TechTarget Inc (TTGT) 2015 Q2 法說會逐字稿

Good day, and welcome to the TechTarget second quarter 2015 earnings release 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 and General Counsel. Please go ahead, Ms. Freedman.

Thank you, Keri.

Before turning the call over to Greg, I want to remind everyone of our earnings release process. As previously announced, in order to provide you with an update on the business in advance of the call, we have posted Greg's letter to shareholders on the Investor Relations section of our website and furnished it on an 8-K.

On the call today, Greg will briefly summarize our results for the quarter and six months, and then management will respond to questions. Following Greg's introductory remarks, the management team will be available to answer your questions. On the call today, we have Kevin Beam, our President; Mike Cotoia, our Chief Operating Officer; and Janice Kelliher, our Chief Financial Officer.

During this call, any statements made by TechTarget that are not factual may be considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of future performance. Our actual results may differ materially from expectations. Please refer to our risk factors and other factors in our annual and quarterly reports filed with the SEC.

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

Also during this call, we may refer to financial measures not prepared in accordance with GAAP. A reconciliation of these measures to the most comparable GAAP measures accompanies our shareholder letter.

With that, I will turn the call over to Greg.

Thank you, Jane. We saw a nice bounce-back across the board in Q2. Online revenue grew 17%. IT Deal Alert revenue grew 42%, and we added 30 new customers, bringing us to 260 customers in the quarter for IT Deal Alert.

International online revenue grew 23%. Core North American online revenue grew 9%.

Revenue from our top 12 customers grew 13%. And revenue from the rest of our customers grew in excess of 20% during the second quarter compared to the prior-year period.

Adjusted EBITDA grew 36%, to $7 million, in Q2 2015 compared to the second quarter of 2014.

In addition, organic traffic grew more than 30% in the quarter compared to the respective quarter last year.

The foreign currency issues that affected our customers' behavior in Q1 have stabilized. While the situation is still challenging for our largest customers, who get a large amount of their revenue internationally, there is less volatility, which is better for us.

We are maintaining our previously issued 2015 guidance, which forecasts approximately 13% online revenue growth and 25% adjusted EBITDA growth at their respective midpoints.

We remain very optimistic about our long-term growth opportunity, and we were pleased that we were able to repurchase 410,439 shares for approximately $3.8 million out of our cash flow in the quarter.

I will now open up the call to questions.

(Operator Instructions) Kerry Rice, Needham.

Great quarter, Greg. Maybe can you provide a little more detail around IT Deal Alert? Maybe what you're seeing for revenue renewals on QSO? And it may be early for Priority Engine, but more so on Priority Engine and Deal Data, how you see that pipeline building for the second half? I know in the shareholder press release you expected it to contribute to full-year results. But maybe you can give us some early indications on that, how that's building?

And then, the second question is you said that the FX is not as impactful. It's a little less volatile, a little more stable. But are you seeing --? Anything else you can provide there about -- the top 10 or top 12 customers, they just feel more comfortable given that stability? And maybe where you think that goes in the second half of the year here?

Sure. I'll take the second question first. So, on the FX, it's still a challenging situation for our largest customers. They get most of their revenue outside the US.

The difference in Q2 versus Q1, my view is in Q1 they were surprised by it. It got worse and they weren't expecting it. So, when they were in the middle of the quarter and they saw they were going to have revenue challenges, mid-quarter they cut their marketing budgets.

So, while it's still not a great environment for the largest customers -- and you can see that evidenced by their results, where there's revenue declines or modest revenue increases -- what they expected in Q2 happened. And so, that creates less volatility for their marketing budgets. They kind of spend what they expected to spend.

So, it's still a tough environment with our largest customers, but we didn't see the intra-quarter cutbacks that we saw in the first quarter. So, we saw the 13% growth from them.

In terms of Priority Engine, very good initial feedback from our customers. About two-thirds of the customers that are signing up for Priority Engine are signing up for annual contracts. And the other third that have been signing up for shorter periods of time, we're starting to see renewals from them. So, they are having very good success with it.

The pipeline is definitely building very strongly for Priority Engine. So, we're very pleased with that.

It's definitely -- the sales cycle is a little more elongated than I think we originally anticipated. A couple of factors there is the integration with Salesforce.com, which creates -- you have to just talk to more people. You have to talk to the Salesforce administrators. You have to talk to sales operations.

And it's a product that can be used both by the marketing team and the sales team and the inside sales team. So, sometimes when you're navigating different accounts, you have to talk to different groups within there, and they're figuring out where it should live budget-wise.

People like it. We're getting good response from it. But in terms of sales cycle, that's elongated a little bit. But overall, we're very pleased with it.

Maybe just a follow-up on FX. Spending bounced back. So, would you say that their spending was back to where it was, roughly, before they were surprised in Q1? Because you indicate that they were kind of surprised in Q1, so they could cut their budget. But it seems like it -- that it actually kind of bounced back in what they were spending.

I wouldn't really say it's a bounce-back. I'd just say we didn't see --. What happened in Q1 was we saw cuts and delays in the middle of the quarter, which is unusual. So, in Q2, we got some -- we recognized some revenue that had a late start from Q1.

If you basically look at the large IT companies' results, you'll see that they are -- as I said, they are -- some of them are still in revenue decline mode. And the ones that are growing, it's pretty modest growth -- single digits.

So, the environment continues to be very challenging for the largest IT vendors, and that's reflected in their marketing budgets. So, it was definitely a better environment in Q2, but I would say, in general, our large IT customers are fairly cautious.

Okay. I'll step out of line and get back in if I've got more questions.

Brian Fitzgerald, Jefferies.

Bookings were in excess of $2 million, versus $1 million last quarter. Is that --? What's the color around that full $1 million? Is that all from new customers? Maybe another way, are these 12 buying substantially more than the first 30? Or, are there upsells going on from the original 30, as well?

Those are primarily new customers. So, you can see we added more than 30 new customers in the quarter for IT Deal Alert in general.

But we are -- Priority Engine is a new product we only introduced in the beginning of the year. So, we're rolling it out to our customers. So, that's primarily -- the additional bookings are primarily from new customers, although as I said before there's a handful of customers that had done it on a one-quarter trial basis. And those customers, we're having good success renewing them.

Great. And then, maybe about the Deal Data customers? I think you said last quarter a couple of them were in [short one 2Q] testing periods. As you've said, the feedback has been good. Are you seeing momentum around the Deal Data customers?

Deal Data and Priority Engine, it's basically the same data. So, the way to think about it is people that buy Priority Engine want to integrate it with Salesforce.com. And people that buy Deal Data want the data, but they either don't have Salesforce.com or they don't want to integrate it with Salesforce.com.

So, when I speak about Priority Engine, Deal Data is the same story.

Got it. Okay. I will step back in the queue.

Eric Martinuzzi, Lake Street Capital Markets.

I had a question, just with regard to what happened a year ago. I know you're not giving guidance for Q4 here, but a year ago on ITDA we had a step-down sequentially on ITDA. And I know we've got some cross currents going on, too, with the launch of some new products there. But for modeling purposes, what makes the most sense as we look out to Q3/Q4?

Last year, we had a big push at the end of Q3. We had several large customers who wanted to order a lot of -- ordered a lot of Qualified Sales Opportunities, which turned out to be unusual.

What's different about this year, besides Qualified Sales Opportunities, we have the Priority Engine and Deal Data, which is more than 10% of the revenue. And then, we'll be recognizing revenue in Q4 that's been sold in Q3 and Q2.

In addition, we will be adding a modest amount, but we'll be getting some revenue from the new research products.

So, my expectation is that overall IT Deal Alert revenue in Q4 will be higher than Q3.

Okay. That's helpful. And then, shifting over to the research product, I assume you've been test driving it with some people. Is there any early reads on the product? Obviously, you have high hopes for it, but just anything maybe that you hadn't considered before that's being revealed with the test drive?

So, conceptually, we're getting an extremely enthusiastic response from people that we're telling them what we're -- what the type of data that we're trying to collect. And people immediately recognize that it's very unique and it's very valuable and it just doesn't exist.

What really -- the rubber meets the road when we start asking people for money, and that will be happening at the end of this quarter into Q4. But we're definitely -- I think it's pretty universally accepted that what we're doing is very unique and very valuable and no one else really has the ability to collect this type of data.

So, we continue to be very optimistic about it, and we are full steam ahead with collecting this data right now. So, we're in full data collection mode. We're seeing good success with our users willing to share this data with us. We're collecting it. And before this quarter ends, we'll be publishing our first research report.

Okay. And then, lastly, on the buyback, obviously you guys were active in Q2. You have to kind of walk a fine line here, because I know you want to have liquidity in your shares but you also want to be active, kind of mopping up when you think they're undervalued.

Can you kind of give us the logic behind why you did what you did and maybe whether that persists in Q3?

Basically, we're very bullish on the opportunity. We feel that the shares don't reflect that opportunity. And so, if we have to choose the ability to buy back shares that we think are very attractively priced versus liquidity, we're going to buy them back. So, we'll worry about liquidity later.

I don't -- our experience has been that we've been pretty aggressive buying back shares for the last several years, and our experience is when the price is higher, liquidity improves.

And certainly you've got the -- you're generating the cash flow to pursue that strategy.

That's it for me.

Mike Malouf, Craig-Hallum Capital Group.

With regards to the top 12 customers' being up 13%, that includes IT Deal Alert, I think. So, if you backed out that, can you give us a sense of what they grew just with the core online product?

If you look at it -- so, knowing that they're roughly 40% of our business. So, you see that North American core grew 9%; international core grew 18%. That would give you indications. I don't know the exact number off the top of my head, but that would give you -- those would be good indicators of what's happening with those top 12 customers, not including IT Deal Alert.

And do you think that there was any pull-forward with any kind of business from the September quarter? I think you mentioned a little bit of that on the international side.

From September quarter into Q2?

Yes.

No. No, I don't think there was.

Okay. And then, when you look out over the next couple of years, if you sort of compare and contrast QSO versus Priority Engine and Data together, does Priority Engine become a bigger mix of the overall IT Deal Alert? Or, is it --? I'm just trying to get a sense of how big this could be, when you look out.

I definitely think it becomes a bigger mix over time. It's annual subscription. So, the way people buy QSOs, they're very focused on quarterly initiatives, what types of opportunities do they need to drive opportunities right now to get into their sales pipeline, whereas Priority Engine is something that customers would use every day integrated in their work flow.

So, yes, we are seeing that it was up 50% sequentially, Q2 versus Q1. It was up over 10% of the IT Deal Alert revenues. So, yes, we expect that to continue to be a bigger piece of the pie.

And then, the intention on research is to sell that in annual subscriptions, as well. So, one of the big objectives that we have, part of the strategy, is to build a very significant annual subscription revenue stream from these data products.

Qualified Sales Opportunities are just by their nature -- some customers buy them on an annual basis, but most of them don't. It doesn't really lend itself to the way they want to buy them or the way their budgets work.

And do you think when looking at IT Deal Alert as a standalone that QSOs will continue to grow year over year, sort of looking out in the next couple of years?

Yes. Yes, we're adding more customers. It's a great product. Yes, that will continue to -- it's still relatively early in its life cycle.

Great.

Ben Axler, Spruce Point Capital Management.

Greg, congratulations on a great quarter. I think maybe my question was answered a little bit by a prior question. But looking at the stock price and the earnings, the earnings have more than doubled here year over year, and the stock price trades relatively flat year over year. Is there an opportunity to maybe step up the buyback a little bit? It looks like you bought back some stock, but nonetheless there was still some stock dilution.

So, I guess the question is, is there an opportunity to be a little bit more aggressive with the buyback here?

The way -- we buy through 10b5-1 plan, so that we can buy during closed periods. And the way our plan is set up is that the lower the price, the more we buy. So, we're set up to be opportunistic.

The challenge with company buybacks, there's just a lot of rules. There is volume limitations. You can't buy in the first hour. You can't buy in the last hour. You can't buy on upticks. So, there's a lot of rules that makes it challenging. You can't get -- basically another way to say it, it's hard to get as many shares as you want because of all the rules that are in place.

But we're definitely plan to continue to be aggressive and more opportunistic, the more attractive the shares are priced.

Great. And perhaps, given that the dynamic of the cash flow has changed a little bit -- you're getting more annual subscription with the IT Deal Alert and there's more stability -- would the Company ever considering initiating a dividend?

It's something that our Board considers on a regular basis, in terms of we do have significant cash flow and we're always measuring reinvestment versus buyback versus dividend.

So, none of those are -- we're going to do what we think is best for shareholders. There's still a large amount of shares that are held by management and Board members. So, we're going to continue to do what's best for shareholders.

And there's not any -- there's no religious issue for us on dividend versus buyback. It's just when you kind of do the accretion analysis and the math on the buyback, where it is at current prices, it makes that a very easy decision.

Okay. Thank you very much, Greg, and great work, again.

This ends our question-and-answer session. The conference has now concluded -- we do actually have one extra follow-up question. I apologize.

[Aria Cole, Cole Capital].

Two questions for you. You indicate in your letter that the pipeline for IT Deal Alert is robust. Is it possible just to give us a little more color on what you mean by "robust," in terms of maybe how much the size of the pipeline, in terms of dollars, what it's changed like from a year ago, or so?

The pipeline I was referring to specifically was Priority Engine, which is a new product. So, it didn't exist a year ago.

But basically, it's a new product. We're launching it. It's annual subscription. So, some of the sales that we get today, the revenue recognition is deferred.

But we stated that it was -- we had 50% sequential growth in the Q2 versus Q1. And if you kind of look at past shareholder letters, you can see that we've booked more than $1 million in the quarter.

So, I would expect those types of booking rates to continue.

Okay. And then, secondly, regarding your top 12 large technology customers, clearly you have valuable services to offer them. But in order to grow your sales, you have to displace spending in those companies because their budgets are more constrained. Have you come up with any sort of new tactics for how you can increase the odds of winning deals by displacing spending elsewhere inside those enterprises?

It's really all based on our IT Deal Alert and our purchase intent data. So, our sales value proposition has changed a lot, because now a lot of our lead generation products, our branding products, are all geared off of us having the ability to identify which accounts are active in the market.

So, you can just be much more targeted. Your branding programs can go specifically at people that are in the market. Our lead generation programs can do that.

And people obviously want to do branding and lead generation outside of that, as well; they're looking for broad things.

But the whole selling proposition has changed a lot. We're using our position as having, owning the best purchase intent data in the IT market to our advantage to help the other product lines.

Great.

Assuming there are no further questions, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day.