TechTarget Inc (TTGT) 2017 Q3 法說會逐字稿

Good day, and welcome to the TechTarget Third 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 Charles Rennick, General Counsel.

Please go ahead, sir.

Thank you, Rachel.

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.

Also joining us on the call today is Dan Noreck, our CFO.

Following Greg and Mike's remarks, the management team will be available to answer your questions.

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.

Greg?

Thank you, Charlie.

The investments that we've been making to transition to a provider of purchase intent data are paying off, which makes us very optimistic about the end of this year 2018 and beyond.

Online revenues were up 16% in Q3 2017.

IT Deal Alert revenues were up 84% versus Q3 2016 and are up 58% year-to-date versus the first 9 months of 2016.

Revenues from Priority Engine and Deal Data were up 139% in Q3 2017 versus Q3 2016.

The number of IT Deal Alert customers in Q3 2017 was over 600.

We had over 60 new Priority Engine and Deal Data customers in Q3 2017.

23% of the revenue in Q3 2017 was derived from longer-term contracts.

Adjusted EBITDA was $6.1 million, which is a 22% adjusted EBITDA margin and is up 64% versus Q3 2016.

We believe that our customers transition to becoming data-driven sales and marketing organization presents a very large opportunity and is still in the early innings.

Many of the temporary headwinds that we have faced in the past 2 years are abating.

The dollar has weakened and the temporary disruptions to marketing budget in some of our largest customers, caused by significant divestitures or acquisitions, will be behind us in 2018.

While overall IT spending remains challenged, we are confident that we will continue to gain market share and grow faster than the overall market with significant upside when IT spending increases.

I will now open up the call to questions.

(Operator Instructions) The first question comes from Brian Fitzgerald with Jefferies.

I wanted to ask a question around international growth and what you're seeing there.

How are the trends going?

Anything in particular with the growth?

Any dynamics that you are seeing that's driving it internationally?

And then the second question was just around, looking at the upcoming GDPR rollout in Europe in '18, the way we think about it is that in no way it has to do with kind of consumer opt-in type of data protection that it shouldn't really impact you guys.

As a matter of fact, it might even turn into a tailwind for you guys.

Any thoughts on the privacy regulations as they roll out?

Brian, it's Mike Cotoia.

In terms of your first question, in regards to global trends, we're starting to see -- navigate through some of those headwinds that Greg had mentioned, primarily as it relates to those global accounts.

And even if you dive further, as it relates to some of those 4 major accounts that have gone through some pretty significant transactions or acquisitions, we are starting to see that trend alleviate a little bit, in terms of getting back to some normality.

So that absolutely had an impact on our global business.

But what's really been driving the global business right now has been the adoption and roll out of IT Deal Alert.

And remember, that's fairly new in the EMEA and APJ markets, and we've broken that down, so we're hitting each specific market.

And very similarly to the North America, the vendors that we deal with are craving for purchase intent data, so that they can become better data-driven marketing and sales organizations, and the IT Deal Alert numbers are showing that.

In terms of GDPR, I agree with you.

I think, first of all, we are fully in compliance with that, and we are -- I think, if anything that could be a competitive advantage to us -- we compete with some organizations that are enterprise as well as consumer-focused.

So they may have a few more challenges than we have.

But we've been very clear in terms of GDPR that we are compliant, and we look forward to that opportunity because I think it will create some tailwinds for us as well.

The next question comes from Jinjin Qian with Needham.

Two questions, if I may.

First is regarding your new partnership with DiscoverOrg.

Just trying to get a sense of how that has contributed to the acceleration of customer wins this quarter?

And in general, how are you going to leverage their 4,000 customers in terms of go-to-market strategy to kind of further add to your customer base?

And shall we expect any additional partnership with other companies in this space, such as ZoomInfo and Hoovers?

Second is, in terms of the core revenue.

Any trends you've see in the IT spending?

Any update on your top customers that you can provide?

And how much of your preliminary guidance of 25% year-over-year growth for next year depend on the recovery of the core business?

Okay.

Jinjin, this is Mike.

I will start with the first question regarding the DiscoverOrg partnership.

That was recently inked, only a couple of months ago.

And really what we want to make sure we're doing is getting this in front of our customers, so we will see some benefit in 2017, but the primary benefit will be in 2018 and beyond.

So if you recall, Priority Engine is the platform that we offer to our customers that allows them to rank and prioritize accounts as well as active prospects, find team members within those accounts based on their intent and their behavior on our sites.

We are -- do that by technology segment, and we do it by [GO].

The reason what was attractive with the DiscoverOrg partnership was they have the most enhanced and accurate contact database that will allow us to expand, really, will allow our customers to expand their reach in order to reach the entire buying team within -- with inside of their accounts and prospects.

So we think there are lot of good synergies there.

They focus primarily on the sales organizations.

We focus very heavily on the marketing organizations.

So together being able to go back to our customers and allow both sales and marketing to reach the entire buying team as well as our marketing customers to expand some of their key marketing strategies, such as an ABM, account-based marketing strategy, as they head into 2018, is going to be very advantageous for us.

In terms of additional data partnerships, we are always looking, and we will explore additional partnerships based on the feedback that our customers give us.

So as you remember, we announced the HG Data partnership back in June, and that was around installed base technology to help our customers really identify, who their competitors and who their partners were that were already in the account.

The DiscoverOrg really helps us out with the contact extension within the IT organization.

So we will be very selective, but we expect to have some additional partnerships announced later on next year.

And then in terms of IT spending trends, we're projecting -- we have a lot of momentum with some of the trends that we have as an organization, but we're still challenged.

We're directly tied to the IT spending.

And if you look at Gartner's latest report, I think that the IT spending for 2017, enterprise IT, was still below 2%.

I think it was coming around 1.7%.

So even with that, we feel that we're going to be, a, with the turn of some of these global accounts that are, I want to say, coming out of that whole headwind that Greg had mentioned early in terms of transactions and the acquisitions.

The momentum of our data business, the strong focus on the subscription business.

Even if IT spending stays the same at 2% or below, we feel that we'll see double-digit growth on the revenue side as well as 25% EBITDA growth.

And then this is Greg.

Just to the point that if IT spending increases, we would expect to be significant beneficiary of that.

So a lot of people are -- believe that if tax reform goes through that will help IT spending because of the expensing of capital improvements in the first year.

The repatriation of cash and just a lower corporate tax rate will spur reinvestment.

And then just 1 additional point, I'll make, Mike covered it well, but on the additional partnerships with Priority Engine, as he said, we expect to do more.

And part of our strategy there is to make Priority Engine our customers' data -- purchase intent data platform.

So become a one-stop shop.

So all the different data sets that customers would want to use would be integrated right into Priority Engine.

And then, Priority Engine, as you know, integrates right into whatever salesforce automation system you're using, whatever marketing automation system you're using.

So as you know, we integrate directly with salesforce.com, Marketo, Eloqua, HubSpot, Pardot, et cetera.

The next question comes from Allen Klee with Sidoti.

Can you give us some commentary on how you're doing with getting customers to buy both core and IT?

And how that business is tracking relative to the overall?

Alan, this is Mike.

I'll break this down in terms of global versus nonglobal accounts to give you some color, if that's okay.

On the global side, we're seeing, as we mentioned earlier, we've been dealing with some headwinds on that, especially with the 4 major accounts.

But we're starting to see a little bit of a transition where they are investing in the IT Deal Alert business, whether it's Priority Engine or Qualified Sales Opportunities or Deal Data.

And we're seeing some leveling off on the core business, which is our brand and lead [gen].

What we have seen through the trends is, if you are nonglobal account -- and those global accounts are the 10 accounts that, I mean, you can name them.

If you are a nonglobal account, the nonglobal accounts that invest in IT Deal Alert are more likely to spend on core, and their core investment has been relatively flat to down low single digits.

If you are a nonglobal account and you're not investing in IT Deal Alert, your core spend with us is down much greater.

So it's been a very clear direction given to our sales and product teams and client services that we will lead with our data product, hook our customers onto the data product and then go back and surround them with the core content marketing and branding elements because they work hand-in-hand with the data.

And now, that our data platform can actually show our clients how effective some of their content marketing strategies are, it's been a plan that we're going to continue to execute on.

And our -- the customers -- the feedback that we are getting from our customers that use IT Deal Alert and core, both of those solutions reinforce each other.

So if you use IT Deal Alert and core, your core will have more success and your IT Deal Alert will have more success.

So we're telling that story to customers that the best way to maximize their ROI is by being -- using both solutions.

The other point that's interesting about that, as Mike said, the metrics for our IT dealer customers on the core spend is much higher than the non-IT dealer customers.

But as we continue to grow the number of IT Deal Alert customers -- and as you know, that's been growing nicely every quarter -- that's also another positive trend for the core in 2018.

Could you just remind me how many IT Deal Alert customers you have relative to core customers?

There are about 600 IT Deal Alert customers and about 1,200 overall customers.

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

Let's start off with the balance sheet.

Can you just give us a sense of uses of all the cash?

I know you obviously have $34 million or almost $35 million on the loan, $31 million in cash.

At this rate of buying back stock, it looks like -- just given your free cash flow, you're going to sort of tread water here.

So I'm just kind of wondering is there some plan just given you weren't as successful buying as many shares back originally as you thought during that tender?

Yes.

So we have about 6 million left on our buyback, which we plan on executing.

And then as you said, we've got about $35 million in debt, about $11 million is due next year in 2018 against those debt payments.

So and then, that's how we're looking to spending the money over the next year or so.

The next question comes from Eric Martinuzzi with Lake Street.

Just curious on the ITDA side, obviously, people are having a good experience with the product and that's why it's (inaudible).

But do you have any -- what you have in place, I guess, to kind of expand the content?

In other words, do we get -- within certain verticals, do we get to a point where there is some frustration on the part of subscribers that they are not getting enough fresh deal content to satisfy their sales force?

I'm not sure.

So are you talking about in terms of to have future growth in terms of future functionality?

Right.

Right.

In other words, are you guys -- because you've got to chase down these deals on your own end.

You've got expenses associated with that.

Maybe it's years out, and I'm worrying about something that's not an issue, but it just seems to me, at a certain point, you got to expand the content creation side in order to satisfy the demand.

Yes, so first of all, I'd say, our penetration rates are still very low.

So it's still very early innings at most of our customers in terms of adopting a data strategy.

So I would say, for example, many of our customers have multiple segments, and are not in all of their segments yet.

Another way to tackle that is lot of customers that are in multiple segments have an account-based marketing strategy.

So we can cut the purchase intent data that way as well.

There's also -- we have a product road map, which is very robust.

We'll continue to introduce new functionality based on feedback from customers.

We also have a lot of runway from these -- the 2 partnerships we've already announced.

I mean HG Data, we've only been doing for a couple of quarters and DiscoverOrg less than a quarter.

So I think that there's plenty of runway.

I mean that's really the issue you bring up is not really one that's on our radar screen right now.

We're -- there's so many growth opportunities in front of us.

Okay.

And then you talked about double-digit growth in 2018.

I'm wondering, how is that being driven?

Obviously, you're adding new logos, you're expanding your footprint.

Is there any element of a price increase?

Are the steps being taken now?

What's driving the double-digit growth there?

Great.

This is Mike.

In terms of the double-digit growth, there is a few areas.

Number one, what we just report was double-digit online growth for Q3.

And we are seeing very consistent numbers in our guidance for Q4.

If you also take off the leveling off of the global accounts and went to the transactions and putting those in our rearview mirror, that provides a little bit of catalyst.

As Greg mentioned earlier, even our core business, if you look at our core online business, in Q1 of 2017, we were down 26%, Q2 23%.

We just reported down 14%, and we're projecting to be single digits in Q4.

So when you level off the core spend and see that stabilize and you see the growth in IT Deal Alert, it really does lay out for a double-digit growth strategy.

We've also added a new sales development rep team.

So they are going after new logos as well as cross-sell and up-sell, and they are leading with Priority Engine and the other IT Deal Alert products.

And so we feel that based on that information as well as -- you've got to remember we will not have to contend with any event revenue next year.

So if you recall back in February, we canceled the events in 2017, and that was roughly a $5 million business the year before.

So we will anniversary out of that as we head into 2018.

So with the core stabilize, the high growth of IT Deal Alert, looking in the rearview mirror in terms of some of these major transactions and the Q3 as well as what we've guided for Q4 of overall online growth being mid-double digits, it really does set us up with some good momentum in 2018.

And I would say there is basically 5 components of the IT Deal Alert growth.

So with annual subscriptions, we're obviously selling a lot of those, so we're selling lot of those.

That we're selling now.

We'll recognize revenue in 2018.

We continue to add new customers at a healthy clip as you've seen.

Renewal rates are very healthy, which is also helping.

We also are having success up-selling people to more IT Deal Alert categories.

We're also having success cross-selling core.

And then we also do have plans to implement price increase in 2018.

So all of those factors will contribute to the very fast growth we're expecting with IT Deal Alert for next year.

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

Thank you for attending today's presentation.

You may now disconnect.