TechTarget Inc (TTGT) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the TechTarget's First Quarter 2017 Earnings Release Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Charlie Rennick, General Counsel.

Please go ahead.

Thank you, Anita.

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 Relations 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 Dan Noreck, our CFO.

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.

Actual results may differ materially from our forecast.

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 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 and Mike.

Great.

Thank you.

IT Deal Alert demonstrated very strong performance in Q1 2017.

IT Deal Alert revenues were up 52% year-over-year.

Quarterly IT Deal Alert revenues topped $10 million for the first time.

Revenue from Priority Engine and Deal Data were up 162% year-over-year.

The number of IT Deal Alert spenders in Q1 2017 was over 450, which is up 62% from Q1 last year.

We had 61 new Priority Engine and Deal Data customers in Q1, and we had a successful launch of Priority Engine outside North America with 55 international customers utilizing the service in Q1.

We continue to make product enhancements at Priority Engine.

Today, we announced a partnership with HG Data.

HG Data has amassed the largest library in the IT market of software and hardware installed base data, and many of our customers run marketing campaigns based on what technologies their prospects currently have installed.

So now our customers will be able to identify active accounts where they have the best chance to succeed further with this data.

We will continue to roll out new features for Priority Engine on a regular basis throughout the year, and we continue to have very good success selling annual and long-term deals.

Approximately 18% of revenue in Q1 was derived from long-term contracts.

The momentum with IT Deal Alert continues to be strong.

Our customers are committed to becoming data-driven sales and marketing organizations.

We believe that we are in the early innings of a megatrend and that we are the clear leader.

Moreover, while we believe the current macro challengers are masking our strength and the large potential opportunity that exists, we think we are exceptionally well positioned to take advantage of any improvement in the environment.

We expect to continue to use our strong balance sheet and positive free cash flow to repurchase our common stock and reduce our overall share count as we believe this is in the long-term best interest of all shareholders.

I will now open up the call to questions.

(Operator Instructions) Our first question comes from Kerry Rice with Needham.

Just a couple of questions.

I know previously, you guys have talked about long-term contracts being about 20% of revenue this -- in 2017 and then moving further towards 25%.

Do you feel like you're still on track with that is the first question.

The second one is that you've historically talked about IT Deal Alert growing about 40% for the year.

Is there any reason to think that, that would go higher given the strength we've seen in the quarter?

And then the final question is, with these ongoing transactions of your large customers, it seems to kind of have persisted in a way on revenue growth.

Are you still optimistic about the second half of 2017?

I think you are looking for some fairly significant growth in the second half of the year.

Can you talk a little bit about that and maybe how we should think about the second half revenue growth?

Kerry, it's Mike.

To answer your first question on the long-term contracts and shooting for 20% as the overall part of the revenue, yes, we feel we're on track with that.

If you recall back in Q4, we're around 15%.

We're up to 18% now.

I think that forecast is very reasonable and attainable.

And even if you look out towards '18, '19, '20, when we said we expected to go 25%, 30% and 35%, I think we're off to a good start on that, and I feel confident on that.

In terms of IT Deal Alert number growing at 40%, obviously, based on the numbers, we're off to a really good start in Q1.

You saw over 50% growth.

As Greg mentioned in the Shareholder Letter and in his announcement right -- in the introduction, our clients are becoming -- must become data-driven sales and marketing organizations.

So when you have real and observed purchase intent data by technology segment that they can leverage in their marketing and sales efforts, it's critical.

And we feel that in terms of the 40% growth, we feel like we're on track for that.

As well, we could see some upside on that depending on how this goes.

But the fact that our clients are all really driving to become data-driven marketeers is very critical for us and for them.

Also just to tie on to that, there's another step to that as well.

Making sure the data can be used, so you'll hear about some of the enhancements that we're laying out, some of the partnerships with Priority Engine.

In the last quarter, we spoke about the integration into Marketo and our road map to integrate it into more of these marketing automation and other platforms.

That's really going to help with the adoption and the growth on this as well, because if you make it easier for clients to use the best data in the market, it will stick and it will continue to grow.

In terms of the big 4 that we talked about before, you'll recall, we used to have 5. One's in the rearview mirror.

And if I take a look at that today, we are back to -- on that fifth one, back to a pre-transaction revenue states, if not even -- we've seen some growth on that.

The other 4, we have one that's coming up we hope will be in the rearview mirror pretty soon.

And then obviously the big one, $60 billion one, it's been a little bit slower in terms of those guys getting their integration set, their product set, their road map set and even their people set.

But we expect that, that will get settled in the second half of the year.

And at the end of Q3 and into Q4, we expect to see some stability and some growth in those areas.

So we still stick to our -- what our plan was for the first half and second half, and I don't see anything that's swaying from that right now.

Yes.

So we are maintaining the 2017 annual guidance that we originally provided in February.

That's helpful.

The next question comes from Mike Malouf with Craig-Hallum Capital Group.

This is Louie Toma for Mike.

In the press release, you mentioned that your 4 accounts that are involved in corporate transactions were down 50%.

And then you said that your top 10 customers were down $2.5 million.

Could you put a number of dollar impact to -- of those 4 accounts?

Just trying to get an understanding of how much of the weakness is coming from your big customers in general versus these corporate transactions that are taking place.

And then I have a follow-up.

Louie, yes, this is Mike again.

I can't put a specific number to this, but what I can tell you is this.

If you take a look at it in this view, the IT market continues to face a lot of strong headwinds.

And you saw that Gartner just published their IT 2017 spend forecast, which they slashed in half from 2.7% to 1.4%.

Now some of the reasons that we've spoken about before as well as you may see in that report, this is very challenging, especially for the global accounts.

And you know the large accounts that are out there that have offices in every major country around the world, a lot of traditional hardware and software vendors trying to evolve into a cloud strategy.

But we're watching their earnings, and I'm sure you're watching them very closely, too.

And those continue to disappoint.

Revenue being down year-over-year, and in positive scenarios, "positive scenarios," flat.

50% of their business is being conducted outside North America.

So with the strong dollar, that's having a negative impact on their financials.

And then also the transition to cloud.

We're seeing their cloud revenues grow at a pretty good percentage, but it's off a small number.

And it's being overshadowed by the traditional hardware and software business.

So if you take a look at our total like our global customers and you know the accounts, their overall core business was down about 40%.

They had an increase in IT Deal Alert business, but it did not offset, obviously, the drop in core.

Then if you peel back the big 4, their core business was up 50%.

So I'm giving you some pretty significant numbers on that in terms of ratios and percentages.

And their increase in IT Deal Alert in terms of pure dollars was nominal versus the decrease in percentage of the core.

So we're working with that type of environment right now, and there are some challenges on the core.

And that also leads us into like why our key focus, which we set from the beginning of the year and we will continue to do that, is lead with our IT Deal Alert offering and making sure that when our customers buy IT Deal Alert -- I'll give you an example and I think we brought this up last quarter, too.

If you take a look at the non-global accounts that have spent and are investing in IT Deal Alert, their core business is up single digits.

If you are not investing in the -- if you're a non-global account and you're not investing in IT Deal Alert, their businesses -- their core business is down.

So the plan or the playbook, which the numbers really lay out and show us, get our customers to invest in long-term IT Deal Alert subscription contracts, integrate, layer the core on there and be able to show how that core can be measured through the Priority Engine tool is really the game plan on that, which we're going to stay very focused on.

That's helpful.

And I guess what I'm wondering about is it seems like we've been seeing weakness from these big customers for so long.

So what gives you confidence that it will improve and the timing to that?

And is this more of a structural change that we're seeing in the environment more than just a currency and temporary issue with the economy?

Well, I think -- let's not like -- we have to put a value on it.

In terms of IT, there's really been no catalyst in the IT market in terms of spend in a long time.

Again, Gartner just slashed their forecast from 2.7% growth to 1.4%.

I think a lot of companies are looking to see what happens with some of the tax reform issues, right?

Are they going to lower their corporate taxes, are we going to be allowed to -- or will customers be allowed to expense their IT expenditures in 1 year versus having it done over 3 or 4 years?

Things like that can help create a catalyst, and we don't need the market to go to 5% to 6% growth.

But to get back to a normal 3% to 4%, it's there.

And the strong dollar again, these organizations that we talk about in the global side, they're billions -- hundreds of billions of dollars in revenue.

And when half of their revenue is outside the U.S. and they're getting impacted by the strong dollar, it does hurt those folks and it impacts their financials negatively.

What they all need, though, is the right data, the purchase intent data.

And that's why our key focus is on making sure that our IT Deal Alert offerings and some of the new releases and the product road map strategy helps address that so people actually have access to real and observed purchase intent data that can help them along the way.

And so they get their overall messaging or they can bounce back from some of the financial headwinds that they are facing in the IT market.

And then just one thing I would add, this is Greg, in terms of the confidence that things will improve.

If you look specifically at the 4 accounts that are going through a transaction, over the 18 years running this business, we've been through that many, many times.

And there's a very consistent historical pattern that happens that we see.

And once the integration is done -- when the integration is being done, a company gets very quiet from a marketing perspective, because they figure, why should we spend a lot of money until we have our message fully baked and ready to go to market?

And then once that happens, when they get the product road map in place, they get the messaging in place and they get the people in place, it's typically a renewed focus on marketing to get that message out.

And as you know, as Mike said, we originally have 5 companies.

One of those companies has already completed that process and is growing again.

One of those companies, we can see light at the end of the tunnel and the spending trends are upward.

And then 3 of the companies are in a very large merger.

They're still in the middle of that integration.

But our expectation based on history and based on daily conversations with those customers is that by -- they'll -- the marketing budgets should start recovering in the second half of this year and then it really bodes well with those accounts in 2018.

Got it.

One last question.

If I look at your Q2 guidance, it implies -- if you take the midpoint, it implies that revenues are going to be down 10%, but it implies also that EBITDA is down 35%.

Is that just your normal operating leverage to your model?

Or is there some other expenses that are in there that are causing a dramatic accelerated decline on the EBITDA line?

Yes, Louie, this is Mike again.

I think if you're looking at 2016, what was that, about $29 million?

Yes, yes.

There's event revenue baked into that.

You have to take that out.

We eliminated events in February.

(Operator Instructions) Our next question comes from Allen Klee with Sidoti.

If we look at the top 4 customers, how did sales in this quarter compare sequentially to 4Q '16?

I believe they -- you know what?

I have to -- hold on one second.

I was looking at year-over-year.

Let me pull some of that out.

As I look at that, do you also have another question?

Yes.

My other question was in your press release, you talk about the Priority Engine partnership with HG Data.

And could you go into that a little bit to help us understand what that -- how that can help you out?

Yes, absolutely.

So if you take a look at Priority Engine as a stand-alone, what that is doing is providing access to all of our purchase intent by technology segment across our entire portfolio of sites.

So clients can walk in there and they subscribe to it if they want to go after, let's say, a data protection, data backup market.

They want to understand which accounts are actively researching and how they are ranked on data protection, data backup by region.

So we'll bring it out by North America, EMEA, APJ.

Then we'll identify who are the active prospects that are engaged in research by their intent behavior on our site.

And we'll show them all these related topics that they're looking at.

Our customers came back and said, one of the things that we'd like also to see on there, which isn't necessarily prepurchase intent data but something that can really complement our efforts as we go sell into account, is installed base, because if I'm a client that is competing with clients 1, 2 and 3, I want to know who they have installed in that -- if my prospect has them installed, so I can deposition and help sell into that account.

And that's a really key tactic that they're using on the sales and marketing, understanding not only who's interested in buying what or researching what but who's the incumbent, who's installed right now and making sure that we have that type of information to help them with their sales and marketing efforts.

Now HG Data, they have a great process.

They do a deep web scrape.

They are always doing references that are ongoing for technologies, their press releases, case studies, job listing, resumes, public filings.

We're getting that data -- we'll be getting that data every month and imported into our system so we can actually help complement that data that we show on the prepurchase side with the current installed base across hardware, software, data center, cloud providers.

This concludes our question-and-answer session and our conference.

Thank you for attending today's presentation.

You may now disconnect.