TechTarget Inc (TTGT) 2020 Q2 法說會逐字稿

Good afternoon.

Welcome to TechTarget's Second Quarter 2020 Earnings Release Conference Call.

(Operator Instructions)

Please note that this event is being recorded.

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

Please go ahead.

Thank you, Kate, and good afternoon.

Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer.

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 the 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 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 report on Form 10-K and our quarterly reports on Form 10-Q 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 it over to Greg.

Great.

Thank you, Charlie.

Despite the significant challenges created by COVID-19, TechTarget continues to perform extremely well.

For Q2 2020, revenue grew 1%, to $34.8 million.

Adjusted EBITDA grew 7%, to $11.8 million.

Adjusted EBITDA margin was 34%, up from 32% in Q2 2019.

Long-term contracts represented 34% of revenue in Q2 2020, up from 33% in Q2 2019.

Gross margin was 75% in Q2 2020, compared to 77% in the same quarter last year.

And adjusted free cash flow was $10.1 million, representing 86% of adjusted EBITDA in the quarter.

We are very grateful and proud of the way the TechTarget team has responded to these difficult and unexpected challenges.

We've learned a lot about ourselves and our customers that we believe will make us even a stronger company in the future.

We are more optimistic than ever about our competitive position.

As enterprise technology companies continue to rely on data to make their sales and marketing organizations smarter, more competitive and efficient, there is increasing demand for first-party data that is compliant with new privacy regulations.

We believe that we are the best positioned company to take advantage of this large and growing opportunity in the trillion-dollar IT market.

I will now open the call to questions.

(Operator Instructions) Our first question is from Jason Kreyer from Craig-Hallum.

You covered this a little bit in the shareholder letter, but I just wanted to ask on the delta between domestic and international if you can just spend a little bit more time talking about that.

Do you view the domestic market as just kind of lagging behind what you're currently seeing internationally?

Or do you see a fundamental reason why we wouldn't see those figures converge over the next few quarters?

Jason, this is Mike.

Thanks for the question.

I hope you and your family are doing well during these times.

In terms of the domestic and international market, let's talk about the international market first.

We continue to see good growth in the international market, and I think there are several things that bode very well for us in those markets.

Number one, our opt-in registration process, as Greg mentioned earlier, when it pertains to compliance and especially GDPR and other policies that are out there in the market fits well for us and bodes well for us.

Every one of our members is opt-in.

They're registered as consent based.

Number two, owned and operated sites continue to be a competitive advantage for us versus companies leveraging third-party cookies, which Google will phase out in 2022.

So that's going to be a good continuous competitive advantage for us in the international markets.

I'd also say in the international markets there are a lot of regional face-to-face field events that are starting to transition to purchase intent-driven online campaigns.

And you'll see that throughout EMEA and APJ, where OEMs, vendors as well as their channel partners really had a lot of their budget, their field marketing budget, tied to events.

And then I would also say in the international market, as we deal with COVID and this pandemic across the globe our international GOs throughout EMEA and APJ, they do not have as many, what I would call, smaller companies that can be more adversely impacted by COVID.

Now a couple of other things that I would say.

We also changed up some of the management, made some enhancements to our management team across EMEA and APJ, with a very strong focus around the collaboration between the GOs as well as to the United States.

When I go back to the United States, I think in terms of all the markets are trying to drive to become better data-driven sales and marketing organizations.

I still think we're in the early innings of that whole transition.

I would say in many times, in many instances, the U.S. is probably ahead of these other regions.

But where we saw some of the pullback on in the U.S. was from the legacy global accounts.

So you -- we don't name all of our individual accounts in the global TAM, but these are legacy hardware companies that really pulled back into North America, and they pulled back across the board.

And many times during the time of a pandemic or recession or pullback in the market, they will pull back on their brand opportunities.

In the regions internationally where they do a lot of face-to-face events, they're starting to transition that budget over into, like I said earlier, purchase intent-led digital marketing and sales initiatives, and that should bode well for us, not only now but for the long term.

Okay.

I appreciate all the color there.

You kind of just alluded to this a little bit, but the longer-term contracts are kind of falling out of favor with some of the customers.

Is that resulting in any, like, higher churn or turnover rates as customers come up for renewal?

Or have those been kind of where you expected them to fall in?

I would say in terms of long-term revenue, which is up from year-over-year, but when you get into a situation like the pandemic or, again, like a pullback like this, Priority Engine will probably be the first product that has the most scrutiny because we're asking for annual or multiyear commitments.

It's also harder to get new customer acquisition on this.

So in terms of the churn or the turnover, we're seeing that very -- fairly consistent.

What we are seeing is that our business model is pretty unique, and I like to describe it as very resilient even through times like this.

Where people don't want to sign up today for an annual or multiyear deal on Priority Engine, they still know that TechTarget has a very strong relationship with our audience members.

And that's really important to point out.

Millions of dollars and 20 years of investing in content strategy, providing relevant information to the enterprise technology community has bode well for us, and has been well for us.

So as customers look at it as they try to navigate through, again, the pandemic, are we going into a second phase of the pandemic, we're going to be looking at an election later on, they will be more apt to do 3- to 6-month campaigns, do a lot of content marketing.

But we feel once we get through some of this uncertainty that we are in a great position to accelerate the long-term revenue and the long-term deals.

Our next question is from Aaron Kessler from Raymond James.

A couple of questions.

Maybe if you can, maybe the linearity throughout Q2 that you saw from customers and then maybe into July.

Also, maybe just any vertical areas of strength that you would talk about.

Are you seeing greater demand for Cloud services?

And then just maybe, finally, any updates on Priority Engine Express, kind of the rollout there.

Sure.

Aaron, I'll answer these.

I don't know if they're going to be in the exact order that you said.

First, in terms of the vertical areas, markets that we continue to see -- there are a lot of markets that are pretty hot in terms of activity and interest on the buying side as well as the vendor side, and that would include, as you mentioned, Cloud, artificial intelligence, machine learning, even disaster recovery, information security, threats management.

We're seeing that.

As you recall, back in February we acquired a company, Data Science Central, which really aligned with the markets of AI, machine learning, predictive, data sciences.

We did that for their audience.

They've got a great audience and a great following.

So we believe that those segments will continue to grow and do well.

In terms of Priority Engine Express, we've continued to execute on that.

What we've seen on that, obviously, when you get to a period of a pandemic that we're in where we've seen it impact a lot of the smaller companies that might be a better fit for Priority Engine Express, you see a little bit of a pullback, but we've also seen some signs of that picking up again.

What I would say, too, is that it's also opened the ideas and the discussions that we might be able to build multiple product solutions between our Priority Engine Express, which, as you recall, is that entry-level, roughly $30,000 a year, all the way up to our normal entry point for Priority Engine, which is closer to $100,000 a year.

What we've learned from our customers, that there are different levels with different features and functionalities that they would want between those 2, like, points.

So we're starting to build some additional opportunities and options with Priority Engine on that.

So I'd say Priority Engine Express, we've learned a lot, we've seen some execution and we're seeing customers adapt and sign on, and it may open a door to expand other options.

In terms of the Q2 linear, I assume that you're asking the revenue being approximately the same, Q2 to Q3.

Is that what you were asking?

Yes, or just maybe how customer demand changed throughout the quarter and just kind of what you were seeing as we went through the kind of [COVID pandemic], just as we went through the last few months.

Okay.

Great.

Historically, our Q3 has been a little bit lighter than our Q2.

But what we've seen on this, when we were back in May talking, what we first saw coming into the pandemic, well, there were 3 types of customers.

There were customers that were going to be very opportunistic.

They've been through maybe not a pandemic, but they've been through a downturn, they knew they needed to invest and they knew that there would be an end to the whole thing.

And we saw customers really belly up and really focus on that.

We saw customers that wanted to hold serve.

And you know what?

They didn't want to do anything drastic.

They didn't want to try anything new.

They knew that they needed to stay in front of their markets, their audiences, and they did that.

And it would be maybe shorter commitments.

And then we saw that group of customers, and again those could range from very small, I would say, maybe they were funded but they're really watching their cash flow and they're looking at every expense on the book, where they pulled into complete defense mode.

What I would say is the opportunity for TechTarget to continue to tell the story not only about our Priority Engine solutions and our intent data, but how all of our solutions are powered by real and observed purchase intent.

And the importance of our customers to stay in front of their audience through the different vehicles, whether it's content marketing, whether it's some of the branding elements, which, again, they could still be pulled back on that, whether it's through [band] type of solutions, has really provided us, I would say, to a sports analogy, we can play both sides of the ball, offense and defense, on that.

So we're seeing it pretty consistent from Q2 to now.

There is still uncertainty out there with our customers, but I think, as we talked about in the shareholder letter and Greg's earlier comments of, having owned and operated sites, having regulated opt-in members and being able to help our customers stay in front of their customers and prospects who are our members has been really proving well for us over this period of uncertainty.

Our next question is from Marco Rodriguez, Stonegate Capital Markets.

Wondering if I could maybe talk a little bit more about Q2, just from a slightly different perspective.

Just if you could go through the months of the quarter, just what did the growth profiles look like there?

The aggregate revenue was up 1% in Q2, but just wondering how April, May and June all compared to each other.

And then if also you can kind of frame how July looks in comparison to that, as well.

We typically do not break out our monthly disclosure on revenue.

I would say, if I classified this, I mean, we're all here.

In March, things kind of were announced in terms of all the things going on with COVID-19.

And I think people were still finishing their Q1 and what they could get at least invested through March and into early April around their plans, they were trying to do that.

I would say without giving (inaudible), because again we do not break down and disclose the monthly breakdowns, but if customers had annual plans, I would say this, through conversations, they may have changed that very quickly to quarterly plans.

I hope that gives you some color.

And I think we're seeing pretty consistent across the board those quarterly plan type of mentality as we navigate through the next quarter.

And I'm going to guess as we get into Q4 we might see that, too, because uncertainty is always a big question mark, right?

We're looking at is there a second wave.

We're looking at an election in November.

We're looking at a lot of different things.

So I think people want to see things get settled.

So I'd say the biggest behavior shift, and it wasn't drastic but you could see it, was the annual to multiyear mindset to, I need to navigate through the next 3 months or 6 months.

And so I hope that provides enough color.

And that's been consistent, I would say, throughout the quarter and as we head into Q3.

Okay.

That's helpful.

The movement then from the annual type subscriptions to something more quarterly, was that then the main driver?

If I look at the long-term contract revenues as a percent of revenue, in Q2 I think you said it was 34%.

In Q1 of this year it was at 39%.

So that does obviously imply either some sort of level of churn or cancellations.

But maybe if you can talk a little bit about that.

Is that just a function of the move from annual to quarterly?

I would say the #1 thing is it's a math equation.

The denominator of overall revenue in Q2 was much higher; it was 10% higher.

So again, when you look at that 39%, that's off a $31.4 million number in Q1.

When you look at the 34%, it's off of a $34.8 million number.

If you compare it to Q2 of 2019, it's up from 33% to 34%.

So we're seeing growth on that.

So I wouldn't say that's a shift of going completely to a quarterly mindset.

We still believe that our long-term revenue over the next couple of years will get to 45% to 50%.

And right now I think we're doing very well, and we're actually very bullish in terms of our position in the market and what we have for long-term outlook.

Okay.

Got it.

And then in terms of just the new product launches, are things still progressing on the timeline you were expecting?

Or is there anything being kind of pushed to the right, if you will?

Great question.

We are still full steam ahead in our product launches.

And we're working on, I would say, probably the biggest version update and release the Priority Engine's short history.

And we talked about it in May, and we are right now working with some customers to do some beta over the next couple of months.

We plan on having that ready for the fall.

A lot of the focus on the Priority Engine launch updates.

We'll focus on our connected app to be integrated into our customers' workflow, including Salesforce.com, having access to our customers' data for better attribution, but really having a big transition.

So it is for the outside and field reps within our customers and even their inside sales force.

Today, Priority Engine does a lot of ranking and prioritizing at the account level.

So markers have an ABM strategy.

They have a net new marketing strategy, whatever it is.

Inside sales reps and field reps want more information at the contact level.

Now we do provide that now, but now we're going to be ranking and prioritizing the individual active prospects and contacts across all the accounts in a sales rep's view, within his or her own territory and/or view within Salesforce.com.

So we're excited on that.

We've got some really good feedback from our customers that are, we've upgraded them into the new user interface.

They provided us some ideas and insights that we have then gone back to our development team and have the efforts to come back and work on that as part of the major release at the end of September.

Our next question is from Bruce Goldfarb from Lake Street Capital Markets.

What are your largest and midsize customers saying about their marketing and spending intentions throughout the end of the year?

I think, first of all, our largest and mid-market customers have really opened up in terms of they understand that this transition to purchase intent and data-led marketing initiatives are going to be good.

Bruce, there's been so much money spent in the past on face-to-face events that I think that that dynamic is going to be gone for a long -- it's never going to come back to what it was pre-COVID.

And we look at those studies.

I think a lot of these folks are being able to take those event dollars, and there are some massive dollars, some of them will be tucked away for the next 4 or 5 months as they navigate through these times of uncertainty.

And I talk about, like I said, COVID, is there a second wave, is there a third wave.

There's a presidential election.

But they also were taking those dollars that were previously spent on events, and they're trying to find ways to invest in, what we will say, online data-driven, purchase intent-driven marketing and sales enablement programs.

So we see different stats.

We look at analysts that talk about IT spend being down 7% for the year and maybe rebounding in 2021 and having a healthy break.

We're staying close to our customers.

They are navigating through their 90-day windows.

And I know they have some longer outlooks as well, but they really are navigating a lot through 90- and 180-day windows.

But the conversations we're having is we're staying close with them.

They know the importance of staying in front of their audience.

They also know that they have to stay in front of a compliant audience, whether it's through GDPR or CCPA regulations that we're seeing throughout the United States.

And we are a good bet for that because that's how we built our audience through content, opt-in registration consent base.

So I think we'll be very good navigating through this time with our customers.

Great.

Thank you.

And any intent to expand in virtual conference facilitation?

I saw that you guys were helping out with the Flash Memory Summit.

That's a good question.

We've got a couple of things that we're looking at in terms of we do help some of our customers who sign up or have VTS platforms and help them with the VTS providers don't have as an audience.

So now that they're reaching out to us to help them promote and get attendance to their audience, attendees to their virtual trade shows.

So that's something that we are looking at in terms of the VTS and webinar type of opportunities.

Great.

And my last question is, in addition to the refresh, the rollout of Priority Engine in the fall, the update, any other initiatives in sales or product or pricing to drive top line in 2021?

I think you'll see with some of these, the rollouts of the new products, they will -- it always follows with a price increase as we go into the following year.

And there are some pretty powerful features and functionality that we're offering.

Again, we've been awarded in industry destination sites a lot of recognition around the Priority Engine as a marketing and sales intelligence tool.

So as we get deeper into sales on the sales side as well as on the marketing side as well as the features and functionality and the additional intent insights that we can bring and some of the partnerships that we bring to bear, it typically comes with a price increase.

But we're not going to talk about the price increase for 2021 yet, but that's historically how we've laid this out.

Our next question is from Allen Klee from National Securities Corporation.

My apology that I joined late.

So somebody might have asked this.

But in your shareholder letter you talk about some pretty good news on the international side.

Do you think that the positive, the reasons for that, that that's something that should continue, at least in the amount of the future that you can look at?

Sure.

Allen, good to hear from you.

It's Mike.

I do.

Obviously, the world is a different place than it was 90 to 120 days ago.

But as we look at the enterprise IT and the B2B technology market, there's a few things that really do bode well for us on the international space.

Number one is there's a lot of compliance and privacy regulations and, I will say, spearheaded not limited to GDPR.

And we have an opt-in registration process, and during a period of privacy regulations that bodes well.

Number two, we own and operate our sites.

So we own and operate all of our websites, and we capture our own first-party data.

A lot of customers -- a lot of competitors, I should say, rely on third-party cookies, and we all know that Google is going to be phasing that out in 2022.

So we look at that as a long-term competitive advantage.

Right now what we're seeing, too, in the short term in those regions, whether it be EMEA or throughout APAC, there are a lot of face-to-face events, regional events.

And what I mean by that is you could have an OEM that has 3 or 4 channel partners, so again we're talking about a channel opportunity, too, that the way they would spend their field marketing budget would be on face-to-face: lunch-and-learn, seminars, breakfasts, whatever it was.

Those are gone.

And they may come back at a fraction of what they were before COVID but, my opinion, they are not coming back to any level pre-COVID.

So those budgets have to be spent, and people still need to drive and generate a pipeline that's going to be able to drive revenue and hit their numbers.

And so again, owning your sites, operating your sites, having opt-in members and having a great investment, and I'm talking very deep and wide investment in editorial content which attracts all of these members, puts us in a position to allow our customers to transition their budget, and a lot of it is international, onto events.

So I think those are the -- that was asked earlier.

That's a great question, but that's really the answer that we see right now.

And I think that provides a short-term and potentially very long-term benefit for TechTarget.

Thank you.

And my last question is just a clarification.

When you do a new release of Priority Engine, that just gets given -- it is my understanding that if you're an existing customer that you just get that.

It's not a new purchase for them.

But most of your new purchases, I guess, happen around the beginning of the year?

Is that the way to think of it?

I think you look at it -- we have a lot of updates throughout the year, and they might be minor updates or tweaks, and that's always just updated into our customers' existing subscription.

We don't charge them for that.

This announcement, what we're doing, is major, and it's pretty impactful.

And if customers are using -- we can switch them over into the new UI, and that's not a charge.

But if there's additional features and functions that they want to take advantage of, there will be a price that we will charge for that.

And as we get all this laid out there and get into the end of the year and into next year, where a lot -- like you mentioned, more of our renewals are in that December time frame, the full price increase will be adopted there.

This concludes our question-and-answer session.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.