Q4 2023 TechTarget Inc Earnings Call
Participants
Charles Rennick; VP, General Counsel & Corporate Secretary; TechTarget, Inc.
Greg Strakosch; Executive Chairman of the Board; TechTarget, Inc.
Michael Cotoia; CEO & Director; TechTarget, Inc.
Cal Barton; Analyst; Craig-Hallum Capital Group LLC.
Kunal Madhukar; Analyst; UBS Investment Bank
Justin Patterson; Analyst; KeyBanc Capital Markets Inc.
Andrew Marok; Analyst; Raymond James & Associates, Inc.
Presentation
Operator
Good afternoon, and thank you for attending the TechTarget report fourth quarter and full year 2023 financial results conference call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now pass the conference over to our host, Charles Renwick with TechTarget. Charles. Please go ahead.
Charles Rennick
Thank you, Matt, and good afternoon, everyone. Speakers joining us here today are Greg Strakosch, our Executive Chairman; Michael Cotoia, our Chief Executive Officer, and Daniel Noreck, our Chief Financial Officer.
Before turning the call over to Greg, we 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 web and furnished it on an eight K. You can also find these materials with the SEC free of charge at the SEC's website at www.SEC.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website. Following Greg's introductory remarks, the management team will be available to answer questions or 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 most recent periodic reports on Forms 10 Q and 10 K. These statements speak only as of the date of this call and TechTarget undertakes no obligation to revise or update 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. The reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable effort accompanies our shareholder letter.
And with that, I'll turn the call over to Greg.
Greg Strakosch
Greg?
Thank you, Charlie, for the big news since our last earnings call with the announcement we made on January, we entered into a definitive agreement with Informa second line tech target within Performance pack digital business. The combined company will have increased scale with over 8,000 customers in over 20 countries, first-party purchase intent data from over 220 leading digital brands and a physician audience of over 50 million people combination increases our TAM by over 10 times as we enter 18 new vertical markets within a unique, a unique end to end solution across the go to market. The combination creates a company with a strong financial profile. We expect 2024 Pro for pro forma revenues to be over $500 million within five years. We expect revenue to grow to over $1 billion in revenue and at least 35% EBITDA margins. We structured the deal. So our shareholders will get some immediate benefit by receiving an $11.79 that per share and cash and long-term benefit for providing the opportunity for shareholders to participate to participate in the value creation through a 43% stake going forward.
In regards to the current environment, we came in slightly ahead of the high end of our Q4 guidance. This reflects a macro technology environment, which customers remain cautious regarding their sales and marketing investment levels. We expect this dynamic to continue throughout 2024 because of uncertainty surrounding inflation, interest rates, the presidential election and geopolitical issues internationally. I will now open the call if you would like to ask a question.
Question and Answer Session
Operator
Please press star one on your telephone keypad. If you'd like to remove the question, please press star followed by two again to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. And we'll pause briefly as questions are.
Yes, first question is from the line of Jason Kreyer with Craig-Hallum. Your line is now Great.
Cal Barton
This is CalBear to go on for Jason.
On the first one for me.
I was just wondering if you could just talk a little bit on the AI capabilities across TechTarget and Informa, if there's any kind of differences and approaches between the two companies and how complementary those capabilities?
Michael Cotoia
Craig, this is Mike. I'm going to focus on the AI capabilities with a target right now because we've been working with generative AI capabilities and roadmap in the last year plus. So I really want to focus on that. And I see there's really four areas that we are fully see the benefits of general, may I hand creating measurable impact on the business on the first, I'd say it would be on our product side. In Q4, we launched our intent mail AI., which is under our personal assist product suite. And what that does is hyper-personalized came out of January emails or sales reps to leverage for the outreach, our sales reps work with them who work for our customers. So we're doing that leverages AI to blend type targets, prospect level, purchase intent, insights and behavior, along with what we call recent product line, customer information to personalize or Repsol reach for what this does it increases response time reduces the time to create the emails. And as part of our product suite, we also have different entry points or points of interest at the individual prospect level. So a rep can build a cadence that has multiple entry points to engage with a prospect that they are he or she is targeting. We're seeing good adoption in terms of reps, leveraging that reducing their time to create emails and leveraging first-party prospect level intelligence. We also see an internal comp, you know, leveraging it across our internal functions within tech target. We have a content marketing department who's going to help promote customers' content. So our audience into the prospects in everything that we do is 100% index by topic by content. We weight the performance, the promotions. So we've done that, and we've built a model that now our instead of hiring more junior copy writers were taken onboard experience. Copy riders help train the models to help through the promotion and subject lines. Weather was paper in one of our assets that we want to promote to our customers so we've taken out we've seen success on that, and we're now evaluating and rolling out to lean on Generali for internal control, up our internal procedures and processes across four or five other different functional areas. I mean, in terms of number and audience and create a better user experience for our members who come to our sites, we built the private LM driven out of our own content and first-party data, which is all behind the firewalls to provide what I would call a micro experience. It will be driven by club intelligence. So when a user or a member comes to our sites, we can then prompt them to find out what other information they would that would be relevant for them for their research and then guide them to our knowledge base of content, whether it's editorial content, vendor content, it has been constant webinars content to make sure the better user experience. And as we create a better user experience for our members. We also gain relevant first-party purchase intent signals. And then I would say, whenever you have a disruptive or evolution in the market that benefits TechTarget quite well. We see that we're celebrating our 25th anniversary. We came into the business. We have stores is big virtualization, became a big mover cloud. Now a I think if you take a look at the content that we produce and we have a 1,000 number one rankings around the topic of generative AI and that those customers need to cut through the noise because there's a lot of noise on how to leverage it, what are the regulatory construct, positive market enterprise stack that have always been a beneficial and a drive of Bronto target business was in the four areas. I would say that we implemented and continue to implement and evolve around the business.
Cal Barton
Perfect.
Thanks. And then just last one for me.
It looks like the guide implies something like a double digit decline in Q1, but flat or better for the year. Is there anything that you would call out that's kind of signaling that you could see spend free up a little bit?
Michael Cotoia
Yes. Absorption in Q1 is always historically the lowest and you align us in the technology market from Q1 is always the smallest revenue quarter for the year and analyze the technology market. When you say Q4 to Q1 over the history of our business, typically between 10% and 13% decline from Q4 to Q1, no project and between 9% and 10% from the I think it's still as we mentioned in the shareholder letter, there were not a lot of with big catalysts in the market right now, we've seen a high interest rates, the inflation. We have a geopolitical situations going on and we have an upcoming election. But I would also say is that our customers spend a lot of money in R&D and there's always going to be a pent-up demand when that shift from gold from costs putting too low because there will be a pent-up demand for technology loss or marketing and sales, typically a flight to quality. And we've seen this through several downturns over the course of 25 years. And we were seeing some again, very consistent with our November call like pretty stable on that. No surprises right now. So as we've seen that stabilize versus last year, going into Q1, we saw a big dip because there's some signs that the market stabilize a little bit. And when the pent-up demand is there, there will be a flight back to quality, and we're putting ourselves in the best position to take advantage of that flight back to quality.
Okay.
So let me cover it.
Cal Barton
Perfect.
Thank you so much.
Operator
Thank you.
For your question.
Next question's from the line of Kunal Madhukar with UBS. Your line is now open.
Kunal Madhukar
Hi thank you for taking my questions. A couple if I could. One is on the commission audience. So what percentage of your traffic in any given month is commissioned audience? And how much of the pollution audience have you kind of maybe potentially lost because of all the layoffs that somewhat second is with regard to the guide, wanted to understand a bit of seasonality and what was going into your guide in terms of the 1Q that you do and explicitly and the 4Q, what are the QI. Q over Q trends in revenue that you're kind of anticipating? Thank you.
Michael Cotoia
I've got a lot of time with the on the permission-based audience side, I would I would reflect that to our organic traffic. And so we saw an increase of 14% year over year of organic traffic mile. That's actually coming off a home that's actually coming off a high watermark for 22 Q4 and 22, where we saw 51% growth the previous year so in terms of audience and permission-based audience whenever we can, what a program for our customers in terms of region or delivering them prospect level intelligence, 100% of our audience is permission bank in terms of the layoffs foreseeing a layoff or that the vendor side, not necessarily if I took out the banking side. So the announcement that you see continuously throughout 2023 and even into two out of 2024, our tech vendors with a lot of layoffs around sales and marketing because of real numbers and their demand that they have, and that doesn't really impact what we see in terms of the traffic that a permission-based audience.
On your second question in terms of seasonality, I mean, go back historically, what we see and you go back into our financials for last, yes, 60 or 70 years being public is that Q1 is typically the smallest revenue quarter Benergy, not done finalizing their budgets. It a lot of the vendors at year end, our December year end. So budgets might not be finalized until February, March or March. So in terms of data world. That's typically the lowest revenue quarter in Q2. It ramps up. We see a lot of product releases and updates being presented by customers to see that more trade shows in April and May Q3 levels off with Q2. Typically you have some of the summer months, especially in Europe, with people taking vacation in Q4, which is typically your largest revenue quarter, both for us that target, but that directly aligns the enterprise tech market as well. So we're starting to see some signs of that coming back slowly in terms of order patterns. That's what we're focused on in terms of our investments and the opportunity to get back to.
Kunal Madhukar
Thank you.
Operator
Thank you for your question. Next question is from the line of Justin Patterson with KeyBanc. Your line is now open.
Justin Patterson
Great. Thank you and good afternoon. Two, if I can. First, just going back to guidance. When you think about just kind of the that recovery over the course of the year is that driven primarily by customer growth within there, but really making some assumptions in terms of pricing impacts around Priority Engine and the rest. So that's question number one.
And then question number two, just philosophically, the product portfolio you have today is very different than what you've had in the past coming out of downturns, whether it's ESG. or even just the bright talk asset. So if you kind of look at the tech target that exists today, how do you think a recovery might an enterprise recovery might differ today versus what you've seen in the past?
Michael Cotoia
I guess I'm going to start with your second question for us because as you bring up a good point. The product portfolio portfolio today is much different than it was three years ago, five years ago or even two years ago. That's been part of our strategic road map it's very important. And what we've been very conscious about is making sure whether it's through our organic capabilities and launches on our product side or through acquisitions. We want to be the premier provider to help our customers with their and go-to-market strategy. So when the recovery comes back, they're going to have customers that are going to increase their demand all around content marketing, any really relevant content to talk about the technical or the economic validation and positioning within the market to engage with the wildfires.
So now getting into that and go to market strategy earlier with not only the ESG capabilities but the write-off capabilities to a multimedia format, making sure we can do this through webinars. We can do this through PDF we can do this through infographic to make sure that we're helping our customers earlier in their go-to-market stage, then being able to articulate that content and put those into those effective programs that will be delivered and put in front of prospect level prospect and buying teams get we know who they are, we know to have their permission based. We know everything that they're looking at inventory and able to capture all that intent to deliver both the sales and marketing organizations to help them prioritize not only accounts, but the individual prospects within those accounts. So combining that together and then into being able to apply that to the health care vertical with Xceligent and create additional peripheral content that's been really important for us and that's a big focus. So when you have an opportunity to play in the hole and go to market strategy for a vendor, put yourself in a really good position in terms of the first question, how do you see, you know, modest growth. I think it's a combination. So but we reported the number of customer count was down and that reflected in terms pretty close to the decline in revenue for this year, we started seeing the overall revenue per customer level. That was actually up a little bit, but I think it's a combination between, yes, there will be some customers that come back to net new. I think there's some pricing capabilities that we have on our technology. I also think some of the new products that we'll be launching as part of our roadmap with Priority Engine, some extensions of what we're doing and having some of these regions that may have been consolidated into a global spend from North America. If the market starts picking up public later in the second half of Merial budget being allocated to marketing, we mentioned in the last two earnings calls. Whenever we see a pullback, it just gets centralized. We tend to take them out of the regions they want to centralize have typically in the US than they allocate some dollars on that. For the reasons you have numbers, you get to the MCOs, they have field marketers down there. So between Yes, customer increasing customer count, some pricing and new product solutions. That's that's the approach that we see for 2024 and more probably to 2025 and beyond.
Justin Patterson
Great. Thank you very much.
Operator
Thank you for your question.
Next question is from the line of Josh Reilly with Needham. Your line is now open
Ron really on the charts as to the question regarding have you I'm sorry, Interpay Yes, Sumit, we expect the margin progression is linear?
Michael Cotoia
Yes. Okay. So you're a little broken up on that.
You're talking about the margin expansion over the years. And could we say is we targeted a really good history of making sure that we manage our margins. And when you have a $500 million, if you look at the numbers and it's a pro forma $500 million going into 2025. And the ability to take on revenue growth, which we I've shown improvement enough over the history of our time to have a greater than 50% incremental EBITDA margin. A lot of that revenue ends up all of the bottom line. So we'll be able to expand the margins on that side from getting into the real key on is a lot of growth through cross-selling and upselling our platforms and to new customers. Also, if you take a look at the two businesses when they combine, we have over 8,000 customers that we have an opportunity to both cross-sell and upsell the solutions that we have, respectively, to get a deeper footprint into existing customers in terms of the Onvia Business, which I can't really comment on them. That's a new product line, but it really does align with our strategy that we're talking about fitting into our customers earlier to help them with their and go-to-market strategy. So through our revenue growth, driving 50% plus incremental EBITDA margins, if you do the math over the five years, you get to your 35% EBITDA margin that will be in year one that takes over the period several years to the growth and the opportunities that we have got it.
That's helpful. And then regarding some of the products coming from Informa industry, diving embrace some nice diversification from an industry perspective. While Omnia is solely focused on the tech industry. Does it make sense to bring some of the industry guys, 20 verticals into the business model of Omnia, given it's a pure subscription and expand their business coverage beyond tech verticals?
Michael Cotoia
Yes, I can comment on the Informa business and each of the divisions on what I can comment on is what our strategy has been and has been publicly announced about getting into adjacent markets, making sure we have our content enablement services, making sure we have an end to end solution and having a platform to reach across all the opportunities, including adjacent markets. So that being said, you know, that's been a vision that we've stated pretty clearly around permission-based audience first-party insights in a comprehensive and go-to-market strategy until we have the combination, we'll be able to go when that's finalized in some time, we'll be able to dive into that a little bit more with the public.
Got it.
Thanks for the color
Operator
Thank you for your question. Next question is from the line of Andrew Moran with Raymond. Your line is open.
Andrew Marok
Great.
Thanks for taking my question.
I wanted to dig in on the customer count a little bit. So that decline seems like it accelerated in 4Q was down 100 and 3Q down about 300 in 4Q. What do you think is the floor here. And I guess to the extent that, you know, how much of the decline over the course of 23 is kind of involuntary lead companies going out of business versus voluntary cutbacks?
Michael Cotoia
So how much of that decline if you look at the overall decline throughout the year from the time you have a lot of customers that may have signed annual deals in 2020 to Pinnacle's the second half of 2022 revenue, Q3, where we started seeing some declines. So we learned a lot about a lot of organizations sign up for annual deals going into Q4 of 2022. That's when the market started to send signals that it was slowing down. So that's why one of the reasons why Q4 was a little bit higher given the timing of annual deals. And after May, June July got expired, they would deal with I-Mab wrote a pullback in terms of our voluntary or involuntary furloughs. Genasense is a couple of things. Well, less than one year out from the Silicon Valley Bank collapse and they are 100% overall, 100% focused on technology companies. So a lot of those companies went away. A lot of those companies are still in business, but they are navigating through the environment and they have to make sure they are managing their costs very closely. So as the market picks up, as we talked about and the demand picks up, which it will, it's not a matter if it's a matter of when one of those companies will come back also to the customer count. And I mentioned this earlier, you might have an organization that spending in North America for me, an impact in the A-Pac region made cutbacks in Amea. They have cut back for North America was still going that would decrease our customer count based on those regionals that we treat as separate businesses because we're working on separate contracts and agreements when the market comes back, you typically see you have centralized budget plus back into the field so that's the color that we gave you. I cannot tell you if you look at the total customer count to revenue kind of again, I think the overall revenue per customer is actually up slightly in 2023 versus 2022. So it's Bill and again, it's another side we talked about in November, we'll say no, no major surprises, right.
Now.
And this is what we're seeing right now and navigating that. And we don't see if those all out, but we don't see the catalyst close right now in the first half of 2024.
Andrew Marok
Really appreciate the color.
Thank you.
That's that's very helpful. And one more, if I could. I mean, I understand that it's very early days right now and this may not even be that much of a client facing effort at this point, but has there been any meaningful feedback from your clients so far in terms of the reaction to the announcement of the Informa deal?
Michael Cotoia
Well, I will I mean, we're not really allowed to discuss it now, but we're really focused on business as usual here and making sure we're doing the right things for the business. But at present, I will tell you this from my own view, I think is pretty but we talked about our M&A strategy for the last three years, I'm going to have a really high, get it better, and that's against my own point of view. We talked about our strategy of driving our first-party purchase intent, data, permission-based audience and content. And so we've been very clear over the last few years and also getting into adjacent markets. So we've been discussing this publicly for the last couple of years as part of our roadmap strategy and film business, well, this is the announcement with us and for everyone them, they can interpret it how they want it but yes, we can always share what we have to feed that.
Okay.
Really appreciate it.
Thank you for the color.
Thank you for your question. Next question is from the line of Bruce Goldfarb with Lake Street guys.
I will.
Cal Barton
But thanks for taking my call. My questions on Google Chrome, new treatment of cookies. Have you seen any increase lifted budget from long-time customers allocating more to attack target spend versus legacy cookie driven spend so good.
Michael Cotoia
As we all know, Google announced the phasing out of cookies starting in January and accelerate that throughout the end of the year, there was just announced in terms of input that inaction definitely part of our playbook. I mean, we are all or part of data both at the prospect level and as well at the account level, we're going to take advantage of that in terms of our go-to-market strategy and making sure that customers and we believe and even part of some of our product strategy, which you'll see us announcing Q1 will be the end of Q1 will be a powerful insights get remember, most of our customers have already bought prospect level intelligence from us, and we've identified the top of those prospects work. And you have a lot of accounts that buy a lot of our customers also want modeling propensity modeling, ABM strategies with account only information. So as part of our roadmap strategy and our product launches, you're going to see some announcements around our account Insight feeds, which would be at the account level only in tying that into our first-party data versus Google AZLP third party cookies. We see that as a pretty big competitive advantage.
Andrew Marok
Thank you. And then I'm post I don't know if you can answer this, but post Informa Tech combination, should we expect new Board Chairman could be elected from the post-close directors?
Or could it be a neutral,
Michael Cotoia
if I'm able to be a lead director could be.
Andrew Marok
Okay.
And then and then lastly, when do you when do you expect demand and like in the legacy business to stop contracting.
And do you think like Q3, Q2 or Q3 or Q4?
Michael Cotoia
I mean, I would aside it almost hit the numbers and the guidance we gave the share of relatively flat, up 2% for Yelp and heading into 2024. We still have you on the tech industry on the enterprise. B2b tech industry still have high inflation, high interest rates and a lot of layoffs right now, that's a very good set of what I do know on this is we've seen pullbacks 51, and we've seen customers have spent a lot of money, invest a lot of money in R&D. We also see technology initiatives such as a I have seen it with virtualization and cloud and other things before that create a pent-up demand. And it's not a matter of if it's a matter of when the market turns around when customers turn from negative watch everything I do on costs tried really to focus on growth through sales and marketing efforts regionally and globally, there were downturns, and I wish I had a crystal ball on that. I mean, we've seen some signs again, natural last couple quarters, some stabilization without tons. There will be a quick recovery in my tenure, but we've seen that in the past and where we see that recovery and whether that's Q3, 20 for Q4 and 24 for the beginning of 2025, our goal is to be ready for that recovery to take the upside in that. And that's because you can see some of the investments we've made announcements that we've made. That is a real focus for us right now.
Andrew Marok
Great.
Thank you.
Operator
You for your question.
There are no additional questions waiting at this time. So that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.
