TechTarget Inc (TTGT) 2016 Q1 法說會逐字稿

Welcome to the TechTarget Q1 2016 earnings release conference call.

(Operator Instructions)

Please also note, today's event is being recorded.

At this time, I'd like turn the conference call over to Ms. Jane Freedman, Vice President and General Counsel. Please, go ahead.

Thank you, Jamie. 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 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 first quarter. Following his introductory remarks, the management team will be available to answer your questions. In addition to Greg, we have: Mike Cotoia, our Chief Executive Office; Kevin Beam, our President; 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 our future performance. Our actual results may differ materially from expectations.

Please refer to our risk factors and our annual and quarterly reports filed with the SEC. In addition, the forward-looking statements speak only as of the date of this call. 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.

Great. Thank you.

IT Deal Alert continues to gain traction in the market. Q1 2016 IT Deal Alert revenues were up 34% compared to Q1 2015. We're seeing the most growth with Priority Engine and Deal Data, with revenue attributable to those products up more than 3 times compared to the same quarter a year ago, and up over 50% sequentially from Q4 2015. We are expecting this growth rate to accelerate in the second half of 2016 as we benefit from Priority Engine subscriptions sold in the first half of the year.

This demand for our purchase intent data has given us the opportunity to reshape our business in two very important ways. First, our data is being integrated into our customer's sales force and marketing automation systems and workflow. Second, we are very focused on migrating as much of our business as possible from short-term campaign based marketing deals to long-term subscription contracts. While it is still early days for us, we are making good progress in this area. In Q1 2016, we recognized over $1.5 million of revenue from long-term contracts.

As our Company's embarking on an exciting new chapter in our history, I'm thrilled to announce that Mike Cotoia has been elected as the CEO of TechTarget and a member of our Board of Directors. After serving as the CEO for almost 17 years, I am taking on the role of Executive Chairman. In this role, I remain a full-time employee of the Company, and will assist Mike with long-term strategy investor relations, among other things. Many of you know Mike. He's been with TechTarget since 2002 and has served as our Chief Operating Officer for the past four years, where's he's been responsible for the day-to-day operations of TechTarget. Mike is a great leader. We are all in very good hands with him at the helm.

We're also announcing today, our intention to launch a tender offer for the purchase of up to 8 million shares or almost 25% of our issued and outstanding shares, at a purchase price of $7.75 per share, representing the five-day volume-weighted average share price of our stock from May 2 through May 6. We will fund the tender offer through a new five-year term loan for $50 million and cash on hand. We are also maintaining our 2016 annual guidance.

I will now open up the call for questions.

(Operator Instructions)

Brian Fitzgerald, Jefferies.

Hi, Greg, it is Pitz, just a couple things. It's still early innings in the research product, but maybe you can talk about what trends you are seeing on with the product? Then just more globally in terms of the tech outlook, I know you are always a good harbinger for what the outlook looks like, but can you just give us any sense or an update there? Thanks.

Sure. On the research business, we're getting very good feedback from the research that we have released, where we continue to add new research categories. We are selling the research. We have customers taking us on it and the pipeline is building very nicely.

The key thing with research, the more time you have into it, where you have comparables from quarter to quarter and year-over-year makes it more valuable. So it is ramping nicely in the categories we have had out longer, where we have more historical data. So we are very pleased with that. That is on plan, where we expect it.

In terms of the overall tech outlook, I would say not much has changed there. It is still pretty challenging for the largest tech companies. They're still dealing with the economy not being in a reinvestment cycle.

In addition, the strong dollar definitely makes it tougher internationally for the large tech companies, who most of them get more than 50% of their revenues outside the US. Then specifically, you still have -- some of the very largest companies are still in the middle of a merger, right? So, I'm talking about Dell and EMC and VMware. So, I'd say that would be the general outlook of what we're seeing.

But in terms of why our business with our largest 12 customers was down slightly, in Q1, I think it is important to note that our midsize companies and the VC-backed startups, our revenue with those companies -- revenues increased by over 10%. Because they are not dealing with -- obviously, they're not dealing with any of these mergers. They don't have as much exposure outside the US. So we take that as a really good sign in terms of how our products are being accepted in the market.

Great. Thanks. Congrats on your new role.

Great. Thank you.

Kyle Evans, Stephens.

It sounds like Priority Engine and Deal Data are starting to gather some momentum. Can you talk a little bit there about pricing, length of contract, churn, and maybe how those for Priority Engine and Deal Data might differ from the core Deal Alert product? Then I have got a follow-up. Thanks.

Yes, so the Qualified Sales Opportunity product is where we do the first level of follow-up and we sell each of those opportunity reports for $300 to $500 a piece. They're typically bought in quarterly campaigns. Priority Engine and Deal Data is the raw data. That is the product where customers are integrated into their workflow, into their sales force automation systems, their marketing automation systems.

We have over 300 tech segments for Priority Engine. We sell it two ways. We sell it on an annual subscription for $90,000 per segment, as I said, there's 300 segments. Or you can buy it quarterly for $30,000. What we're seeing is more and more of our customers are choosing the longer term. That is why you see our revenue from annual subscription is growing very rapidly for us.

Got you. On the core digital publishing business that is the engine that makes everything else work, what's the -- any change in the competitive landscape there in the quarter?

No, I wouldn't say specifically in the quarter, but long-term, what we've seen is this prolonged, challenging environment has caused many of our traditional competitors, specifically ones with print legacies, to really retreat and reduce their investment in content, in audience acquisition, in new products. So that has been very positive for us.

That's this quarter and that's going back through last year as well. So, I'd say if anything, what we are seeing is an improving, competitive position on our part. Our unique content model, really is an incredibly strong barrier on the purchase intent data, because no one else really has a content model that would give meaningful insight to which technology products companies are looking to buy.

Great. Maybe one last one, any granularity you can add to the Q2 guidance? I know it sounds like exchange rates and international is tough. You are gathering steam in Priority Engine and Deal Data, but any more you can give on how we got to these midpoints would be great. Thanks.

Yes. The one point I would make is, we're really making a very concerted effort to sell IT Deal Alert on an annual basis. That limits our flexibility somewhat in terms of what you can put into one quarter. So we're definitely taking the long-term view there.

We would -- we're willing to give up some short-term revenue to get the longer term agreement in place for all the obvious reasons: the increased stickiness, the increased visibility, our ability with pricing power on renewals. So that is one of the things in terms of kind of the push/pull on the short-term versus long-term, you might give something up little bit in the short-term but long-term it is obviously much better for the business.

Eventually, we believe that we can get a meaningful portion of our revenue to be on a long-term contract basis. We think that our -- eventually that our multiple will reflect that.

Great, thank you. Congrats.

Thanks. You're welcome.

Eric Martinuzzi, Lake Street Capital Markets.

I just wanted to revisit the full year -- the old guidance for the full year was $120 million to $125 million top-line. Then EBITDA was $29 million to $32 million. Did you comment on that? I missed your --

Yes. I commented that we are maintaining that guidance.

So, a pretty big step-up in the back half and you're saying that is -- this Priority Engine and Deal Data are really what is going to be driving that?

Yes. Yes, so it's that and the new research product. So since -- anything -- we benefit in the second half by any -- on these long-term agreements, anything that we're selling in Q1 or Q2, we get some of that revenue in Q1 and Q2, but we also get revenue in Q3 and Q4. So it is just kind of the way that subscription revenue builds.

You talked in your shareholder letter about $1.5 million of long-term contract. That was 6% of your revenue in Q1. You also talked about morphing the business over time. Is there a particular goal in mind? Or is it just, hey, 6% becomes something bigger. We're not sure what it is, but we don't want to be the way we are now?

Yes. I think that we both -- we don't know the exact number. But we believe that it can become a meaningful portion of our online revenues. Because the other thing that we are seeing is as we get people to our customers, who want to -- our customers -- this is good for our customers. They want to sign up for long-term agreements because they want to integrate this purchase intent data into their systems and their workflow.

We're starting to see some of our customers that are now more open to putting some of the core products on a long-term agreement as well. Because it is basically one of our products is, we can show you where the purchase intent data is, which companies are looking to purchase, but we can also integrate a brand-new campaign and a demand generation campaign with that. You should always be on. So there is lots of benefit from this push we're making for the long-term agreements on the Priority Engine.

Okay. Then lastly, on the tender offer, your shareholder letter, you also addressed the topic, you are basically setting aside the original $20 million repurchase program and putting this pretty substantial tender offer in place. What was the -- at a Board level, what was the discussion why they're really kind of amping it up here to 2.5X what you're previous intent was?

Yes, well, we think that long-term it's very compelling for shareholders, very accretive if we can retire 25% of the shares. So what we looked at was putting some leverage onto the balance sheet, which we hadn't done before. We looked at the current valuation and what we think the business can do long-term. That's kind of how we came to the decision to launch this tender offer.

What's the time -- I haven't been through this process recently, what is the timeline we should be looking at? Is it 30 days, 60 days?

It is 20 business days.

Okay. All right, thanks for taking my questions.

Great. You're welcome.

Louis Toma, Craig-Hallum.

Actually, this is Mike Malouf. I wanted to ask a little bit on the IT Deal Alert. That's a pretty big back end swing and I think you had talked about 50% growth. Is that still sort of your target for IT Deal Alert?

Yes, but we guided to -- for our 2016 IT Deal Alert annually was 40% to 50% growth.

That still sounds good to you?

Yes.

Okay. Then with regards to the $120 million to $125 million guidance, was there -- I know that previously you commented on trying to be a little bit conservative with regards to the recovery in the core online, specifically, on the North America side. Is there still some cushion built into that? Or now are we sort of after you have seen June and March, be a little bit behind what you thought was it was awhile ago, are we -- still have any kind of cushion there? Because the back end looks like, I think, like what Eric said, a little bit of a spike in the back half.

Yes. What we try to be with guidance, we try to be accurate. So, that is how we always approach it. We obviously built into this guidance is higher growth in the second half of the year.

Okay. I'm sorry, I missed the timing on the tender. What's the timing again?

So, we announced it today. We are expecting to file it tomorrow. Then it is 20 business days from there.

Okay, thanks.

You're welcome.

(Operator Instructions)

Kerry Rice, Needham.

Just -- most of my questions have been answered, but maybe as it relates to the full-year guidance and the second half ramp. How do I think about a weaker dollar and maybe some of these mega mergers that are being completed, if spending comes back from those? Are those two factors, would those be upside? Or have you factored some of that into the second half ramp, is the first question?

The second question is, you've often talked about renewal rates, particularly dollar renewal rates, on IT Deal Alert products, how is that trending? It was about 200%. Where is it today? Or maybe you can talk about a tax rate of multiple products now, anything around that context? Thank you.

Yes. In terms of the second half ramp, the assumption is current environment. So if the currency changed, one way or the other, that could affect results. In terms of the renewal rates, on the Qualified Sales Opportunity product, when we were giving those types of revenue renewal rates, that was in the early days. That product really sold quarter to quarter, so it is very challenging to do those types of comparisons.

But as we start -- in terms of Priority Engine, which we're really selling on a subscription basis, it's on small numbers but we're seeing very strong renewal rates there. We'll be able to, in the future, have a more traditional renewal rate because that's obviously easy to calculate when you have x number of annual subscriptions renewing.

What about attach rates? Are customers taking in more than one product at a time? Are they still kind of fairly specific whether it is Qualified Sales Opportunity or Priority Engine or Deal Data?

Yes. So it really depends on the size of the customer and how many markets they are in. But what we typically see is for larger customers to play in more than one market, as they'll test in one market and then we're able to cross-sell them and up-sell them into other markets. So that is definitely what our strategy is. That is what we have seen play out.

Maybe another way to ask it, is also category. I know Priority Engine, you said is in 300 categories. Are they usually buying more than one category? Or is there kind of an average? Or anything you can add there?

Yes. Our customers are so -- we kind of have three different sized customers. So we have the top 12 that play in many, many segments. Most of those customers buy in multiple segments.

Then we have our midsize companies that would play less segments. Many of those customers buy in multiple segments. Then in terms of the VC-backed startups, they typically only compete in one segment. So it is unusual for them to buy more than one segment. So it is kind of as you expect based on the size of company in how many segments they compete in.

The other thing I'll say about, in the large companies, to keep in mind, that those budgets are decentralized. So if you're a very large tech company and you're in 25 different segments, there is not one person controlling all that. We deal with their storage team, their security team, their cloud team, their virtualization team, their development team. So it's -- those tend to be a little decentralized.

All right. Thank you for the details.

You're welcome.

Ladies and gentlemen, I'm showing no additional questions. We will conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.