Q2 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.
Bhavin S. Shah; Research Analyst; Deutsche Bank AG, Research Division
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, and thank you for joining the TechTarget Reports Second Quarter 2023 Conference Call and Webcast. My name is Kate, and I will be the moderator for today's call. (Operator Instructions)
I would now like to pass the call over to our host, Charles Rennick, with TechTarget. You may proceed.
Charles D. Rennick
Thank you, Kate, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our CFO.
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. Thank you, Charlie. We are pleased that we hit our Q2 2023 forecast despite the continued macro weakness in the technology market during the quarter. While it's too early to say that we are seeing a recovery, we believe the environment feels like it is stabilizing. We are maintaining our previous guidance for 2023. While nobody wishes for a downturn, historically, we've taken advantage of these down cycles by using our market leadership and strong balance sheet to reinvest and optimize the business for the eventual upswing. We are optimistic that we are currently doing the right things that will pay off for our customers, employees and shareholders in the future.
I will now open up the call for questions.
Question and Answer Session
Operator
(Operator Instructions) The first question will be from the line of Justin Patterson with KeyBanc.
Justin Tyler Patterson
Greg and team, I just wanted to tease out that point you just left on. As you mentioned, long-time TechTarget shareholders know that you view downturns as an opportunity to really reposition the business. As we come out of this downturn, how should we think about just the pace of growth for TechTarget, especially if you lean into these categories like AI that you teased out in the letter a little bit? And then second question, I would just love to know a little bit more about what you're seeing on the macro. Obviously, it's still choppy out there, but you did hit numbers this quarter. You did reaffirm the guide. Just curious if you're seeing a little more stabilization and signs of things just not getting as bad anymore.
Michael Cotoia
Great. Yes, Justin, in terms of navigating through the downturn and taking this opportunity to invest back into the business, that's going to help us accelerate what we believe we'll get back to normalized growth, which we've seen in the past with double-digit growth.
So there's a lot of areas that we're really focused on during the downturn, and our playbook has always been making sure that we're being aggressive with product and feature rollouts, making sure we're doing the right things internally to reallocate resources to pivot against the right initiatives and the right priorities. And then part of this is around timing of the macro, as you asked as well.
As we noted in the letter, we don't -- seeing the macro improving tremendously, but we are seeing some signs of stabilization. As we mentioned last year at this time, as we went into the slowdown, it might take 3, 4, 5 quarters for companies to navigate through this. But at one point, they're going to need to feed their pipeline. And there's typically a flight back to quality around first-party data, prospect-level intelligence, market alignment and proximity. And that's not really a matter of what if, it's more of a matter of when. And we think when that comes back, we will see the growth that we're used to, double-digit growth moving forward with incremental EBITDA margins expanding and overall margin expansion.
Operator
The next question will be from the line of Josh Reilly with Needham & Company.
Robert Michael Morelli
This is Rob Morelli on for Josh. With the cycle incrementally challenging, how should we think about trends in the second half of the year given the normal seasonality? Will it be a 10% sequential increase in revenue from Q3 to Q4? Is that seasonality still in place?
Michael Cotoia
Yes. Rob, I think as we look at it and you take a look at the current macro conditions, it's sort of changed a little bit this year, right? So we've been pretty -- like if you look at the overall guidance that we reaffirmed this year of $225 million to $230 million in revenue and $65 million to $70 million in EBITDA, I don't think I see any major swings in terms of Q3 to Q4. I think you will see some growth in Q4 versus Q3. It's kind of early to tell on that, but it does go back to what we're really focused on: the investments we're making around the products, the investments we're making on the content side, the gen AI opportunities that we're working on as an organization, and then our customers that really need to focus on building that pipeline going into the end of the year and into 2024.
And the best way to build that pipeline is through quality data, quality insights at the account and prospect level. So you can really marry it out in terms of you can reconcile the range based on what we gave for guidance, which is well in line with what we had on the analyst side. And plugging the Q4 numbers that you're seeing, we're going to align to that range that we announced back in May. So that's how I would look at it right now.
Robert Michael Morelli
Got it. That's helpful color. One thing we've heard from competitors is new business cases are the most challenged in the current environment. How would you position the TechTarget product set in terms of use cases for new customer acquisition versus upselling existing customers and gaining retention?
Michael Cotoia
Yes. What I'd say on that is I think in this type of math, when we talk to customers, new business cases and net new logos is always a challenge. Because as you can see in the tech market, there's been a pullback on spending, there's been layoffs and things like that. But again, this goes back to there comes a point in time, and this happens during every down cycle, when our customers need to really engage and build up a believable and trustworthy pipeline. And so when that happens, I think there are 3 things that will bear fruit on that.
Number one, there will be a flight back to net new logo acquisition. Two, there's always going to be land and expand, protect your existing customers. And I believe, three, as we get through this expense-cleansing cycle, the customers are going to be very particular in terms of what investments they make to make sure they're really driving ROI through the product innovation and through our alignment to our markets and through our prospect-level intelligence. We think we check all the boxes on that. So we'll see that hopefully sooner rather than later, but this is something that we're planning to see going in, in 2024.
Operator
The next question will be from the line of Bhavin Shah with Deutsche Bank.
Bhavin S. Shah
Great. Just kind of following up on what you saw kind of play out through the quarter and what you're seeing today. Can you just maybe elaborate a little bit more from a product perspective on any changes you're seeing from Priority Engine to maybe some of your other kind of more marketing-focused solutions? And then even from a customer kind of cohort perspective, larger customers versus small customers, any kind of difference you've seen in terms of improvement, stabilization, that would be helpful.
Michael Cotoia
Sure. So Bhavin, on July 20, we announced one of our largest launches on Priority Engine. There were 3 or 4 key areas that we really want to focus on. Number one was our Salesforce integration with our new Salesforce Connector. And what we're really focused on that, we talked about this in previous earnings calls, was enabling our customers to really leverage their own first-party data and align it with TechTarget's first-party account and prospect-level data, but also allow our customers who are using third-party data-driven ABM platforms to sync that data with their first-party data within their own CRM system, along with TechTarget's first-party data at the account and prospect level.
That helps with cadences, workflows, ABM strategies, sales outreach because you want to combine all the data sets and really understand not only at the account level, but which prospects that you can -- should focus on based on their activity. So that's been a pretty big enhancement for us.
We also launched a new UI/UX interface to help on the sales side. Reps within our accounts have a shortcut to the most critical account list territories data. For example, they can favorite some of their accounts and store them, favorite some of their prospects and have it right in front of them with one click. They can add to their CRM. They can view contacts now and identify contacts who've actually viewed their marketing content to have a quicker more engaged conversation.
The other thing that we launched was our account journey visualization. It's been really key for us because we want to show how the account is engaged in across the TechTarget network, what buyers are researching, when are they researching, when do they become a lead. And also, the sales reps within our clients, how and when and what are they doing to engage with those accounts.
So now we have insights that help them show this is what your marketing investments have done with TechTarget. This is the outreach that we are seeing. This is what your sales teams are doing or not doing. So it's all about attribution, visualization and holding everybody accountable. That was really a big launch.
And then we updated our new opportunity dashboards. We want to make sure that we are getting as much attribution and visualization and transparency about the data that we're providing through the accounts and the prospect level, GDPR, consent-based prospect members of our buying teams, and show how those efforts are working against opportunities that have been created so they can look back and see the impact in that marketing level and that marketing spend as well as opportunities that have been created and how are we accelerating them from opportunity creation date to closed won as well as closed loss. So there's a lot more that we can do with that around insights about why you win a deal, why you might lose a deal. So that's part of the road map.
In terms of the other marketing opportunities and products, I mean we're in a really good position today versus probably -- our breadth of products has expanded. So we have different avenues to walk in and show value for our customers. So for example, if a customer today in a choppy macro doesn't want to sign up for a 1-, 2-year Priority Engine subscription, but they have a need around content strategy, about positioning their products, showing an economic validation of why they should choose -- a technology buyer should choose their solution, we can walk in there with content strategy and content enablement services. We can walk in there with webinar capabilities not only to promote to our members, but to help our customers promote their own database, where we've relaunched and updated our whole FastPass [reg], with one click to register based on the information we know about prospects from our customers' database that have already opted in and permission-based. We walk into our branding elements, our content marketing elements, demand generation elements.
So now when a customer says, I can't commit to X, but I have these problems at Y and Z, we have a reason to engage and deliver value. I would say we've seen some shiny points with some of our strategic accounts, large accounts. And we talked about this last quarter, how we revamped the sales organization, where we created [pods] that we have in ESG, which is our content enablement services opportunity and capability set, a BrightTALK and a TechTarget, all engaged within these accounts, so that they are bringing that end-to-end capability set, but entering with a customer need or have a demand, a pain point or a value that they need.
So we're seeing some signs of that. I think as somebody else mentioned on the call, I think a lot of our clients have been staying very close to their existing clients. They want to be in front of their existing clients. I think if this market can turn, continues to go from stabilization to growth, you'll see a flight back to net new logo focus, penetration as well as land and expand.
Bhavin S. Shah
Super insightful and detailed. Just a quick follow-up on AI. I know in the letter, you talked a lot about some of the investments you're making and the opportunity there. How do we think about maybe the opportunity on leveraging some of the generative AI on the content creation side of things and being able to kind of offer more articles and features leveraging kind of gen AI?
Michael Cotoia
Yes. That's a great question. So I mean when you look at gen AI, you got to look at the market that we serve, and then we get a lot of questions around generative AI. And the markets and the constituents we serve are the technology buyer and technology vendor.
And on technology buyer side, we've all seen the demographics that buyers, driving towards a millennial-stage buyer, wants really deep insightful content. There was a Harvard Business Review [started] that came out at the end of 2022 that said millennials -- 54% of millennials in the tech-buying stage want a rep-free experience. They want to get engaged with relevant content.
We serve an unbelievable opportunity. And when you remember why people go to TechTarget, it's because of our market alignment, our content that we serve out, we dominate organic -- Google organic search, and we're serving the buyers information.
So one of the things that we've worked on, we hired Paul Healey, who is running our generative AI strategic strategy on this, is when customers go to Google, which we continue to dominate, and come to TechTarget sites, we're going to be able to, as part of our road map, set up a prompt-type capability set through gen AI to help serve up all the knowledge-based content and the insights around that particular topic that those researchers are looking at.
And I'll say this, like there's nobody else that I can think of in this enterprise B2B tech area, because of their lack of investments in content and our strong investments in content, that can serve that up. So if I go in there as a buyer, I go to Google, I search XYZ, I end up on a TechTarget community. I'm reading my articles and I get prompted, what else are you looking for? What else can we help you with? Ask a few questions.
Then we can serve up content from our BrightTALK community, which is protected right now, vendor content, our enterprise strategy group research content, market insights, everything is served up for that buyer. So it provides a better experience and in the flip side, it drives more engagement, more insights and more capabilities for us to productize to our customers at the end.
Operator
The next question will be from the line of Bryan Bergin with TD Cowen.
Bryan C. Bergin
I wanted to start just kind of a double click on the feeling of stabilization. So can you just talk a little bit more about the confidence in calling that feeling? Is it a result of more leads within your sales funnel? Is it actual signings? Is it just a slower level of touch? Just can you give us a sense of what's, I guess, contractually committed in that revenue outlook as well to get comfort in the full year?
Michael Cotoia
Yes. We don't disclose what we have contractually committed. But Bryan, here's what I can tell you is we've seen through the conversations with the sales teams, with our customers, our customer success teams, the conversations feel like they are like what we stated in the shareholder letter. There's more of a stabilization. As you saw at the beginning of the year, it was a little bit of a free fall. People didn't know. There were still layoffs going on, and there's cost cutting. But it's also some of the breadth of our offerings that we talked about a few minutes ago are giving us other entry points to get into the door to bring value to our customers that might not want to sign, as I mentioned earlier, a 1- or a 2- or a 3-year deal.
But now we have a reason to engage around -- again, around messaging, around creating leads, driving and increasing the database, even branding activities. So we're seeing that, I would say. We don't disclose it, but we see the trend in bookings too. We've seen deals that have -- if you looked in the past quarter where they may have committed and we had a certain percentage in our sales force forecasting, that pulled back. We're seeing some of those, a lot more of those kind of fruition in terms of signage. So it's early. I don't want to say we're out of this. But the signs that we've seen over the last 30, 45 days are trending cautiously optimistic.
Bryan C. Bergin
Okay. Okay. That's good to hear. And then as it relates to maybe free cash flow and capital allocation, just first off, anything to be mindful of on free cash flow and maybe conversion of the EBITDA for the second half? And as you generate cash flow, can you just give us a sense on capital allocation priorities? How are you feeling about M&A appetite here, just given that large cash position, versus more active share repo deployment?
Gregory Strakosch
Yes. So no real change in strategy. We're looking at M&A opportunities. And as we say in the shareholder letter, we're looking at share buybacks and potential debt buybacks. So we'll continue to be opportunistic on both fronts there.
Operator
The next question will be from the line of Bruce Goldfarb with Lake Street Capital.
Bruce Goldfarb
Congrats on your results, especially given the current macro environment. Have you guys -- have you seen a recovery in demand from accounts that were impacted by the collapse of Silicon Valley Bank?
Michael Cotoia
Well, I would say we don't break it down. But I would say, Bruce, that's 4.5 months old so there's still some repercussions going on through that. What I would tell you is we haven't run in any cash collection issues that we report on that. We're still engaged in conversations. They are -- some of those accounts or a good amount of those accounts are spending. They're watching their budget. Like of all people -- I don't want to say with all companies, but when you're VC backed and you're running to grow at all costs and then the brakes get jammed to a halt, you're very careful on what you spend. And you want to make sure that you're getting ROI and you can attribute your investments to that ROI.
I believe as we continue to navigate this, it's only 4, 4.5 months since the market collapsed on that, our conversations are about that, about what you need to do, what you need to accomplish, what do you need right now and how can we help you. And then here's the breadth of products that not everything might fit for you, but we're going to put the right products with the right solutions in front of you. Versus, I would say, pre-SVB collapse, we could be in those conversations and their appetite might have been bigger than it should have been, where they wanted to get everything. So we're going to see this gradually, I think, pick up and we haven't seen an adverse impact right now. But in terms of conversations and go-forward opportunity, but it's still fairly early, it's 4-plus months since that March 8 date.
Bruce Goldfarb
And do you believe that the installed base could support a price increase in 2024? I guess, assuming the macro -- I guess, a significant improvement in the macro, I guess.
Michael Cotoia
I don't want to answer right now. If you ask me today and I don't have a crystal ball, I would say I'd be very careful on doing a price increase. But it also depends on the feature and functionality launches that we have coming down the road, which might warrant a price increase. But we're not there yet, and we're taking this week by week, quarter by quarter, and then we'll look in November when we're launching it.
Bruce Goldfarb
And then have you seen any change in your search rankings with the arrival of AI-assisted search like ChatGPT?
Michael Cotoia
Well, we see that our search rankings continue to grow. We -- I'll say, we have -- we dominate in enterprise B2B tech. Our search [rep] to our enterprise AI side was up like 120%. If you type in gen AI or generative AI or what is gen AI, what is generative AI, TechTarget is ranked #1. We have a lot of articles. I don't know the exact, but it's hundreds that are ranked now organically. So we continue to do really well on that Google and Microsoft thing. We'll continue to drive researchers to trusted and sourced communities and publishers, and that's a really key differentiator for what we offer.
Bruce Goldfarb
Great. And then my last one is, I mean you guys were active on the buyback during the quarter. Do you think you'll be active or would you think you'll have appetite at current prices, current stock price?
Gregory Strakosch
Yes. I mean we're going to -- like I said, we'll continue to be opportunistic, and that's been our track record. And so I wouldn't -- I expect that to continue to stay the course on that strategy.
Operator
The next question will be from the line of Kash Rangan with Goldman Sachs.
Jacob Patrick Staffel
This is Jacob on for Kash. Just one for me. I wanted to ask what was meant in the shareholder letter by you're using the slowdown to optimize your organization with an eye on streamlining operations, improving go-to-market processes and reducing expenses where appropriate. Can you maybe touch on more so what's meant by that? Does that mean potential risks? And anything around that might be really helpful.
Michael Cotoia
Jacob, as you're probably well aware, we made a few acquisitions over the last couple of years, and so they're on disparate systems. And one of the things that we had a real big focus on this year was streamlining those systems, the efficiencies, the reporting, the customer experience. So for example, we had -- so we had 3 different Salesforce instances. We continue -- we've integrated that into one. We're looking at other workflow management tools and solutions. The way we deliver our data to our customers or the way we capture it, we're streamlining that, which then we can take some of those resources and reallocate it to other projects that are priorities.
We don't plan a rip. We plan on making sure we believe we're at the right headcount. We plan on driving the most efficiencies, but we also want to make sure that we're properly staffed to align with those priorities and those opportunities that we have, and that's what we meant by that.
Operator
Thank you. That concludes today's Q&A session and today's conference call. At this time, you may now disconnect your lines. Thank you for your participation.
