TechTarget, Inc.

Good afternoon and thank you for attending today's TechTarget Reports third quarter 2022 conference call. My name is Austin and I shall be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Charles Renick with TechTarget. Charles, please go ahead.

Thank you, Austin, 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'd 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 AK. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by tech targets that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section of our filings with the FCC. 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 that accompanies our shareholder letter. With that, I'll turn the call over to Greg. Great. Thank you, Charlie. For Q3, 2022 GAAP revenue grew 11% to approximately $77.4 million. Adjusted revenue grew 8% to approximately $77.4 million. Net income was approximately $14.8 million, an increase of 49%. Adjusted EBITDA grew 15% to $32.4 million. Net income margin was 19%. Adjusted EBITDA margin was 42%. GAAP gross margin was 74%. Adjusted gross margin was 77%. Longer-term revenue grew 25% to $33 million, representing 43% of total revenue. Cash flow from operations was $22.5 million, and free cash flow was $18.8 million. I will now open the call to questions.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. If you're using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is with Justin Patterson from KeyBank. Justin, your line is open. Great.

Thank you very much and good afternoon. Perhaps two if I can. First, I was hoping you could elaborate a little bit more on some of the slowdown you saw during the quarter. We've heard lots of companies talk about longer sales cycles. So, you know, just kind of curious about what your observations have been around customer behavior. And then secondly, really appreciate the 2023 initial outlook. Could you talk a little bit about some of the assumptions that give you confidence in mid-single-digit growth and 40% EBITDA margins? Thank you.

Great. Yeah, Justin, this is Mike. In terms of the Q3 slowdown, typically when we discuss this in previous quarters, when we talk about Q3, it's a back-weighted quarter. It's our biggest back-weighted quarter where when we get after Labor Day, you usually see a really big push with customers spending on their sales and marketing dollars and sales enablement dollars. To finish off a strong Q3 for us as well, set us up for Q4. And with the global macro uncertainty, when we got out of Labor Day, post-Labor Day, we did see a lot of deals get pushed. Budgets within our customers and our customers were caught or on hold. and they're really doing a reset where they're going to evaluate uh you know what their budgets are going to be and with the global macro uncertainty this behavior is not surprising i mean we've seen this before where they will reset evaluate budgets it might take a quarter or two to go through those budgets and assessments but what we've typically seen is a flight back to quality so we've talked about our business with our you know editorial content strategy opt-in permission-based audience, first-party purchase intent data, and really the resiliency of the IT market today versus 10 years ago. I want to look at the last real big downturn. I think that's really guided, and it's not surprising how customers react. You will see some customers shift their product portfolio where they may step back from brand, which Fortunately for us, it's only 10% of our business, but some of the larger customers may pull back on brand and some of the current campaigns, they may shift to more what we call further down the sales funnel type of lead through our qualified sales opportunity or HQL products. So that's what we're seeing right now. And in terms of the 2023 initial outlook, we're entering this global pullback right now. But what we've seen before and we believe it's still going to be real, our customers still have numbers and targets to hit. And we talked about this reset where they're going to be looking at their investments and they have to make sure that they're enabling their sales teams to have the right pipeline, understand the right accounts, understand the right prospects and buying teams within those accounts. And we historically, and we believe this will be the case too, see a flight back to quality. So at a certain point, Our customers are going to have to reinvest, and they'll reinvest quickly. We also see it snap back pretty quickly when they get to the point of we don't have enough pipeline to support the sales target, to support the company target. So as you can see, our initial guidance into 2023 is we believe this current environment will carry over to Q1, and we'll see into the first half. But ultimately, customers have numbers to hit, targets to hit, and pipeline to fill. And having that fight back to quality does play well for TechTarget.

That's helpful. Thank you very much.

Our next question is with Aaron Kistler from Raymond James. Aaron, your line is open.

Great. Thank you. Just on kind of the slower growth that you're seeing, I think it's kind of across the board you asked, and international as well as by company size. Also, can you detail any product differences you're seeing? It sounds like priority engines are still seeing pretty solid growth of 15%. So is the slowdown more on the ad side? Just a little bit more color there would be helpful. Thank you.

Yeah, I mean, we're seeing the slowdown. Again, we reported Q3 numbers. We had a report 11% growth. I think if you looked at constant currency, it would be close to the 13% growth. You're seeing some pullback in the U.S. I would say EMEA, as we've all seen, we think the economy is challenging right now in North America. I mean, EMEA is in pretty tough shape. I mean, they're in recession, high prices, costs, the war in Ukraine. I mean, there's a lot of challenges going over there as well as some of the political turmoil. So we're seeing that across the regions. I would say the hardest of regions is probably EMEA right now. And in terms of products, yeah, we saw some good growth, the priority engine. as I mentioned in the previous question, we are seeing some shifts in product or budget allocation from the branding or the ad spend, which again is roughly 10% of our overall business, but customers that spend on that, they will quickly pull back on that because that's probably the hardest product to measure and show our line. They may shift on some of their programs, demand gen programs, and we shift that budget to What I call further down is sales funnel types of products. We've got qualified sales opportunities and HQLs, high quality leads. And that's really what they're doing that for is they're trying to get as much opportunity to close any outstanding deals that they have in their pipeline. So they're trying to drive immediate revenue because driving new logos and closing deals is taking longer for them. So that's kind of what we're seeing in the product mix, but we're keeping an eye on it. What we are also seeing as a customer is we'll need really good content to make sure that they're getting their message out there but we're we're navigating this right now and basically we see those are some of the shifts and we're seeing the impact on the slowdown amia as well as north america great and this may any changes to your kind of expense growth plans for 23 it sounds like you're going to take a little bit more careful approach but any plans a change in hiring plans etc yeah you know Throughout our 23-year history, you know, part of our DNA is to invest wisely and smartly. And we'll make sure that we continue to invest in the right areas and the right priorities that will, you know, help grow and support our long-term, short and long-term priorities around the company. But we do keep a close eye on expenses. As you'll see, we'll finish the year at 40% EBITDA margin. We're projecting 2023 at 40% EBITDA margin. So we'll manage the expenses according to the revenue projections, and we have a good track record of doing that as well as spending on free cash flow. We'll continue to execute on what we've done in the past, and it's really paid well, paid dividends for us.

Great. Thank you.

Our next question is with Bhavin Shah from Deutsche Bank. Bhavin, your line is open.

Great. Thanks for taking that question. Just kind of focusing back on the guide for 4Q, and I guess it's the 23. Can you just maybe elaborate a little bit more? I know you talked about it a bit, but just in terms of some of the underlying assumptions in terms of the macro, are you expecting the macro to get to worse and budgets to get worse? Like kind of what's embedded as we think about the guide and we think about that deceleration in the revenue growth in 4Q and the first half of the year?

Yeah, Robin, I mean, what we look at is we look at our customer behavior. And based on the real-time global macro uncertainty, this behavior is not surprising to us, and it's kind of predictable. So when we got into September and we saw the pullback and you saw the global markets really drop, I look back and say, okay, how has our business performed over the last couple of years all the way into the summer of 2022, where our bookings, our growth penetration across the different regions was going really well? When this happens, and this happens quickly, and when we first really saw this was coming back from Labor Day where deals were delayed and deals were portioned, some budgets were cut, not for all customers, but we saw it across small, large, and mid-sized customers. What typically happens is they do a reset. They get direction from their management that things are on hold, you're reducing your budget, you're cutting your budget, you're putting things on pause. They take a look and they start reassessing what I would call the must-have quality investments versus the nice-to-have. You know, during a high tide, you know, rises all boats, right? So a lot of companies went out and made extra expenditures and investments in different areas. I'm not saying that they didn't scrutinize ROI, but they were a little bit more free in terms of investing on that. Well, now they're going to reset. They're going to take a look at every single one of the investments. How long that takes, I really can't tell you. What I've seen in the past, it could take a couple quarters to really get that reset. They'll identify the best solutions, data, and partners that can help them accelerate and meet those numbers that they're going to have to hit. And so in the next quarter or two, we see them really trying to scrutinize reset and then drive back to that flight, you know, flight to quality. And I think it will end up in the long term probably being good for our customers and good for us as well in terms of the flight back to quality and assessing must-have ROI-driven solutions.

That's helpful there. And then I guess during the quarter and post-waiver day, have you seen any outside impact from any of your larger customers and having a more pronounced impact on your business, whether it's on the brand side or anything else? Were there one or two specific customers that materially pulled back on spend?

You know, in terms of the brand, we definitely saw the brand business pull back. Again, that's the fastest thing that customers can pull back on and cancel because it's also the hardest product to measure. Now, if you look back at our business 10, 15 years ago, that was probably closer to 30% of our business, and right now it's approximately 10% of our business, maybe even a little less than 10%. So, yeah, it impacts us, but it doesn't impact us like, you know, you know, somebody that's 100% advertising marketing business. And it's not one customer that said, okay, we don't have a 10% customer. So it wasn't where somebody just pulled back and canceled. You're seeing, and I think you're seeing this as well across, you know, the market where customers, whether they're small or mid or large, are just really managing, scrutinizing every expense that they are going to look to put, you know, invest in. And it's going to take a little bit of time to assess that. But again, as I go back to When we've seen this back in the last financial pullback, customers still have numbers and targets to hit. They have a pipeline to feed. They have sales reps to make sure that they are supporting. And there is always a flight back to quality in terms of data and insights for both sales and marketing organizations.

That's helpful. Just a last quick one, and it's great to see that 40% EBITDA target for next year despite the uncertain macro. But how committed are you to that target? I mean, if the macro gets worse and revenue kind of continues to be impacted, will you continue to kind of hit that target? Or given some of the longer-term opportunities, might you have to kind of rebalance some of that?

You know, we'll take a look at it. The good thing about it is we have a 23-year DNA. of investing wisely, not over spending in areas that are not going to impact the business. And I think having that DNA and that type of discipline has paid well for us. We made a lot of really key investments in 2022. We doubled the product of the software and development teams to help us with our priority engine enhancements and features and roadmap. And we're glad we did that. We want to pull back on that. And there are some other investments that we're making towards our content enablement services that We know that our customers are going to need really good content to engage with a self-service buying team that we want to keep going. So the way we've managed our expenses over 23 years, we'll keep an eye on it. If there's something that provides an opportunity to accelerate growth and we have to, you know, it's a percent here or there, we'll look at that. But we have done a really good job. We are well-disciplined in cost management. And it's also we're very well disciplined investing in the right business areas, and we're going to continue to execute on that path discipline.

Good for helpful. Thanks for taking that question.

Our next question is with Jason Cryer from Craig Hallam. Jason, your line is open.

Hey, Cal here on Ford. Jason, you kind of talked about a little bit earlier with the customer behaviors, but I was just wondering if you could kind of talk about the business metrics around that, you know, like contract duration, sales cycles, churn, and if you're seeing the macro have any impact on these KPIs.

Yeah, I mean, what we're seeing on our, what I could share with you is that we've seen some of the deals that we have forecasted, and as you saw in our you know, shareholder letter. This is the first time since June 3 of 2010, 46 quarters, over 12 years, that TechTarget has missed both the quarterly revenue and adjusted EBITDA numbers. So what we're seeing is a delay in terms of budgets. Customers are also telling us that their budgets are frozen. So if we had something in the forecast that we committed at 70%, We have a really good track record of knowing when that's going to come in, when that's going to land, and when that's going to run and recognize. And so some of those deals have been delayed, and we've seen customers just pull back on budget where they want to reset and make sure they're assessing the right quality investments. And again, I can't repeat this enough. Fight back to quality will eventually happen, and that's what we're seeing through customer behavior. We've also, as I mentioned, have seen some customers shift their product strategy in terms of what they are investing with TechTarget from, yes, some of that brand or demand gen campaign focus to more bottom of the funnel, lower end of the funnel, qualified sales opportunities and HQLs to help their sales teams land the lowest hanging fruit that they can get right now to support their current numbers. Because they're going through the same thing, and I'm sure you've seen that. on some of your other calls. But that's the guidance I can give you, and that's what we're seeing, and we're keeping a close eye on it.

Perfect. Thanks. And then just last one here from me. As you went through COVID, you know, we kind of saw more tech target products or prospects for shorter duration engagements as opposed to some of the priority engine deals. Just wondering if you're seeing any of that here in the early stages of this recession. Thanks.

I think we're seeing some of that where people are, some of our customers are not going to, they're going to delay making long-term commitments, one, two, three-year commitments. There are some signs of that, so we'll keep an eye on that, but I think that that's a safe assumption over the next quarter or so as people navigate through this, that you might see similar patterns and behaviors at the beginning of 2020.

Our next question is from Joshua Riley from Needham. Joshua, your line is open.

All right. Thanks, guys, for taking my questions here. I wanted to hit on the customer base difference. I think this is an interesting point to highlight with investors that four or five years ago, you know, we all know you had a very different customer base back then. Are you surprised that some of these more software-oriented customers are pulling back maybe a bit more than we would have expected given their secular growth versus the legacy guys who had a little bit more cyclical growth?

Yeah, Josh. It's a good point. Four or five years ago where you didn't have as many cloud, you had a lot of on-prem hardware investor customers where when they pulled back, they pulled back for a while and we had a bigger percentage of our customer segmentation allocated to those folks. So I would say that... Over the last few years, too, we've also gone from, if you look in the last 10 years, almost 1,000 customers to over 3,000 customers. We have different product suites. We have different entry points. We have different capabilities, which has really evolved in our business, and also having 42% of our revenue on long-term contracts, all very favorable. But when you also get hit with a global macro uncertainty, you will see a lot of these customers... at least pull back. They won't necessarily cancel and be gone, but they will pull back. And you're seeing in the market cost cutting and reductions that they're doing across small VC-backed firms, mid-sized growth firms, even some of the largest stalwarts that you see out in the market are all doing that. And it happens so fast that if you looked at some of this data from the middle of September till today, I think it's really these folks trying to assess reset and reprioritize and making sure that they're focused on ROI. So yeah, they're more insulated from what happened versus five years ago, but they're not immune to it. So there will be some pullback.

Okay, got it. That's helpful. And then if you look at the 15% growth in priority engine, how much of that, you know, you had been trending pretty consistently at 20% for a long time. How much of the decel is due to weakness in the SMB Express product versus just more general demand there?

I think you see it across more of the general demand as people are looking to, whether they're renewing and saying, I want to hold off and see how this goes for another couple quarters or a month. I think it's across, you see it a little bit across the board. We've also seen some of our priority engine customers you know, increase their, their spend, their investment, their commitment. But I think it's not just in one area right now because of this sudden pullback in the, you know, in the global macro environment that you're seeing across different customer segments to say, let's stop, let's assess, let's make sure that we have the right investments. And again, what plays well for us is that we've always seen a flight back to quality. When you have first party intent data, you watch Google eliminate, you know, announcing the elimination of third party cookies. You've got a permission-based audience. You've really got a strong content investment. My prediction on this is it plays well as we navigate through this and come out picking up market share on the back end.

Got it. And then maybe I'll just sneak one more in here. You mentioned in the letter that you're investing here in the downturn, which makes a ton of sense. How should we think about your appetite for M&A here versus buybacks, given the stock is obviously down and the valuations come down and Do you have to have a pretty high threshold in terms of growth and returns from an acquisition to make an acquisition versus buying back stock here? Thank you.

That's a good question. I mean, so we're going to manage and be opportunistic. We announced a $200 million buyback, but we're also very involved in looking for the, we've talked about this in the past, and we think there's going to be some really good opportunities based on the recent valuation resets with companies around content, intent, audience, peripheral opportunities, you know, capabilities, as well as adjacent markets. And so we are going to be opportunistic on that. And when we see the right organization that can help tech target at the right valuation, you know, that's our playbook along with the buybacks. Yeah. So, I mean, we're fortunate. We're in a position. We can do both.

So we've got $384 million in cash. We think we'll generate $100 million of cash flow next year. So we think that we're going to be able to do both in terms of be aggressive with buybacks and also obviously taking advantage of any downward valuations in our share price, but also downward valuations in acquisition targets. And again, like I said, we have a good history on this of taking advantage of downturns previously in terms of reinvesting and take market share, buying back shares at good prices. We have a good history of that. And making, you know, smart acquisition at good prices. So, you know, that's the silver lining of these global pullbacks. It gives, you know, strong companies the opportunity to really strengthen themselves. And, you know, we look forward to taking advantage of that.

All right, thanks, guys. Good luck.

Our next question is with Brian Bergen from Cohen. Brian, your line is open.

Hey, this is Gareth Gassetta. I'm for Brian. I just wanted to touch on priority engine and was hoping for an update on the overall progress of the sales use case version of it and now that we're lapping year one anniversary and maybe going into, you know, how the performance has been versus your expectations where there have been positive surprises and maybe where things might be a little bit bumpier?

Yeah, great. In terms of the sales use case, yeah, we launched that. It's coming up in one year. We've seen really good success on that. As you know, historically, we've sold Priority Engine to marketers, and marketers would leverage that for their nurture email strategy. So at the beginning of 2022, we launched our – Our sales use case modular from Priority Engine. We've seen really good adoption on the sales side. We've seen great usage trends on that. Reps using it for various different ways, whether it's around customer retention, making sure it's net new logos, territory management. And we're going to continue to build upon that. What I'd like to also let you know is I mentioned earlier, and we also brought it up in the shareholder letter, that we put a lot of investments in 2022 and a lot of the back half you know mid-year into the back half around our developer software team working on priority engine and one of the key um some of the key areas that we're really focused on is integrations of our data through priority engine into our customer sales force now we have that today but we want to expand on that make it easier enable our customers to leverage our information in their workflow but also in a bi-directional manner for TechTarget to be able to have access to certain key data points within their Salesforce to help drive ROI and analytics dashboards and updates such as open pipeline, close one loss opportunities, where are these deals in the pipeline, how do we set up our sales reps within our customer's environment to make the most appropriate and relevant follow-up. We also want to make sure that we are working with our customers to provide more insights across their total campaign with TechTarget, both on the sales side and on the marketing side. So what they're doing with their lead generation and demand gen, their content, their branding, the visitors on their website, to really bring that end-to-end view into priority engine to help fuel and help modernize, which we've been talking about for a couple of years, both sales and marketing. So there's a lot that we're doing on the platform. We like where we are with the sales use case. We're going to continue to expand on that, but we're also not forgetting the marketers as well.

Great. Thank you. And if I could just add one more here. I know you talked a lot about kind of clients pushing back their budgets and reevaluations. I was just wondering if you could kind of go into if you're seeing any pushback from clients on pricing and maybe what levers you guys might have to kind of navigate a more cautious consumer.

Yeah, you know, we don't see a lot of pushback in terms on our pricing. I mean, once in a while we do. I think our customers understand that we're the highest priced and the highest value based on how we get our data at both the account and at the individual prospect level. So I think they see that. There are low-cost providers where sometimes we will, you know, if a customer comes back and says, I want you to drop your CPL to X, if they're not embracing the current value of our opportunity, we might not take that deal and walk away from it. And I think that's a strategy that we've been very, you know, we've been consistent with, and we're going to continue to do that. And, you know, like I said, when people and customers navigate through this, they reset, they need a flight back to quality. And that means having the most accurate, precision, quickest, and transparent path to get to their prospects, to get to the right account, as well as to engage with their existing customers, because there's a big customer retention focus, and having access to our data and our capability set through content, campaign activation, insight, intent, what I'd call, you know, content to close capabilities enables our customers to have that so we really want to come into the pricing pressures that's great thank you our next question is from max michaelis from lake street capital max your line is open hey guys just one for me

Just given the guide in Q4 and the outlook into 2023, what are your guys' expectations for gross margin as well as are you guys, should we plan on taking any wage inflation into operating expenses for next year as well? Thank you.

Yeah, I think that our gross margins will be relatively consistent with what they are today. And we've got it to 40%, you know, early projections, 40% EBITDA margin. So I would, you know, would pick that in the model and, um, I don't think there's going to be a lot of change to that. Thanks.

And then on my last part of my question, though, just like OpEx, just wage inflation, should we plan on baking any of that into 2023 as well?

I really wouldn't bake that much into it. I mean, I think you're seeing some of the markets turn right now, and you see a lot of companies out there really trying to manage... expenses all across the board, including, you know, headcount employees and raises. So I wouldn't, I wouldn't take much of a change.

Okay, thanks.

Our next question is with Greg Burns from Sudoti and Co. Greg, your line is open.

Hi, I'm looking at your guidance, revenue guidance for 23. Does that assume growth and priority engine?

We don't break it down, Greg, by the product, but, you know, it's – we gave a preliminary how we feel this will run quarter to quarter throughout the year and, you know, go to mid-digit growth, but we don't break it down by product.

Okay. And then of your 3,200 customers that you called out, what percent of those are currently deploying the sales use case?

Did we, we don't break down, I mean, it's very small.

It's still one year within the first year, you know, growing nicely, but still off a small base.

Okay, thank you.

That concludes our Q&A. Thank you for your participation. You may now disconnect your lines.