Q2 2020 TechTarget Inc Earnings Call

Specialists my pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask question. Please note that this event is being recorded.

I'd now like to turn the conference over to Charlie Redneck General Counsel. Please go ahead.

Thank you Kate and good afternoon, joining me here today or Greg Strakosch, Our executive Chairman, Michael Doyle, Our Chief Executive Officer, and Dan Orica, 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 calls we posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K.

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

Any statements made today by tech target factual maybe considered forward looking statements. These forward looking statements are based on assumptions and are not guarantees of 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 SEC.

These statements speak only as of the data this call and Techtarget undertakes no obligation to update them.

We may have also we may also referred 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 Greg. Thank you Charlie.

Despite the significant challenges traded by covert 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, Q2, 2020 up from 33% in Q2 2019.

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

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

We are very grateful im proud of the way. The Techtarget team has responded to these difficult and unexpected challenges we've learned a lot about ourselves on our customers that we believe will make us even a stronger company in the future.

We're more optimistic than ever about our cat is competitive position.

As enterprise technology companies continue to rely on data to make their sales and marketing organization 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 position company to take advantage of this large and growing opportunity in the trillion dollar IP market.

We'll now open the call to questions.

We will now begin the question and answer session. So ask a question you meant press Star then one on your Touchtone phone to using its speakerphone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then too.

At this time, we'll we'll pause momentarily to assemble our roster.

Our first question is from Jason Kreyer from Craig Hallum.

Going thank you good afternoon gentlemen.

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

As converge over the next few quarters.

Thanks.

Jason This is Mike. Thanks for the question Hope you and your family doing well during these times in terms of the domestic and international Mark Let's talk about the international market for our we continue to see good growth in the international market. I think there are several things that bode very well for us in those markets number one are often registration process.

As as Greg mentioned earlier.

When it pertains to compliance and especially GDPR in other policies that are out there in the market fits well for us and bodes well for US every one of our members is off then they are registered as consent base.

Number two owned and operated sites continue to be.

Our competitive advantage for us.

Versus companies, leveraging third party cookies, which Google will phase out in 2022, so thats 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.

And to purchase intent driven online campaigns and you'll see that throughout EMEA and Asia PJ.

Oh, yes vendors as well as their channel partners.

Really had a lot of their budget, the a field marketing budget tied to events.

And then I would also say in the international market as we deal with Cove. It in this pandemic across the globe our international videos throughout EMEA in a PJ they do not.

Have as many what I would call smaller companies that can be more adversely impacted by told it.

Now a couple of things that I would say, we also changed up some of the management I made some enhancements to our management team across EMEA Nay PJ with a very strong focus around the collaboration between the deals 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.

Hold transition.

I'd say in many times in many instances. The U.S. is probably is ahead of these other region.

But what we saw some a pull back on in the US was from the.

Legacy Global accounts. So you know we don't name all of our individual accounts in the and the global town, but these are legacy hardware companies that really pulled back into North America, and they pulled back across the board and in many times during the time of a pandemic or recessional 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 event there side of the transition now 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. Appreciate all the color there.

You are you kind of just just alluded to this a little bit but I mean.

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 had those been kind of where you expected them to fall in.

Yeah, I would say in terms of.

The long term revenue.

Which is that up from year over year, but when you get into a situation like the pandemic or again like a pullback like this priority engine, probably the first product that has the most scrutiny because we're asking for want you know you annual multiyear commitments. It's also harder to get new customer acquisition on this so.

In terms of the churn of the turnover, we're seeing that very fairly consistent what we are seeing is that.

Our business model is pretty unique and I'd 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 a priority engine. They still know the techtarget as a very strong relationship with our audience members and that's really important to point out milk.

In terms of dollars in 20 years of investing in content strategy, providing relevant information to the Tech enterprise technology community has bode well for us and it's been well for us so as customers look at it as they try to navigate through again. The pandemic are we going into the second phase of the pandemic, we're going to be looking at an election later wants.

They will be more apt to do three to six month campaigns to a lot of content marketing, but we feel once we get through some of this uncertainty that we're in a great position to accelerate the long term revenue on a long term deals.

Perfect sounds great. Thank you for the time.

Yep.

Our next question is from Aaron Kessler from Raymond James.

Well ahead.

Great. Thank you a couple of questions memory. If you can maybe the linearity throughout Q2 that you saw from customers and then maybe into July also emerged any vertical areas of strength that you were talking about are you seeing greater demand for for cloud.

Services and then just maybe finally any updates on priority engine expressed the ramp there. Thank you.

Sure.

And I'll answer the one of the going be an exact or that you said, but as a first in terms of the vertical areas are marks that we continue to say you know watermarks that are pretty hot in terms of.

Activity activity in interest from 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 to get a great audience mcglade falling. So we believe that those segments will continue to grow and do well.

In terms of priority engine Express.

You know Weve continued to.

Execute on that what we've seen on that obviously when you get to appear to have a pandemic that were 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 that picking up again, what I would say too is that it's also.

Open the ideas in the.

Discussions that we might be able to build multiple product solutions between our priority engine Express, which as you recall that entry level roughly.

$30000 here, all the way up to our normal entry point for priority engine, which is closer to a 100000 all the year, what we've learned from our customers that there are different levels with different features and functionalities that they would want between those two.

Like points, so we're starting to build some additional.

Opportunities in options with priority engine announced so I'd say priority engine expresses we've learned a lot we've seen some execution, we're seeing customers adopt adapt and sign on and it may open the door to expand other altered other options.

In terms of that the Q2 linear I assume that youre.

Asking the revenue being approximately the same Q2 to Q3 is that is that what you are asking yeah. We're just just maybe how customer demand change throughout the quarter, just kind of what you're saying as we went for the kind of most content them just as we announced in the last few months.

Okay, Great historically, our Q3 has been a little bit lighter than our Q O Q2.

But what we've seen on this lower back in May talk and what we first thought coming into the pandemic. When there were three types of customers know 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 one of the whole sharp 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 you know the they're really watching their cash flow and they're looking at every expense on the book, where they pulled in to 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 a battery powered by real observe purchase intent and the importance of our customers to stay in front of their audience through the different vehicles, whether its content marketing, whether it's on the branding elements, which again they could still be pulled back on that whether it's through you know pant 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 a pretty consistent from Q2 to now.

There is still uncertainty out there with our customers, but I think as we've talked about in the shareholder letter and Greg's earlier comments of.

Having owned and operated sites have in.

Regulated opt in members and being able to help our customers stay in front of their customers and prospects who are on our members has been really proving well for us over this period of uncertainty.

Great. Thank you put up to.

Yeah.

Our next question is from macro that he gets stonegate capital market.

Well I had.

Good afternoon, guys. Thanks for taking my questions.

Wondering if I could maybe talk a little bit more about Q2, just from a a slightly different perspective, just just if you could go through the month of the quarter just what did the growth profiles look like there I mean, the aggregate revenue was up 1% into Q2, but just wondering how April may and June all compared to each other and then.

So you can kind of frame how july looks comparison to that as well.

You know, we typically do not breakout our monthly disclosure on revenue I would say if I classify this I mean, we're all here and in March you know things kind of Bob.

We're now in terms of all the things going on with ER with Cowen 19, and I think people were.

So, 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 away because again, we do not break down and disclose the monthly breakdown, but if customers had annual plants I would say this through conversations. They may have changed very quickly to quarterly plants I hope that give 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 you know a big question Mark right. We're looking at is there a second way we're looking at an election in November were looking at a lot of different thing So I think.

People want to see things get settled so I'd say the biggest behavior shift and it wasn't drastic but there you can see it was the annual to multi year mindset to I need to navigate through the next three months or six months and so I hope that provides enough color thats been consistent I would say throughout the call.

Water and as we head into Q3.

Okay, and so that and that's helpful. The the movement than from the annual types descriptions to something more quarterly.

With that then the main driver if I look at the long term contract revenues as percent of revenue.

In Q2, I think you said it was 34%.

In Q1 of this year it was at 39%.

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

Turn on 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 I would say the number one thing it's the math equation. The denominator of overall revenue in Q2 was much higher 7% higher so again when you look at that 39% that's off of $31.4 million number in Q1, when you look at the 34%.

It's off of a $34.8 million number if you compare 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 quarterly mindset. We still believe that are a long term revenue over the next couple of years, we'll 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 from long term outlook.

Okay got it and then in terms of.

Just that the new product launches or are things still progressing on the timeline, you're expecting or are there anything you can kind of pushed to but to the right. If you will.

Great question, if we are still a full steam ahead in our product launches and we're working on I would say part probably the biggest updated version update in release and the priority engines short history, and we talked about it in May in we are right now working with some customers through some bid over the next couple.

Months, we plan on having that ready for the fall a lot of Ah the focus on the priority engine launch a updates will focus on our connected apt to be integrated into our customers workflow, including Salesforce Dot com have an access to our customers data for better attribution, but really how.

But you a big transition so it is for the outside and field reps within our customers and even they are inside salesforce today priority engine does a lot of ranking and prioritizing at the account level. So markers to have an A.B.M. 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 reps view within his or her own territory and or view within.

Salesforce Dot com, so where we are excited on that we've got some really good feedback from our customers that are you know we've upgraded them into the new user interface. They provided us some ideas and then sites that we have not 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 to supply.

Number.

Understood. Thank you guys I really appreciate the color in the time.

Thanks.

Our next question is from Google boost Cold starts from Lake Street Capital markets go ahead.

Thank you congratulations on the great results despite coated.

And the impact there.

What are your largest and midsize customers, saying about their marketing spending intentions.

At the end of the year.

Yes, I think first of all our largest and you know in mid market customers have really opened up in terms of they understand that this transition to purchase intent and data led marketing initiatives are gonna be good <unk>. Bruce has been so much money spent in the past on face to face events that I think that dynamic is gonna be gone.

On for a lot less it's never going to come back to what it was pre covance and.

We look at those studies I think a lot of these folks are being able to take those event dollars and there was a massive dollars. Some movies tucked away from the next four five months as they navigate through these types of uncertainty and I talk about you know like I said Cove. It is there a second wave is there a third wave there's a president.

Selection, but they also would taken those dollars that were previously spent on events and you're trying to find ways to invest in what we will say online data driven purchase intent driven marketing and sales enablement programs, So where we see different stats, we look at analyst.

Let's talk about I T spend being down 7% for the year and maybe rebounding in 2021, and having a healthy break you know 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 980 day windows, but the conversations were having is just we're staying close with them. They know they the importance of staying in front of their audience. They also know they have to stay in front of a compliant audience, whether it's through GDPR or C.C.P.A. regulations that we're seeing.

Throughout the United States and we are a good bad for that because that's how we built our audience to content often registration consent Bay. So I think weve very good navigating through this time with our customers.

Great. Thank you and and intend to expand in virtual conference facilitation, but I saw that you guys were helping out with the flash memory summit.

Yeah. That's a good question we've got.

A couple things that we're looking at in terms of.

We do help some of our customers, who sign up or have VTS platforms and elbow, what the vps 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 in webinars type of opportunities.

Great and who my last question is in addition to.

The refresh, but the real the rollout of priority engine in the fall or the the update any any other initiatives in a sales or product or pricing.

To drive topline in 2021.

Yeah, I think you'll see with some of these.

The roll out of a new products that will it always falls would they price increases would go into the following year and okay. There are some pretty power feature powerful features and functionality that we're offering.

Again, we you know we've been awarded you know and industry destination sites a lot of recognition around you know the priority engine as a marketing and sales intelligence tool. So as we get deeper into sales and the sale side as well when a marketing side as well as the features and for.

Optionality in the additional intend inside so we can bring and some of the partnership 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 I we've laid this out.

Great.

Thank you that's all ahead and congrats again.

So.

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

Oh good afternoon, my apologies that I joined late so if somebody might have asked this but in your shareholder letter you talk about.

Some some pretty good news on the international side.

Do you think that the positive the reasons for that that that that's something that should continue at least in the <unk>.

So the amount of the future that you can book that.

Sure Hey, Alex good to hear from you, it's Mike I do.

You know obviously.

The World has a different place and it was you know 90 to 120 days ago, but as we look at the enterprise IP in the B to B 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 but not only a live not limited to GDPR and we have an opt in registration process and during a period of privacy regulations.

So that bodes well number two we own and operate our sites. So we own and operate all of our web sites and we capture you know our our own first party data a lot of customers.

A lot of competitors I should say I should say rely on third party cookies and we all know that Google is gonna be facing that out in 2022. So we look at that as a long term competitive advantage.

Right now, we're seeing too which are in the short term.

In those regions, whether it be AMEA war throughout Asia Pac 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 three or four channel partners. So again interest what time, a channel opportunity too that the way they would spend near field marketing budget would be on face to face lunch and learns seminars. Brett. This is whatever it was those are gone.

And they may come back at a fraction of what they work with for coal bed, but they end up my opinion, they are not coming back to any level pretty confident so those budgets have to be spent and people still need to drive can generate a pipeline that's going to be able to drive revenue and hit their numbers and so.

So again all in your sites operating aside Kevin often members in having a great investment and I'm talking very deep and wide investing in editorial content, which attracts all of these members.

Puts us in a position to allow our customers to transition now budget and a lot of its international onto events. So I think those are the I did I was asked earlier Thats a great question, but that's really the answers that we see right now and I think that provides a short term and potentially very long term.

Benefit for Techtarget.

Okay. Thank you and my last question, it's just a clarification.

When you to a new release of priority engine.

That's just gets given it's my understanding that if you're an existing customer that you just get out it's not a new purchase for them or.

Yes.

But most of your new purchases I guess happened around the beginning of the year.

Yes, that's the way to think of it Okay. I think you'll look at it you we have a lot of updates through out you know throughout the year and there might be minor updates or tweaks and that's always just update it into our customers existing subscription, we don't charge and from that 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 you lie 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 a price too you know 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.

Lot like you mentioned more about renewals urban that you know December timeframe, the fall price increase will be adopted there.

Oh, sorry go to explain that well. Thank you so much.

Thank you.

This concludes our question and answer fashion.

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