Q2 2019 Earnings Call

Good afternoon.

Welcome to the Techtarget second quarter 2019 earnings release, all participants will be in listen only mode.

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I would now like to turn the conference over to Charlie Reddick. Please go ahead.

Thank you Ben and good afternoon.

Joining me here today are Greg Strakosch, our executive Chairman, Mike <unk>, Archie and Dan Noreck our CFO .

Before turning the call over to Greg I want to remind everyone on the call our earnings release process.

As previously announced in order to provide you with an update on the business in advance of the call. We have posted our shareholder letter on the Investor Relations section of our web site.

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 periodic reports filed with the FCC.

These statements speak only as of the date of this call and tech target 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 right. Thank you Charlie.

Before I jump into the numbers I'd like to note that techtarget are celebrating our twentyth anniversary this month.

Well, we are extremely grateful to all of our dedicated employees and to our loyal customers.

I'm glad to report that we delivered record revenues adjusted EBITDA and margins in Q2 highlights in Q <unk> Q2, 2019 revenues grew to 34.3 million.

Up from 31.5 million, which is up 9%.

Q2, 2009, adjusted EBITDA grew to $11.1 million from $9 billion up 22%.

Adjusted EBITDA margin was 32% in Q2 2019 versus 29% in Q2 2018 gross margin was 77% the same as last year.

Incremental EBITDA margin was 71% in Q2 2019 on a year over year basis.

Adjusted cash flow was $7.5 million in the quarter, representing 68% of adjusted EBITDA.

Long term contracts represented 33% of revenue in Q2 2019.

Priority engine revenues were up 44% in Q2 2019 versus Q2 2018.

Based on these good results combined with our second half forecast, we are increasing our annual guidance for 2019. This afternoon.

We expect the annual revenues to be between 133 million and $134 million, we expect adjusted EBITDA to be between 39 million and $41 million.

Previous annual adjusted EBITDA guidance was between 37 million and $39 million.

Oh, so I'd like to welcome Kristina that Howden to our board.

She is a technology industry veteran and it's currently the Chief strategy Officer at mine cash.

We look forward to working with her I will now open the call to questions.

Thank you we will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if it anytime. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

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

Hi, guys. Thanks for the questions maybe first in the shareholder letter you talk a little bit about testing kind of how much content you should remember protect me if you can expand on that a little bit.

No no I was here from a couple of quarters ago, we talked little bit about the GDPR impact impacting a couple of customers just.

Any thoughts there and then there are just maybe a general kind of macro I T spending environment and marketing out what you guys are saying thank you.

Great Hi aren't it's Mike let me take those in order first of all in terms of content and tough from the content, which we know not shareholder letter we would get no content in two different ways. We look at we a member protected content versus non number protected content.

And we remember protect a lot about content because at the end of the day, it's the members that we attract.

And recruit and get on our sites that actually drives the purchase intent insights in the data that we then monetize across all of our you know purchase intent driven product lines and solutions. So it's really important that we protect out it's really important that we tried to obtain an attractive right audience members because that's what we monetize.

There is not protected content as well yeah.

You know when you don't protect content, Google will reward you on that and if we wanted to decide not to protect content. We can agree its a lot about traffic in a in our page views, but the value that we focus on other members and driving net new members to our audience to our sites that we can leverage and manage so we're always looking at it we're always tweaking it and find out the right balance.

To put things in perspective, if you take a look at our overall revenue approximately 15% of that revenue is driven through better impressions in traffic, where 85% is really driven through the intent measures that we capture through a net new and existing audience members. So that's number one on the GDP our fraud.

You know I think things are fairly consistent it's been over a year since they watch GDP I believe was May 25, 2018, you know our customers.

You know are adapting to that and are seeing you know and we've gone through that and there's really nothing new on that front again going back to the model that we own and we operate our sites. We have an opt in consent base registration process I think puts us in a very good competitive advantage when it comes to compliance measures.

And then overall on the I.T. spending the macro I T environment.

Well, obviously, we still.

See it is fairly positive and they were seeing a lot of conversations obviously in the news around you know tariffs and trade concerns.

And I think that the drop in tariff and freight concerns create cautiousness with a lot of our larger customers, who have a lot of international business and were buying and selling within those regions.

But you know the way we look at our forecast of the projections you know we take the current macro into consideration.

So you know we feel pretty good about that offer you know I would also say two or three years ago.

You know the the global kind of cost that we we break out we break out our customer concentration with the global Telecom the next 100 and all others.

Today, we're pretty fortunate.

Because you know our global 10 customers make up a much smaller percentage of our overall revenue than they did a couple of years ago, and that's due to our product development, our marketing and our sales execution and driving net new customers and really spreading that customer concentration so that really bodes well for the business and it makes us less relying on those global Dan.

Got it great. Thanks for that that's.

Our next question comes from Mike Malouf with Craig Hallum. Please go ahead.

Great. Thanks for taking my questions and congrats on 20 years.

Thank you Mike.

A couple of you know one of the things just kind of interesting as you roll out. This priority engine is trying to get a little bit of feedback from these oh from these new I'm sorry, the priority engine express needs new smaller vendors and you said in your letter that a that you are the learning stage and you're getting some early feedback and it's been yes positive and I'm wondering if you could just give us a little bit of color on that and kind of tell us what you are learning.

Yeah, that's great. So we have done a soft rollout on priority engine Express if you take a look at what we've been doing over the last several years a priority engine I'm going to I'm going to go back to that we've been selling an enterprise solution. So you know a target account list of ours between you know 800 1300 accounts. So we see a really good opportunity when it comes to I'd say, that's smaller market and therefore, we put a lot of development in resources and some investments and looking to roll out our priority engine Express so over the last you know couple of months, we've been rolling this out in a soft.

Hey, Dan.

Engage them with very small customers selling the solution stopping going to sell getting the feedback understanding exactly what they are looking to do not looking to do and how we can make sure that we really get this ready for 2020.

We've learned a few things along the way, which has been very helpful. We've seen a lot of we've heard a lot of positive feedback.

Our smaller customers.

Lack of water resources.

They don't have a marketing automation many times. They don't have an integrated you know nurture campaign, they need to understand and have a very friendly user interface and they're also very focused on identifying and using this solution as a sales use case with their inside sales reps and even their outside sales reps. So we're really focused on is going to vary.

Very simple user interface.

Focus very much on a sales use case.

Oh and understand that we can help them build a different types of lifting customize list. For example, an ideal customer profile list, which is really going to focus on exactly their sweet spot. So we can get them the right up at the right time.

They don't have the resources they don't have a complexity if they need it simple they want to towards the sales use case and we're learning a lot from that so we have sold units and that's and we are tweaking modifying adjusting and getting ready to go in 2020, but so far the feedback has been very positive when we look at that market too just to add on a few points. This is a large untapped market for us we are historically selling enterprise solutions into enterprise accounts and it's a mid mid enterprise accounts.

We've been able to see so far through Uh huh.

Improvement in customer concentration, meaning less relying on the global 10, So we have a little bit of a a track record of making things like this happen. So as we head into 2020, we're excited about the opportunity.

Yeah, that's great and then maybe just a comment you know these are some are in the letter you. You you commented on somebody enhancements that you've given to priority engine, including as you said the ideal customer profile personalized account rankings and a couple others and I'm just wondering are these.

Competitive marketing automation offering that maybe some of your customers have or or you know based on your previous comments you sort of said lot of these customers don't have marketing automation.

Are you sort of moving in that direction to sort of give at that level of.

Functionality.

So I'd say that we are making some enhancements both in the enterprise called the enterprise a priority engine as well as the priority engine expressed.

I would say, we complement the marketing automation.

Market in functionality and services that other companies offer again in the enterprise market. We saw a lot of things that we're rolling out in investing in in priority engine and I'll get into priority engine Express again in a minute, but our customers even at the enterprise and midmarket level, they need simplicity they need a good user interface they need to really understand what they should be doing with all their customized solicit their building within priority engine. So we've increased the amount of functionality and what we're trying to do is really sharp is slow to the enterprise accounts.

Key data points.

That they can see and leverage across to your sales and marketing organizations, our customers take priority engine and they create customized list, which might be based on a current territories installed base it might be based on verticals company size and what we're trying to do is take all those lives that they're creating along with our customer success team.

And highlight and point out in surface, some really key qualities that their sales and marketing organization can jump on right away.

So we're talking about like enhanced qualification intelligence, we want to let them know right on the user interface, who is engaged with you versus competitors personal account rankings and improved engagement signals are they integrating with you know not only us techtarget content, but are they integrating with your own content marketing or are they looking at your website and go on your website traffic or engaging with your banner.

The key is to triangulate all this information and serve it up to our customers. So they can actually upon this in terms of priority hasn't expressed we're really trying to make this is simple.

Streamlined and scalable for our customers that fit under that small to maybe mid size category, depending on how you bucket them.

Yeah, that's great that's great. Thanks for that appreciate it.

You're welcome.

Our next question comes from Marco Rodriguez with Stonegate capital markets. Please go ahead.

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

Or just can hey, just following up on the prior question here on the priority engine Express.

The value propositions that you're basically providing the.

The smaller enterprise or companies it looks like it's already starting to resonate a little bit and you're starting to learn some some positive.

Attributes to how to structure, this particular product and and in the letter you talked about increasing the salespeople there just.

Trying to get some clarification on one.

Are there going to be additional heads or are you shifting people I'm out of other areas.

Yeah. Good question so.

Marco I, if you recall about a year and a half ago to actually two years ago. We started investing in a sales development rap program, we never had that before it was recruiting and hiring sales we call 'em, we call them STR.

That will work on building and booking appointments that can be handed off to our outside sales reps.

And we've built that with the vision that we're going to be looking at additional products that were going to roll out and we're going to be able to go out and we want to make sure we have the resources on the bench.

So a lot of the things that we're doing here our shift.

We take our sales development Rep, we started increasing their position into whether it's a fill the count is up.

Field account executive role, which might be sold into the midmarket accounts or it say you know an opportunity to look at our priority engine Express opportunity. So we'll.

Ships reallocate some resources Justice. So set this up so we continue to see success. We can quickly mobilize with the best that we have to go out and support the opportunities that we see in front of us, but that being said, we're continuously hiring sales development reps, because we want to train them under our umbrella odd training course, our methodology for they are ready to make and take action when we see fit.

Got it that's helpful. And then in terms of the full production rollout for the priority engine Express I know you're talking about.

2028, as a kind of a target time any maybe a a finer point in terms of when in 2020, you might be doing this is kinda just kind of like a Jan one or first half second half type rollout.

Well certainly have this ready for the first half of 2020.

January .

Got you, Okay, and then on the priority engine the enterprise for your engine to kinda borrow your phrase there. These additional enhancements that you're a fairly consistently adding to that particular product line.

You are are you using those enhancements to increase pricing or is this more of a.

Enhancements that drive the product to make it looks more attractive to a to acquire.

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Well the real focus on our hands upright to fall right, it's really important for us to be able to show our customers transparency and attribution.

So I mentioned earlier that we.

We can provide priority engine provides all the intent signals that we're delivering that we don't from our owned and operated sites. We can identify their you know those folks that are in priority engine those active prospects.

You have also engaged with our customers content will engage or viewed their website, who clicked on their banners and be able to triangulate that and to show our customers that your content marketing in your priority engine efforts, which are bought or an integrated basis are working and supporting each other makes those customer sick and allows us to you know.

Grow those to grow those customers on that end.

As we see that.

We believe we have pricing power Weve had a couple of pricing increases year over year, and we believe weather in the best position to deliver real one observed purchase intent.

Make it very clear who's in market by which technology segment by which region and help our customers ranked prioritize and mobilize their sales and marketing efforts again, we hope that that creates some pricing pricing leverage so.

Gotcha.

And last quick question on cash flows and I'm your priorities for the remainder of fiscal <unk>.

19, and and as you move into fiscal 20, just trying to get a little bit better sense as far as your capital allocation priorities between.

Our reduction of debt a additional stock buybacks and further investments into the company.

Yeah, I mean, I I will chime chime in on this and I Love Gregor Deanne also you know again, we're going to continue to with our capital investments I mean, they're fairly modest and consistent year over year, we have a tenbfive one where we are you know we are in the market for for buybacks and if we see opportunistic opportunities to invest in other areas within the company and outside the company, we will look to do that.

Yeah, We think we do a good job of managing our cash we will pay down some of the debt, which we had that we took out a couple of years ago to really.

Be the catalyst for the buyback and will continue to be financially responsible around the way we leverage the cash.

Hi, Thanks, a lot guys appreciate your time.

Thank you.

Our final question today comes from Ryan Myers with Lake Street Capital markets. Please go ahead.

Hi, guys. This is Ryan my are stepping in for Eric Martinuzzi here. Thanks for taking my questions.

First question can you give us some color on the demand you expect to see from your 10 largest customers in the back half of 2019.

Yes, you know.

I think it's going to be fairly consistent with what we've seen in the first half of 2000, and I think you might see a little bit you know Q3 is never a yeah.

We've been in business for 20 years Q3, it's never a quarter that you make hay and right because there's a lot of those summer months they've entered into these large global accounts have offices throughout Europe , and Asia through North America, and it really start seeing them pick up in September and October heading into the last quarter of the calendar I was I didn't fairly consistent. It's you know we're in every one of the child I think every one of those accounts a deal with international business are dealing in <unk>.

Taking a fairly cautious approach because of the tariff and freight dogs.

And as I mentioned earlier, it's been very important we're very fortunate as a business that we are less reliant on those top 10 global accounts quarter in and quarter out. If you look back in our business three or four years ago between 40, and 45% of our business was derived from those accounts. So if they were down a little bit or they were flat. When you know that would really impact us today, we have a very well balanced and I would almost say describe it as a bell shaped curve where.

Roughly 25% of our business coming from those top 10, roughly 50% of the business is coming from the next 100 accounts and approximately the remaining 25% is coming from the remainder of the account.

So you know I don't project anything that's going to be you know.

Huge vertical leap in terms of improvement or decline for the what the top 10 global and.

[noise] that's projected in issued in our forecasts and projections and we don't really count on those global kind of Cowen.

For growth right. The growth is really coming from Ah the midsized companies.

And the smaller companies that are in the fastest growing parts of the Iraqi market, So and as Mike said, we're less reliant them on ever before so that's really no change there, but that's kind of in the status quo for the last three quarters with a with a global tenneco.

Okay, Great and then just one more for me see organic traffic declined 13%, but the revenue was up 9% on can you talk a little bit about what was behind that traffic decline.

Yeah, I mean, so when you take a look at the traffic decline. It we do not have a direct correlation between our revenue and traffic now we take a look at our content that we produce on our site.

And obviously, Google will reward you if you do not member if you do not remember protect would gate the content. They want free access to everybody and that will drive page views up and go from there, but as we mentioned earlier only approximately 15% of our revenue is really derived from a page views and traffic that would be considered a branding revenue we as an organization always evaluate how much content, we want to protect and when I mean protect when an end user comes in and they need to opt in or they need to register and when they register we now capture their purchase intent behavior their insights that we monetize across the other not 85% of the business. So if traffic is down 10% 13% pages.

It's not keep me up at night, we have plenty of traffic to address and fulfill the revenue needs to demand needs based on the branding product line.

Great. Thanks, that's all for me.

Thank you.

This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.

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