TechTarget Inc (TTGT) 2016 Q3 法說會逐字稿

Day and welcome to the TechTarget Q3 2016 earnings release conference call.

(Operator Instructions)

Please note 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, Aaron. Before turning the call over to Greg Strakosch, our Executive Chairman, and Mike Cotoia, our CEO, I want to remind everyone on the call of our earnings release process.

As previous 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 a 8K. On the call today, Greg and Mike will briefly summarize our financial results for the third-quarter and nine-month periods.

Following Greg's and Mike's remarks the Management team will be available to answer your questions. On the call in addition to Greg and Mike we have Kevin Beam, our President; and Janice O'Reilly our CFO.

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 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. With that I'll turn the call over to Greg.

Great. Thank you. The weakness that we are seeing from our largest customers was reflected in our Q3 2016 guidance. We're expecting similar conditions in Q4 2016.

We are buoyed by the fact that we believe this condition to be temporary and situational. Eventually corporate transactions are completed and our experiences is that once integration is complete, marketing spending returns to previous levels and can grow from there.

In the meantime we're continued without strategy of partnering with our customers to help them take advantage of our purchase intent data as they make the transition to being data-driven sales and marketing organizations. These short-term headwinds do not diminish our view of the long-term opportunity.

That belief informs our view to continue to use our healthy financial position to repurchase our shares at attractive prices. I will now open the call to questions.

Thank you.

(Operator Instructions)

Kerry Rice of Needham.

Thanks a lot. Most of my questions are answered in the shareholder letter, but you know you highlighted that you know in the past you've had you highlight the five largest customers and they've been involved in corporate transactions.

It looks like the one that completed their transaction came back pretty quickly. Is there any reason to think that the other four once there transactions are complete, that they wouldn't come back as quickly as the current one?

Any color there? Any even timing on thinking of when those transactions might close and they can start to spend again? Thanks.

Yes, Kerry, this is Mike. In terms of your question, yes, back in August we spoke about five organizations. One graduated and when we talk about graduated we mean it's been a 12 month cycle since the time of the spin off.

So it's been it didn't come back overnight. It took two or three quarters and into the fourth quarter to get it back. We saw the spending back to pre-transaction levels. The other four organizations and again, you probably can tell who they are in terms of the news in the market, we expect the same thing.

One was very recent, just started, they have a long way to go in terms of identifying their staff, identifying their product strategy, their roadmap end-of-life product, and that's going to take two or three quarters. So any take a look at the second half of 2017, we've been through this before.

We've seen this happen, and when things get settled these Companies come back and when they come back they continue to share from off-line to online and they want intent data to help their marketing and sales efforts. It's not an overnight, it's not a flip the switch, it will take several quarters but we expect that and we have experienced that.

Okay. And then obviously you talked about the large customers you highlighted that the midsize customer seems to continue to grow nicely. Are the small customers still feeling soft, getting less backing and suspending spending at lower levels too?

In terms of that next share of customers we continue to see growth on that and then the next smaller customers, they're relatively flat. They were down two percentage points. And they feel the impact. When there is not a catalyst in terms of reinvestment cycle in IT they can feel it as well.

What I can tell you is that some of our longer-term strategy is starting to pay off. It's early signs with some of these smaller and midtier accounts around longer-term data subscriptions.

So our goal is to make sure that they don't come in and they get up in terms of in quarter and then out of quarter, revenue mix. So we have a pretty strong focus and emphasis in getting those next 100 as well as the small and upcoming VC-backed organizations into longer-term contracts, and we're seeing some early but good signs.

Thank you.

Brian Fitzgerald of Jefferies.

Thanks, guys, a couple of questions on priority engine. It was nice to see 14% of revenue coming from long-term contracts. You've stated before you believe 30% to 40% of total in a few years can be from long-term contracts. Do you still think you are on track for that? First question on priority engine. Second one, on the international rollout, is it occurring at the tempo that you expected and then I got a couple of others.

This is Mike. In terms of the 30%, 40% growth that we've talked about in terms of the IT Deal Alert product offering and their suites, we are still very confident in that. I think if you noticed during the shareholder letter we guided for the year to have 30% growth in IT Deal Alert.

If you take a look at that and you back into the numbers, based on what we have, you'll be able to see that our growth in Q4 in IT Deal Alert overall will exceed our Q3 numbers and if you go back to 2015 and 2014, the Q3 to Q4 always had a decline.

So timing and some of it is just clear adoption. We are seeing customers purchase the priority engine, we are seeing usage and adoption levels in feedback, very positive, and we see that as a very good fit into our strategic long-term vision of long-term subscription data contracts.

Just in terms of that, we were 11% last quarter, we're 14% this quarter and we believe that will continue to grow and over the next few years we will reach that target, 30%, 40% of revenue under long-term agreement.

Got it. And then maybe another one on priority engine was just around that 230% year-over-year growth, which you also increase customers, [28] new customers, any linkage between the priority engine growth rate and then how much of that was from newer customers versus older customers?

Well we just launched the -- in Q3 we launched the priority engine capability in EMEA so we are seeing a lot of again, it's early, we are seeing good success on that. A lot of these organizations typically will test [this] for 90 days before they transition into annual deals, so we have a couple of animal deals already. So we are seeing good growth on that side.

Not only in the new customer front but as well as adoption and renewal and when we talk about renewals [tries] and transitions some of these three-month pilots to annual deals. So we still feel very confident in those numbers and they continue to grow and as you continue to get the annual deals, the revenue just gets back -- we pick that revenue up quarter after quarter moving forward, so very bullish on that.

Great. Thanks, Mike.

Eric Martin Newsy of Lake Street advisors.

Thanks. With regards to the four large customers that throttle back on the IT Deal Alert spend, how was their spend on the core?

Their overall spend was down, you know, they were down in the core as well as the online and we highlight in the shareholder letter the amount of, they declined $2.5 million. So there was a mix of core and online in that so it's not as if somebody's pulling back and some when reallocating it.

It's not really cannibalization metric, it's a pullback on both fronts. And again, as we look at these four companies, and you're seeing the transactions that they've gone through, these are extremely material in nature, they will take some time and they have temporary and situational nature.

Again we have been through these before, we have seen them and at the end, when they get their product strategy, their organization structure in place, and their go-to-market ready to go, they will come back, and they will be focused on intent data and they're going to be looking at that intent data and that purchase intent data to help with their sales and marketing efforts, so again we see that as very temporary and situational.

Okay. Based on the Q4 outlook, and I do appreciate you highlighting that point about implied sequential growth in ITDA Q4 versus Q3, because that is counter to what happened last year.

But still we are going to wind up here in a situation where even with the 30% growth in the IT Deal Alert, we are still talking about the total revenue being down about 5% in 2016. If things do come back as you expect them to, post these four large customers getting back on the spend, what's the expectation for 2017 revenue? Is this single-digit growth? Potentially more?

This is Greg. I mean in terms of where we are at with the cycle with those four customers, we've guided 40% revenue growth for IT Deal Alert in 2017 so that's in the neighborhood of $12 million of incremental revenue.

I think on the core, I think if we expect it to be roughly flat with it down a little bit in the first half and up in the second half. But in terms of EBITDA, I would say is that the investment we made this year expecting additional revenue, that investment is kind of in place for next year, I think we're expecting roughly flat expenses for 2017 versus 2016 so we are expecting very high, higher than normal, incremental EBITDA margins on the incremental revenue for 2017.

I see. And then the international, obviously the election is top of mind today. Anything with the results of the Presidential election and potential trade changing in international trade agreements that could have a long-term impact on customer base that would have a long-term impact or medium-term impact on Target?

I mean this is a speculation. But in terms of for healthy IT spend you need two things in place. You need catalysts on the IT side, which I would say that we have in spades, we have the migration of cloud, we have big data, we have security, we have again, data mobility devices, so there's lots of catalysts on the IT side. And then what you need is a reinvestment cycle, corporations being reinvestment cycle which we haven't had.

Now if, realistically, if some of the proposals that are out there get implemented in terms of things like reducing corporate taxes, another part of that proposal is to expense investment in the first year, those types of things have the potential to spur, you know, reinvestment by corporations and whenever there's an increase in reinvestment, that's very good for IT spend and for the refresh cycle. But at this point, that's speculation but I think that would be the potential upside. But as we stated in the past, we think that with flat IT spend, if it stays where it is, we can grow revenue double digits but we've also a belief that when IT spend recovers to a relatively moderate amount, kind of a normal 3% or 4%, maybe 5%. What we have seen in past recoveries is a Vee shaped recovery to the marketing budgets and we think that in that environment core could go back to being a 20% grower again, you know, pretty quickly and that would also help when incremental budgets expanding that would always also help IT Deal Alert.

We've been able to grow IT Deal Alert a tremendous amount in a very challenging environment but that growth has definitely been dampened by shrinking budgets. That growth rate could be -- it's 30% this year, we think that could be much higher than 30% if we were in a more favorable economic environment.

Thank you.

Louie Toma of Craig-Hallum Capital Group.

Hello, guys. I just a couple of questions. First is the core online has been weak for a while without impacting IT Deal Alert, it seems like IT Deal Alert has been resilient and now you're starting to see an effect related to the overall weakness particularly from these big customers. Can you talk a little bit about that?

Have things changed with IT Deal Alert where it's not as resilient as it was before? Just give a little commentary, please?

This is Mike, in terms of IT Deal Alert I think it's still very resilient. I think when you look at the Q3 number part of this was obviously due to a couple of those large accounts but then we also talked about that fifth account that has come back and back to pre-transaction investments with us so we feel that's again, short-term, very temporary. Also there is a little bit of timing on this.

So the end of Q2 as well as Q3 on some of the deals, where we took in some of the revenue in Q2 and we got a deal at the end of Q3 that actually fell into Q4. That's why I highlighted before that, the revenue shift or the revenue makeup from Q3 to Q4 will increase an IT Deal Alert and if you go back to 2015 and you look at Q3 to Q4 and you go back to 2014 and look at Q3 to Q4, it has always been a revenue decrease.

So we're actually seeing the increase on this -- part of it is timing and then part of it was from some of these larger accounts.

Can you give us or remind us what percent of revenues these four customers represent and relative to what they were, say a year ago? They've been declining a lot, so I'm assuming the exposure to them has declined significantly.

So we haven't disclosed by those specific accounts, but we have disclosed that our top 12 global customers -- and those five companies were part of those top 12 global customers. Historically it's been around 40% of revenue. You are correct, that is now decreased so it's in the mid-30%'s.

So that's one of the things that bodes well for us in 2017 that we have less exposure to those larger accounts and more exposure to the midsize accounts around mid-40%'s now which is growing nicely. And then the other part of that is you know a much bigger part of our revenue now is IT Deal Alert which is growing very nicely so if you look at those two pieces of business, which is a bigger piece of the pie growing faster, that really bodes well for the overall growth rate in 2017 and 2018 and beyond.

That's all I had. Thank you.

Allen Klee from Sidoti & Company.

I'm not sure if you touched on this but what do you think if your largest customers were not going through deals, what kind of end demand you think you would get from them?

Well, I think if you look at what we said, we had a decline in the quarter of $2.5 million just from four customers. If there were not going to the deals, I think we would have been flat to up with those accounts so it would be very significant amount of revenue.

And what do you think is driving -- you said that there is kind of demand because of new technologies, you said cloud and a few things, but is there a way to quantify how much that's kind of improving just overall end demand?

What's happening is those segments of the market are healthy but there's other segments of the market that are not healthy. So when you combine it all together call you basically have a flat environment.

I think the best way to look at that is if you look at the large global IT vendors and you look at their results, you'll see that they see very fast growth with like their cloud offerings or their big data offerings, or their software offerings but that's being offset by declines in more traditional parts of their business. So the overall environment's roughly flat.

When you get a reinvestment cycle, what you typically see is a big refresh of existing infrastructure as well as faster growth on the new type of areas and that's how you kind of get to, you know, an overall healthy IT spend.

Last question. I was just curious in the UK, did you notice any changes as a result of Brexit having any impact on you?

We've seen a lot of uncertainty. From our European customers, and as you know uncertainty leads to delays and wait and see, and so we definitely saw some deals kind of go on wait and see mode and push out, so we definitely and we saw that in the US as well.

Thank you.

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