Q3 2020 TechTarget Inc Earnings Call

Good afternoon, and welcome to the cash target Q3, Twentytwenty earnings release Conference call.

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I would like to turn the conference over to Miss the trolley Rennick General Counsel. Please go ahead.

Thank you Ashley and good afternoon, joining me here today are Greg Strakosch, our executive Chairman, Mike Cotoia, Our Chief Executive Officer, and Dan <unk> our CFO.

Before turning the call over to Greg I'd like to note that some of US are joining you today remotely and 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 gregs introductory remarks, the management team will be available to answer your question.

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

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.

Please refer to our risk factors in our annual report on form 10-K, and our quarterly reports on form 10-Q filed at the FCC. 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 will turn the call over to Greg.

Great. Thank you Charlie.

We're seeing a clear reacceleration in our business as evidenced by us, beating our guidance in Q3.

And our forecasting almost 20% revenue growth in Q for.

For Q3, 2020 revenue grew 7% to 36.2 million.

Adjusted EBITDA grew 12% to $12.5 million.

Adjusted EBITDA margin was 35% up from 33% in Q3 2019 law.

Long term contracts represented 35% of revenue in the quarter adjust.

Adjusted free cash flow was $9.6 million, representing 77% of adjusted EBITDA.

For Q4, 2020, we expect revenue to be between 42 million and $43 million.

We expect adjusted EBITDA to be between $15.6 million and $16.4 million.

We are optimistic about the future as we believe we are in the early innings, but very large opportunity as our customers focus on making the strategic transition to making their sales and marketing organizations data driven we are cautiously optimistic that the Ria reseller mission. We are seen as we close the year well continue to 2021 I will now open the call for questions.

Yes.

Thank you.

We will now begin the question and observation.

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Your first question comes from Jason Kreyer with Craig Hallum. Please go ahead.

Hey, gentlemen, good afternoon wondering if you can just spend a little bit of time walking through some of the enhancements that you pushed out with the new prospecting product and then is that completely rolled out to every one or is that more of a of something that's going to be scaled out overtime and then I guess my follow up there would be just on the <unk>.

Pricing increases that you've implemented just wondering if you've gotten any push back there and people are seeing the incremental value in the platform.

Great [laughter] AJ [noise] excuse.

Excuse me it's Mike.

In terms of enhancements, we're really excited about what we just rolled out for priority engine I would say our September release was the largest.

Update and roll out since inception, and the product and let me just step back when we talked about priority engine in the past you know, we really had a strong focus on working with corporate marketers and markers have a very specific use case for several use cases. They may have an ATM strategy nurture strategy they were.

On a build their database.

There's a one time you know many type of approach.

One of the things that we did in our September rolled out was we updated the user friendly interface and we really made it focused on sales use cases and that was very very key again stepping back to the marketing side, we have a counterintelligence mccown insights that we like every week a week over week day over.

Good day and it allows our marketers to target these accounts and within those accounts you have the active prospects who are the actual you know often use ours when we launch was.

Prospect level intelligence into September and you know, what the user base, which I'll dive into what a minute how long would that active prospect usual level of intelligence. This is really enabling and empowering our sales teams within our customers to understand the intent signals that the individual active prospect level.

They can help red can prioritize within their own territories. So now from a sales person.

Up to you and I can toggle back and forth like I will get my territory. Each day are each week and look at the list of accounts in rank them prioritize them and.

And and mobilize my sewing efforts, the calling efforts, but then I can quickly terrible over in rank and prioritize the activists.

Individual active prospects with in my territory and I can create a call less immediately so for example might could toy inside of July maybe the most active prospect in my territory, but Jason Claude inside of Craig Hallum to be number two so it really enables better call.

Better sales interaction and better insights. The other thing that we're really focused on is that we've had a tighter integration and that's a big focus for us in a while customers workflow. We've done a really good job on the marketing side, and we're really making good penetration on the sales side did marketers and sales lovebirds data in different ways.

That's an early a marketers approach is a one to many maybe an account based marketing strategy in order to frenzy you'd already worked in his or her territory. It has you know we call lists and has they're all work flow and typically it's within sales force. So you know we have the.

No for stabbing integration into sales force. So no one of them all up I can see all the intent and the insight.

The individual at the prospect level will not be taught level, while I'm in my work flow and above identified a new contact that's not in my current territory inside the sales force I can click to add that contact seamlessly. So really building a go piece of it easy to use work flow for both marketing and sales.

As always been a road map I would say the September release has been really really impactful and just to give you. Some additional staff, which we talked about in the shareholder letter we've seen our page views within priority engine increased by 80% since the beginning of the year and what I mean by that is our customers are on their priority and then we track all their use.

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The portal interactions from people, who have self identified as sales professionals within our customers is up 40% since the September launch. So we're pretty bullish on that and we're going to continue we have a road map as part of your second question.

Oh additional features and functionality a lot of it will focus on leveraging our customers first party data along with our data we have other keep engagement offerings that we're gonna be integrating into this as well. So we have a very robust product development roadmap for allergy and you'll see that come out in the first half of 2012.

Johnny and continue to move out 21 and continue moving forward in terms of the pricing you know we built a lot of features and functionality for our customers and.

As I mentioned, the new user interface in and integrations sales force some of the active prospects individual intelligence that we provide we have not had pushed back on the pricing so far so its.

Yes, we see that as a positive sign going into 2021.

Perfect a lot of good color there just one more from me I'm wondering if you can unpack some of the commentary from the ladder. You. You said that you know subscription offer is kind of Oh sorry.

Sorry, subscriptions offer more resilient or you know predictable model in the downturn, but then.

We've kind of seen you know the priority engine growth slow the last two quarters. So I am just wondering if you can kind of unpack those two statements. It give some more color on that yeah.

Yeah, Okay. So don't want to break that down into two things when we take a look at the overall enterprise lighting environment, let's take this back five 610 years ago, where a lot of a lot of our customers, we're selling let's call. It traditional hardware server storage networks today, when you take a look at what our customers are selling to their customers.

As a big shift to digital transformation their customers have to move towards a digital ready environment No matter, who they are now and when you say that you know and that benefits our customers because it's no longer just saw the point in time product, where there I don't want to dump and Ron and move on this on an ongoing solution so for our customers.

It provides they have some visibility because I T is sort of moved away from a discretionary type of spend to more of a business a continuous business type of investment.

So for US we look at it and say our customers have better visibility into what they transition their business to you know meeting a lie with some of the current day needs in terms of I T. A lot of business types of solutions and it provides less volatility.

Again, if I roll the clock back you know 5678 years ago. If we were going through this pandemic in most of our customers are selling hardware gear business would drop significantly and that would have a trickle effect on us now how does that relate to priority gadget, an arc and our and our business because you're right. We have a subscription business and we are.

Non subscription business I think when you went to the into a pandemic.

Which we've entered into you know the first product the product that will have the most impact on that is priority engine.

No when I talk about that it really focuses around you know net new customer acquisition and we know.

So if you have a net new customer might be a small tesla they may not be ready to commit to an annual or you know a multiyear deal if I'm, a another customer and I'm up for renewal and I'm trying to navigate through this pandemic I may not want to commit to another year in it we'll deal.

But what we're seeing is those customers aren't leaving techtarget. They are shifting towards our other products remember our model has been in place for 21 years right. We have though at the heart of our business, we able to publish a relevant content to help enterprise IP in line of business professionals, you know weve George upcoming projects we are.

Plus the resource we have a great relationship with our audience because when there was a pure gift for the gap. So as these folks what we've seen over the last six months. During this now but you know navigating this pandemic, we've seen a big increase in lead generation and other data product customers coming in it our goal on that as well.

We'll make sure. We serves these guys well they view us as a trusted solution. We will then transition that into an integrated online campaign and ultimately take these new customers when there's more clarity and visibility in the market to an annual long term data subscription model and.

And I would say doing that I mean, our long term revenue was 35% I think we're holding pretty far another ups, you know oh single digits on that but being able to do that caps in the money in all the areas and then have a plan to get all these new customers into long term subscriptions bodes well for us in the future.

Got it thanks for all the color much appreciated.

Yeah.

The next question comes from Ryan My as with Lake Street Capital Partners. Please go ahead.

Guys. Thanks for taking my question. So revenue came in above your guys. So my first question is what would you attribute most of that revenue would be two is it higher than expected spend from a global top 10 or any color there would be helpful.

Yeah. So we break down right. So we take a look at our customer mix and as you can see our global top 10, we actually did see a little bit of an increase quarter over quarter, but they are down about 15%.

Previously as all other customers are up 17% and 11% respectively.

Where we saw this if we so we continue to see really good movement and acceleration in our international efforts and that's across all regions. We are we have offices throughout EMEA as well as Latin America, and we also sell into back.

Right and there's a couple of things that are accelerating the growth there number one.

Our model, which has been in place for 21 years as a publisher or hasn't very consistent opt in compliance you know a approved methodology for our registered members and there's a lot of privacy and compliance regulations that you've all heard about whether ITD be our TCPA CPR rate. It just came out.

In California, I'm, having an opt in database for your membership is critical right now as we navigate through that so I think we've become you know again, a trusted solution secondly, we're seeing throughout those regions as well now in North America, a transition of face to face event budget moving into <unk>.

On one.

So you see that heavily it's prevalent in EMEA and APAC. It's also as well in North America I don't think that shift is I think that the face to face event business is gonna be changed forever, I mean, I'm not saying, it's going to go away there should be some business that comes back but what customers are doing there are accelerating their digital strategy.

Our customers are and we make capture those with a lot of like.

I'll say content syndication content marketing lead generation efforts, because they understand that they still need to get in front of their prospects and their existing customers through digital methodologies and <unk> and digital programs. They understand the tech target model of really investing heavily in content through our editorial investments.

Growing these communities having active members opt in registered members and so we're seeing a big increase not lead Gen revenue.

No quarterly or semi annual campaigns, but I'll go back to what I spoke to Jason about earlier.

These this increase in net new customers provides a good opportunity for us because as they generate as they work with us on these lead Gen campaigns. We then have a playbook you know a game plan to integrate them into other offerings that we do and ultimately bring them into a long term data subscription. So that's what we're seeing most of the growth.

Well you know in international as you can see our business is up 30%, we feel good going into the second you know into Q4 as you can see by the guidance and hopefully that continues from growth in a 2021.

Okay. That's helpful. And then last one for me. So you said in today's prepared remarks that you continue to see smaller customers hesitant to commit to the longer contracts and I know you called that out last quarter have you guys seen any sequential improvement in this area.

Yeah, I would say its modest but nothing to really improve on you know if you look back at this when we reported our Q2 that was you know right at the beginning of this it was almost a a lot of these companies just stop there we're not stop a really froze and hadn't really assess their budget well out of these small companies or VC backed firms.

We're gonna castle, the hiring a lot of people and they had to navigate it I think people are starting to see customers starting to see that you know there is still a lot of uncertainty out there, but the world than not and and you know they have to stay in front of their prospective prospects and customers. So we're seeing some of those folks do a product you don't do our offering.

We continue to sign up for some longer term deals, but if not we want to capture them through our other deals and then transition them into long term data subscriptions.

Great. Thank you.

Welcome.

Your next question comes from Macari Rodriguez with Stonegate capital markets. Please go ahead.

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

Just wanted to maybe see what your thoughts were in terms of the guidance and the impact of parts of Europe that seem to be kind of.

And ready to go down into some form of a lock down again.

How are you guys kind of thinking about that and its particular impact in Q4.

Great. Thanks, Mark I mean this is.

We experienced this in Q2 right a lot of folks out in Evan will walk down across the globe and as you know and in Europe as well.

You know they announced a recent walk down in through a lot of Europe right now with the cases go up.

You know in terms of how we predicted I mean, we are still seeing.

You know our customers who.

Who had previously allocated and budgeted for face to face of Ben.

They still have a need to get in front of their customers and their prospects.

And you're looking to leverage and all of our customers are trying to look to leverage the right data told transition their sales and marketing efforts I think this whole face to face shipped.

A face to face events shipped we're feel markers with Allergan you know most of their budget was allocated towards events is now being allocated towards online digital data driven. So you know we still have healthy projection for EMEA in Q4, obviously, there's some uncertainty I mean, but as you can see we.

We provided some you know relatively almost as Greg mentioned in the shareholder letter almost 20% growth overall, and that's you know growing across all regions, including a male.

Okay. That's helpful. And then how should we how should we think about that international business as it relates to sort of mix of your offerings. There whether it's you know that the movement from event, a digital priority engine and kinda branding how should we be thinking about that yeah.

Yeah, I would say I still think you know in the international markets you know tend to.

Drag a little bit behind the U.S. markets in terms of you know.

Marketing campaigns and services and leverage in town and leveraging purchase intent for their marketing and sales transformation.

I'd say you know right now with the Cove in the pandemic situation.

I think it's accelerating a lot of these movements across the board right now and people are going to reassess.

Everything that they're looking at so if I am the CEO or CFO of the company and I've lived through 2020, and I said, what about at one of our customers and I guess, you don't Wanna navigated through this in 2019 I spend X amount of dollars in a bad spending 2020, I was able to navigate like spend X minus 7%.

I think that they're going to end up putting those budgets towards online to help scale drive continuous interaction.

And you know even if it starts with lead generation and content marketing offerings integrate it with some of the brand solutions at the end of the day, our customers are really focused on leveraging the REIT intent throughout their marketing and sales cycles when they're in market. So I think priority engine plays a really good place from that as we start to me.

Additionally, in folks from events to content syndication from content syndication to integrated online solution from integrated online intent driven solutions. The priority engine integrated campaigns. So I think it bodes well you know obviously, we'll know more in the next 90 days. If we finished yeah. We talked to you guys in February on that.

But you know I don't have a crystal ball, but I think this plays well for us long term.

Got it and last quick question on kind of a high level question here one of your competitors that recently announced an acquisition of a company that provides sort of that or a high powered by our intent data solution. It's Randy maybe you could share your thoughts on that technology and also how you might be thinking about this from a competitor.

Standpoint.

Yeah, I mean and that competitor.

You know they that was there if we're talking about same competitor I think you're talking about is it zoom and Bob.

Yeah, Yeah, yeah. So they they acquired a company small company that talked about AI powered real time in time, you know that was their supplier before so I you know they acquired the supply I think it's probably a smart move on their part, but I don't think it changes the offering and you know what I take a look at it they don't really.

Job around contacts in you know clean glessner contacts.

If you take a look at what were doing with it.

Well, we have as you know we have what we call real and observed first party purchase intent you have to start with investing in content. We are 100% focused on the enterprise I see a enterprise I T market, we have the right engagements coming in what we know.

Which people are looking at which vendor content, which editorial content or peer to peer content. We're doing a search on a very specific technology segment within a very specific region like that we'll it's very difficult to leverage you know things like third party cookies or bid stream data.

That you know there is a lot of questions about that it's only at the account level and you really don't want to muddy the waters on that so our approach is being very transparent number one as I mentioned.

We focus on providing the right engagement signals the intent signals and we get that because of our content investment and with a lot of displacing the web were enterprise I T vendors publish their content through their marketing efforts and we know.

100% or we know we do love it when I was <unk> percent transparency I can tell you those active buyers were on one of our 146 enterprise I T community website I could tell you what articles day Rad I can tell you what vendors white papers. They downloaded webcast debuted what search terms they had and that.

Real and observed in 10 and engagement signals that will help power and transition our customer sales and marketing efforts to be become better data driven and drive more opportunities early in their sales cycle.

Got it very helpful. Appreciate your time guys.

Your next question comes from Aaron Kessler with Raymond James. Please go ahead.

Great. Thanks for the questions first just on the Q4 revenue guidance, we're going to probably about 17% to 19% growth obviously, a big acceleration from Q3 can you expand a little bit on this how much that might be the shift from events that you're talking about a price increases in sales offering normalization by ti spend et cetera.

Sure Yeah I think.

I think first of all some of it is being driven by the shift from events to one line no doubt about it and we're seeing that internationally as well as in North America. I also think there's some catch up some pent up budget with our customers you know our reps are very close to our customers they've been very close throughout this entire pandemic, we've had conversations with our customers as they look to shift.

They you know they may have reduced their or eliminated they're meant budget, but they kept a budget some of their budget within their coffers to make sure that they can leverage in the world in and Oh conversations have been pretty good right. Now. We are you know they have ended the year budget. They want to use it they want to look at it whether it's true.

Content marketing content syndication lead Gen efforts conversations we're having with our clients are you know techtarget viewed as a trusted resource we know we can't get to our customers or prospects in the face to face a best selling we absolutely know we trust to get to them online and digitally and through content offerings. So I think your.

Got to see a lot of that end of the year flush come our way those are the conversations we're having on it and you know I don't think you'll see the price increase you might see a little bit little that now, but a lot of that you'll see in 2021 in 2022.

Got it okay, great and just make a quick question on the.

Additional sales features but your bad it's a priority engine how should we think about how how much is expand the Tam and kind of is there a go to market strategy to try to expand your relationship with them with the businesses and it may reach that you're going to get some color. How many sales people were using this person's marketing people previously as well thanks.

Yeah in terms of expanding Tam I think you know we've done a really we still have a lot of runway with our you know marketing focus marketers are still in the early innings of transitioning and leveraging data to transition their efforts and there's a lot of different data signals out there and you know what I always refer to what data is very clear.

Lean very transparent.

In <unk> you know so we're still going to continue to focus within our existing you know marketers base, a marketing base and our customers have you know several different use cases on the marketing side. They also have offices across the globe. We have a lot of runway of you know somebody signs up for a U.S. license warm Signup Burlatsky I'm license.

France, Germany, England, a pack and break it down by countries and we have a really good road map on that in terms of increasing that to the sales use case, that's important to us because.

You know marketing has a lot of focus on you know.

Getting the right data driving engagement and marketing the air solutions in their company.

And they want to make sure that they bridge the gap from what they're doing and make a bridge over to sales. So sales using that same day and understands the campaigns going on can really mobilize and prioritize and make a make this impactful. So I think where you know I think we're very focused on making sure that we have a a very E.

Easy to use sales application here, which is much different than the marketing application a lot of it will focus on some of our integration strategy into sales force. We have hired some folks to help out and train the sales teams within our customers and our marketers love that because they are.

Sales teams are leveraging and seeing success out of there you know what marketing is investing in in terms of priority engine that only makes everybody. Happy then you know we've shifted to a next year.

Part of this up sell is a seat license. So you have more sales reps use that you're going to have more revenue on the seat license and I mentioned in the shareholder letter we've seen.

40% increase.

And people that have identified themselves as a sales tidal within our customers using the portal since September so the last 30 days.

We've seen a big success on that the big growth on that and we're going to continue that that's a big focus. So I think it provides opportunity on both expansion you can explain.

Expands relationships that we have within our organizations. It connects the dots between marketing sales inside sales outside sales field marketing.

So we still want to pretty good position on that.

Maybe just quickly I think in the shareholder letter you mentioned priority engine page views increased 18% since beginning of the year is that the market big acceleration from what you're seeing maybe in 2019.

Yeah. So it's a lot of that is weak.

Yeah. So we paid views accelerated by any grew 80% from from the beginning of the year. That's an increase from the previous year wouldn't report what the previous year was we're seeing markers more engaged on that different use cases other people in the marketing team some shale applications within our customer side the channel marketing so.

We're seeing that what we were really want to make sure. We highlighted so that's important because we want people not only to visit a wasn't user wants it's got to be part of the work flow and that's been important for us what the marketing side, we learnt a lot as we developed what we were doing our strategy around making marketers you know how the market has been very sticky inside of priority engine and we apply those learnings to.

Our sales use cases, and the user interface and the internet.

[laughter] India.

Integration of the sales force into the our customers workflow all looking to expand upon that as well so what the impressive number I think is.

When we finally wants this upgrade in September on the sales use case that we saw a 40% increase in people that are identified themselves as sales not only going into the tool, but would repeat users and visitors using multiple times and we track all that data every day and every week. So I think there's a good opportunity there as well.

Got it that's helpful. Thank you.

Welcome.

Again, if you have a question. Please press Star then one.

Question comes from Allen Klee with National Securities Corp. Please go ahead.

Hi, good evening.

I wanted to focus on looking at Threeq versus Fourq, you or what you're thinking about and.

A few things related to that one with the international I heard you say that there's more people buying but but they're not buying priority engine as much it's more.

Other of your products in high how do we get to feeling confident that that's sustainable and then [laughter].

And then also with your global 10 customers.

Did you you said in the letter that they're up sequentially in the third quarter and it says that you expected them to be up for the fourth quarter does that mean that in the fourth quarter, you expect them to be up year over year.

Yeah. Good question. So let me step back on the international side I I said at the beginning the international business is really doing well across all phases, we're seeing good growth and priority engine, but we're also seeing good growth in the lead Gen side. So our customers. It's not I think one of the questions was if you have any small customers and there hasn't been too.

But on what will they do in terms of international business I, probably audience numbers were up you know well they drove the growth on the international side you know for.

For the company overall, so we will continue to see success on that because oh. They are I look at each of those regions, whether it's a pack Amir or Latin America, there they lagged behind the United States in terms of transition on the technology side and on the marketing side. They are starting to see an excel.

Coloration, so again priority engine across all of our content marketing initiatives have done very well internationally throughout the last couple of quarters I would say the only thing that hasn't grown would be our branding, but that typically comes from our top 10 global customers and whenever there's a pull back they will pull back on the.

Your brand investment, but again our brand revenue is typically between 10 and 14% of overall revenue. It's not you know it's nice to have but it's not the rubber and that we're focused on in terms of you know the overall long term focus of the business in terms of the global 10, I expect it to be ball.

Q4 sequentially, we expect them to grow and we do expect them to grow year over year. We are seeing some you know penetration. Some of these accounts. We're looking at is lumpy you know, it's a nice long term deals with some of these accounts.

The one thing I will remind you.

So I never want to be relied on as the top they're big they're good portion of our business, but today they represent about 20% of our overall business 10 years ago. They represented close to 40% of our business. So if there was ever a pullback in a market like we did see now was it was a recession that would have a material impact on us today we.

Much better customer concentration spread across you know the global 10, and all others and that bodes well for US you know not only short term and long term and even columnist for a while you know that that's been a pretty big initiative for us So just keep that amount to 20%.

Total.

Customer share.

Thank you I know last question I'm, sorry, I thought I heard you say that you thought that the price increase from priority engine, we would really see in 21 and 22, but.

But.

Did that or maybe I misheard that did the price increase come mostly go in in September or does it get like.

Kind of overtime it goes in with different customers well. It goes in when customers are renewing or they start signing up for an annual subscription. So even if we got some customers that signed up now they would they would.

We have there would only recognize one quarter of that full annual subscription for the price increase you will see it was we had to nobody summers people buy new animal you know or renew or buy a new window subscriptions, because it's ratably recognized you're going to see that over the 12 months and just where we are in the Calvin Harris.

We only have two months left three months left.

So you'll see most of that revenue in 2021.

Okay. Thank you good good job.

Hi, Jim.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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