Q1 2020 Earnings Call

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Good afternoon, and welcome to detect target Q1, 2020 earnings release conference call all participants will be in listen only mode.

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Please note. This event is being recorded I'd now like to turn the conference over to Charles Renick General Counsel. Please go ahead.

Thank you grant and good afternoon, joining me here today remotely our Greg Strakosch, our executive Chairman, Mike <unk>, Our Chief Executive Officer, and Dan Arc, our CFO before turning the call Liberty, Craig I'd 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.

As did our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K.

Following gregs introductory remarks, the management team will be available to answer your questions.

Any statements made today by Techtarget that are not factual maybe considered forward looking statements.

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 periodic reports filed with the SEC.

Great and speak only as of the data this call and Techtarget undertakes no obligation to update them. When they 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.

Okay. Thank you Charlie.

I hope everyone is healthy.

We're very proud of the Techtarget team, they're very grateful for the resilience and positive spirit as productivity has remained high by working from home.

Revenue grew in Q1, 5% to $31.4 million adjusted EBITDA grew 7% to $8.5 million.

Adjusted free cash flow was $7.7 million, representing 91% of adjusted EBITDA.

Our balance sheet remains strong with $45 million of cash and $23 million in term loan debt, but only $1.6 million of the debt is due for the rest of 2020.

In the quarter, we purchased 736000 shares of Techtarget stock today, we're announcing new 25 million dollar stock repurchase plan.

I will now open the call to questions.

We will now begin the question and answer question to ask a question you May plus Star then one on your Touchtone phone.

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Our first question will come from Aaron Kessler with Raymond James. Please go ahead.

Great. Thanks, guys. A couple of questions. One maybe just sounds like customer size performance I can give us an uptick there what you're saying, especially during this period second just what's our pressure are you seeing more on the advertising side of the business with a display products and third major so maybe some other expense controls what type of.

ER, which line should we see other thank you.

Right.

Hi, Eric I Hope you all well this is Mike.

In terms of the customer size performance.

We break this down at a typically a three different customer segmentation groups. The global tend the next 100 and all others.

I think when we talked about this [noise] during the last call back in February we're probably going to be moving in 2020 want to breaking this down into two classes of customers. The global 10, and then all others and the reason why say that is because the global pad is the only a consistent cold water customers that we report quarter over quarter in.

Year over year, where the next 100, and all others can flip back and forth depending on their growth in their decline within the quarter. So I think to bring more clarity on that and make it easier to understand we got to break that down into two customers moving forward, we probably won't do that until 2021, but consistent with what we had said before in terms of.

Customer size before as you know we saw was you know our large global accounts and North America had declined.

Year over year, but the all other accounts were up 11%.

And what we see in North America is primarily those customers have headquarters in North America, most of their employees and a large percentage of their revenue is based in North America, where you might see them form a larger brand campaigns programmatic campaigns llodra overall campaigns. So when you enter into a time of a pullback like where all the.

Along with during this cobot 19 period, you'll see a lot of those.

Programs get reduced you'll get pause or just you'd be at a small level now on the reverse side. The global <unk> Global accounts were actually up internationally and again, there's not a lot of <unk>, there's still some but not always a lot of large brand campaigns or pure advertising campaigns. Those offices are primarily.

Really.

Employed by field marketers marketers in sales organization, so that they're working on the field together in there's more you know communication and collaboration around you know I'm going after opportunity leveraging a little bit more data on that also there's a lot of regional that's in those international markets, which.

As you've seen in the short term is it's stalled out on the face to face events.

How much that comes back later on we don't know if it comes back to a certain level. We don't know, but we think there's an opportunity for tech target. So on the top 10 global accounts.

We saw a pullback in North America, and then I would say in terms of the really small accounts and remember when we talk about all other accounts.

We have close to 1400.

Spenders with Techtarget and there are some very very small account and in a period again like this where there's a pullback in I'll just say an immediate recession type environment.

These accounts I've got to want to preserve capital preserve cash they want to navigate it began to play defense and so we'll see some pullback terms of the advertising pressure to get to answer that we we typically see the branding dollars, which is the advertising you know coming from those larger accounts when there's a pullback like das they typically.

Really well.

Resort back to more of a content syndication or you know shorter term type of programs HM, but again, our branding revenue represents anywhere between 10 and 15% about overall revenue. So you're looking at our branding Robbins <unk> considerable banners on our sites, we're charging anywhere between 100, all CPM to $500.

Yeah. So that's really how that affects you know all the advertising pressure and then address your expense.

You know Techtarget as you know.

Generated a you know it's been a positive cash flow.

For the last 17 years, we manage our expenses very closely.

We saw this come in and you know the beginning what we saw some of this coming we saw some of the Oh conversations and what was going on the news in the beginning of February. So we immediately polled all discretionary expenses you know travel travel and entertainment. We took a look at headcount and when I mean by headcount open racks that we.

In the budget that we froze the open racks. If there was a backfill somebody may have left at the end of Q1 in the middle of Q1, we didn't back fill it. So we we manage that very closely as you can see money. Good EBITDA in gross margins and yeah. We'll continue to them all of that so hopefully that answers to questions across all three.

Yeah, that's great, though thank you.

Welcome.

Our next question will come from Eric Martinuzzi with Lake Street. Please go ahead.

Yeah, it's kinda interested into green shoots question I've heard a other companies in digital advertising definitely talking about the dramatic fall off the end of March.

In April but late April early may sign to people you know.

But it's sort of thawing any comment there as far as techtarget.

[noise], Yeah, I think right now what I would say that we are running very fluid and uncertain situation and Eric I would classify our customers into three buckets right now during this pandemic number one I think the dealer customers out there that a very opportunistic in C.

But there's an opportunity to take market share and drive mindshare and overall revenue.

They understand that yeah, we're in a downturn right now we're in a pandemic, but this will end when it and they don't know, but they they do know they will be a recovery whether that's a V shape you Jay it talks about w. shapes.

So.

They are very focused on that then you have customers that want to.

Well the course, and we have some of those customers that you don't want to keep things status quo. They might not want to try new things they might not want to implement new ideas and philosophies, but they understand what they need to stay in front of the air prospects in their existing customers and the value of Techtarget would be any content provided from day one yeah. We saw.

Celebrated its twentyth anniversary year anniversary being a business.

We published thousands of piece of relevant constant every every week every month every year. So what attracts an audience that they know they have to stay in front of and then there was that third bucket and I think that third bucket our accounts that might not have strong financial statements on the balance sheet. They may have had early seed funding they really need to preserve cash in capital. So they will play.

Transmode and they may pause, what they're trying to do they may look to a push yourself for 90 days the looking for pre preservation of cash in capital. So I think it it hits across all those folks what I would say protect target, which is pretty significant if you look back at the last downturn, which was.

2008 2009.

40% of our business was really aligned to that global 10, those top 10 global account and then today, it's approximately 20% so were better leverage with better customer concentration with developing the right products to make sure that all customers can use it's what I feel very fortunate that we have a long term data some scripts.

One business, but we also have a short term capability for our customers to pivot.

And so do the appropriate marketing that they feel they need to do today and having that combination.

Okay and another way to frame. The question is to go up maybe not so much in the near term, but in the mid mid to longer term is your assumption or is your yeah I hear your forecasting for 2020 internal even though I know you withdrawn your 2020 guidance is your assumptions that there.

There is relief in Q3 or that there's relief in Q4, just at a high level I'm not looking for dollars.

Yeah, I assume you said I just think that is so unpredictable it would be really tough to managing that what I will tell you in the mid to long term debt. Our market is transitioning to a data driven market that is not change and so the foundation of our investment so what we're doing on priority engine and the data driven business and the launch.

Now plays out very very well and our customers what real observed purchase intent data. They wanted at the account level and they want an individual prospect level and when we have an organization that builds content producers that produces a and publishes 140 plus technology website captures the data at the account in India.

Federal level that is Genie P.R. and D.C.D.A. compliant we are in that right position. So.

Do I think things pick up in Q3 in Q4, maybe this comes back.

I I use the term that I have found that optimism, but I really don't know the answer on that so hopefully that answers. Your question I just don't want to give you any numbers that are not.

[laughter] generic one thing I'll I'll say it for a little color on if you look at you know I say you know covert showed up in Q1.

But you can see for my numbers. We still you know finished Q1 very well and then if you look at our Q2 guidance, you're kind of see normal seasonality that normal you know sequential increase in revenues. So to me both of those things are are promising and speak well to the.

The resiliency of our product line and our customers are pretty resilient I'd say you know our industry work from home wasn't a big.

Which in this whole, obviously, what Mike what you're saying about everyone going towards data and haven't subscription revenue was really helping US you know terms the second half the year yet the economy performs well then I think you know what performed well, but there's so much uncertainty around how the they the virus is going to play out and how that affects economy, but where we you know we're comfortable that we're seeing.

In normal seasonality.

Okay and last question for me has to do with the repurchase plan you.

Well at 736760 shares.

In the quarter I understand that you now.

Reloaded that stock repurchase program. There is the way it was word it kind of made me think a current prices probably aren't as attractive to us is that to save in that the average price that you purchased and in Q1, that's where you would be more supportive or am I misinterpreting [noise].

Well you know not net I don't want to get into so prices, but I think.

In general in this period of uncertainty.

Everyone and ourselves, where I was going to manage cash very carefully.

So.

No I don't think you'll see us be extremely aggressive I think it's you know its smart for us to have a plan in place I'm. You know you know historically, we've been very opportunistic on in buying shares and so if there are some sort of you know opportunity where we think.

The shares are trading or you know way out of balance of where they should they you know them. We would at just in general you know I think we're in a a mindset of you know conserving cash right now, but the reason we're putting in places that you know, we always want to have the ability to be opportunistic.

Got it thank you for taking my questions.

Again, if you'd like to ask the question. It a star then one.

Star them, one task for your question.

Our next question will come from Marco Rodriguez with Stonegate. Please go ahead.

Hi, Good afternoon, guys. Thank you for taking my questions.

I was wondering if maybe you could.

Talk a little bit more about the your three buckets. Your clients. How you provided the percent of revenue for your global kind at about 20% just wondering if you could parse the additional data for the other two buckets and then if maybe you can talk a little bit about.

Where are you kind of see that the biggest risks or to your revenue our revenue growth movements through the year as it relates to those three buckets.

Right.

Michael the way, we define and how weve to find our revenue by a customer buckets are falling to the global pen and over the largest you know I would call legacy hardware and software in global accounts.

Then we identified the next 100 and then we have a bucket that we call all others, what's causing a little bit confusion. When we talk to the analysts are back in February I think we may have mentioned it back in November as while 2019 was.

There's only one.

Consistent cohort cohort of accounts and that is the global Pat. So you actually have you know accounts that may fall into that next 100 and in one quarter and no one were reporting on that a year later in the following quarter.

They may fall. So for example, if you've got to a customer in Q1 that spend 200000 miles in the quarter and they fell into the next 100.

And then Q1 of 2020, you know they only spent $100000 they would fall into that all other bucket, possibly I'm just giving you. An example, so.

They would drop down but in the flip side in Q1 to 2019 appeal to a customer that only spent $25000 on was classified into that all the bucket and then increased their spend which we've seen many times.

I have in $25000 and fell to 150000 I'll be able to got leveled up into that second bucket. So at the end of the day.

Yeah.

Next 100 account what does showed you know a decrease of $55 because the 200000 dollar count was replaced by 150000 law account and then the all others would have shown an increase of $75000 because of 25000 dollar count was replaced by 100000 dollar County, and the net effect is the $25000 game.

So I guess well yeah, it's pretty confusing when you start talking about the story, how they can flip flopped back and forth. So we break it down in June and you know moving full we're going to make it a lot clear right and analysts about ambassadors of assets. When asked just back to break it down into our global can and every other account. So I do want to give you a little bit of clarity on that a little bit of.

Background on that in terms of.

Well, we see you mentioned some the rest the first thing I would say is.

Oh.

We have done such a great job as an organization on not only the sales side, but on the product developments on the marketing side and the execution side.

Building, a suite of products and solutions that you know we are well well known for industry. You know enterprise solutions that are reaching additional customers. They can go a little bit downscale, a little bit further down into that SMB market. So weve.

Yeah, but you know eliminated west, but we absolutely reduced.

The risks that we used to have went out with top 10 customers made up 40% about revenue and so that was a good thing that we've done again across the board and I mean, that's in North America as well as international I think when you go through periods like this and I brought it up a little bit earlier on the call.

You have very very small customers, then need to preserve cash and they need to preserve capital and they need to navigate through this you're trying to make payroll. They are applying for P.P.P. loans, they're doing a lot of different things right now to navigate through this time, so they don't want to a stand on.

Questionnaire each spending in the short term or be commit to long term data deals you know even for the long term. So I think there's a little bit of you know.

Cautiousness on that end and then I would also say on some of those global accounts.

There's a little bit of cautiousness on the brand component again, when I when I met your brand those are banner advertisements that might come on our site, where if the markets doing really well they can turn that on a drop of the Dod and throw extra money towards their brand. They have good plant they've won all brands and they might want to scale that up but.

When you incur a pull back like yes, they will lessen that in North America, and so that's where I see it but when do you take a look at the market as a whole.

The one costing thing that we have seen over the last couple of years. Once again, we are still in the very early innings of this is our customers need to in watching transition to a data driven sales and marketing organization and the number one type of data. They want is real and absorb purchase intent data at the account and at the prospect level.

So that's really what we help alleviate some of that risk and see you know long term growth.

Okay understood and then in terms of the impacts you guys saw some a revenue standpoint.

Can you just maybe touch on what you've seen thus far here in April.

As it relates a different regions.

Yeah, I mean, I I still see again.

April was the first four months a than I would say that there's been an impact or you know the whole covert break out in the pandemic.

And I think it ranges all over the place in terms of again you have some customers that are being very opportunistic right now and they see that they've they've probably been through this before and they not to this particular situation, but they've been through a downturn when they want to take advantage of it you do have a lot of customers that I kinda like hold served and stay the course I don't think you're going to.

Increased a lot and they might just keep things a little bit level and then you have customers that are going to play very defensively in navigate over the next you know 90 days I can tell you that are.

Yeah International numbers have been you know we saw good growth in Q1, we continue that I think there's a lot to say about those international regions, which are very event.

Oh guest and event centric regional events those events have come to a complete standstill people still need and again those offices that are out there are a lot of sales and marketing offices, they need to drive revenue on pipeline an opportunity. So there's been a quick transition to did.

Good old and this makes celebrate some of their transitions because they're typically a couple of years behind North America.

And I think that there is an opportunity because I don't know how well face to face events will come back that there's not only a short term, but when things get settled down the new norm may be a big reduction in event business and they and a big of focused a force focused on digital and purchase intent driven digital media.

I did a and last quick question here you guys operates such a a very highly variable model a little bit surprised by the the gross margin a sequential decline year over year decline can you maybe talk a little bit about that or what the drivers where there are there any sort of onetime.

Items, and how we should be thinking about that as we progress through the year.

Yeah. It's good question, so our gross margin dropped about 25%.

It really what I'd say as we have a very big focus on data quality and I would put that under our data cleansing umbrella. So we will high a third party resources to help cleansing the pan some of our data that we're collecting on our you know on our first party data.

It's important for us because the quality of our data matters and if there is a field missing wore a misspelling or email it's not complete.

We need to invest in those data cleansing efforts and against their typically third party resources there not full time employees, we can manage that pretty carefully up and down.

But to be able to drive the quality of the data and make sure. You know we have a very big focus on quality control and quality assurance and even with some of our upcoming releases were priority engine, where we've got a.

Not just a focus on the marketing customers, but also one of the sales customer that date is gonna be integrated into their systems of record whether its sales force more kind of look why you name it and we want to make sure that we have the most accurate and updated independent in claims data available. So yeah. It was down to 25% lot of 3% on.

Financials, or we're going to keep an eye on that but we're not going to substitute quality because that dave's going right into our customers.

Systems.

And part of that is also just a function of the amount of revenue. So Q1 is always our law west revenue quarter, and it's always our lowest gross margin quarter. So we'd have some we have they made some additional investment in data Clark is like that but also part of that it's just up a mass function of ER.

The lowest revenue quarter over the year.

Got it and or is there an expectation that those individuals will continue to work through some data cleansing the remainder of the year or they stopping sometime midyear.

Yeah, we'll see how well you know Walmart or that the <unk> throughout the year and we may have those folks where they pulled back some of the resources I mean, we have a you know if you recall back in August 2018, we acquired a company called Oh, She knows that really focused on the data a pending class and we take this very seriously so.

We made some of that being pulled back and you know if we see the revenue continue to grow and it certainly aren't you know threshold may even increase it based on the demand of the product and the data that we house.

Got it. Thanks I appreciate your time, you you bet.

Our last question will come from our nuclear with National Securities Corn. Please go ahead.

Yes, Hello couple of questions on priority alert first off I think you were planning to implement a price increase in the beginning in the year. If you have any comment on on how that's gone then you talked in the past about adding some additional features linking it.

More to Salesforce dot com.

Maybe talking about is that still on track and and then.

During the quarter, you rolled out a product verified MSP targeting which use priority engine to focus on the map managed services and I was just wondering is a way to think of that the tide.

Kind of target better targets.

Market, you already had or or expands to the pie you're going after thank you know you're welcome Alan Let me answer the questions. One at a time in terms of the price increase we.

We really don't get a lot of pushback.

When we increase our pricing, where we typically increase our pricing at the beginning of each calendar year, which is our fiscal years you're now.

Obviously, when we are trying to drive a customer acquisition in that new customers.

During a.

But in recession type environment.

I don't think the price increase that we put in in January has an impact I think the overall macro is having an impact on that so I don't see really an issue with the pricing increased and we will continue to bring features and functionality in the priority engine that will warn additional you know increases down the road that we feel because we're going to be leveraging a lot of different data. So.

Ports.

In terms of the features and Salesforce you mentioned that we were watching some features and Salesforce dot com yeah. One of the key goals in investment strategies that Weve had as a company that we've communicated is to get tight integration into our customers Oh.

Marketing and sales work flow and their system of record, which in most cases in the.

The technology World Salesforce is a big.

No.

Picks up a lot of the market share when it comes to systems of record around the CRM and some of the functionality they do.

We are continuing to move forward on in terms of those investments that were doing and I think if you take a look at it where plant planning on coming out with a an updated version the priority engine at the end of the summer early early fall, we're gonna beta some of this in the middle of the summer.

And historically, we have been very focused on selling and helping our enterprise.

Customers in their marketing departments, and we're going to continue to do that and you know whether it's maybe m. strategy and nurture strategy helped build net new contacts that they can then develop and get into their systems and their workflow data still gonna be right, where we are however, there's a lot of functions in those costs those market.

As I should step back they're very focused on identifying what accounts that they should marketo and expand within those accounts again like an m. strategy and account based marketing strategy.

We're gonna be making some additional investments around you know our user interface or.

Integration into sales force in we're gonna be able to provide more sales use cases in terms of not only at the account where ranking in stack in the account.

Well, we're going to be able to look to rank in stack <unk> individual buying team members no matter what account there and so yes data the big focus and a big investment for us because if we can get the marketing use case with priority engine sales use case for priority engine and then we have our advertising the content business.

The business it gets integrated into everything you know if you you have created a triple threat.

And as it relates to the verified M.S. pay.

We had a community on our sites that were MSP managed service providers and we went out made some investments personnel, we hired a publisher in that group as well as you want it to make sure that we were tying in the data around the M.S.P. market into priority engine, because we didn't have that before.

So it's a build on an extension or some investments around an audience that we had but we needed to make a we needed to monetize that better and that's what the MSP verified that must be solution is about.

That's very helpful. Thank you and then.

In early March you announced the acquisition of a data science central and I'm just wondering if.

If we should think about this is just kind of a little tuck in or if there's anything in terms of the contract fusion.

That is more meaningful that we should think about thank you. Yeah. That's a good question that you know if I'm looking at data science Central look at that as an audience play I wouldn't you know we didn't go after it for the revenue or I mean, it was immaterial, we didnt have too.

I see immaterial in terms of reporting and financing it was not about a revenue and EBITDA play or that it really was about their audience. They have a great audience that aligns with you know machine learning enterprise artificial intelligence.

HM data privacy sell predictive analytics and that we added audience to on our site of Techtarget communities on our sites you know around our search enterprise AI audience and business analytics, a audiences that we see a great opportunity based on where those markets are heading in it has been.

Absolutely wonderful acquisition. The audience members of really are are a big played a very active there a focus and that really well aligned with what our overall business strategy is so I look at it as a small tuck in acquisition financially, but it's in a market that we expect to grow up very well into lodged a path.

The I think we're gonna be in a very good position for that long term short and long term.

Thank you Mike My last question, it's just definition or like I, just forgot when you talk about adjusted free cash flow, how how do you define that.

I will let.

Dan play data our CFO.

Yep anyone.

So we define adjusted.

Free cash flow means the change in operating cash less purchases of equipment and other capitalize that assets and debt repayment.

And then we actually disclose the definition and our shareholder letter.

Okay wonderful. Thank you so much.

Thanks, Alan Thank you.

This concludes our two on their conference. Thank you for turns during todays presentation. You may now disconnect.