers have multiple sales teams. For each different technology segment, they have a different sales team. So I think it's -- each major account has a different set of challenges. None of them are really organized the same way.

Got it. And how common is it among -- if you look at the top 50 or so IT companies out there, technology companies, how common is it for them to have a centralized sales effort? Is that by far the minority or is that more common?

I think there's kind of a demarcation when you get after about the top 12 that have tens of billions of dollars of revenue. Those ones are more likely to have multiple sales teams. I think once you get past that top 12 -- and those are the 12 it could be in most of the segments -- when you get past that, most of the sales teams tend to be more centralized.

Got it. Thanks very much.

You're welcome.

Kerry Rice, Needham.

Just a quick follow-up on some of the new products, whether it's a Deal Data or Priority Engine, or maybe even the post-Deal Data that you guys haven't rolled out. Can you talk about how you think about the opportunity? It sounds like the Deal Data is a little more niche, customized, and maybe Priority Engine is a larger opportunity.

And I know Priority Engine was just recently rolled out in January. But do you have any early thoughts about how the uptake has been there at all?

Deal Data is basically for two sets of customers -- customers that have their own data scientists teams -- and at this point, that's the handful of the largest customers have their own data scientist teams. And also for customers that don't use salesforce.com. Because Priority Engine is 100% integrated into salesforce.com.

So if you don't have salesforce.com, you can't use Priority Engine. But we can get the purchase intent data into any CRM system. So that's Deal Data. That's the size of that opportunity.

Most of our customers use salesforce.com. And basically all of our customers have a marketing team, and all of our customers have an inside sales team. So we believe that the opportunity there is a very good one.

In terms of initial rollout -- as you know, we just announced it in January -- we scheduled over 100 demos. So when we talk to the customers and say -- we have this product, do you want to learn a little more about it? The interest level is very high.

There's somewhat of a sales cycle, because we have to talk to them about the product, and integrate through salesforce.com. Even though that's done in minutes, people want to understand that, so often they have to have the sales operations person involved to talk about that integration.

We're happy with the number of those deals that we sold in the first month. But it's too early to draw a conclusion from that. You always have early adopters that want to get the latest and greatest. We think it's off to a really good start, and we're optimistic about it. But we'll know a lot more over the coming months what type of traction we get with it.

All right. Thank you.

Aria Cole, Cole Capital.

Greg, regarding your inside and outside sales force at TechTarget, can you give us a sense for how materially you hope to expand the sales force in the upcoming 12 months? Is it 10%, 15%, 20%, or some other number?

We have a sales team right now of about 80 people. And we're looking to add about 20 new people this year.

Got it, great. Thank you.

You're welcome.

As there are no other question, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.