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TechTarget, Inc.
8/4/2021
Good day and welcome to the TechTarget second 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 the 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 AK. 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 may be considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors sections of our filings with the SEC. The company 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. We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter. With that, I'll turn the call over to Greg.
Great. Thank you, Charlie. We continue to enjoy positive momentum from multiple tailwinds. which is translating into broad-based strength across all products, customer segments, and geographies. Revenue grew over 80% in the quarter year over year. We are growing faster than we originally forecasted, and today we are raising our annual forecast for the second time this year. The revised upward range is included in our shareholder letter that we released today. Also today, we are announcing the acquisition of Xtelligent Healthcare Media, which is a natural extension into an important adjacent vertical technology market. I will now open the call to questions.
We will now begin the question and answer session. To ask a question, you may press 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. And the first question comes from Aaron Kessler with Raymond James. Please go ahead.
Okay. Thanks, guys, and congrats on the nice upside. A couple questions. May, first, any insights you can give us? I didn't see it in the shareholder letter. Maybe it's in the 10Q, North America versus international performance. And then, May, on the Xtelligent acquisition, if you can talk a little bit about maybe the monetization plans. I think you said you'll kind of plug that into your platform, but just a little bit more details how you – may be integrating that given its kind of different vertical within healthcare. Thank you.
Great. Thanks, Aaron. This is Mike. Thanks for the question. Across the globe, both in North America and international, we saw outpaced performance than we had originally guided to. The real detail wins that we talk about in the shareholder letter in the Momentum in the industry, one, the transition from face-to-face events. On the international side, face-to-face events was pretty dominant in the market pre-COVID. A lot of field marketing dollars were being allocated to face-to-face events, and that has been shifted quickly, and that's going to continue to move to digital, always-on, and first-party purchase intent data-driven. There's also a lot of privacy regulations and compliance across the globe, but in particular on the international side. And so having an opt-in, permission-based audience through our own registration, through our own content vehicles, our customers really see the value in that, and that value continues to increase. And then Google's announcement of eliminating third-party cookies has really brought a spotlight on this, again, to enhance the privacy concerns and the opt-in and people wanting to deal and engage with first-party content. I'd say on the North American side as well, we're seeing, again, as we stated during the shareholder letter, there's a big focus for our customers to modernize their sales and marketing departments, and they want to do that with first-party purchase intent data. And having that first-party purchase intent data driven with our own active, relevant, and segmented audience members has really driven the cake. I would say that we've seen Really good growth across all of our products. So our demand generation, as well as our priority engine numbers, as we noted in the shareholder letter, priority engine grew 20% year over year. Across the customer segmentation, our global 10, as well as all others. And again, across all the geos. And then for your second question, on the Acceligent side, this acquisition, as we noted, checked all the boxes. original content, opt-in permission-based members, and a large amount of first-party purchase intent data. And we see the opportunity right now to monetize that purchase intent data into our priority engine subscriptions. I would expect that we'll be rolling out new segments in this market where healthcare intersects with IT, software and hardware. We have a really good untapped opportunity right now to grow that first-party purchase intent data that Xtelligent brings to bear with the acquisition.
Got it. Great. Thank you.
The next question comes from Joshua Riley with Needham. Please go ahead.
Hey, guys. Thanks for taking my questions. Congrats on the strong quarter. So I think if you look at the strong increase in the guidance for the second half of the year here, how much of that is balanced between the Xtelligent acquisition, the core tech target business kind of outperforming, or maybe even greater strength than you anticipated in BrightTalk?
Thanks, Josh. In terms of the Xtelligent side really doesn't factor into this guidance that we're doing. At the beginning of the year, we provided some guidance because, you know, we're operating and reporting under one number. You know, BrightTalk and TechTarget sell to the same customers, same accounts. We have very similar offerings. They complement each other, but we're reporting on one number. And we originally gave, you know, modeling guidance of 20% growth for BrightTalk, and you have the numbers from last year, and low to mid-teens growth in TechTarget organically. We're just seeing us accelerate across those original guidance or forecast measures. And again, just to reiterate, we're seeing that across all the product sides. As you've read in the shareholder letter, priority engine, which was single-digit growth last year at this time, is now 20% growth and demand generation. So that's where we're seeing the growth based on what we originally forecasted. We're seeing the accelerants on those areas.
Okay, great. And then Just to follow up on the Google delaying the third-party cookies removal from Chrome. My sense is that's not going to cause any direct loss of business in the near term. But did you have any pipeline building from customers that were looking to switch their intent data providers that are maybe going to reevaluate the timeline of when they were going to make the change? Thanks.
Great question. First of all, we see this as a very strong competitive advantage. And Google delaying it a year – We see that okay because customers really need to plan what their overall marketing strategy is going to be around intent data, using third-party cookies versus first-party cookies. I would say it's shown a bright spotlight on this topic. We're having a lot of conversations with customers on this, and they will continue to migrate from the use of third-party cookies to first-party purchase intent data, contextually relevant and aligned marketing programs, And that bears well for us over the next year, year and a half until it fully transitions.
Hello? Thank you. You're welcome.
And the next question comes from Brian Burgin with Cowan. Please go ahead.
Hi, thanks. This is Zach Aisman on for Brian. A couple questions. First on Priority Engine, certainly seems like the trajectory is stronger than what was contemplated last quarter when there was guidance on 15% growth in the second half. Can you maybe give us some more color on expectations for the second half? And then on that note, maybe talk a little bit about Priority Engine Express, an update on sales adoption there and any data points you can share as it relates to progress on Express?
Great. Yeah, Zach, if you look at our priority engine, so I'm going to bring us back to last Q2 as we got out of, as we entered into the COVID arena, and you saw a lot of pullback in terms of customers committing to long-term contracts. But what customers started quickly doing was shifting their face-to-face event budget to demand generation, content syndication. They wanted really tight contextual alignment. with relevant active opt-in first party members. As we grew the demand generation list of clients and revenue throughout Q3, Q4 of 2020, and then throughout the first half of 2021, one of our playbook was to engage with those customers, make sure they're seeing value in the ROI from their demand generation efforts in investments with TechTarget, and slowly migrate them into longer term subscriptions. annual subscriptions being powered by Priority Engine. When we spoke back in May, we expect this to be 15% plus growth. We exceeded those. Our customers are doing the migrations from shorter-term demand generation to more integrated long-term subscriptions. In terms of the second half, I expect it to be very similar in terms of numbers and pretty consistent with what we're seeing Q2, high teens to 20%. And I would also say that not all of our customers are back in terms of migrating from short-term demand generation programs to longer-term subscriptions. So, you know, we're very bullish in the second half on that. We continue to execute and do well against the playbook. In terms of Priority Engine Express, as I mentioned, very early in the cycle, in the launch on Priority Engine Express, We've seen some really good momentum on a percentage wise. It's very high in overall dollar amount. It's still building its base in terms of customer revenue and insertion order count. So we're really bullish about that, but it's really confirming that we have a really good opportunity in that SMB market that are really focused on sales use cases. A lot of those small companies do not have elaborate, sophisticated marketing teams or marketing systems. but they all have inside Salesforce, inside sales reps, outside reps, and they really want to identify which accounts and which contacts within those accounts that they should be mobilizing and prioritizing their sales efforts against.
That's helpful. Thanks. And just to follow up, looking at the P&L's operating leverage this quarter was pretty impressive. Actually, SG&A and product dev was essentially flat. quarter over quarter looks like on an absolute basis. How should we think about investments here going forward and just leverage? I know you gave some guardrails on guidance in 3Q and 4Q and kind of back into things. It looks like 3Q will stay flat and 4Q expenses might pick up a bit. But can you just talk a little more broadly about leveraging the model and how should we think about this going forward?
Yes, this is Greg. So OpEx will go up You know, gradually in the second half, the first half, we do about half of our employee bases gets reviewed on compensation increases in July and about half are in January. So that will increase some response. But in terms of long-term operating leverage, you know, it's a great model. There's very little incremental cost of sales. So it's a model where most incremental revenue on a gross level you know, on a gross basis, drops to the bottom line. So, you know, we target around, you know, at least a 50% incremental EBITDA margin. So that allows us to reinvest, you know, half the incremental revenue. So it's a model where we're able to reinvest at a healthy rate and expand margins at the same time. So this type of operating leverage that you see in this quarter and you'll see in this year is pretty consistent what you've seen with us for the past several years. and what you can expect to see going forward. So as we've said in the past, as we continue to scale revenue, 40% adjusted EBITDA margins are, you know, we're going to see in the near term. And we think, you know, long term as we scale the revenue that, you know, 50% adjusted EBITDA margins are achievable.
Great. Thank you.
The next question comes from Patrick Koval with Deutsche Bank. Please go ahead.
Great. Thanks so much. This is Bhavanan for Patrick. Congrats on the strong performance in the quarter. Michael, in your shareholder letter, you mentioned some early cross-selling efforts going well with BrightTalk. Can you maybe elaborate on this a bit? Where are you seeing some success today? And maybe what's left on the product side to really drive additional revenue synergies?
Right. Bob, yeah, in terms of the cross-selling efforts, as I mentioned, the acquisition of BrightTalk just made complete sense for all the reasons that we talked about earlier. Content, the audience, and the first purchase intent data. But even more importantly, the complementary product offerings, they really focus on webinars, videos, talks. They create a platform where customers can, you know, an all-inclusive platform, generate their own content. promote it, as well as create a demand generation system engine within that platform. Our reps, we're all one organization, but our reps are walking the BrightTalk reps into accounts where they're spending with TechTarget, but might not be spending with BrightTalk at a material level. And the BrightTalk reps continue to do a great job of walking TechTarget reps into those accounts that are spending on the BrightTalk product, but maybe not as heavily on the on the tech target solutions. And there is a huge high I get it factor from customers. They want to make sure they have the right mix of media content vehicles out there to engage with the active buyers throughout the entire research process. And this combination is working well. It's working well in North America. We're doing it throughout EMEA and we're rolling this out in APJ as well. We've seen it with really good success. I'm sorry, what was the second question you had on the product side?
No, is there anything left on the product side to really drive additional synergies in terms of any new product features that you need to come out with?
Yeah, very good. So there are a lot of synergies on the product side that we're looking at in the short term as well as the long-term strategic product roadmap. Again, BrightTalk has just launched their BrightTalk Central Platform, which I would refer to as an all-inclusive content platform. creation and demand gen vehicle for the marketers. We obviously have our Priority Engine platform that works across marketing and sales. Recently, we announced in Priority Engine that we are just an account level intelligence from the BrightTalk members, from the BrightTalk community into Priority Engine. We did this really to focus on a sales use case. And what that has been able to accomplish in the short term It has allowed our customer sales force to now have double, on average, 2x the amount of accounts that are active within their respective territories that they can engage with. So now you have more reps within our accounts calling on more accounts within their territory that are active with first-party purchase intent signals. which creates a larger engagement and consumption model of the tech target data and the BrightTalk data coming together. So we're keeping that on the account level right now. We're working on future roadmap strategies in terms of the platform, as I mentioned, from Priority Engine as well as BrightTalk Central. Teams are working closely together, and we're really excited about the short and the long term on that.
That's super helpful, and that segues nicely to my second question. Can you maybe just talk a little bit about the sales use case within some of your larger customers of Priority Engine? How has adoption been thus far relative to your expectations and any data points that you can provide just to highlight some of the adoption you've seen thus far? Yeah, that's a good question.
The use case is going well. So, you know, historically, this has been a marketing-focused use case platform where marketers would have insights into the accounts as well as the active prospects at the account level by segment and by geography. And marketers, this is still a big focus for us, marketers that are looking to mobilize against an account-based marketing strategy, ABM, named account strategy. They want to increase their database. Sales is a different use case. So we rolled out prospect-level intelligence at the beginning of this year, where sales reps, if you think about their cadence, they will come in, they'll do a call blitz, they have a territory that they call into. Now it's enabling them to rank at the individual prospect level, who is most likely to be prioritized first. So if I'm a rep and I came in on Monday morning and I'm doing a call blitz, I might have an active prospect that we've identified in account A be number one to call into, account B would be number two, versus just focusing on the individual account level. And what that does is it allows sales reps to to customize and personalize the individual outreach, whether it's email or phone conversation, when they reach out to that individual buying team member. And that has seen really good adoption. We've seen sales issues increased by 2x. And we're driving, again, very focused around the sales application and the sales use case. In this recent press release, Bob, We talked about ingesting the account intelligence data from BrightTalk, but we also expanded on our functionality with what we call inbound converter. An inbound converter is a technology that's tied into Priority Engine that tracks the accounts that visit our customers' websites. And what we've now done is if we expanded that intelligence and granularity, to not only tell you what accounts have visited your sites, but we're now identifying which pages on the customer's websites those accounts are engaging with. Are they on product review pages, customer success pages, demo pages? So it helps prioritize the accounts. Then we marry that account data into Priority Engine to show which individual active members within that account's buying team are probably the ones that are engaging on those customers' websites. So what we're really doing is de-anonymizing the account-based traffic going on to our customers' websites, and we're prioritizing which people they should reach out to within those accounts. And sales is seeing a lot of success on that, and we are focused on both on the sales use case and on the marketing use case and features and functionalities on our next rollout or revision, which will come in the late spring. the latter part of the year in the fourth quarter.
Got it. Super helpful. Last quick one, if I could squeeze in. Long-term revenue mix downtick slightly from 1Q. Is there anything of note impacting the mix here, or was it just strong performance on some of the managed side of the business?
It's two things. The overall number grew dramatically, you know, materially, quarter over quarter. And if you look at the overall revenue dollars associated with long-term revenue, they were up Double digits, quarter over quarter.
So it's just really that the percentage is a little lower because the revenue was so much higher.
Makes sense. Congrats again, guys. Thank you.
The next question comes from Greg Burns with Sudoti & Co. Please go ahead.
Good afternoon. What was the Xtelligence trailing 12-month revenues in EBITDA?
Greg, we don't report that for disclosure reasons. I can tell you the main focus of this acquisition was on the content, the opt-in audience, and the untapped monetization of first-party purchase intent data. In the press release, we mentioned that the CEO of Xtelligent is a former TechTarget employee. He spent 11 years here focused on our member and audience acquisition methods and process. The focus on this number – the focus on this acquisition was around the content, the audience, and the – again, the potential in terms of first-party person intent data and the ability to monetize that. We also really – we have a lot of good relationships that we – with organizations around the industry and – You know, we don't really get into any – we try to avoid any bid process. So what we see is value, again, around content, audience, and first-party purchase intent data. We try to keep that really close to the vest. Again, just to not reach any of the materiality thresholds. We didn't have to disclose it. But we also want to make sure we keep a competitive advantage so investors – so our competitors aren't seeing how we are trying to value potential organizations, and we want to make sure it's fair to our investors.
Okay. And was the healthcare IT vertical, was this something that you had your eye on for a while? Are there any other kind of niche technology verticals that you might be able to do the same thing, kind of plug them into your platform and expand the monetization opportunities?
Yeah, great question. In terms of the healthcare – IT vertical, this is a vertical that we've been keeping our eye on for a couple years. And the adjacent vertical, you know, where healthcare intersects with IT and infrastructure, security, hardware, and software, just made all the sense in the world to us. We believe it's going to open the door to new customers, opportunities. As I mentioned earlier, we believe that we have an untapped revenue opportunity with Priority Engine and bringing our purchase intent data onto the Xtelligent community. And in terms of other verticals, you know, there are some other adjacent verticals that are interesting to us and that we're keeping an eye on. And even BrightTalk, when we acquired BrightTalk, they have some audience and verticals in the FinTech space, asset management space. So those are definitely something that we're keeping an eye on now and moving forward.
Okay, great. Thank you. Yep.
The next question comes from Eric Martinuzzi with Lake Street Capital Markets.
Hey, guys. This is Kevin on for Eric. Thanks for taking my questions. Just on the acquisition, and I know you just touched on it briefly in the last question, but maybe could you give us a little more color in terms of was this one of the larger players for content and audience in terms of the healthcare market? I.T. vertical or was it kind of the quality of the stuff they were putting out there? I know you had a relationship with the founder and stuff, but what really maybe size up the market is what I'm trying to get to.
This play was focused not on the size, but on the target and the quality of the content in the audience. and the untapped opportunity with the monetizing the purchase intent data. There are a couple of big players out there. I think Becker Health and HIMSS that is part of a nonprofit organization that has a big event every year. The reason why this fits so well is we know the folks over at Xtelligent. We know the type of content and the approach, which mirrors what TechTarget would do in terms of the enterprise IT market. We really value the opt-in, permission-based audience members. Again, we talk about eliminating third-party cookies, what's going to happen with third-party data. And we just see an opportunity to really monetize the large amount of purchase intent insights that they can generate on their sites due to the quality and the targeted focus of the health care market.
Got it. Thanks. And then just a bigger kind of question here. I know you touched on the letter, but the continued migration from in-person events to online, do you see that going? Is there any flurry of more in-person events? I know you mentioned international earlier in the call, but do you see any of that coming back anytime soon or no?
Yeah, I really I don't see it coming back to where it was before or being anywhere near that. There's a couple of things that really, you know, the analogy that we use internally is when somebody moves from analog to digital, it's really difficult to go back to analog. But also, when you go from face-to-face events to online, first-party, intent-driven type of opportunities, it's more scalable, it's measurable, and it's less costly. I think CEOs of organizations... are really done with sending 25 people to Las Vegas or wherever it is to have people out of the office for five days, set up booths, have all these travel costs. And you're seeing that, well, we have to make this digital transformation. COVID accelerated that. We need to capitalize on that. And we can grow, scale, and measure that more effectively. So I really see this trend moving forward in a positive manner. And again, this bodes very well for what we've built as an organization.
Thanks, guys.
You're welcome. The next question comes from Justin Patterson with KeyBank. Please go ahead.
Great. Thank you. Two if I can. First, just on the M&A environment, how should we think about the pace of M&A going forward and the opportunity available? Even after the acquisitions, you still have a lot of cash on the balance sheet and are still throwing off cash. So just curious what that future pipeline looks like. Then secondly, you know, priority engine growth strong. You've got the new businesses coming in. How should we think about just what the normalized growth rate for tech targets should be going forward? Thank you.
Right. Justin, in terms of M&A, there is a lot of activity going on in the market. We've seen this for the last couple of years. We have a model that we look at. And we are very active in looking at organizations that fit that model. And again, that model really focuses on content, opt-in registered members, first-party purchase intent data, and or complementary solutions like BrightTalk. BrightTalk checked four of the boxes on that. We look at a lot of organizations. We are very selective on what we're going to choose, and it needs to fit that. I would say for every acquisition we've done, we've probably looked at 40. And we're going to continue to be selective on that. We're not going to make a decision just to make a decision. It's got to really fit in the short and long-term strategy and what we're really focused on as a business. And, you know, in terms of normalized growth, again, at the beginning of the year, we figured, you know, we provided that model of 20% bright talk and low to mid-teens and tech targets. It's early, but if you look at it and the trends continue the way they're continuing, we continue to execute on how we're executing, I would say this would be mid-teens plus growth moving forward, mid to high teens.
Great. Thank you.
This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.