TechTarget, Inc.

Good morning and welcome to today's TechTarget Report second quarter 2022 conference call and webcast. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, please press start followed by one on your telephone keypad. I would now like to pass the conference over to our host, Charlie Renick, General Counsel, please go ahead.

Thank you, Candice, and good morning. Joining me here today are Greg Straykosch, our Executive Chairman, Mike Katoya, our CEO, and Dan Norick, 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'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 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 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. Great.

Thank you, Charlie.

Good morning.

We are pleased to report we exceeded our revenue forecast and adjusted EBITDA forecast in Q2 and achieved 43% adjusted EBITDA margin in the quarter. In addition, we are reaffirming our annual revenue and adjusted EBITDA guidance today. For Q2 2022, GAAP revenue grew 24% to approximately $78.9 million. Adjusted revenue grew 19% to approximately $79.4 million. Net income was approximately $12.4 million, an increase of 142%. Adjusted EBITDA grew 33% to $33.8 million. Net income margin was 16%. Adjusted EBITDA margin was 43%. GAAP gross margin was 74%. Adjusted gross margin was 77%. Longer-term revenue grew 24%. to $32.8 million, representing 41% of total revenue. Cash flow from operations was $20.9 million. Free cash flow was $17.3 million.

I will now open the call to questions.

Thank you.

If you'd like to ask a question, please press Start followed by 1 on your telephone keypad. If for any reason you'd like to remove your question, please press start followed by two. Again, to ask your question, it is start followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. So our first question comes from Justin Patterson of KeyBank. Your line is now open. Please go ahead.

Great. Thank you very much and good morning. I was hoping you could talk about just some of the trends you're seeing from customers so far. Obviously, a very strong quarter, more recurring revenue these days. Enterprise IT is different, but would love to hear anything about just trends you saw throughout the quarter and what you're seeing quarter to date. Thank you.

Great. Justin, yeah, first of all, thanks for the compliment. Proud of you. proud of the team and also grateful towards our customers who continue to modernize their sales and marketing departments with a focus on high-quality first-party purchase intent data solutions. In terms of the trends, we've seen strong growth as we reported in the numbers in Q2, as Greg just mentioned in the introduction, across all of our purchase intent-led data solutions. You know, there are, you know, we're also understand that we can't ignore the noise about the economy. You know, we all see it, the high interest rates, inflation, consumer confidence, everyone talking about whether we're in a recession or not in a recession. So I think it's pretty safe to say that a lot of customers are probably spending more time scrutinizing their budgets. We have some customers that are, you know, might extend some of their sales cycles as they extend and navigate through this macro. But on the other hand, we have other customers that are very opportunistic and aggressive with incremental and they want to take advantage of this choppiness to gain market share. So it's hard to really put a blanket statement on these set of customers are doing X or these set of customers are doing Y. I will say that over the last couple of years, what we see is customers have spent a lot of money trying new tactics or new solutions out in the market. And I think as the market gets tighter volatile a little more choppy like we're experiencing today those investments will be highly scrutinized customers will really want to focus on quality and roi and i think that tech target solution should hold up pretty well based on our first party purchase intent data as well as our permission-based audience members and we do talk about the trends you know in the shareholder letter fairly healthy i.t environment But the other three trends around modernizing sales and marketing departments through data and automation, sensitivity to privacy regulations, which really bodes well for us with our permission-based members, and still a long-term transition of budgets from face-to-face to online for better measurement, scale, and efficiencies, those are not as economically sensitive. And I think in the long term, those trends are going to continue to bode well. So what I'd say on that is, We have a mix of what's going on in terms of customers, some being aggressive, some being, you know, really scrutinizing their budgets. We don't wish for a recession by any means, but I think based on our quality of our data and our audience, we're better positioned than most.

Thank you. You're welcome.

Thank you. Our next question comes from the line of Aaron Kessler of Raymond James. Your line is now open. Please go ahead.

Great. Thank you. And congrats on the quarter. First, just on the priority engine made for sales teams, if we can get an update there, just kind of what type of traction you're seeing with this product. Also, just a lot of companies have reported kind of lower brand advertising budgets. Be curious what you're seeing from the more the brand advertising side of the business as well in this environment. Thank you.

Sure. In terms of the priority engine sales use case, that was a big focus heading into 2022. Aaron, did you remember, historically, we focused on the marketing buyers, where they would use it for their ABM strategy, nurture strategy, building on their net new, building their account database and their prospect database. On the sales strategy, we've seen really good traction on that, where The information that marketers have, we want to make sure that it's into the sales use cases. So very focused on territory management, making sure that we have the right prospect level intelligence. So when a customer goes in there and they're using it for their marketing sales case, and then they start leveraging the reps to use priority engine what we've done really well is go in engage with the reps in their whether they're bdrs sdrs inside sales reps or even outside reps to work and train them on how to use the data and we've seen really good traction in terms of once we show them how to use the data which accounts in their territories should be focused on and which of the individual prospects within those accounts they should call because they have all the information at their hands what they're researching which competitors are influencing those accounts within a reps territory in their key entry points of research we're seeing good adoption on that and we're going to continue with the ability to for training we're investing heavily in customer success in our sales enablement training to empower the reps to leverage within our vendors our clients accounts to leverage the data in the optimal way. We are also very focused on, and I've mentioned this before, of getting tighter bidirectional integration into Salesforce as well as other marketing and sales technologies. So I mentioned Salesforce. We've done, you know, we work with Marketo, Eloqua, HubSpot, but we're now really working on partnerships with integrations around sales engagement and sales enabling platforms such as sales loft in outreach so as we continue to get that data into the our customers salesforce salesforce's workflow we expect to see uh continued traction in terms of the um brand you know the one advantage that we have it's you know first party data where our branding or ad revenue uh is high quality it's also high value and it's high price uh we've seen a continued momentum on the brand side. You will see, and I expect to see some of these accounts may pull back a little bit on some of the brand expense and really focus more on the data and the demand generation and the project confirmation type of data. But the brand revenues fared well and it's grown well. And, you know, we've all seen the announcement of, you know, the announcements and the vision of Google eliminating third party cookies later on. So I think that brings good attention to us. And I think our customers will continue to evaluate their brand strategy. And the last thing I'd say is the branding piece of our overall revenue is a very small piece of the overall target revenue. Yeah, I would just add in.

So branding is 10% of revenue or less. The second thing I would add in is just in the B2B The branding world is very different than the B2C branding world. It's basically an opposite business model. Consumer branding is basically unlimited web inventory with low prices. In the B2B world, in the IT space specifically, we benefit from a scarcity of inventory. There's a finite number of million-dollar purchases going on at any one time, so it's In the big picture, it's low-quantity, very high-quality premium pricing. So we're definitely much more insulated than the consumer Internet, and in Q2, branding represents we're very healthy growth.

Great. Thank you.

Thank you. Our next question comes from the line of Bavin Shah of Deutsche Bank. Your line is now open. Please go ahead.

Good morning. Thanks. This is Dan on for Bob. And I wanted to just touch quickly on the guidance as it relates to macro. I know you mentioned some kind of deal cycles elongating or maybe greater scrutiny on deal cycles. And it was good to see you, though, reaffirm the full year revenue guidance. But maybe you could just help us think about kind of what's embedded in that guidance in terms of a continuation of some of those trends or additional conservatism that you've built in should macro get incrementally worse throughout the rest of the year?

Yeah, good question. So, I mean, we're keeping a close eye on the overall macro. We have a lot of conversations with our customers. As I mentioned earlier, yes, there are some customers that might extend or scrutinize some of the budget spends. But on the other hand, there's still a lot of customers that are very opportunistic and you know, finding incremental and accelerating their spend. It's, it's like what I mentioned earlier, it's not a one size fits all right now. So I think we're taking some of that into consideration. And, you know, things can change quickly for the up or down. I mean, over the last six months, it's been a self fulfilling prophecy that we're going to be heading into a recession. Everyone talks about it, when everyone talks about it, everyone starts thinking about it, and then they start scrutinizing everything that they're looking at. So You know, we'll see how things turn, and there could be some upside to that, but there also could be some pause and some fits and starts to that as well. So things can change quickly in this, but we've provided guidance, and you've seen how we've done against our guidance in the past, and we feel this is the right guidance and keep reaffirming our annual guidance for the year is the right thing at this time.

Great. Thank you.

Hi, Craig. Hi, Jason.

Please go ahead.

Okay. Thank you. So two questions for me, guys. So just any commentary on international markets? I know we've heard that Europe's been a tougher market lately. You seem to buck that trend in the quarter. So is there any commentary there? And then the second one, can you give any usage rates around video or webinar? I'm just curious because As face-to-face events come back online, I think there's a fear that people are going to use video less. So I'm wondering if you've got any metrics that can validate more usage on that platform.

Right.

Jason, on the international side, again, healthy growth in the quarter. When we talk about those secular trends, especially around privacy regs and GDPR and all the European privacy laws, This really bodes well, you know, short and long-term without permission-based audience members. I also think we've identified that in the international markets, this whole transition from to online and data-driven is probably a little bit behind the North American market. So, again, we look at long-term secular trends and what's going to benefit us and our customers in the long term. I think that bodes well for us. And you're right, on the face-to-face markets, uh face-to-face events it was heavily concentrated face-to-face events pre-covid uh the drive to you know navigate a lot of them navigated online during covid we are seeing some face-to-face in the short term but as the market gets tight you take a look at these companies are trying to build a digital transformation to leverage data online tactics for better scale and measurability and roi and that bodes well for us now There are also some short-term, you know, headwinds. You know, there's obviously some tighter markets, recession-based markets right now in EMEA. You also have the war going on right now. When we have these conversations in February, you know, there's no impact. But you have a macro inflation and heading into a recession definitely in EMEA. have the war in ukraine and you have some short-term macro headwinds so there is a little bit of pause and hesitancy but we're still seeing good growth across the board and that's the color that i can give you today and again as i mentioned earlier you know we'll take a look at this market over the next you know 30 60 90 days but i really focus on the long-term trends and those long-term trends still vote very well for us and in terms of usage rates um you know we don't track and monitor the video and webinar usage rates versus face-to-face events we do see that there's been a pickup in some face-to-face events but every study that we've seen and what we've looked at and when we talk to our end user group as well as our customers it's really being driven by the end users, the actual technology buyer that does not have the enthusiasm as much as the vendor to go to a trade show, to spend three days out of the office, to go out there and travel, and to be there. So, yeah, we expected there to be a pickup and face-to-face events, but if you look at the long term on this and how today's buyer is a little bit different than yesterday's buyer, they're very familiar and comfortable with online leveraging data and okay with researching purchases, large purchases, on near time and by leveraging the online capabilities with information and content. You know, we still believe that that's a long-term opportunity for TechTarget in this market. So people that have good content, the leveraging online, the leveraging data are going to fare well.

And we've seen with the events that have been held, they've been relatively poorly attended, certainly attendance well less than pre-COVID. And this whole trending trend know people wanted to do as much self-service research as possible kind of goes against the trade show model which is interface with vendor sales reps and all the research we're seeing is that um the buyers want to minimize that um and these are million dollar purchases so there's going to be some involvement but they want it to be as late in the process as as possible so um you know we don't we don't see uh any bounce back to face-to-face events being a threat to our business. And long-term, we think they're just going to, just like they were pre-COVID, we think that the business is going to continue to shrink.

Thank you.

Our next question comes from the line of Joshua Reilly of Needham & Co. Please go ahead.

All right. Thanks, guys, for taking my questions, and nice job on the quarter here. If you look at your mix of customers, it's shifted a lot more towards cloud vendors who, as we all know, raised a lot of capital in the last five years and generally still have large net cash balances. Do you see this cushioning any potential macro weakness versus prior downturns when you had a greater exposure to large global 10 IT vendors that had more sensitivity to the strong dollar?

Yeah, Joshua, I think today's customer segmentation definitely is a competitive advantage for us right now. You know, you take a look at today's market where a lot of IT is spending and investing in cloud, SaaS, utility type of solutions. Today's IT is helping drive and run businesses. so if you look at five or six or go back to you know 10 years ago when there's downturns uh if you were a hardware company and you were selling servers storage and networks and it was a downturn people would just delay the purchase they would push it off for six months 12 months a year and they would just deal with you know older equipment today's i.t environment is they're running their business whether it's finance sales marketing you know um customer experience through these cloud types of solutions and these SaaS-based solutions, very hard to stop investing in that or stop not completing a project because it would be very impactful in a negative way to the business. Right now, IT is a competitive advantage. People that invest in technology and do it for their business will gain a competitive advantage and they don't want to lose that. I think today's customer segmentation is much better. We feel much better about that today than we did 10 years ago. I think that'll continue to be in that movement.

Besides that those companies are financially very healthy, the business model is just different. It's all subscription. In the past, as Mike was saying, Tech companies would see their revenue decline and a downturn, and we're not seeing that today. The subscription revenue is very stable, so why it may get harder to win new deals, their base of revenue is very steady. One thing to always remember about technology companies, they're always under intense pressure to generate revenue, no matter what the environment is. And so if you have stable revenues with your existing subscriptions and you're under intense pressure to generate new revenue, we don't believe that's a formula for people to reduce investments in things like we provide purchase intent data that makes your sales team more strategic, more intelligent, more productive, helps them win deals. So we think we're in kind of the sweet spot services we provide really for any economic environment.

Okay, great. And then I have two more quick questions. One, how are you thinking about priority engine price increases this year, given that you've had some, you know, good price increases the last couple of years, but, you know, it's really matched the innovation that you've delivered. And then second, are there revenue synergies between TechTarget and BrightTalk? playing out as you expected. Thanks, guys.

Great. In terms of the price increases for priority engines this year, we'll evaluate that going into 2023. You know, our focus right now, Josh, was to make sure that we expand on the sales use case. This year was the first year that we launched where we would charge a seat license for additional sales reps. So our reps and our product teams and our customer success teams really focused on adoption and onboarding and making sure our sales reps that are leveraging priority engine are getting the most value out of that and as we continue to do that we'll be able to sell more seat licenses which we haven't done before so in terms of price increase we'll evaluate that at the end of the year um in terms of revenue synergies yes so we've done a really good job and it's not just BrightTalk and TechTarget. We have ESG BrightTalk and TechTarget where we continue to introduce each of our opportunities to the other folks across the company. And when I look at the business today, I see there are so many entry points for us to get into an account, whether it's on web-based, video-based, text-based, database, demand generation, priority engine, branding, content enablement strategies. Our reps are really well-equipped to make sure that they're aligning with their resources across the entire organization to say, okay, this customer has this pain point. where two years ago we might not have been able to really address that pain point in the most effective manner. So they are introducing each other into those accounts, having joint conversations, working together collaboratively, and we've seen good success on that.

Okay. Thank you. Our next question comes from the line. of Brian Bergen of Cowan. Your line is now open. Please go ahead.

Hi, thanks. This is Zach Azeman on for Brian. A couple questions both on priority engine. The first one, what was the growth in the quarter and is the expectation for the year still high teens to 20%?

The growth in the quarter was 20% and we're still maintaining the overall expectations on the growth.

Got it. And then as a follow up on priority engine, how should we think about the macro sensitivity here? Understand there are structural tailwinds and using more data and insights during sales and marketing process. But at the same time, do you think that some clients become more averse amid the macro uncertainty, given its higher price and longer term in nature?

You know, I think customers that are really getting spun up and understand the value of not just intent data, but first party purchase intent data. And not only at the account level, but at the individual prospect level, there's a high get it factor there because no matter what type of environment you're in, IT companies need to grow their revenue and grow their market share. And if the markets get tighter, it's going to be really hard for them to find those deals because there are fewer deals that are going to land in the quarter. So having a competitive advantage or a head start to identify those opportunities or see those accounts that they should be focused and prioritized on should bode well. Now, with that being said, I've said this over the last seven quarters, priority engines are the catalyst of all of our first-party purchase intent data solutions. We can walk into a customer, show them all the data in priority engine, let's say they're not ready to do and integrate you know a long-term deal an investment priority engine it dovetails very nicely into the other offers that we have whether it's content enablement services activating that content into a demand generation you know um program looking at contextually contextually aligned and relevant banner placements as well as some other solutions. So it's really important to understand, I mean, I get asked this question the last couple of quarters, you know, is Priority Engine growth 20, 21, 19? At the end of the day, all of our products are first-party purchase intent driven and led. And Priority Engine really highlights the value across all of our solutions and gives us the ability to walk in and get the right introductions and sell the right solution for that customer at that time.

That makes sense. Thanks.

Thank you. Our next question comes from the line of Eric Martinozzi of Lake Street. Your line is now open. Please go ahead.

Yeah, I wanted to focus on the cost structure. The 77 percent adjusted gross margin was kind of in line with what I was expecting, but Just could you remind us of what are your costs of revenue and then any inflationary impacts on those costs?

The cost of revenue is on the content producers. Dan, what else are we classifying?

It's mainly, excuse me, as it relates to cost of revenues, you're mainly talking about salaries and headcount. And in terms of inflationary pressures?

Yeah, in terms of inflationary pressures on our expenses, I mean, what we see right now is I think what everybody's seeing. It's on the employee side. We know it's an employee market out there. We just did our mid-year comp reviews. We try to be as aggressive as we can. We want to reward our top employees. We made some hires that were focused on the key investment areas Eric, in May and June, that will see a full cycle in the back half. A lot of those highs are on product development, engineering, product marketing, customer success, as well as sales. You know, we might pay a little bit more now in the market than we did two years ago, but we're making the right investments with the best, you know, with our best employees and with the right people that we have to, you know, continue to invest in. And again, that's across engineering products, customer success, sales. uh in product marketing so you're experiencing wage inflation but your your retention rates are in line with historical norms yeah well um yeah i would say you know retention is probably a little bit of retention pressure but we're you know we are we're pleased where we are we're seeing you know wage inflation But we're also managing the business really well, as you see in the 43% EBITDA margin. So I think we're doing the right things for the business and investing in the business, as well as managing against the financials. Okay.

And then shifting gears, you talk about gaining share. Obviously, there's the organic growth rate of the business. There's also the M&A avenue, which you guys have experience with. are you seeing uh you know what's the level of activity there we have any near-term prospects if valuations come in a bit or is it still a kind of longer term uh share gain opportunity yeah so i would say we look at a couple things with the cash on hand that we did to the convertible back in december with a zero percent coupon um

We have a lot of conversations on the M&A side and we have consistent conversations. And when we have those conversations, we're looking at several things. Do they fit into our content model? Do they fit into our permission-based audience model? And are they going to help accelerate our lead in the first party purchasing intent model? However, we also know that valuations are moving. So, and especially in the private markets where it takes a little longer to catch up than the public markets. Everybody sees what's going on in the public market. Private companies, it takes a little bit longer for them to see. So we're starting to see those valuations get more check, come more in line. And so those conversations will continue to happen. And it also has to be the right deal for the buyer and the seller. But we are very active in those conversations. We're going to continue with the buyback. We've done this. You've known us. We've done this historically over the course of our, for a long time. And it's been very creative for our shareholders and it's been good for the business. So we're going to continue with the buyback. And then we also know that we have some converts coming up in 2025 and 2026 that our goal is to make sure we'll leverage the free cash flow of strong free cash flow that we generate to pay a lot of that off when it comes due in cash versus in stock. That is our goal with our cash.

Thank you for taking my questions.

Thank you. Ladies and gentlemen, thank you for joining us on the TechTarget Report Second Quarter 2022 Conference Court and Webcast. Have a great day ahead. You may now disconnect your lines.