TechTarget Inc (TTGT) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the TechTarget Q4 2016 earnings release and full-year financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Charles Redman, General Counsel. Please go ahead.

Thank you. 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 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 relation section of our website and furnished it on an 8-K. Following Greg 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 our Dan Noreck, our Chief Financial Officer.

Any statements made today 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. These statements speak only as of the date of this call and TechTarget undertakes no obligation to update them. We may also refer to financial measures not prepared in accordance with GAAP, a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter.

With that, I'll turn the call over to Greg and Mike. IT dealer revenues were up 52% in Q4 and up 36% in 2016, despite a very weak IT spending environment. We expect IT dealer revenues to be up at least 40% in 2017. Revenue from long-term contracts was 15% in the fourth quarter. We expect revenue from long-term contracts to be at least 20% in 2017 at the least 25% in 2018.

In 2016, Face-to-Face events represented less than 5% of our revenue. We have made the decision to phase out this product line because event marketing budgets have been shrinking and it has become more difficult to recruit attendees, and it takes an enormous amount of resources to produce the successful events. This will allow us to have more focus on our main goal to becoming a data business, integrating our core products with our data offerings, and selling our services on an annual basis.

2016 was our 13th consecutive year of being cash flow positive. We plan to continue our strategy of using excess cash flow to repurchase our shares and reduce our share count.

In regards to looking forward to 2017, we expect online revenue to grow double digits and adjusted EBITDA to grow at least 20%. Our expectation is that we will continue to see challenges in the aggregate in the first half of 2017 from our four largest customers, who are in the middle of corporate transactions. We expect to see improvement from these four customers in the aggregate in the second half of 2017.

We remain extremely bullish on our prospect as our customers commitment to becoming data-driven sales and marketing organizations continues to grow, and they continue to rely on our data to make this transformation. This is an enormous opportunity where we have a leadership position, a very differentiated offering with significant barriers to entry.

I will that will open the call to questions.

We will now begin the question-and-answer session.

(Operator Instructions)

At this time we will pause momentarily to assemble our roster. Our first question comes from Tim O'Shea with Jefferies. Please go ahead.

Yes, good afternoon and thank you for taking my question. So just on the international rollout of Priority Engine, I think you said in the past the new clients typically take around 90 days of testing the product before moving onto annual contracts. I am just curious if you could talk about the success that you had transitioning your international clients into annual deals.

And then overall, would you say that the international rollout is occurring at the tempo you expected, and maybe if you can provide an update around the Asia launch, how is that going? And then I have a follow-up, thanks.

Tim, this is Mike. In terms of the international rollout, as you know we launched in our EMEA region early in 2016 and we have seen very similar experience that we've seen in the United States, in terms of starting with the 90 days and then transitioning to annual contracts. So we are seeing that very consistent with what we saw in the United States.

In terms of the APAC regions, we fully launched those at the end of Q4, so those are early stages of the rollout. But what we are seeing as a pattern that, again, they will test with the 90 days and eventually get into the annual subscriptions. And from what we see early testing and early results, we feel those patterns will be similar to the US. And in terms of the tempo, we've been very aggressive in terms of getting the IT Deal Alert offering available in the APAC regions.

We break it down into some of the A and Z in India and [Ozion] markets. It has been a product that our customers have been asking for. Because we've been showing them the data and in terms of the tempo and the rollout, I think we are right on target in terms of that. I am excited about the tempo and we believe we're going to see continued success in those regions.

Great, thanks, Mike, and just a quick follow-up. Just looking at the guidance, $22.5 million to $23.5 million of revenue for Q1. Is there any events revenue in there, are is that all online? Thanks.

There is just a small little stub event that we had announced at the end of last year. It's just a couple hundred thousand dollars and then we don't expect to see more event revenue in Q2 or beyond.

Okay, great. Thanks, Greg.

Our next question comes from Kerry Rice with Needham. Please go ahead.

Thanks. Maybe a couple questions about next year and then maybe a higher level one. You mentioned the second half should be stronger than first half. Is that primarily due to these four large accounts coming back, or is there anything else that you are including in why that strength will pick up in the second half?

The second question is, you mentioned with Priority Engine the integration sales force, you mentioned Marketo. Any other names, marketing automation solutions that maybe are key partners that we should look for as milestones?

And then the third question is on a high level. There's been a lot of discussion on potential tax reform with the new administration. How, if that comes to bear, is that beneficial, if at all, to TechTarget? Thanks.

Great, Kerry, this is Mike. I'm going to take these one at a time. In terms of the first point regarding the four accounts picking up, those are the accounts that are in the middle of pretty substantial transactions. And that is absolutely a piece of the pickup in the second half of the year.

You know the accounts, you know the dollar amount in terms of the transaction size and the deal sizes, and as we mentioned back in our November earnings call, these typically take 12 months to cycle out and make sure that we get back to speed. What I can tell you is when those accounts come back and reenter the market in terms of they have a pretty clear vision of their product strategy, their roadmap, they will all become very data-driven marketing and sales organizations and they really will leverage the [intent data] that TechTarget has to offer.

Also just to give you a little bit of color, on the core side, the IT market is still extremely weak. We saw that especially in Q4 and some of these pockets, you're seeing the larger enterprise, traditional hardware, server and storage companies with their earnings, we had a crazy election, things were really put on pause. We will see that come back and also what we will focus on is the part of our long-term strategy, short and long-term, is really the data business. And making sure that we transition that into longer-term data subscriptions where we see a little bit more stickiness in that and that will see a bigger pickup in the second half as well.

On your second comment, I hope that answers, on the Priority Engine, yes, we announced -- we integrated the sales force and we now integrated into Marketo. There will be other marketing automation companies that are on the radar that you will see that we will announce in the next quarter or so that you will see. And they're named vendors out there, so you will see that.

And then on the third piece of the tax reform, everything that we are seeing with the new administration points us to lower tax rates, repatriation of companies and companies' money, however what we're also reading on is it's really not going to be until the later part of the second half of the year. So you may not see the direct benefit of the new tax reform until very late 2017, but more likely in 2018 and, Greg, I will let you comment on that.

Yes, I think on the tax reform, I think the proposal that we are most excited about, if it goes through, is the ability to expense capital investment in the first year, instead of expensing them over a longer period of time. In the past, that has been a catalyst for IT spend, and as you know, when IT spending goes up, marketing budgets will go up. So for us that would be a very good thing.

Then second, the proposal on repatriation of cash held overseas we also think would be positive for us because if you look at our largest customers, our largest customers have tens of billions of dollars trapped overseas. I think it would be good for us if that money came back to the US.

And then I think the overall idea behind lowering the corporate tax rate is to spur reinvestment. Because if you look at the IT spending over the past 10 years, the economy has not been in reinvestment mode. Companies have had lots of cash, but [the stride has been poor cash], dividends, buyback, M&A, not reinvestment. So anything that would spur reinvestment, obviously that helps IT spending, as that's one of the key places where companies reinvest.

As we have said in the past, if IT spending stays the way it is, roughly flat, we believe we can grow our revenues double digits per year basically by gaining share. But if IT spending increase 3% or 4%, which is certainly within the historical norms, nothing out of the ordinary, we believe that marketing budgets would increase.

And then instead of us, what we are doing today, fighting for legacy dollars to gain share, we would be a jump ball on new marketing budget. We think with our competitive position and how that's strengthened, we think that we could become a 20% revenue grower very rapidly.

Thank you.

Our next question comes from Eric Martinuzzi, Lake Street Capital Markets. Please go ahead.

In 2015, I think your top 12 accounts were about 40% of revenue. Do you have a similar metric for 2016?

On the top 12 -- they would estimate around 35% (multiple speakers) --

I was just going to say that's shrunk to 35% and then the midsize accounts would have grown.

Okay. I was just wondering, was there movement amongst those top 12, or are you just saying, hey, we grabbed these same 12 names from 2015 and here's what those same 12 names equal now.

Yes, we look at our business in a couple of different ways. We'll look at that same cohort of the largest global companies that are billions in revenue, and we look at that and that has shrunk from 40% to 35%, while the next 100 customers has increased. We also look at our top 10 customers, top 25 customers and those tend to be a lot of overlap between those. But when we're talking about those global ones, it's the same like accounts.

Okay, that's helpful. And then you talk about the big four that we are patiently waiting for to come back. When you say you expect improvement in the back half of 2017, does improvement equate to growth or is that just an attenuation in the rate of decline?

I think the first -- this is Mike. The first step is, all of these companies have to lay out their product strategy, their roadmap strategy and come together in their marketing plans. And they all pull back during these major transactions and they all watch every nickel that they are spending now until they have a clear path.

What we have seen in the past, and for example, there was a fifth company that, I will say anniversaried out, and we saw that not only stabilize, but actually had some growth year over year if I look at it. So we expect these to stabilize, come with the plan on their marketing strategy, leverage intent data that TechTarget has to offer and grow their business with us from these lows. So yes, we expect these guys to stabilize and come back and grow.

Okay. And then the exiting of the events business, are there any one-time issues that will impact profitability and how will those be treated? Will they be digested as taken or are they going to be treated like a restructuring and a EBITDA add-back?

There will be some costs taken this quarter against that. They are not large enough to warrant a one-time restructuring charge. So they will just be -- they're just integrated into the Q1 EBITDA guidance.

Okay. Thanks for taking my questions.

You're welcome.

Our next question comes from Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Great, thanks, guys, for taking my questions. When you take a look at 2013, 2014 and 2015 in the North America core online business, you average around $52 million a year and then obviously 2016 happened with all the restructurings. When these four bounce back, as you're expecting in the back half of this year, do you expect to get back to at least the $52 million run rate in the North American on an annual basis?

Hey Mike, it's Mike. If you take a look at the four accounts that we're talking about right here, we feel these guys will come back and they will be building their business on our data business and also bring back their core online spend. But there's an interesting analysis that we looked at.

So we looked at all of the core spenders and our IT Deal Alert spenders, and even outside of that, we'll call those global accounts, what we noticed on that was anybody that spent in IT Deal Alert, or if you looked at it as a whole, that were outside those global accounts that we talk about, that spent an IT Deal Alert, their core spend was up roughly 10%. And if they were not IT Deal Alert spenders in 2016, their core declined by double digits.

So really the strategy and the sales execution that we are doing is making sure we lead with our data products for global in the top four, all the way to the non-global accounts, because when we get those vendors to invest in IT Deal Alert they have a high propensity to buy on the core online. So that has to work across the gamut.

So yes, I think those four will come back and they will come back in the data side as well as the core will come along with it. But it's also those non-global accounts that when you get them into an annual, longer-term data subscription, being able to tie them into the core, our trends are telling us that works very well and that's a big part of our playbook.

Yes, so that and to answer the question specifically, yes, we think we can get back to that $50 million plus and we think we can grow it from there when IT spending recovers.

Great. And then that fifth customer that has now left and come back, how has their spending shifted more toward the data side on the IT Deal Alert side than you would've expected? Or are they still really supporting the core online as well?

They are a strong IT Deal Alert customer and they still spend in the core. Yes.

Okay, and then one quick question on the deal data side, I know that you were trying to get into the investment management business with the product, can you give us an update on how that is going or do we still need a couple more quarters of data before it starts to sell?

We are probably looking at a couple of more quarters on that. We still have a lot of inroads we are making on the vendor side. And selling some of the syndicated type of data, but also evolving this into some custom data that our vendors have requested. Plus on the investment banking side, timeshares are very important and annual year-over-year type of metrics is key for these folks, so I would say that's going to be the second half of the year.

Okay, great. Thanks for the help.

Thanks, Mike.

Our next question comes from Allen Klee, Sidoti. Please go ahead.

Good afternoon. Can you give us a sense of the level of your sales force and any plans of changing that in 2017?

I mean I think the sales force is fairly consistent with 2016. In terms of how we are structured, we have our global account reps that cover those large, I think you know most global billion-dollar accounts, and then we break our sales force into what we call media group reps and sales directors and managers that really align with the specific technology in the market, i.e. storage, data center, hyper conversions, business intelligence. And we also break that down into by region -- what we have a direct sales force in London, France, Germany and throughout APJ.

What we have done over the last six months is we have put some more sales support services on our Priority Engine product for onboarding and renewals to help and assist the sales force in that. Because it is important when we sell Priority Engine that our customers that buy that -- and again, these are typically longer-term contracts, we want them to engage in the data immediately and effectively and use the data the right way.

So on the sales support side, we've restructured a little bit of that to help with that, we have seen good success on that. And we have some specialists that will help us sell the data products and help support the media group or global account reps in North America as well as throughout the world.

Okay, great. And then for your core online product, do you have any major changes for 2017?

I think in terms on the core, what is really sticking out to us is when we sell the IT Deal Alert subscription revenue, we have a greater propensity for our customers to buy the core. And to dive into that a little bit, what our Priority Engine tool or portal allows our customers to do, which they could not really do before, is to see how their content marketing in their core, we'll call core legion and brand, are affecting these accounts and these contacts.

So we will show right in the system, this account is ranked number one this week on business intelligence software. And there were 25 people who are actively prospecting within the account, and when I say actively prospecting, their engaged in content on our sites on this topic within the last 90 days. Now when they lay the core on that, where they put their white papers or their other content assets on, and they brand, and those buyers within the account engage with that content, which we will call the core, we will show right into the Priority Engine portal, this just moved form an active prospect that engaged with TechTarget content to a lead that has now dropped and engaged with your content, so they actually can see it in one place.

And before it was very difficult for our vendors to do core, put it into the inertia system, try to nurture it. It almost would go in a black hole sometimes. Now when we show it right in front of them in one tool that surrounds the account, the buying team and the individual, the plan is to make sure that we lead with the data and then double back and sell the core. And like I said, with those accounts that are outside the global, those folks that were spending in IT Deal Alert, their core marketing was up double digits, 10%.

And also by integrating the core with the data offerings, which we are selling more on an annual basis that allows us to sell some of the core on an annual basis as well. So integrating those two is a key part of the strategy and it's also the way for our customers to get the best ROI by using both offerings together.

That's great. That's powerful, thank you. Then just some questions on guidance. I noticed the tax rate in the quarter was a little high. Could you comment on that, and then just any thoughts on if there's any reason the tax rate should be different going forward? And also your interest in other expense line jumped up for this quarter and is that just a one-off thing or is there any other reason that I should know?

So the tax rate in the quarter specifically was related to some options. So non-deductibility of options. So that was specific. So on the annual basis, you can expect the same. And then on the interest question, I'm going to let Dan answer that.

So the answer was in relation to the $50 million term loan that we took out from the bank to fund the tender offer and our share repurchase program.

Right. Okay. When you give your guidance for the first quarter of 2017, you're guiding to revenue at the midpoint around $23 million, which if you just compare that to the online revenue in the quarter, you just did, it's around $25.6 million. What is the reasoning for the down sequential revenue? Is it a seasonality thing with fourth quarter or something else?

Yes, it is 100% seasonality. Budgets get finalized in Q1, this has been, since the inception of TechTarget, and the IT market works that way. The biggest quarter is typically Q4, end of the year budget, things are getting done. Q1 they're trying to finalize budgets for the year, things don't get finalized until the middle of February, March, sometimes they're even delayed further than that, but it is seasonality.

So historically if you look our revenue, first quarter is typically 20% of revenue for the year. The second quarter is 25%, 26%, third quarter is 25%, 24% and the fourth quarter is 29%, 30%. So that is kind of -- some years it is a little bit different than that based on just the rhythm of year, but if you look over a long period of time, that is the normal breakout of revenues based on seasonality.

So it's like Mike said, big end-of-the-year push, first quarter, companies are figuring out their budgets and strategies. And also keep in mind, a lot of the marketing spend is tied around new product launches, which tend to be in the spring and the fall, so that relates again to the strength in Q2, September through the end of the year.

My last question, I'm not sure if I missed it in the press release, but did you have any comments on how your small customers performed?

Those customers were down a little bit.

Okay. Thank you very much.

Thanks, Al.

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