Q1 2023 TechTarget Inc Earnings Call
Participants
Charles D. Rennick; VP, General Counsel & Corporate Secretary; TechTarget, Inc.
Gregory Strakosch; Co-Founder & Executive Chairman; TechTarget, Inc.
Michael Cotoia; CEO & Director; TechTarget, Inc.
Bruce Goldfarb; Head of Product Strategy; Lake Street Capital Markets, LLC
Bryan C. Bergin; MD & Analyst; TD Cowen, Research Division
Jacob Patrick Staffel; Research Analyst; Goldman Sachs Group, Inc., Research Division
Justin Tyler Patterson; Director of Internet and Media Equity Research & Lead Senior Analyst; KeyBanc Capital Markets Inc., Research Division
Robert Michael Morelli; Research Analyst; Needham & Company, LLC, Research Division
Presentation
Operator
Good afternoon, ladies and gentlemen, and thank you for attending today's TechTarget Report First Quarter 2023 Financial Results Conference Call. My name is Danielle, and I will be the moderator for today's call. (Operator Instructions)
It is now my pleasure to hand the conference over to our host, Charlie Rennick, General Counsel. You may proceed, Charlie.
Charles D. Rennick
Thank you, Daniel, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, 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 our 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 Greg's introductory remarks, the management team will be available to answer your questions.
Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law.
Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures, to the extent available without unreasonable efforts, accompanies our shareholder letter.
With that, I'll turn the call over to Greg.
Gregory Strakosch
Great. Thanks, Charlie. GAAP revenue was approximately $57.1 million, a decrease of 16%. Adjusted EBITDA was approximately $17.6 million, which is 31% of revenues. Longer-term revenue was 41% of total revenue. Free cash flow was $14.7 million, which represents 26% of growth.
The technology market continues to be besieged by weak demand, widespread layoffs and budget cuts. If that wasn't challenging enough, the leading technology bank failed in the quarter, which we believe increased negative sentiment among our customers. Our results reflect the challenging macro environment.
I will now open the call to questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from the line of Justin Patterson of KeyBanc.
Justin Tyler Patterson
Great. Two, if I can. First, in the letter, you teased out some of your thoughts on AI a bit. I'm curious, when do you think we can start seeing some of the benefits from AI flowing into the business? And just kind of frame some of the investments that you're making into it right now.
And then secondarily, just thinking about EBITDA guidance for the year, you noted that reinvestment is one of the few areas you can control in this market right now. How should we think about just the guardrails around the annual EBITDA guidance?
Michael Cotoia
Great. Justin, this is Mike. In terms of the AI benefits and the framework around some of our AI initiatives, we've been working with AI technology for quite some time, but we see an opportunity in the business. We recently announced the appointment of Paul Healey to run our AI strategy. And we see several key areas that we'll see opportunities to help really accelerate the business.
And I think it's important to note that there's a lot of announcements right now around AI. And what you're going to see is a lot of content being disseminated across the entire Web, very thin content, not really specific, addressing current concerns and needs. So there's going to be a, call it, content dilution, and that's going to be out there in the market.
But for publishers and strategic content providers like TechTarget, we believe it's a competitive advantage. We have a lot of insights, relevant insights, relevant content, that we supply to technology buyers to help them do their research day in and day out. So we've been in business for 25 years, coming up next year, providing technology buyers really strong content to help them when they're doing their research. Out of that content that we've invested, we've extracted and we've been able to maintain and gather really valuable insights at their buying team level, at the account level.
And so what we see is the opportunity to help our customers action against the insights that we can deliver, a, in the product portfolio and the product suite. So as you know, for years, we're kind of at the mercy of our customers to action against the data and the deliveries that we provided to them in their campaigns. But now we'll be able to have very strategic, insightful next steps to help them action and trigger very specific e-mail outreach, phone conversations and then content strategies.
As you know, our content enablement business is a very strong opportunity for us, and it's something that we've made some investments in around ESG, BrightTALK and TechTarget together. We have a content that we provided on our editorial and the analyst sides. Well, also, our customers need to have an effective content strategy and be able to leverage that content strategy from our capabilities, and pilot with AI as well, that will help them provide that effective content strategy to engage with those buyers.
And we've talked about this before, the buying key demographic continues to change. I think we mentioned this in our last earnings call, that over 50% of technology buyers wanted a repless experience, which means they really rely on content to make all decisions about 6-, 7-, 8-figure acquisitions that they want. They can't be fooled by thin, broad-based, irrelevant content that's not recent and relevant. So being able to help our customers, tying in those insights to help power and empower their content strategy will be an effective play for us that we have as a publisher and as a community with proprietary first-party data insights. So we're excited about that opportunity.
In terms of EBITDA margin for the year, it's really important, we understand that the technology market is really challenged right now. I think you can see that through all the announcements on the layoffs and budget cuts, and it's just throughout. And then you tackle on the collapse of Silicon Valley Bank that had 30,000-plus customers, all technology focused, many of them VC-backed. So it's challenging on that front. But in terms of EBITDA, we still need to make sure that -- we've managed downturns in the past. We have a very effective playbook. And we believe there's still a really good opportunity to make the right investments in the right areas. One of them I just mentioned, around AI. We can talk about some other ones in the call around some of the product enhancements and what we're doing.
So we want to make sure that we're being opportunistic. We will manage our discretionary spending like we have as part of our playbook for 24 years, and we will do a good job on that. We have a track record on that. In terms of guardrails, we're estimating about 30% EBITDA margin. I think those are the right -- that's the right ballpark to assume with the updated guidance and the go-forward strategy.
Operator
The next question comes from the line of Josh Reilly of Needham.
Robert Michael Morelli
This is Rob Morelli on for Josh. Kind of carrying on with the topic around Silicon Valley Bank, how should we think about the impact from SVB influencing confidence among your customer base? And then can you remind us of the exposure to venture-backed start-ups? And have things improved subsequent to the quarter end on trends with these customers?
Michael Cotoia
Yes, great question. In terms of the Silicon Valley, as you know, they were 100% focused on the enterprise-type market. And a lot of those customers that they serve, which I believe is over 30,000, a lot of them were VC-backed firms. Our business has evolved in a nice way over the last several years in terms of our customer segmentation. If you look at our business 10 years ago, close to 40% of our business was guarded through the top 10 global accounts. And today, that's below 20%. And we have 3,000 customers. You can imagine, like we span across all customer sizes and segmentations in the enterprise B2B side.
Silicon Valley Bank, the economy -- and when I say the economy, the technology-specific macro environment was challenging as it was. We noted that in Q4. We saw it in Q1. There's no surprises on that. You can see by the layoffs. You can see by the cuts that we're seeing day in and day out, which is still carried into Q2. Silicon Valley Bank brought another amount of uncertainty and a lot of jitteriness to the market. So if you can imagine those customers, which we serve -- we have a good size of our customer base that serves those smaller customers who are VC-backed, software-based organizations. They all went through a very challenging period. There's a lot of uncertainty and jitteriness.
And I don't think you see a lot of the VCs right now ready to hand over another check where they want to make sure that these companies are making the right decisions around their expenses, discretionary spending, making line item cuts. As we are a premium player in the market, and we always want to strive to be that premium player because of our content investment, our first-party purchase intent data, those line items get scrutinized across all segments of our customer base, and that includes the VC-backed firms. So we believe that, that caused another jolt in a negative way to the economy. And I think we've all seen that. Everything you've read and you've seen through the technology landscape states that. So we're dealing with it. We're working with our customers to make sure we're dealing with it.
I would also say that we talk about the enterprise tech market, and that is the worst performing sector right now in the markets. It's also probably the most sound long-term sector in the market where we have the ability to see -- if you talk to 100 investors, I think 100 out of 100 would say the long-term viewpoint of the enterprise B2B tech sector is very strong and something that they would invest and bank on. So that's important for us. So yes, we're managing through a downturn in the market. Our business is 100% aligned to enterprise B2B tech, so we are going to feel that pain. I think others that we talked to probably feel a little bit worse as well. But when that market turns around, we also capture the upside, and that's why we're making those investments that I mentioned earlier.
Robert Michael Morelli
Got it. And then as you kind of mentioned, there's the layoffs within the tech industry. Have you started to see some of those impacted landed new opportunities? And have they started bringing you guys in, as they were champions of your product at their last jobs, in sales and marketing?
Michael Cotoia
Well, some of those people are still looking for jobs, so that makes it very challenging. And then the people that are staying with the company that maybe were not caught in the layoff, are very hesitant. Again, this whole move of uncertainty, when you're uncertain in your head, you're very cautious about spending, even with the budget that you have. So you might see some pickups in terms of some pockets that we see. But the mood is very focused on uncertainty.
And for those folks that -- listen, I will tell you this, we have really good relationships and we have a good brand, and we have a good recognition with our customers. Typically, if somebody does get laid off and goes to another customer, and this has happened, they will call us to bring us in. And I can tell you that that's happening. The thing that you just want to make sure of, some of those folks have not landed a job yet, they're looking for a job. And the folks that have remained in their jobs that weren't part of the layoff are very hesitant in terms of making that additional spend or that investment right now until they see more clarity and visibility into their job and into the market.
Operator
The next question comes from Bryan Bergin of Cowen.
Bryan C. Bergin
I wanted to ask a question on the outlook and kind of your visibility to it. I'm curious, can you comment on the macro assumptions that you've embedded here in the outlook through the second half of this year, just any insights around your current visibility relative to where you typically would be at this point of the year? And I guess, how much in that '23 outlook is still signed versus a qualified pipeline or work you have to go get still?
Michael Cotoia
Yes. Thanks, Bryan. I mean, we take a look -- I mean, as we look at Q2, and then like you mentioned, the second half, we look at what we have booked right now and we have visibility into. We look at all those dynamics on it. We also are taking into account like the current environment, like the behavior that we're seeing with customers. Now if that turns more for the positive, there could be some upside in that number. But every time that we think that there's going to be -- we're hoping that things are going to be improved. Like I said, nobody counted for the Silicon Valley Bank collapse, right? And I don't think people fully understood -- I want to make sure people understand that they were 100% aligned to the enterprise tech space. We are 100% aligned to the enterprise tech space, so we see that.
But in terms of that, we look at what we have, at the conversations that we're having. Typically, you've seen the cycles where Q2 is -- maybe Q1, Q3 is pretty even and Q2 and Q4 really ramps up. I think 6 months out is really hard to determine going into Q4 right now. So a lot of what we are providing in terms of our guidance is what we see now because it's very -- it changes pretty fast. But in the last 5 or 6 months, it's pretty consistent with the tech market pullback, and that hasn't changed. So it's hard to give you -- I don't want to say a crystal ball, but like on when I think things will get better, because based on what we've seen right now, the tech market is in a lot of uncertainty, doubt. And there's a lot of jitteriness on this.
Bryan C. Bergin
Okay. No, understood. It makes complete sense. And then just a follow-up, so the shareholder letter talks about new product capabilities for Priority Engine, so I think focused on some integrations with other platforms and related workflows. Can you just kind of tease that out a bit more, what you're working on there?
Michael Cotoia
Yes, absolutely. So we've made some announcements. You'll see a lot of announcements over the next 1.5 months to 2 months in terms of what we're doing. Let me give you some feedback on what's going on. A lot of it is focused on, a, number one, are tech-enabled integrations that really will allow our customers to leverage our proprietary first-party intent data at the prospect and an the account level, not only within their CRM and marketing automation platform but within other platforms, whether it's their homegrown platforms and temp providers, ATM platforms, that power other sales and marketing campaigns.
So that's really important for us because it's key to make sure that our customers have access to the data that we supply, the proprietary data, whether it's in the Priority Engine platform, whether it's in their CRM or if they have other platforms that power programmatic or nurturing campaigns or XYZ, and working with our customers as well as some of the partners throughout the community is really important for us. We're also going to be releasing features that will improve Priority Engine as a direct workflow tool, including enhanced e-mail alerts that will help our sales and marketing have very specific and relevant and real-time information about how they can action against.
For example, being able to work the marketing and sales team that XYZ organization was on your website, and not only on your website today but what pages they were on your website. So on the marketer's side, they can then trigger within their workflows, whether it's in their own marketing automation or through another platform, on ways to target those organizations with the appropriate message. Also, being able to alert sales reps to say -- and again, very unique, at the individual prospect level, that this new member of the buying team became an active prospect on the technology initiative that you sell in your respective territory, being able to promote that to our -- push that out, that information out to sales reps, provides them a very tangible, easy and laid-out timely action to engage and personalize their outreach, whether it's sales or on the marketing side.
We've talked about in the past that we'll roll this out as well and announcing this, our sales force integration within our customers' CRM around sales force customer marketing automation with bidirectional data analysis and workflows. Why we're bringing this up is because we want to make sure that we are tied to the opportunity data and we can identify investments, the TechTarget investments, that we've identified prior to the opportunity becoming an opportunity in our customers' sales force. So we've identified it. And then post-opportunity creation date, how have we accelerated that opportunity right in front of our customer sales and marketing departments. So those are really key.
And then the one last thing, which I'm really excited for, and this is, again, both for marketing and sales users, we'll be updating and enhancing our visualization around account activity dashboards and time lines. It's really important that we can show our customers the investments they've made within TechTarget are working. So when you have a look-back on a visualization and the visualization platform, this is in the last 9 months, here is how your investments in TechTarget have engaged with buyers, how we've identified the buyers and as you progress the buyers, right in front of them, which again will have our customers to trigger the most actionable and relevant next steps is really important. It's stuff that we've been working on for quite some time, and we'll be announcing that.
So as you can see, our product investments enable customers, a, to leverage the data across any and all of their platforms that they use to go to market; increase their usage and reliance with sales and marketing to see results; and to show attribution and ROI. Those are the 3 focus areas that we are really honing in on our Priority Engine, in our platform investments.
Bryan C. Bergin
Okay. I appreciate all the detail on that. Just a follow-up on it, are you at a point where you're able to, on the other side of this, leverage the investments you've made here potentially into next year from a margin standpoint?
Michael Cotoia
Yes. Our goal on that is to make the investments now during a down economy where everybody is getting impacted, some worse than others that we've seen, put the right investments around the product, the content strategy and a couple of other key areas. And once this market turns, which we all know, that the enterprise B2B tech market in the long term is going to be a strong market, it still has the thesis of modernizing their sales and marketing departments, leveraging first-party data, leveraging other data sets as well and make it more effective for sale and marketing departments, this will help with our long-term growth margin expansion and what we've been talking about for the last 5 years.
Operator
The next question comes from the line of Bruce Goldfarb of Lake Street Capital Markets.
Bruce Goldfarb
Just a question, like in the shareholder letter, you highlighted strategic investments. Are there certain technologies or areas that you have like a sort of a shopping list for that you're kind of targeting?
Michael Cotoia
In terms of investments, on the last question we just discussed, in fact, was the investments we're making in the Priority Engine platform and capabilities around integrations, around usage, around tracking, about ROI. That's one of them, Bruce. We're also seeing some investment -- we're making some concentrated investments around our content and content enablement services. So the business -- we've seen and we've seen throughout the market that today's buyer, enterprise B2B technology buyer, wants to spend less time working and dealing with sales reps and vendors and want more time on research with relevant content on their time and on their dime.
And so making sure that we have the right content that's attracting those buyers to then helping our customers put an effective and thoughtful content strategy together through our investments with ESG, BrightTALK as well as TechTarget and leveraging some of the information we talked about around our AI capabilities to help accelerate our customers who have access to the most relevant content that will engage with buyers at the right time is really key. Because vendors that do not have a content strategy, an effective and thoughtful content strategy, will miss out on this because the buyers of technology do not want to rely on technology reps, vendors. They want to have information on their time. And then I would just say in the other investments that we look at, we're always looking at -- can you guys hear me?
Bruce Goldfarb
Yes, yes.
Michael Cotoia
Okay. In the other investments that we're making, we're always evaluating our M&A capabilities and our M&A prospects across the content, data and technology-enabled audience sets. So we're going to continue to work on that.
Bruce Goldfarb
Great. And then how would you compare like same customer sales metrics, sort of a same-store sales basis, for this year versus last year?
Michael Cotoia
Well, what we do is we disclose that on an annual basis. So that was in our February numbers, and we will report on that next February as well. So we do it on an annual basis.
Operator
The next question comes from the line of Kash Rangan of Goldman Sachs.
Jacob Patrick Staffel
This is Jacob on for Kash. I'm a little late to the party. So I apologize if this was touched on already. One thing I wanted to touch on was as generative AI has become a lot more topical and the use cases have become a lot more apparent and seemingly widespread, right, I mean we saw check down like 50% the other day. Are there implications around TechTarget? I mean like, are you working to implement it into your product offering? And then how are you viewing it as something of a competitive differentiator or something that might close the moat of what TechTarget offers? Can you provide any color around that?
Michael Cotoia
Yes, absolutely, Jacob. Yes, we had brought this up earlier, but I have no problem kind of readdressing this. In terms of AI, we've been leveraging AI in our workflow and in our investments over the course of several years. And we see companies like TechTarget, publishers of relevant, thoughtful content and origination of content, actually, have a competitive advantage in this market right now. Yes, there are other, let's say, content providers that are -- or sites that might be click-bait anglers and trying to get more big using traffic. That's really not our ballgame. And we believe the publishers have spent years on investing in quality and thoughtful content to attract a very engaged, relevant and recent audience that can then extract very powerful and proprietary first-party purchase intent insights, has a huge competitive advantage over other companies in this space. So on that side, we feel very competitive.
Now leveraging those first-party purchase intent and our proprietary purchase intent insights will absolutely help our customers in terms of we're embedding -- we're going to be rolling out, announcing that, inside of our products. So for example, we have always relied, or have been at the mercy of our customers, to follow up, make sure they're leveraging our data, making sure that everything is being done. And that's hard when you hand that off. To be able to leverage our first-party insights and then provide a recipe, very specific recipe, and trigger action ads to say, Mr. Sales Rep or Mr. Sales Rep, you need to communicate with this buying team member whose insights are this, their entry points are this, they're trying to address this pain point, and you have the information to do that, it's going to be really relevant.
Because technology buyers, they're smart. They're spending 5, 6, 7 figures on these ad purchases. They want relevant, insightful information and they want really good outreach, in terms of when vendors are outreaching, to make sure they understand their pain points, their needs and to address that. We have that data. Now to make sure that we're actioning that data and putting them on our customers' workflow, that's going to be beneficial. The other thing that's going to be able to help is help accelerate our content enablement services. Our customers need every content strategy on the marketing side, product marketing, field marketing. And to be able to take the insights that we have, help power and help generate more content that's going to be personalized, specific, targeted to the technology buying teams at scale is critical for our customers.
Jacob Patrick Staffel
Okay. I guess just a quick follow-up, though, from my perspective, if a customer can maybe more easily generate their own unique content using generative AI and associated technologies, does that sort of phase out the area of business that TechTarget offers that service in? Like, how should we be thinking about that, if that makes sense?
Michael Cotoia
Yes. Customers are not publishers of content. They produce -- [they play in R&D and] technology. They don't have the insights into [29 million up] B2B professionals. We're looking at the most deep and relevant content around 100 specific market segments where we also marry up the vendor content, the peer-to-peer content, our BrightTALK community that has all the engagement. No one have access to that. And I'll tell you, you can't fool technology buyers, right? It's going to be relevant, it's going to be real. It's going to be trusted. So buyers want trusted sources of content. We have a great reputation on that. So again, I'm going to go back to my original statement, strategic publishers and content providers that really serve and invest in thoughtful and independent content will be served well in this space.
Operator
There are currently no additional questions registered at this time. So that will conclude our time of question-and-answer as well as today's call. Thank you for participating. You will now disconnect your lines.
