TechTarget Inc (TTGT) 2022 Q2 法說會逐字稿

Good morning, and welcome to today's TechTarget Report Second Quarter 2022 Conference Call and Webcast. My name is Candice, and I will be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Charlie Rennick, General Counsel. Please go ahead.

Thank you, Candice, and good morning. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO.

Before turning the call over to Greg, 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 our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions.

Any statements made today by TechTarget that are not factual including during the Q&A 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 and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law.

Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable efforts accompanies our shareholder letter.

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

Right. Thank you, Charlie. Good morning. We are pleased to report we exceeded our revenue forecast and adjusted EBITDA forecast in Q2 and achieved 43% adjusted EBITDA margin in the quarter. In addition, we are reaffirming our annual revenue and adjusted EBITDA guidance today. For Q2 2022, GAAP revenue grew 24% to approximately $78.9 million. Adjusted revenue grew 19% to approximately $79.4 million.

Net income was approximately $12.4 million, an increase of 142%. Adjusted EBITDA grew 33% to $33.8 million. Net income margin was 16%, adjusted EBITDA margin was 43%. GAAP gross margin was 74%, adjusted gross margin was 77%. Longer-term revenue grew 24% to $32.8 million, representing 41% of total revenue. Cash flow from operations was $20.9 million. Free cash flow was $17.3 million.

I will now open the call to questions...

(Operator Instructions) So our first question comes from Justin Patterson of KeyBanc.

Great. I was hoping you could talk about just some of the trends you're seeing from customers so far. Obviously, a very strong quarter, more recurring revenue these days. Enterprise IT is different, but would love to hear anything about just trends you saw throughout the quarter and what you're seeing quarter-to-date?

Great. Justin, yes, first of all, thanks for the compliment. Proud of the team and also grateful for -- towards our customers. We continue to modernize their sales and marketing departments with a focus on high-quality first-party purchase intent data solutions. In terms of the trends, we've seen strong growth as we reported in the numbers in Q2, as Greg just mentioned in the introduction across all of our purchase intent-led data solutions.

There are -- we also understand that we can't ignore the noise about the economy. We all see at the high interest rates, inflation, consumer confidence. Everyone talking about whether we're in a recession or not in a recession. So I think it's pretty safe to say that a lot of customers are probably spending more time scrutinizing their budgets. We have some customers that are -- might extend some of their sales cycles as they extend and navigate through this macro.

But on the other hand, we have other customers that are very opportunistic and aggressive with incremental, and they want to take advantage of this choppiness to gain market share. So it's hard to really put a blanket statement on these set of customers are doing x, or these set of customers are doing y. I will say that over the last couple of years, what we see is customers have spent a lot of money trying new tactics or new solutions out in the market. And I think as the market gets tighter, volatile, more choppy like we're experiencing today, those investments will be highly scrutinized.

Customers will really want to focus on quality and ROI. And I think that TechTarget solution should hold up pretty well based on our first-party purchase intent data as well as our permission-based audience members. And we do talk about the trends in the shareholder letter, a fairly healthy IT environment. But the other 3 trends around modernizing sales and marketing departments to data and automation, sensitivity to privacy regulations, which really bodes well for us with our permission-based members. And still a long-term transition of budgets from face-to-face to online for better measurement scale and efficiencies, those are not economically sensitive.

And I think in the long term, those trends are going to continue to bode well. So what I'd say on that is we have a mix of what's going on in terms of customers, some being aggressive, some being really scrutinizing their budgets. We don't whisper a recession by any means. But I think based on our quality of our data and our audience, we're better positioned than most.

Our next question comes from the line of Aaron Kessler of Raymond James.

Congrats on the quarter. First just on the Priority Engine made for sales teams, if we can get an update there, just kind of what type of traction you're seeing with this product. Also just -- obviously, a lot of companies have reported kind of lower brand advertising budgets. But curious what you're seeing from the more of the brand advertising side of the business as well in this environment.

Sure. In terms of the Priority Engine sales use case, that was a big focus heading into 2022. And as you remember, historically, we focused on the marketing buyers where they would use it for their ABM strategy, nurture strategy, building on to their net-new, building their account database and their prospect database. On the sales strategy, we've seen really good traction on that. We're -- the information that marketers have, we want to make sure that it's into the sales use cases.

So very focused on territory management, making sure that we have the right prospect level intelligence. So when a customer goes in there and they use it for their marketing sales case and then they start leveraging the reps to use Priority Engine. What we've done really well is go in and engage with the reps in their -- whether they're BDRs, SDRs, inside sales reps or even outside reps to work and train them on how to use the data.

And we've seen really good traction in terms of once we show them how to use the data, which accounts in their territories should be focused on and which of the individual prospects within those accounts they should call because they have all the information at their hands with their research and, which competitors are influencing those accounts within a rep's territory. And their key entry points of research, we're seeing good adoption on that. And we're going to continue with the ability to -- for training, we're investing heavily in customer success and our sales enablement training to empower the reps to leverage, within our vendors, our clients' accounts to leverage the data in the optimal way.

We are also very focused on and I mentioned this before, of getting tighter bidirectional integration into Salesforce as well as other marketing and sales technologies. So I mentioned Salesforce. We work with Marketo, Eloqua, HubSpot. But we're now really working on partnerships with integrations around sales engagement and sales enablement platforms such as SalesLoft and Outreach. So as we continue to get that data into our customers' Salesforce's workflow, we expect to see continued traction. In terms of the brand, the one advantage that we have is first-party data where our branding or ad revenue is high quality and it's also high value and a tight price. We've seen a continued momentum on the brand side.

You will see, and I expect to see some of these accounts may pull back a little bit on some of the brand expense and really focus more on the data and the demand generation in the project confirmation type of data. But the brand revenues fared well, and it's grown well. And we've all seen the announcements and the vision of Google eliminating third-party cookies later on. So I think that brings good attention to us, and I think our customers will continue to evaluate their brand strategy. And the last thing I'd say is the branding piece of our overall revenue is a very small piece of the overall TechTarget revenue.

Yes. I would just add in, so branding is 10% of revenue or less. The second thing I would add in is just the B2B branding world is very different than the B2C branding world. It's basically an opposite business model. Consumer branding is basically unlimited web inventory with kind of low prices. In the B2B world and the IT space specifically, we benefit from a scarcity of inventory. There's only -- there's a finite number of million-dollar purchases going on at any one time. So it's in the big picture, it's low quantity, very high-quality premium pricing. So we're definitely much more insulated than the consumer Internet. And in Q2, branding revenues were very healthy growth.

Our next question comes from the line of Bhavin Shah of Deutsche Bank.

This is Dan on for Bhavin. I wanted to just touch quickly on the guidance as it relates to macro. I know you mentioned some kind of deal cycles elongating or maybe greater scrutiny on deal cycles. And it was good to see you, though, reaffirm the full year revenue guidance. But maybe you can just help us think about kind of what's embedded in that guidance in terms of a continuation of some of those trends or additional conservatism that you've built in should macro get incrementally worse throughout the rest of the year?

Yes, good question. So I mean we're keeping a close eye on the overall macro. We have a lot of conversations with our customers. As I mentioned earlier, yes, there are some customers that might extend or scrutinize some of the budget spend. But on the other hand, there's still a lot of customers that are very opportunistic and finding incremental and accelerating their spend. It's like what I mentioned earlier, it's not a one-size-fits-all right now.

So I think we're taking some of that into consideration and things can change quickly for the up or down. I mean, over the last 6 months, it's been a self-fulfilling prophecy that we're going to be heading into a recession. Everyone talked about it. When everyone talks about it, everyone starts thinking about it, and then they start scrutinizing everything that they're looking at. So we'll see how things will turn, and there could be some upside to that, but there also could be some positive and some different sides to that as well. So things can change quickly in this, but we provide guidance, and you've seen how we've done against our guidance in the past, and we feel this is the right guidance and keep reaffirming our annual guidance for the year is the right thing at this time.

Craig -- Jason, please go head.

So 2 questions for me, guys. So just any commentary on international markets? I know we've heard that Europe has been in a tougher market lately. You seem to buck that trend in the corner. So is any commentary there? And then the second one, can you give any like usage rates around like video or webinar? I'm just curious because as face-to-face events come back online, I think there's a fear that people are going to use video less. So I'm wondering if you've got any metrics that can validate more usage on that platform.

Right. Jason, on the international side, again, healthy growth in the quarter. When we talk about those secular trends, especially around privacy reg, GDPR and other European privacy laws, this really bodes well short and long term without permission-based audience members. I also think we've identified that in the international markets, this whole transition from -- to online and data-driven is probably a little bit behind the North America market. So again, we look at long-term secular trends and what's going to benefit us and our customers in the long term.

I think that bodes well for us. And you're right, the face-to-face markets -- face-to-face events, it was heavily concentrated face-to-face events pre-COVID. They tried to navigate -- a lot of them navigated online during COVID. We are seeing some face-to-face in the short term. But as the market gets tight, you take a look at these companies are trying to build a digital transformation to leverage data online tactics for better scale and measurability and ROI. And that bodes well for us.

Now there are also some short-term headwinds. There's obviously some tighter markets, recession-based markets right now in EMEA. You also have the war going on right now. When we have these conversations in February, there's no impact, but you have a macro inflation heading into a recession, definitely in EMEA. You have the war in Ukraine and you have some short-term macro headwinds. So there is a little bit of pause and hesitancy, but we're still seeing good growth across the board.

And that's the color that I can give you today. And again, as I mentioned earlier, we'll take a look at this market over the next 30, 60, 90 days, but I really focus on the long-term trends. And those long-term trends still bode very well for us. In terms of usage rates, we don't track and monitor video and webinar usage rates versus face-to-face events. We do see that there's been in pickup in some face-to-face events. But every study that we've seen and what we've looked at and when we talk to our end user group as well as our customers, it's really being driven by the end users.

The actual technology buyer that does not have the enthusiasm as much as the vendor to go to a trade show. To spend 3 days out of the office, to go out there and travel and to be there. So yes, we expect that there will be a pickup in face-to-face events. But if you look at the long term on this, and how today's buyer is a little bit different than yesterday's buyer. They're very familiar and comfortable with online leveraging data and okay with researching purchases, large purchases on near time and by leveraging the online capabilities with information and content. We still believe that, that's a long-term opportunity for TechTarget in this market.

So people that have good content, they're leveraging online, they're leveraging data are going to fare well.

And we've seen with the events that have been held, they've been relatively poorly attended certainly attendants were less than pre-COVID. And this whole kind of -- people wanted to do as much self-service research as possible. Kind of goes against the trade show model, which is interface with vendor sales reps and all the research we're seeing is that the buyers want to minimize that. And I use $1 million purchases. So there's going to be some involvement, but they want it to be as late in the process as possible. So we don't see any bounce back to face-to-face events being a threat to our business. And long term, we think that is going to -- just like they were pre-COVID, we think that the business is going to continue to shrink.

Our next question comes from the line of Joshua Reilly of Needham & Co.

Nice job on the quarter here. If you look at your mix of customers, it shifted a lot more towards cloud vendors who, as we all know, raised a lot of capital in the last 5 years and generally still have large net cash balances. Do you see this pushing any potential macro weakness versus prior downturns when you had a greater exposure to large global 10 IT vendors that had more sensitivity to the strong dollar?

Yes, Joshua, I think today's customer segmentation definitely is a competitive advantage for us right now. You take a look at today's market where it's a lot of IT is spending and investing in cloud, SaaS, utility type of solutions. Today's IT is helping drive and run businesses. So if you look at 5 or 6 or go back 10 years ago when there's downturns, if you were a hardware company and you were selling server storage and networks and it was a downturn, people would just delay the purchase.

They would push it off for 6 months, 12 months, a year, and they would just deal with older equipment. Today's IT environment is, they're running their business, whether it's finance, sales, marketing, customer experience through these cloud types of solutions and these SaaS-based solutions, very hard to start investing in that or stop not completing a project because it would be -- it will be very impactful in a negative way to the business.

So right now, IT is a competitive advantage. People that invest in technology and do it for their business, will gain a competitive advantage, and they don't want to lose that. So I think today's customer segmentation is much better. We feel much better about that today than we did 10 years ago. And I think that will continue to be in that movement.

Yes. And besides that those companies are financially very healthy. Their business model is just different. It's all subscription. So in the past, as Mike was saying, tech companies would see the revenue decline in the downturn, and that's just not the -- we're not seeing that today. The subscription revenue is very stable. So it make it harder to win new deals, their base of revenue is very steady. And if you -- and one thing to always remember about technology companies, they are always under intent pressure to generate revenue no matter what the environment is.

And so if you have stable revenues with your existing subscriptions and you're under intense pressure to generate new revenue, we don't believe that's a formula for people to reduce investments in things like we provide purchase intent data that makes your sales team more strategic, more intelligent, more productive, helps them win deals. So we think we're in kind of the sweet spot of services we provide really for any economic environment.

Okay. Great. And then I have 2 more quick questions. One, how are you thinking about Priority Engine price increases this year, given that you've had some good price increases in the last couple of years, but it's really matched the innovation that you've delivered? And then second, are there revenue synergies between TechTarget and BrightTALK playing out as you expected?

Great. In terms of the price increases for Priority Engine this year, we'll evaluate that going into 2023. Our focus right now, Josh, was to make sure that we expand on the sales use case. This year was the first year that we launched where we would charge a seat license for additional sales reps. So our reps and our product teams and our customer success teams are really focused on adoption and onboarding and making sure our sales reps that are leveraging Priority Engine and getting the most value out of that.

And as we continue to do that, we'll be able to sell more seat licenses, which we hadn't done before. So in terms of price increase, we'll evaluate that at the end of the year. In terms of revenue synergies, yes. So we've done a really good job, and it's not just BrightTALK and TechTarget, we have ESG BrightTALK and TechTarget, where we continue to introduce each of our opportunities to the other folks across the company. So -- and when I look at the business today, I see there are so many entry points for us to get into an account, whether it's on web-based, video based, tech based, database, demand generation, Priority Engine, branding, content enablement strategies, our reps are really well equipped to make sure that they're aligning with their resources across the entire organization and say, "okay, this customer has this pain point" where 2 years ago, we might not have been able to really address that pain point in the most effective manner.

So they are introducing each other into those accounts, having joint conversations, working together collaboratively, and we've seen good success on that.

Our next question comes from the line of Bryan Bergin of Cowen.

This is Zack Ajzenman on for Bryan. A couple of questions both on Priority Engine. The first one, what was the growth in the quarter? And is the expectation for the year still high teens to 20%?

Yes. The growth in the quarter was 20%, and yes, we're still maintaining the overall expectations on the growth.

Got it. And then as a follow-up on Priority Engine, how should we think about the macro sensitivity here? Understand there are structural tailwinds and using more data and insights during the sales and marketing process. But at the same time, do you think that some clients become more adverse amid the macro uncertainty given it's higher priced than longer term in nature?

Yes, I think customers that are really getting spun off and understand the value of not just intent data, but first party purchase intent data. And not only at the account level but at the individual prospect level, there's a high get it factor there. Because no matter what type of environment you're in, IT companies who need to grow their revenue and grow their market share. And if the markets get tighter, it's going to be really hard for them to find those deals because there are fewer deals that are going to land in the quarter.

So having a competitive advantage or a head start to identify those opportunities or see those accounts that they should be focused and prioritized on should bode well. Now with that being said, I've said this over the last several quarters, Priority Engine's at the catalyst of all of our purchase intent -- first-party purchase intent data solutions. We can walk into a customer, show them all the data and Priority Engine. Let's say they're not ready to do and integrate a long-term deal and invest in Priority Engine, it dovetails very nicely into the other offers that we have.

Whether it's content enablement services, activating that content into a demand generation program, looking at contextually aligned and relevant banner placements as well as some of our other solutions. So it's really important to understand -- I mean, we got -- I get asked this question in the last couple of quarters, as Priority Engine grow '20, '21, '19. At the end of the day, all of our products are first-party purchase intent-driven and lead, and Priority Engine really highlights the value across all of our solutions. And gives us the ability to walk in, get the right introductions and sell the right solution for that customer at that time.

Our next question comes from the line of Eric Martinuzzi of Lake Street.

Yes. I wanted to focus on the cost structure. The 77% adjusted gross margin was kind of in line with what I was expecting. But just could you remind us of what are your cost of revenue? And then any inflationary impacts on those costs?

The cost of revenue is on the content producers. Dan, what else we got to handle?

It's mainly -- as it relates to the cost of revenues, you're mainly talking about salaries and headcount.

And in terms of inflationary pressures?

Yes. In terms of inflationary pressures on our expenses, I mean, what we see right now is, I think what everybody is seeing. It's on the employee side. We know it's an employee market out there. We just did our midyear comp reviews. We try to be as aggressive as we can. We want to reward our top employees. We made some hires that were focused on the key investment areas, Eric, in May and June that we'll see a full cycle in the back half. A lot of those highs are on product development, engineering, product market and customer success as well as sales.

We might pay a little bit more now in the market than we did 2 years ago, but we're making the right investors with the best -- with our best employees and with the right people that we have to continue to invest in again. That's across engineering products, customer success, sales and product marketing.

So you're experiencing wage inflation, but your retention rates are in line with historical norms?

Yes. Yes, I would say retention, there's probably a little bit of retention pressure, but we're pleased with where we are. We're seeing wage inflation, but we're also managing the business really well as you see in the 43% EBITDA margin. So I think it's -- we're doing the right things for the business, investing in the business as well as managing against the financials.

Okay. And then shifting gears, you talked about gaining share. Obviously, there's the organic growth rate of the business. There's also the M&A avenue, which you guys have experienced with. Are you seeing -- what's the level of activity there? We have any near-term prospects, if valuations come in a bit? Or is it still kind of longer term share gain opportunity?

Yes. So I would say we look at a couple of things. The cash on hand that we did to the convertible back in December with a 0% coupon. We have a lot of conversations on the M&A side, and we have consistent conversations. And when we have those conversations, we're looking at several things, do they fit into our content model? Do they fit to our permission-based audience model? And are they going to help accelerate our lead in the first-party purchase intent model.

However, we also know that valuations are moving. So -- and especially in the private markets where it takes a little longer to catch up than the public markets. Everybody sees what's going on in the public market. Private companies, it takes a little bit longer for them to see. So we're starting to see those valuations get more check, come more in line. And so those conversations will continue to happen, and it also has to be the right deal for the buyer and the seller, but we are very active in those conversations.

We're going to continue with the buyback. We've done this -- you've known us, we've done this historically over the course of our -- for a long time, and it's been very accretive for our shareholders, and it's been good for the business. So we're going to continue with the buyback. And then we also know that we have some converts coming up in 2025 and 2026 that our goal is to make sure we'll leverage the free cash flow or strong free cash flow that we generate to pay a lot of that off when it comes due in cash versus in stock. That is our goal with our cash.

Ladies and gentlemen, thank you for joining us on the TechTarget Report Second Quarter 2022 Conference Call and Webcast. Have a great day ahead. You may now disconnect your lines.