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Edited Transcript of TTGT earnings conference call or presentation 6-Nov-19 10:00pm GMT

Q3 2019 TechTarget Inc Earnings Call

NEWTON Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of TechTarget Inc earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Rennick

TechTarget, Inc. - VP, General Counsel & Corporate Secretary

* Gregory Strakosch

TechTarget, Inc. - Co-Founder & Executive Chairman

* Michael Cotoia

TechTarget, Inc. - CEO & Director

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Conference Call Participants

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* Aaron Michael Kessler

Raymond James & Associates, Inc., Research Division - Senior Internet Analyst

* Bruce Goldfarb

Lake Street Capital Markets, LLC, Research Division - Director of Institutional Sales

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good evening, and welcome to the TechTarget Q3 2019 Earnings Release Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would like to now turn the conference over to Charles Rennick. Please go ahead.

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Charles D. Rennick, TechTarget, Inc. - VP, General Counsel & Corporate Secretary [2]

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Thank you, Jacob, and good afternoon.

Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO.

Before turning the call over to Greg, I want 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 have posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, management team will be available to answer your questions.

Any statements made today by TechTarget that are factual may be considered forward-looking statement. 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 SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them.

We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter.

With that, I'll turn the call over to Greg.

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Gregory Strakosch, TechTarget, Inc. - Co-Founder & Executive Chairman [3]

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Great. Thank you, Charlie.

We had another quarter of very strong performance. This is the third consecutive quarter that we have raised the annual adjusted EBITDA forecast for 2019.

Q3 2019 revenues grew 10% to $33.8 million. Q3 2009 (sic) [2019] adjusted EBITDA grew 45% to $11.1 million. For the first 9 months of 2019, adjusted EBITDA grew 38% to $30.2 million.

Adjusted EBITDA margin was 33% in Q3 2019 versus 25% in Q3 2018. Adjusted EBITDA margin for the first 9 months of 2019 was 31% versus 24% in the same time period in 2018. Gross margin was 76% in the quarter, the same as last year.

Adjusted cash flow was $8.1 million in the quarter, representing 72% of adjusted EBITDA. Long-term contracts represented 35% of revenue in Q3 2019.

For Q4 2019, we expect revenues to be between $35 million and $36 million. We expect adjusted EBITDA for the fourth quarter of 2019 to be between $11 million and $12 million. We expect the annual revenues to be between $133 million and $134 million. And we expect adjusted EBITDA to be between $41 million and $42 million.

I will now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Aaron Kessler with Raymond James.

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Aaron Michael Kessler, Raymond James & Associates, Inc., Research Division - Senior Internet Analyst [2]

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Congrats on the quarter. A couple questions. Maybe first, on the price increases you noted in the letter of about 10%, I believe, for 2020, can you just remind us maybe how those have been flowing over the last couple years with your various price increases? And kind of just kind of any pushback you're seeing from clients on some of those price increases? And also just maybe update us on kind of the go-to-market strategy for Priority Engine Express and pricing kind of sales strategy there as well.

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Michael Cotoia, TechTarget, Inc. - CEO & Director [3]

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Sure, Aaron. In terms of price increase for 2020 that we are estimating to be about 10%. We've been fairly consistent with the last 2 price increases that we had going into 2019 as well as 2018, respectively. Our customers take a look at our data that we offer, real and observed purchases intent data, and they have a very large initiative around -- they have very large data initiatives around their sales and marketing organizations. So we haven't really had a pushback on the price. They do understand how we get our data in terms of providing the right content and publishing the right content across hundreds of technology or really thousands of technology segments, owning and operating those sites and communities across our network throughout TechTarget and really observing and capturing the real intent that we're getting from buying team members, so there's -- it's very clear. It's very [caught]. It's very concise. So we haven't really seen any pushback on that.

And in terms of the Priority Engine Express, we went into Q3. We've allocated a couple of dedicated reps to selling that Priority Engine Express solution. We've got some -- early signs are positive. We have paying customers right now that our -- that are paying and signing up for annual subscriptions. And you got to remember these are the customer segmentation. This is the segmentation of customers that typically we didn't have a pricing or a product that would be applicable to them. And these customers are typically smaller software vendors or regional value-added resellers that are looking for ways to identify who's in market today that they can get their sales teams in front of early. So we look at it. As you know, we break out our customer segmentation by our global 10, the next 100 and then all others. And we believe that there's still a set of between 4,000 and 5,000 accounts that are out there that we feel pretty -- we have a pretty good opportunity to go after with these folks. So we are seeing customers now. We're taking their input. We're looking to possibly modify, enhance, position, package, create some other additional spinoffs of this Priority Engine Express for different segments within those all others. So we're off to a good start.

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Aaron Michael Kessler, Raymond James & Associates, Inc., Research Division - Senior Internet Analyst [4]

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Great. And maybe just quickly on sales and marketing, can you talk a little bit about the leverage there? It looks like you've seen pretty flattish sales and marketing on absolute basis this year despite revenues up. Can you just kind of walk us through kind of the leverage expectation going forward in sales and marketing as well?

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Michael Cotoia, TechTarget, Inc. - CEO & Director [5]

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Yes. So we continue -- the way we have this set up is we can quickly reallocate existing sales and marketing resources to the opportunities that provide or present growth opportunities for TechTarget. And one of the way, we may add some head count if we see this scale up, but for now, the way we are set up is we can take our current resources and our employees, and if we see an opportunity that has a high growth potential, we'll allocate those resources on the fly, make sure that we have a good opportunity to support those. And again, as we continue to see growth, you might see some additional resources being added. But for now we can quickly do that. We're pretty agile and we have a nimble setup.

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Aaron Michael Kessler, Raymond James & Associates, Inc., Research Division - Senior Internet Analyst [6]

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Great. And then congrats on the -- I believe, the 20th anniversary.

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Michael Cotoia, TechTarget, Inc. - CEO & Director [7]

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Oh, thank you.

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Operator [8]

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The next question comes from Marco Rodriguez with Stonegate Capital.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [9]

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So I'm wondering if I could follow up on the Priority Engine Express. Any sort of update you can provide us with in terms of when you think that might roll out to more than just a beta testing, if you will? And then if also maybe you can kind of talk a little bit about what you guys have kind of learned thus far from the feedback from these initial clients and what sort of expectations you might have to either address that or somewhat repackage the program.

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Michael Cotoia, TechTarget, Inc. - CEO & Director [10]

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Right. Marco, in terms of rolling this out more than just a beta testing, we expect this to be fully rolled out in the first quarter of 2020. And yes, as you recall, we started beta testing, soft launched this back in Q2. We then allocated a couple, a few dedicated sales rep resources to the Priority Engine Express opportunity. We've seen some early traction with some of these smaller accounts. And again, all of these deals that we're signing are annual subscription deals. Along the way we've learned a couple of things. I mean there are different use cases for these smaller accounts. We have software vendors that have a very specific niche. We have also -- we've identified through our learnings of the beta launch we have channel -- value-added resellers. And a lot of that might be not only national but regional resellers. And they are looking to really identify the opportunities in the projects and the buying teams that are in their regions and really align with what they go to market on. And so they really want to focus on the active prospects. And the opportunities in the potential projects where they're not really focused on would be as much on the marketing initiatives. So we want to make sure that we have the right user interface, ease of use for those regional resellers so that their sales teams, inside sales and outside sales, have easy and quick access to the potential projects and buying teams within their market. So we'll make sure that we have -- take that feedback and apply it and integrate it into our go-forward strategy. But we expect this to be fully rolled out in Q1 of 2020.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [11]

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All right, that's helpful. So it kind of sounds like maybe some of the -- at least the interface and perhaps some of the end result needs to be somewhat customized a little bit more for these smaller-type clients. I'm assuming that the platform is relatively easily changed for that sort of output.

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Michael Cotoia, TechTarget, Inc. - CEO & Director [12]

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Yes. I mean we're always making modifications, revisions and updates to the Priority Engine platform. As we learn -- as we get and capture some of the learnings and the input from, again, a lot of these smaller customers that we've never had historically and [offered a sale], we want to take that feedback and make sure that we can adapt. And we have the ability to do that within our Priority Engine platform. I don't want -- fairly easily. So it's we'll be able to do that for these guys without too much extra work.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [13]

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Got you. And last question here, I'm just wondering if maybe you can provide us a little bit of an update on the Customer Success team. Have you kind of hit a steady state in terms of your head count? And any sort of color that you can provide that kind of quantifies that group's progress on impacting revenue growth and client retention?

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Michael Cotoia, TechTarget, Inc. - CEO & Director [14]

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Yes. So the Customer Success team, I will say this has been the first full year that we've implemented this. We're going to our fourth quarter. This team has done a really good job of -- again, the way this is aligned really goes back to how we've aligned our sales force. And we have field account executives who are signing on net new logos, who we've seen some really good growth there. And previously, before we had this Customer Success team, those reps were trying to manage those accounts. Now they're handing it off to our Customer Success team to properly onboard, make sure we're setting the right expectations, leveraging our use cases. We're seeing much better engagement with our customers within the Priority Engine platform. We can track all of that. We've invested in some technology so we can -- that focus on the customer success and customer management across all of our customers. So we're seeing this ramp up nicely and the results are showing it. We've seen a large increase and retention across these customers that have signed up for the annual deals. We're always looking to evaluate how we expand success across not only this set of accounts but other accounts. So we don't see any abnormal increase in spend for Customer Success investments, but if there are -- there might be some pockets within Customer Success that we may look to expand on or provide additional resources, but we feel that we're properly staffed and at the current rate of the business now and help us out moving forward.

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Operator [15]

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The next question comes from Bruce Goldfarb with Lake Street Capital Markets.

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Bruce Goldfarb, Lake Street Capital Markets, LLC, Research Division - Director of Institutional Sales [16]

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Greg, congrats on a great quarter and all the progress. So first, in -- given it's a more challenging environment for some of your larger customers because of tariffs, is there a chance that they do not renew Priority Engine and instead sign up for Priority Engine Express?

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Michael Cotoia, TechTarget, Inc. - CEO & Director [17]

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Bruce, yes, good question. This is Mike. Actually, we're not going to be offering Priority Engine Express to those -- when you mention those global accounts, those top 10. We know that they have the budgets to invest in Priority Engine. What I would say is -- and Priority Engine Express. If you recall the way we classify our accounts, we bucket them into 3 areas. We have our top 10 global accounts, which are the big names that you all know that have been around for many years. We have that next 100, which I would consider like high-growth, cloud-based, [cloud more] type of organizations. And then we have today all others. On the all others, that -- when you take a look at our total customer pool, it's about 300 customers. What we haven't had is the opportunity to sell from 1,301 to 5,000 customers. We've never really had a solution and an opportunity to get engaged with those customers and to bring value at a reasonable price and to provide growth for not only us but them as well. That is where the Priority Engine Express will be focused on. So in terms of the global folks, they go up. They go down. Sometimes they can be a little bit inconsistent. I know they're down this quarter. What I really would take away from that is, if you look at our customer segmentation over the last 2 years and our customer concentration, we're pretty pleased with -- in the -- with the direction that that's going. A couple years ago, if a couple of the top 10 global accounts reduced their spend dramatically within a quarter, we would feel that hit in that quarter. Today, we are more diversified as a business than we ever have been. And so our focus is to invest in these products such as Priority Engine Express to continue span up customer segmentation and diversity so we can reach that what I would say between customer number 1,300 and 5,000.

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Gregory Strakosch, TechTarget, Inc. - Co-Founder & Executive Chairman [18]

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One of the key things with Priority Engine Express is the amount of data you get is limited. That's also smaller price, so that wouldn't be -- that solution wouldn't make sense for larger organizations. So the way the products are stratified, there's -- you're not going to see -- there's really no risk of cannibalization.

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Bruce Goldfarb, Lake Street Capital Markets, LLC, Research Division - Director of Institutional Sales [19]

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Great. And then lastly, if Xerox buys HP, is there any potential to TechTarget?

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Michael Cotoia, TechTarget, Inc. - CEO & Director [20]

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Actually, they're looking to buy HP Inc. So we do some business with HPI or HP Inc, currently not doing a lot -- it actually might provide a little bit of an opportunity for us. But they're not buying Hewlett Packard Enterprise. And if that goes through, I don't see that hurting us at all.

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Operator [21]

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The question-answer session is now over. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.