TechTarget, Inc.

Good day, and welcome to the TechTargets first quarter 2021 earnings release conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlie Renick, General Counsel. Please go ahead.

Thank you, Betsy, and good afternoon. Joining me here today are Greg Straykosch, our Executive Chairman, Mike Katoya, our Chief Executive Officer, and Dan Norick, 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've posted our shareholder letter on the investor relations section of our website, and furnished it on an 8K. 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. Please refer to our risk factors in our most recent public reports filed with the SEC including in our annual report on Form 10-K and our quarterly reports on Form 10-Q. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them to reflect future events or circumstances. 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 accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Great. Thank you, Charlie. The momentum we had at the end of 2020 has carried into 2021 as we continue to benefit from strong execution and some significant tailwinds, producing the following positive results. Adjusted revenue grew 85% to approximately $59 million. Adjusted EBITDA grew 123% to approximately $19 million. Adjusted EBITDA margin was 33%. Adjusted gross margin was 75%. Longer-term contracts represented 42% of revenue, an all-time high. Free cash flow was $12.6 million, representing 66% of adjusted EBITDA. Based on the momentum we are experiencing today, we are raising our annual guidance. We expect adjusted revenues between $245 million and $250 million. We expect adjusted EBITDA between $80 million and $85 million. I will now open the call to questions.

We will now begin the question and answer session. To ask a question, you have pressed star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jason Creyer with Craig Hallam. Please go ahead.

Yeah, this is Bailey on for Jason. Just wanted to say congratulations on the quarter, and I appreciate you taking the question. One thing we noticed is it seems like you guys are starting to see an opportunity emerging in long-term subscriptions. Just wondering if you might be able to talk through what you're hearing from customers and what gives you confidence in the acceleration and priority engine revenue.

Great. Thanks for the question. This is Mike. Yeah, one of our major goals over the last few years has been to increase our longer-term revenue metrics as a percent of total revenue. When we launched Priority Engine several years back, obviously that was the main goal. It's very important for our customers to stay in front of their potential customers and prospects throughout the entire buying journey. In 2020, we saw a little bit of a pullback on that due to the – COVID situation and the pandemic environment setting in, with customers pulled back in terms of their commitment to longer-term contracts. But the importance for our customers to stay in front of their, as I mentioned, prospects and existing customers is incredibly powerful based on the first-party purchase intent data that we have to offer. We finished the year last year at 4% growth, and in Q1, we've seen priority engine revenues grow 7%. and we're seeing better conversations and better bookings across Priority Engine, and we expect the longer-term contracts associated with Priority Engine will be growing to 15 percent plus for the next quarter, and we predict that to happen for the remainder of the year. As you noted, we hit a record high of 42 percent of our long-term contracts, long-term revenue being a part of our overall revenue. We're excited to see that. We believe that the momentum, the tailwinds, where everything is going in terms of the overall market plays favorable for us. So we feel that there's some good upside in that number.

Excellent. Well, really appreciate that. It's great news. And if I could get another related to Bright Talk. Now that you guys have owned it for a full quarter, just wondering if you might be able to provide any kind of tangible customer feedback on the acquisition based on what your customers are saying.

Yeah, our customers are very excited about the opportunity to work with TechTarget and BrightTalk together as one organization. BrightTalk brings a very unique advantage to the market, something that we did not have previously to the acquisition. Their rich content webinar platform provides a very good opportunity to capture not only permission-based members that have registered on the BrightTalk community, But it also enables those audience members to throw off first-party purchase intent data for our customers to leverage. TechTarget is very tech-based in terms of our content syndication, our lead generation priority engine, the way we provide content to the market. So marrying that up with video-based webinars, summits, virtual trade events is very complementary. And being able to capture the purchase intent signals throughout the entire buying and purchase process for every one of the account buying team members is critical. We've seen results of 30 plus minutes of average dwell time and viewability on a BrightTalk webinar and on a summit and a webcast. So that's really important to be able to throw off very strong purchase intent signals. So our customers want to see everything under one umbrella, and they're excited for it. We're excited for the opportunities. We have a lot of joint initiatives going on between the organizations to make sure that we are providing the right information. Again, it all goes back to relevant content, registered opt-in, permission-based audience members, and first-party purchase intent data. That is really the core value proposition that we bring together under one umbrella.

That's a fantastic color. I really appreciate that. I don't want to monopolize the line, but one last thing on mobile IDs and third-party cookies. That's a topic we talked about and the industry is somewhat fixated on as of late. I'm just curious how much this becomes a topic with customers and potential customers. Are we at the point yet where customers are evaluating these privacy standards with purchasing decisions, or do you see that becoming a key component of the conversation?

Yeah, that's a great question. I'm going to really focus on one of those metrics there. First of all, privacy and compliance continues to be an ever-evolving focus for not only our customers, but their prospects and their customers that are members on our sites. Google announced last year that they would eventually eliminate the use of third-party cookies, and they have followed up with that announcement, and that is projected to end next year. That bodes very, very well for TechTarget because we own and operate a massive amount of communities, over 141 enterprise technology-specific sites with over 20 million registered members, BrightTalk with over 8 million registered members who are opt-in permission-based, third-party cookies being eliminated. Our customers really value the first-party data, the permission-based audience members, so that is actually a very favorable competitive advantage and tailwind for us. And we expect that as one of the three major tailwinds when we talk about customers modernizing their sales and marketing efforts and leveraging first-party information, first-party data, purchase intent data. The announcement of Google of eliminating the third-party use of third-party cookies. And then overall, budget shifting from face-to-face events to online and digital and data-driven. This all bodes well for us, not only in the short but the long term.

Thank you very much. I think that's all we had from our corner. Congratulations again, and I appreciate it.

Thank you. The next question comes from Aaron Kessler of Raymond James. Please go ahead.

Great. Thanks, guys. A couple of questions. On the sales adoption, I know you've had some good traction with that product. Can you just give us an update on what you're seeing from sales adoption of Priority Engines? Also, maybe just an update on kind of priority engine express. I assume you'll see that start to accelerate as companies start to go back in office a little bit more. And then maybe finally, just on the events kind of landscape, how do you think I expect that to progress throughout 21? Do you expect it to still be mostly digital events and that'll be more of a permanent shift? Or do you think there could be some headwinds as events start to kick off again? Thank you.

Great. Good questions, Aaron. I'm going to take them in order in terms of the sales adoption. As you remember, going into this year, we made some new updates and launched some new updates to Priority Engine, and those updates were very focused on sales adoption. We still work very closely with the marketing organizations. The marketing organizations want to make sure that they have the opportunity to target accounts and leverage their ABM strategy and drive net new sales. But on the sales adoption, what we noticed was, and what we heard back from our customers through our customer success team was, they want to access the data a little bit differently. They need it more personalized. It needs to be in their workflow. It needs to be their territory specific. So we really focused on that, and that is we've seen some good adoption, and the usage numbers continue to increase quarter over quarter. I think the number one move that we did on that where we're seeing great benefit is we the prospect level intelligence. So when we looked at this before, when we showed the priority engine accounts by region or by technology segment, they would rank those at the account level from one to, you name it, to be thousands in terms of ranking. And a sales rep would take the same cadence if he or she was calling into J.P. Morgan. They may be talking about threat intelligence. But now at the individual prospect intelligence level, sellers can now understand within their own territory what individual buying team members are engaged in what and what are their points of entry. So that same example of, you know, JP Morgan or, you know, Raymond James or somebody who's looking, you know, looking at that account, now they can identify it and say, okay, Mike Detoya was focused on identity and access management, but Dan Norick And Aaron Kessel will focus on threat management and email security, all within that same account. So you can now personalize and customize and really go over and engage with that individual prospect with more information or more data. We've seen good success on that. We're still continuing, and our focus is on TIDA integrations and APIs in our customers' workflows. A few quarters back, we were very one-directional. We would push our information into our customer CRM system. Now we're having this more of a bidirectional. We have access to key data components in our customer CRM system. Opportunities, pipeline, lifecycle of the deal. We want to make sure Priority Engine is aware of client opportunities so we can show when we alert the client of the intent signals and their reps are seeing more usage in the tool to learn more and when a sales process on the client side was actually initiated, throughout the journey of the deal. We're going to continue to focus on those as we look moving forward over the next couple quarters. It's going to really have a focus on sales usage and sales adoption, and we'll be leveraging some of the account-level data that we're getting from our BrightTalk audience members, so we'll be able to expand our reps' territory in terms of, the intent signals that we can pick up at the account level. We're really focused on some other areas around what we call inbound converter, which is, you know, more about the traffic that we, the insights that we pick up around visitors to our client's website. So being able to have more deep, granular, high, you know, high target, high data type of information about were they on comparison pages? Were they on a product page? So those focuses are actually boding well for us, and our customer feedback has been very positive. In terms of Priority Engine Express, I would say that was the product that probably had the most adverse reaction or impact from last year. We have a lot of SMB customers in North America. When the pandemic hit in, this is a new way of doing things. People started going remote. People did not want to commit to longer-term contracts, and we're starting to see a pickup on that in terms of bookings and interest. People are getting through the pandemic. I don't think we're out of the woods in the pandemic yet. I think the best position would have people, you know, back congregating in the office and, you know, collaborating and doing some things, but we're seeing a pickup on the bookings, and that's helping us with that, you know, 7% growth in Q1 moving to 15% plus in the remaining parts of the year. And on your events landscape, I believe events will start coming back a little bit in 2021, but I think it's predominantly going to be digital events. And as you get into 2022, you may see a mix of some hybrid events. I think that bodes well for us too. My belief, and we've proven this at TechTarget over the 22 years, when you're born online and you're digitally driven, You do a much better job in terms of understanding the audience, the data, and the delivery, and the scale. So there will be face-to-face events companies trying to migrate to online. A, they don't have the platform. I know they don't have the audience. And they don't have the skill set and the history of making this happen. So in 2021, I think predominantly we're going to have a digital landscape in terms of face-to-face events. And in 2022, if it goes to hybrid, we're going to be in a really good position. We're really excited what the BrightTalk folks are developing in terms of the virtual trade events, their summits, evaluating hybrid models. They know the business really well. We have the platform on that. We have the capabilities. We have the audience. We have the opportunity.

Great. Thank you, Greg. Congrats on the course.

The next question comes from Justin Patterson with KeyBank Capital Markets. Please go ahead.

Great. Thank you. Two, if I can. First, appreciate the new metrics in the shareholder letter. You called out over 10,000 prospective customers. What investments do you need to make to really accelerate the pace of adoption within that customer base? And then secondarily, what do you see as the key factors to add more customers that are spending over $100,000 annually? Thank you.

Great. Thanks, Justin. You know, in terms of the adoption, if you look back at the company five years ago, we probably didn't have the right product solution sets to go out there and create more adoption and acquire net new logos that would really be the long tail. So we identify that we have 1,585 customers. And we believe that this is a big opportunity to grow new logos at the long tail side of this. And that's a really big focus for us. With Priority Engine, Priority Engine Express, the Bright Talk seminars, webinars, series, events, we have now a more complete product offering that will be able to help us with the long tail all the way to the enterprise. And we wanted to make sure we provided those metrics because, again, we have 1,585 employees. Customers, we think that that shows that there's an opportunity. We've identified close to 10,000, as you noted, of other technology companies that should be doing business. And as we evolve and develop the products and the solutions and cross-pollinate it across all of our departments, we have a great opportunity there. We noted in the letter that we had 225 customers that spent $100,000, greater than $100,000. I think this is a really good track record to show when we get customers in, Because we understand their business, we have the content, the audience, and we segment it, and we can align their go-to-market strategy with very specific markets through our owned and operated and massive community, it bodes well. We get good relationships in there, and we start with these guys and these customers, and we grow them to six figures or more. And then with 25 customers that have spent more than a million dollars, again, these are some of the new metrics that we've laid in there. It just shows the track record of growing these customers a lot. They have different divisions, different go-to-market strategies, alliance, partners, channel, ABM and marketing, sales, inside sales. Now we have AR opportunities, product opportunities. We have a really good opportunity on that. So that's, I think, what we're going to be focused on and making sure that we're getting those, you know, once we get a customer in the door. we actually do a really good job of growing that customer. I'm going to have Greg chime in for some follow-up.

Yeah, so I'd say that the main, you know, as Mike said, we're selling into different groups within the organization. We're cross-selling products, and we're selling into additional geographies. So that's how we're growing people to over the 100,000 and over a million. And then in terms of the investments to kind of hit that, you know, get more companies along the tail. Two places we're investing, we're adding some, we are adding more sales heads to go after that. And we're also investing in more kind of self-service on the back end to support those customers. So I'd say those are the two places where investments are being made. But they're, you know, those are fairly incremental investments. So they're not going to change the margin structure of the business as we make those investments.

Great. Thank you.

The next question comes from Joshua Riley with Needham & Co.

Hey there. Great. Thanks, guys. So starting off, are you seeing customers increasingly willing to make annual commitments on priority engines? Or how should we think about the activity of customers buying quarterly versus annual subscriptions? And then second, on kind of the same point, you mentioned in the shareholder letter that small customers' interest in the sales use case was pretty strong. How should we think about the applicability for both SMB and large enterprise to be buying those additional sales seats?

Good question. Hey, Josh, it's Mike. In terms of your first question, are we seeing an increase in customers looking at annual commitments or longer-term commitments? The answer to that is yes. What we're seeing right now as we've navigated through this pandemic, and you saw last year the numbers, priority engine has grown low single digits on that. It really was off to a good start, and then it just really pulled back when the pandemic came in. What we saw in that were small to mid-sized companies, and even some of the larger companies that might have been up for renewal, maybe they you know, transitioned and pivoted to lead gen, and then the smaller companies that were ready to buy pulled back in March, April, May, and into the rest of the year as they wanted to get more clarity in terms of the pandemic and the outcome. We started seeing a little bit of a – we saw a pickup at the end of Q4, as you can see in our numbers in priority engine growth in Q1 at 7%. And as we mentioned, we believe that the priority engine number will grow, you know, mid-teens plus throughout the rest of the year. So if things stay the way they are right now, our conversations are good. The customers are starting to come out of the shadows and say we can commit to longer term. The world hasn't ended, and we're going to move forward from there. In terms of the SMBs versus the enterprise, I want to make sure I get this question right. I'd say the SMBs are different for a couple reasons. They don't have a very sophisticated marketing stack and marketing technology flow. And what they do is they really want to rely on their sales folks or their sales teams to drive net new opportunities. Now, that doesn't mean that they don't have any marketing capabilities because we deal with a lot of very smart marketing departments within SMB organizations. But their real focus is let's build an SDR team, a sales development rep team, or a business development rep team, inside team, Let's give them the tools, and let's give them effective tools. And really the advantage that we have is we're going to let those folks know who to call within an organization based on the real and observed first-party purchase intent data by the activities and actions they're taking on our owned and operated sites. And that really helps. And in Priority Engine and some of our other metrics, we're providing entry points. Who are they engaging with? Who do they have installed? So we're really trying to put the piece of the puzzle together. It's not about massive amounts. We have the most breadth and depth, the biggest breadth and depth of information in the enterprise IT B2B space, bar none. But you really want to make sure you understand there are only so many enterprise deals going on around any specific topic. To be able to leverage this first-party data and get it to the sales reps, that's a really good thing. On the enterprise side... It's great because you have the marketers. It's a great opportunity to bridge the marketing and sales departments together. So many times marketing can be distorted from sales. We're actually helping bring that together through, you know, capabilities and priority engine. And we're seeing some of our enterprise accounts really double down in terms of their sales usage, where it may have started with 30 or 40 reps, but it's going to 200 reps now. And they're seeing great success on that. Now, our playbook on that is to make sure, A, that we get these guys focused in using Priority Engine and our integrated marketing platforms that we're enabling them to have access to, build additional segments, technology segments, within the same geo, and then expand across the other geos and help connect the dots. So if Account A, Enterprise Account A, is leveraging our solution and our platform in North America around all flash storage, but they also have an entry point into hyper-converged infrastructure or identity and access management, whatever it is, we want to make sure that we're expanding that right here within the region. We're layering on more content marketing, creating custom content, Then we're taking that across EMEA and to the individual countries in EMEA, APAC, and Latin America. So we see a lot of roadmap on that across the SMB, mid-market, and enterprise.

Okay, great. Just one more from me. So what are you seeing in demand from the kind of the global 10 vendors? We know the concentration is down pretty dramatically to roughly 20% of revenue, but They've been kind of showing some signs of life, actually, recently in their results. I'm just curious, how is that impacting their spend with you guys in the last couple quarters here?

Yeah, and as you can see, we saw an increase in their spend as well. And some of those Global 10 are in a stronger position than some of the others. I'm going to leave them nameless. Some of the folks that really have made that transition to a cloud and SaaS-based strategy are doing quite well. Others are trying to catch up. But, you know, a lot of those companies were very heavily focused in face-to-face events, you know, not only in North America but throughout the regions. So that transition, if they were trying to get online and be digitally driven and do a digital transformation, that has been accelerated. If they were looking at it over the next three years, that happened in the last 12 months. And now we're starting to see those global 10 focus on digital technology We're seeing an always-on strategy more than we've seen before, but that could still be a little bit choppy. I would say, I'm glad you pointed out, that the concentration is roughly 20% of our overall business. Ten years ago, it was over 40% of our overall business, and that was a little too weighted towards those guys because they can be a little bit unpredictable, and they can have quick pullbacks and quick acceleration. So we're really happy. It's been a big focus for us. by driving that new logos and driving the mid-market and even that upper end of the mid-market and low enterprise, that they are at a 20% overall concentration rate.

Great. Thanks, guys. Congrats on the quarter.

Thank you. The next question comes from Brian Burgin with Cowan. Please go ahead.

Hi, thanks. This is Zach Aisman on for Brian. Just a couple questions from us. Starting with the legacy business, It's accelerated in recent quarters, and much of that has to do with customers opting for short-term marketing arrangements, which is well understood. But how should we – it's driven the top-line outperformance as well. How should we think about the sustainable growth rate for the non-priority engine business moving forward as these unusual growth rates decelerate going forward?

Great. Good question. Thank you. So I think in terms of the shorter-term – you know, uptick, you've got to remember a few things. Number one, a lot of the business, the trends that we're seeing, again, I'm going to go back to, companies are shifting their budgets in North America as well as international in their field budgets, from face-to-face events to online. And that's a really powerful trend. And I can tell you, I don't see that going back to the numbers that it was before. Like, when you go from digital... When you ship from analog to digital, very difficult to switch back to analog. If you look at it in layman's terms, there's more scale, there's more flexibility, there's more intent. It is a huge cost savings for customers when they're doing that. So they're going to adopt that. So now what they do is because they were doing events before, a lot of these customers were not familiar with intent data and subscriptions around intent data. they would default or pivot to lead gen. Now they're getting comfortable with the lead generation, the BANT, and now they look at it and say, gosh, not only do I need to lead gen, I need lead gen on owned and operated sites that are throwing off first-party purchase intent data because you can see the message that as people are getting, as Google has announced the elimination of using third-party cookies, our customers want to know that we know our audience, and it's a permission-based audience on our first-party purchase intent data. Now you get into that transition, where they're now getting comfortable with digital, a strategy with data, and we transition them to an integrated purchase intent priority engine through content marketing, through contextually aligned brand messaging on own and operated sites that are driving first-party purchase intent data That is the roadmap of how we take this lead generation increase to longer-term deal increase from 40% to our goal later on to be north of 50 in a couple of years. That's really the playbook.

Got it. Makes sense. And just to follow up on priority engine, historically there's been some annual feature and functionality enhancements, including some last year on enhancing the sales use case. Can you... provide any notable enhancements that may be in store for this year?

Yeah, that's a good question. So we had some of those sales use cases that were enhancing sales effectiveness and usage. You know, we've updated our alert system so sales reps can get alerts within their specific territories. One of the biggest things we did was made sure that we we customize and personalize everything to a sales rep's territories for them. Before, it was a big batch dump. It was more set up for marketing, so we wanted to make sure we transitioned it to sales. As I mentioned earlier in the call, the prospect level intelligence. You know, a sales rep has, if you look through the life of a sales rep, on Monday they have a call blitz and they have their 25 accounts in their territory, and maybe they have 50 accounts in their territory. And they can actually go out there and rank their accounts right in priority engine and But a lot of reps want to rank their prospects, the actual people. So prospect A might work in account one that's ranked one, the first account. But number two could be the most active level, the most active individual prospect could be working for account that's ranked 222nd. It's really important for reps to have that ease of use and the functionality to identify and prioritize prospects. at the prospect level as well as the account level. Better integration in the sales force has been very important. One of the things that our reps have come back, meaning our customers' reps have come back, they said we'd love to actually have more insights at the account level as well and at the individual prospect level. We have a really good opportunity with the BrightTalk account data that we can start integrating it into our sales use cases so the reps can have more entry points while they're using Priority Engine into their territory based on the account intelligence. We're going to look at personalizing some additional territory usage for our cover-up. So this is a big focus on this. There's going to be tighter integrations into not only the CRM system, which is typically Salesforce, and not only the marketing automation platforms, you know, Marketo and Eloqua, but we're going to have looking at tighter integration into sales enablement platforms, you know, outreach and companies like that. That's a great question, and that's a big focus for us, and you'll see more as we announce some of these in the end of the second quarter and we look into the back half of the year.

Yeah, I would just say our kind of historical cadence has been one to two major enhancements, upgrades per year, and you'll continue to see that, you know, for every year. it's early enough in this mega trend of people digitizing and modernizing their sales and marketing organization that there's still a lot of innovation coming in two ways. Our customers are innovating, and we see what a specific customer is doing, and then we can integrate that for all of our customers to use. And then also, obviously, we're talking to customers all the time, and we're coming up with different innovations as well from customer feedback. So I think you'll continue to see you know, a couple upgrades every year, and there's a very robust product roadmap. Thanks for the call.

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