TechTarget Inc (TTGT) 2016 Q2 法說會逐字稿

Good afternoon, and welcome to the TechTarget second-quarter 2016 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.

Thank you, Laura. Before turning this call over to Greg Strakosch, our Executive Chairman and Mike Cotoia, our CEO, I would like 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 our shareholder letter on the investor relations section of our website and furnished it on an 8K. On the call today, Greg and Mike will briefly summarize our financial resorts for the second quarter. Following our introductory remarks, the management team will be available to answer your questions. In addition to Greg on Mike on the call we have Kevin Beam, our President; and Janice O'Reilly 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 our 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 we undertake no obligation to update these statements.

Also during the 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.

And now I will turn the call over to Greg.

Great, thank you. Our customers continue to embrace our proprietary purchase intent data as they try to take advantage of big data to make their sales and marketing organizations more efficient and win market share. We believe that this creates a large untapped opportunity for us as our customers are in the early innings of this megatrend.

IT Deal Alert revenue in Q2 of 2016 was a record $8.4 million, up 45% from the same quarter a year ago and up 23% sequentially from Q1 2016. Our strategy to increase the amount of revenue under long-term contracts continues to move the right direction, as we recognized more than $3 million of revenue from long-term contracts representing the most 11% of overall revenue in the quarter.

We continue to see weakness from the five largest IT companies that are in the midst or recently completed major corporate transactions. Revenue from those accounts was down $2.2 million in the quarter versus the same quarter last year, which accounts for the lack of growth. We expect to see the continued weakness in spending from these large accounts carry into Q3. We're having very good success with midsized companies as revenue from that customer subset was up 12% in the quarter versus the same quarter of last year. Unfortunately we saw weak bookings in July, which is why we are being conservative with our forecast as we need more time to figure out if it's just been an especially slow summer, or if there's a longer-term pullback afoot.

As a short-term weakness that we are seeing does not diminish our long-term view, we expect to continue our strong balance sheet and positive cash flow to buyback our stock at attractive prices.

I will now open up the call to questions.

Kerry Rice, Needham & Company

Thanks for taking my question, this is [Ying Ying] on for Kerry. I would like to ask about international, you mentioned weakness across EMEA, APAC, and Latin America. Could you remind us on the breakdown of revenue among these regions and also give us more color on the dynamics with each of these regions? Because the euro weakened during the second quarter whereas the Brazilian real strengthened. And also if you could comment on any impact you see or expect to see from Brexit and any impact on that on the guidance. Thank you.

Okay, thanks, this is Mike. To start on that, in terms of the overall dynamics in market for the international space, the largest impact that we are seeing is from our five largest customers that Greg mentioned. As you know, 50% of their business -- greater than 50% of their business is conducted outside the US. Those five accounts have recently gone through or are going through a major transaction right now, so there's been a lot of pullback. Though we feel that in North America, a greater percentage of our revenue is from those organizations in each of the geos, in EMEA as well as APJ. So that pullback is actually, we can feel it a lot -- we see the impact a lot more in those regions.

In terms of your question on Brexit, I think what that brings is a mode of uncertainty. In this type of market, when you have uncertainty, IT spending typically gets put on hold. And so that's not good for our customers and it's not good for their customers either, so things get held up. And that's really I would say the slowness in the international markets, again, driven primarily by the five largest accounts.

This is Greg and the one thing I would add on that is our Latin America business is very small as we just launched there directly recently. The majority of our international business is Europe. About a third of the business is APAC and Latin America is very small at this point.

Okay, thanks a lot. And a quick follow up, so we understand the weakness among the largest customers, and typically smaller companies have been a bright spot, but this quarter it's down 5% year over year. Do you see that result from the macro condition, or is it you see some tightening from the BC capital or any other reasons you can comment on? Thanks.

Again, this is Mike. I would first say that the next 100 customers, we saw very strong growth at 12%. And then some of the smaller, we will call, the next tier after the top 112 customers, I think we've all seen some of the economic data that's come out in the GDP and a lot of the slowing. These organizations who are funded or are trying to get more funded will typically react pretty quickly in pullback and hesitate or even put some programs on pause until they see a little more of a -- a more clear of a picture in their forecast. So that's what we're seeing right now in the short term and that's how they react.

Okay, all right. Thank you.

Tim O'Shea, Jefferies.

Hi, thank you for taking my questions. Nice spike this quarter with the 350 IT Deal Alert customers and I just had a couple of questions on Priority Engine. So you guys note that revenue there more than tripled year on year, so I'm curious, how important is that product to attracting these new IT Deal Alert customers? And then as you roll out Priority Engine in the third quarter internationally, just given the strength that you saw in the US, do you have a sense that international might return to growth in the third quarter based on that launch? Thank you. And then I had a quick follow-up, thanks.

Right. Tim, this is Mike. It's extremely important that we roll this out to attract some of these newer customers. When we roll out Priority Engine, we enter and get into our customers' workflow and we become very sticky. As Greg mentioned in his introduction, that approximately over $3 million of our Q2 revenue was associated with longer terms subscription deals. That's important to us. It provides us greater visibility, it provides our customers access and insight to who's in market today and it becomes part of their workflow.

In terms of the rollout, we just introduced and rolled out IT Deal or Priority Engine in EMEA last week. Very early we had a very positive the first week as a true indication. Those were positive results we are seeing, but again, very early to tell right now, and time will tell on that. But if it's anything like North America, we are expecting good results.

And this is Greg. The other thing to keep in mind about the way we recognize revenue on Priority Engine, if we sign a one-year contract, we will only be recognizing [112]. So I don't think we expect it to have material contribution in Q3. The little bit more in Q4, but we think that it will be a nice growth driver for us in 2017, and certainly that's one of the ingredients that we took into account when we stated that we're comfortable with the neighborhood of 40% growth rate on IT Deal in 2017. That was one of the pieces of the growth equation.

Okay, thank you. I appreciate the color. And then quickly on guidance, you mentioned the weak bookings in July. Just curious, how long do believe it will take until you can determine if this is just a slow summer or maybe if it's more of a broader pullback in spending? Thanks.

Yes, this is Greg. So Q3 historically is always a little bit of a backend quarter, so it's historically July and August are somewhat slow, especially outside the US. So Q3 is one of those quarters where September is really important, so I think until they get to September and see what happens there, and then of course Q4 is very strong. So I think when we see September bookings and then Q4 bookings, we will have a much better sense. Just in terms of anecdotally, I think a lot of companies and the economy in general is in a little bit of a wait and see with some of the political uncertainty of what's going to happen for Brexit, what's going to happen with the election. It's hard to say how much of a factor that's playing, if any, but certainly through September and Q4 we will have a much better sense of what we are looking at.

Great, thank you.

Louis Toma, Craig-Hallum Capital Group.

Hi guys, thanks for taking my call. I got on the call late, so I apologize if you already talked about this, but I'm wondering if you could give us a little bit of insight. You had nice acceleration in IT Deal Alert. If you could give us some color on how much was from IT Deal Alert research gaining traction and what your implied expectations are for that with your projection for the year in IT Deal Alert growth.

Louie, this is Mike. We don't break out the sub products on this. I can give you some feedback on research. So far really good feedback from the market. Still good long-term opportunity for the organization. The unique value proposition from the buy side data is resonating with our clients, the pipeline is growing. What we're seeing with our clients is they want more historical data and they want more larger sample sizes. As you know as you've been following us for a while, we are just coming up on the one-year anniversary of having a full-year cycle of data for one topic. But the clients, they want more data, they want more historical data and as the sample sizes and historical data grows as we're seeing the pipeline grow, revenue will continue to grow in that as well.

This is Greg. We are still very optimistic about the research business growing nicely. Pipeline building, but the majority of the growth in Q2 was from Priority Engine.

(Multiple speakers) That helped, thank you very much.

Allen Klee, Sidoti.

Yes, hi, on the topic of the top five customers, to what -- since they're going through transformations, any sense of view of as they go through those transformations and get done with them, that that could then be a catalyst for spending picking up?

Yes, we typically see when organizations -- obviously these are massive transitions and transactions and when they get settled, some have been closed, but it takes a lot of time to get into the market and get their go-to-market strategy in place. Some are on the verge of closing and even when they close, the next day, they are not going to flip on the switch.

Typically, these are positive moves for us because what our customers and even our largest customers want to be is data-driven organizations. And having the intent data that we own that can really supply them and give them visibility into who is in market today is what they are craving for. So when that gets settled, it's a catalyst for us. Until then, we are watching this and staying close to the accounts, but in the short term, as you can see, it will have some impact. This is Greg, just add a little color on that. Our view is that these transitions are temporary for those customers, and we've seen these lots of times in the past, and typically we see spending levels rebound and grow. So I think we've been pretty consistent in our view that it is temporary, and that is one of the reasons why we did the tender when we did when we announced the $20 million buyback after the tender, because we view that it is temporary. We do understand that it mutes our results a little bit, which we think makes a good opportunity to buy back shares at attractive prices.

Thank you.

Eric Martinuzzi, Lake Street Capital Markets

Just a question about the uses of cash. I understand you obviously put a good chunk of it to work on the tender, you've got some remaining for buyback, but just the -- A, is there an appetite for M&A and then B, are there properties that are of interest to you guys? I guess, C would be the allocation of that cash between the buyback and maybe going out and picking up other properties.

Yes, this is Greg. In terms of acquisitions, we always have the view to be opportunistic, and if good properties become available at a good price, then we would be opportunistic. And we believe we have the wherewithal to do that in terms of our cash balance, our ability to raise debt and of course our public currency. We don't feel that there's any financial constraints on our ability to do acquisitions. The real constraint is in the supply.

So we are fortunate that we have, we think, a very strong competitive position, but the flip side of that is that it doesn't mean that there's a lot of TechTarget look-alikes that would be easy to consolidate. But we're definitely -- we definitely keep our eyes open for things that makes sense. It's just, by the time you -- things that are good properties after you look at the due diligence, if they are good, and a lot of these good properties don't come for sale because they tend -- these tuck-in opportunities tend to be very nice lifestyle businesses. And then when they do come for sale, a lot of times it's hard to get a meeting of the minds on valuation. But when all of those planets align, as you know in the past, we've been very opportunistic.

Okay. And then on the traffic, terrific, again, the unpaid traffic, 96% of overall traffic, that's something that -- I've seen companies on the other side of that and you never want to take that for granted. But given the amount of new traffic, your organic starts being up 16%, does that say anything about the appetite for overall -- just this disconnect between the business people are doing and the traffic surging? Or is that really more about the continual raising of the editorial content -- the quality [of the] (inaudible)?

I think it's a few things. I think we continue to invest aggressively in content. We've definitely seen some of our competitors pull back in their investment as this prolonged downturn has really hurt their business. But I think it speaks to -- that there is a lot of activity on the IT side, and there's a lot of catalysts in place for IT spending growth. You have the migration, the cloud, which is very good for us.

You have all these companies trying to figure out big data, you have security issues, you have people trying to get their data onto mobile devices. So on the IT side there's a lot of catalysts, there's a lot of activity, and I think that's one of the reasons why the traffic is growing nicely in addition to that we are doing a good job with it and we're seeing a pullback. The missing piece, which I think is pretty clear when you look at the economic data that's being reported is, companies just are not in reinvestment mode. So for IT spending, you need two things. You need the catalyst, which I think we have in spades, but then you also need companies to be -- have the confidence and optimism to be investing in themselves, and that is not what's happening right now.

Okay, thanks for taking my questions.

This concludes our question-and-answer session, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.