TechTarget Inc (TTGT) 2015 Q3 法說會逐字稿

Good day, and welcome to the TechTarget Incorporated third-quarter 2015 earnings release conference call and webcast.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Ms. Jane Freedman, General Counsel. Please go ahead.

Thank you, Kathy. 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 financial results for the quarter and nine months. Following Greg's introductory remarks, the management team will be available to answer your question. On the call today in addition to Greg, 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 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 only as of the date of this call, and we undertake 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 non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Great, thanks, Jane. Despite the very challenging environment for many of our largest customers, we were able to deliver 12% online revenue growth, 40% adjusted EBITDA growth, 74% online gross margins, and adjusted EBITDA was 24% of revenue. We believe that these solid results in a flat budget environment are driven by the effectiveness of our innovative marketing solutions, and our rapidly-growing IT Deal Alert offering. There is a period of great uncertainty for many of the world's largest technology companies.

The strong US dollar is a significant headwind for US-based global companies. This impacts our customers' short-term spending patterns with us. We're dealing with this volatility in the short term, we are very focused on the large long-term opportunity, as our customers continue their migration to becoming data-driven sales and marketing organizations.

Our customers are increasingly reliant on our proprietary purchase intent data to become more efficient and to grow their revenue and market share. In regards to 2016, our outlook is for double-digit revenue growth and adjusted EBITDA growth of approximately 25%. Based on our current execution and our optimism about the future prospects, combined with what we consider an attractive valuation of our stock, we continue to purchase shares under our stock repurchase plan.

I will now open up the call to questions.

(Operator Instructions)

Kerry Rice, Needham.

Maybe a couple of questions on the outlook, and then maybe a broader question. So on Q4, if we start to back out what you've said in the press release, there seems to be around the online segment about a $3.6 million shortfall from where consensus was. There's about a $2 million potential revenue impact with regarding to maybe the budget flush, which leaves about $1.6 million in the shortfall.

How much of that would you say was related to FX? Is that all FX-related, is it some slow down in international, or how would you put that in context? And then on the 2016 revenue growth, you say double digits. So I'm assuming that's somewhere between I guess 10% and maybe 13%? Is that fair, what you mean by double digits? Thanks.

In terms of the FX context, if you look at the large global IT companies and their results, they are having significant revenue declines, which causes them to cut back on expenses, to maintain their profitability. So if you look at the companies that revenue is declining, in some cases more than $2 billion in a specific quarter, and you look at their releases, they specifically are talking about how FX restraints, significant headwinds for them.

And then on the cost side, if the revenue is weak in the US, or revenue is weak internationally, they're doing it on a consolidated basis, so they're cutting expenses across this board. So I think that, that's a significant factor for the companies that have a lot of their revenue coming in internationally, and you can basically, when you read any of the big global IT companies' earnings reports, that is a central theme. In terms of 2016 yes, that's generally where we're somewhere between 10% and 13% revenue growth, I think is a fair interpretation of that.

(Multiple speakers) Just one follow-up. And I don't know if this -- I'm just trying to get the impact of this. Is the Dell-EMC merger, do you think that, or Dell acquiring EMC, do you think that is going to be impactful, or what think the impact is to you?

Well Dell and EMC are both large customers of ours, as is VMware. Any time you have large companies looking at a big corporate transaction like that, it tends to take a lot of -- takes a lot of attention, a lot of focus, there's often changes in budgets, changes in organizations, as people prepare for that. In the long-term, I think that, that merger, if it goes through, will be very good for us.

In the short-term, I would expect that would change short-term marketing plans. In addition to EMC, Dell, and VMware, three of our largest customers, two of our other large customers, HP and Symantec are in the middle of splitting into multiple companies. So there is a lot of reorganizations going on as you expect in those businesses, as well. Those are very short-term, but those are -- that's a reality of the situation we are in today.

Okay, thank you.

You are welcome.

Brian Pitz, Jefferies.

Great, thanks for the questions. Greg, you launched ClickIQ in October. Can you give us additional color around that product, given that it's involved in the banner world, which is currently facing a fair amount of headwinds. How you think about the importance of banner ads in your overall core online unit? And then separately, TechTarget Research also launched during this past quarter. How have initial reactions, levels of interest been to the product? Any takeaways you could share with us of vendor customers purchasing the product, and how has initial interest been from the new investor-client funnel? Thanks.

In terms of banner ads, banner is one of the places where our largest global customers tend to spend. So some of these headwind issues we could potentially you know we're facing. But in terms of our business, in terms of banners, we benefit from scarcity of inventory, so it's very different from the consumer banner industry. We have very, very premium prices.

And ClickIQ is a very innovative product, where we are basically able to identify for our customers which companies actually view their ads. So all of our customers are very focused on being able to measure their marketing investments as much as possible, and this product really helps them do that even more. So again, everything that we're doing with all of our lead gen, our branding, (inaudible) Everything we're doing, we're taking advantage of this tremendous amount of purchase intent data that we have.

Which is a good segue into the research business, because that is also taking advantage of this unique situation that we have, all this purchase intent information. So we released a preliminary report on the flash storage market last quarter. We got a lot of good interest from that. It opened a lot of doors for conversations. We've got our first new orders in the door, we've hired a couple of sales reps on the vendor side, we are talking to a lot of investors as well.

On the investor's side, as you imagine, the more historical data we have, the more valuable the data becomes, so they can see patterns over time whereas the vendors -- historical data is not as important to them as what is happening right now. So good progress on both fronts, both with the vendors and investors. The feedback that we continually get, pretty consistently are getting, is that the research data that we have on these post deal results is very unique. No one else is doing it, no one else is really in a position to do it, and it will be very valuable to both vendors and investors.

Hey, Greg, a quick follow up in a different direction. Just on ad blocking, any impact there? Obviously, you have a more tech savvy user base, but is that offset by less of a mobile presence? Maybe if you could just comment on any of that?

Yes, most of the ad blocking is iOS, and it's a very small percentage of our traffic is iOS. And then, it's a pretty small percentage of people that have iOS that use ad blocking. So for us, that hasn't been an issue. Because of you think about people researching $1 million purchases on the web, that is primarily done from people in their office.

Makes sense. Thanks.

Eric Martinuzzi, Lake Street Capital Markets.

Curious to know about the -- you talked about IT Deal Alert acceleration in 2016. And based on the outlook for the full-year 2015, I've got Q3 at 34%, Q4 at roughly 38% on IT Deal Alert. So I'm curious to know what's behind the expected acceleration in 2016?

Sure, we expect qualified sales opportunities to continue to grow. That's the majority of the revenue in 2015. With Priority Engine, which is subscription-based, we keep adding new customers and new annual deals. So revenue that we're selling now we'll recognize next year, and we will continue to -- we will be adding more revenue each quarter as well. So that revenue stream should grow significantly. And then as we get these sales people ramped up on the research site, that is all new revenue for 2016. So when you put the growth from those three revenue streams together, that is what gets us to another year of very healthy IT Deal Alert growth.

I see, okay and then shifting to the margins, if I look at Q3 2015 versus Q3 2014, and I'm focused on the online, the adjusted gross margins for the online business, it was down year on year despite the higher revenue. What's behind that?

It is really just driven by the fixed costs associated with it. It's very subject to the revenue fluctuations, because of the fixed cost basis.

Okay. Maybe I'll take it off-line. Last question for me, you have obviously made a big investment in content. Do you see any of your traditional competitors making -- stepping up their content investment?

No, it's actually been going the opposite way. This challenging environment has been extremely tough on our competition. It has had a broad content model. So that is one of the reasons why I believe that our traffic is up so much.

Our organic traffic was up over 50% in the quarter. And it is because we continue to invest in very strong targeted content. So we continue to get rewarded by the Google algorithm, because the content is so good.

But I also believe that part of that growth is that our competition is doing less relevant content, which is another reason it helps us with the Google ranking. That is a place where I think one of the key things to take away from this quarter, in a really tough environment, and everyone sees all the big companies' IT results, so I'm not saying it's anything surprising, it's a really tough environment out there. Our performance in terms of things like traffic and content, and translates into 12% revenue growth, which is really basically all market share gain, because there isn't -- marketing budgets are flat best, really talks about how strong our position is, and how strong our opportunity is going forward, as we continue to take market share.

Understand. Thanks for taking my questions.

Louie Toma, Craig-Hallum Capital Group.

Thanks for taking my question. Just want to touch a little bit more on the FX impact. You had the same issue with FX in Q1, and then in Q2, you had a nice bounce back, and now the FX seems to be the incoming issue again. Can you talk about, is this any different than Q1, and then could you see a similar bounce back in Q4 like you saw in Q2? What are the difference in the way FX is impacting the quarter?

Yes, I think in terms of Q3, the results were very strong, right, the 12% revenue growth. I really think that what we're looking at is the weakness, how that plays out into Q4, because what we get in many years, which we got last year, is you get this end of the year budget flush, in quotation marks. That budget flush doesn't show up until December. So you can't -- we don't know if it's going to come or not come, we won't know until December.

So what we decided to do this year is we're not forecasting it because of how challenging the environment is in terms of FX for our largest customers and what's going on with some of our biggest customers with just specific business transactions they're in the middle of. We said it's -- we wanted to be very conservative and not count on that to come this year. Maybe it will, maybe it won't. But that's a little bit of a specific thing that only really happens in Q4. So in terms of the environment, if you look at the largest IT vendors, and look at their results in Q1 and Q2 and Q3, you get a pretty good sense of what the ebb and flow of how the market is affecting those companies.

And just putting it in perspective, when you look at the things that impacted, you have FX, you have the consolidation, you talked a little bit about each of those [biz]. Is any one of those significantly greater than the other, or are they more evenly impacting the spending of your clients?

The FX, you're saying, or the specific business transactions?

Yes, the transactions that have been taking the --

I think the biggest factor is the FX and the overall environment, because it's very challenging for our large customers is their -- when their revenue is down by hundreds of millions or even billions of dollars, that forces them to change their short-term marketing spend. So that is the biggest factor that is affecting the whole market.

Got it. Can you just talk a little bit -- I know last quarter you mentioned that two-thirds of your IT Deal Alert, your Priority Engine customers were, given that you were doing annual contracts. And a third of them were doing short-term periods. What do those ratios look like now, and for the short-term customers, what kind of renewal rates are you seeing?

Yes, so that is roughly the same. Two-thirds, one-third. And the migration of the short-term to renewing at a longer term is very good. Now keep in mind, it's on a pretty small sample, but those results are very encouraging. The Priority Engine is a really, really revolutionary product, and our customers once they get installed and we train them on how to use it, and they use it on a day-to-day basis are really seeing really fantastic results. And explains why the renewal rates are very strong.

And then last question, can you just give us sense for, when you look at IT Deal Alert in total, how much of the revenues is recurring? What percent approximately?

At this point, it's still less than 10%, but it is growing every quarter. Priority Engine was 15% of revenue, Priority Engine at Deal Data [is] 15% of revenue. This quarter, it was about 10% of revenue last quarter. So that's growing very rapidly. The research offering, the primary offering is on an annual basis as well, so we expect that, that the percentage of revenue that is subscription will be significantly higher in 2016, and then significantly higher again in 2017 and beyond.

Okay, thank you.

Kyle Evans, Stephens.

This is Tommy in for Kyle. Thanks for taking the call. First question, Greg, you mentioned a few times the headwinds that some of your largest dozen or so customers are facing right now. I wonder if you could comment on the outlook for some of your smaller customers outside of that group? And separately I wanted to talk about QSOs for a minute. How many active customers did you have in the quarter, and can you give us any insight on what the outlook is like for that product? Thanks.

So in terms of midsize and smaller customers, they are growing faster than the large customers. But the challenge is, if you look to the overall market, where you can measure the decline in by the largest customers in the billions, you measure the increase in revenue from the medium-size and smaller customers in the tens of millions or hundreds of millions. So unfortunately, they are not growing fast enough to fill the hole that is being created by the largest companies, but we are doing --

Listen, we're doing well with the large customers, too, right, from an execution market-share basis. We're still growing with our largest customers. It's just their budgets are decreasing, so it just makes it -- it's a hard climb. But we're doing good growth, good growth with the medium- and small-size customers.

In terms of IT Deal Alert, we don't break out the specific number by Qualified Sales Opportunities, versus Priority Engine and Deal Data, but we had 280 customers in the quarter, up from 175 customers a year ago. So we continue to have good success with this product, rolling it out, signing up new customers. Customers really like it, where Qualified Sales Opportunities we still are very confident that we will have healthy growth with that product next year as well. And then where you get the hyper growth, we're layering it in the newer products, Priority Engine and Deal Data, and the research.

And there are no further questions at this time, the question-and-answer session has concluded. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.